Acquisition Regulations; Department of Energy Management and Operating Contracts

DEPARTMENT OF ENERGY

48 CFR Parts 901, 917, 926, 950, 952 and 970

[1991-AB-28]

Acquisition Regulations; Department of Energy Management and

Operating Contracts

AGENCY: Department of Energy.

ACTION: Final rule.

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SUMMARY: The Department of Energy (DOE) today amends the Department of

Energy Acquisition Regulation (DEAR) to implement certain key

recommendations of its Department-wide contract reform initiative. This

initiative furthers the Department's policy objectives of protecting

the environment, safety and health, cost control, and enhancing

diversity. Changes are in the following areas: implementation of

performance-based management contracting; the reimbursement of costs

for fines, penalties, third-party liability, and property loss or

damage; requirements for contractor make-or-buy plans; diversity;

implementation of Section 3161 of the National Defense Authorization

Act for Fiscal Year 1993, including displaced worker hiring

preferences; payment of fee; procedures for determining the application

of laws, regulations, and Department directives to contractors; a

requirement for a contractor safety management system covering the

environment, safety, and health; ownership of records; and contractor

overtime management policy.

DATES: This final rule is effective August 26, 1997.

FOR FURTHER INFORMATION CONTACT: Connie P. Fournier, Office of Policy

(HR-51), Department of Energy, 1000 Independence Avenue, SW,

Washington, D.C. 20585, (202) 586-8245; (202) 586-0545 (facsimile);

[email protected] (Internet).

SUPPLEMENTARY INFORMATION:

I. Background

II. Disposition of Comments

III. Procedural Requirements

A. Review Under Executive Order 12866

B. Review Under Executive Order 12988

C. Review Under the Regulatory Flexibility Act

D. Review Under the Paperwork Reduction Act

E. Review Under Executive Order 12612

F. Review Under the National Environmental Policy Act

G. Review Under Small Business Regulatory Enforcement Fairness

Act of 1996

H. Review Under the Unfunded Mandates Reform Act of 1995

I. Background

On June 24, 1996, the Department of Energy published in the Federal

Register (61 FR 32588) a notice of proposed rulemaking to amend the

Department's acquisition regulations to implement certain

recommendations of its contract reform report, Making Contracting Work

Better and Cost Less (February 1994). Those proposed changes were to

improve the Department's acquisition system, principally in areas

affecting management and operating contracts.

On July 25, 1996, the Department published a supplemental notice

(61 FR 38701) to the proposed rule providing additional discussion

regarding the treatment of qui tam costs incurred by management and

operating contractors. A public hearing originally scheduled in the

proposed rule for August 1, 1996, was canceled on July 31, 1996 (61 FR

39940) because of a lack of requests to speak. Written comments on the

proposed rule were due by August 23, 1996. The Department received

comments from 24 entities. After reviewing comments, the Department

published a notice of limited reopening of the comment period for the

proposed Environment, Safety and Health clause (61 FR 53185, October

10, 1996; corrected at 61 FR 53699, October 15, 1996). The purpose of

the reopening was to clarify the requirements in the proposed clause.

The Department received comments on the reopening from 6 entities.

Today's final rule adopts the amendments in the notice of proposed

rulemaking and the limited reopening notice, with certain changes

discussed in this section. The Department today also publishes a

separate rule that effects as a final rule a previously published

interim final rule. That rule (61 FR 32584), published on June 24,

1996, and effective on August 23, 1996, made changes to the

Department's policies regarding competition and extension of its

management and operating contracts. These two final rules constitute

the acquisition regulatory changes to date for the Secretary of

Energy's contract reform initiatives.

II. Disposition of Comments

The Department has considered and evaluated the comments received

during the public comment period. The following discussion provides a

summary of the comments received, the Department's responses to the

comments, and any resulting changes from the proposed rule and the

limited reopening notice. For convenience, this discussion is grouped

by the major items covered. Text changes finalized by this rule are

listed at the end of each major item discussed.

Item I--Performance-Based Management Contracting

A. Comment: One commenter recommended that the Department defer its

rulemaking in this area until after Federal Acquisition Regulation

(FAR) coverage for performance-based contracting (services) is adopted

as a final rule, citing potential for inconsistencies with the FAR and

a concern that the Department's policies could be altered depending on

the outcome of the FAR case (FAR CASE 95-311, 61 FR 40284, August 1,

1996). Regarding the latter issue, the commenter expressed concern that

meaningful public comments cannot be made. The commenter also believed

that the Department's proposed approach mandates the use of

performance-based contracting methods as opposed to the FAR coverage

which appears to provide greater flexibility.

Response: As indicated in the notice of proposed rulemaking, the

Department considered the policies set forth in the Office of Federal

Procurement Policy Letter 91-2, Service Contracting, in developing its

policies for the application of performance-based contracting to

management and operating contracts. At that time, the Department also

was aware of the effort by the FAR Council to develop regulatory

coverage in FAR Part 37, Service Contracting, that would implement the

requirements of the OFPP Policy Letter for service contracts. The

Department notes that OFPP Policy Letter 91-2 was effective on May 9,

1991, and was not dependent on the issuance of the FAR coverage. The

Department of Energy, along with other Federal agencies, has been

complying with the requirements of the Policy Letter in its service

contracts since that date. From a practical standpoint, the Department

already has incorporated performance-based contracting concepts and

methodologies in many of its management and operating contracts and

will continue to do so in the future.

In the proposed rule, the Department committed to reviewing the

proposed regulatory coverage for FAR Part 37 on performance-based

services contracting. The Department has conducted that review and

finds no substantive inconsistencies between its coverage as it applies

to management and operating contracts and the FAR coverage for service

contracts. The proposed FAR coverage, to a large extent, restates

policies and concepts from the OFPP

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Policy Letter. Accordingly, it does not provide new or additional

substantive concepts, approaches, or practices that may cause

inconsistencies with the Department's regulatory implementation.

The Department disagrees with the commenter's belief that the FAR

coverage appears to provide greater flexibility in applying

performance-based contracting approaches. The coverage at FAR Section

37.000, Scope of Part, requires the use of performance-based

contracting to the maximum extent practicable (emphasis added). Section

37.102(d), Policy, establishes performance-based contracting methods as

the preferred approach to acquiring services. In this final rule, the

Department is adopting the same requirements in its policy governing

the application of performance-based contracting methodologies for

management and operating contacts found at DEAR Section 970.1001,

Performance-based contracting.

Accordingly, the Department does not believe it is necessary to

defer its final rule concerning the application of performance-based

contracting concepts to its management and operating contracts. In

order to strengthen the Department's application of performance-based

contracting concepts and methodologies to its management and operating

contracts, the Department has added the definition of ``performance

based contracting'' from the OFPP Policy Letter to section 917.601,

Definitions. In addition, section 970.1001, Performance-based

contracting, has been amended to include a reference to OFPP Policy

Letter 91-2 and recognize the general application of the concepts and

methodologies set out in the policy letter to management and operating

contracts. This Section also creates a linkage between contract

performance objectives and the Department's strategic planning goals

and objectives, and requires the development of quality assurance

surveillance plans.

B. Comment: Three commenters noted that the use of performance-

based management contracting concepts may be administratively

burdensome. It was recommended that the final rule spell out the

objectives of performance-based contracting and provide additional

guidance to contracting officers concerning the development of measures

and incentives and that the Department carefully monitor implementation

to ensure cost effectiveness of the new approach.

Response: The move to performance-based contracting methodologies

represents a significant shift in both policies and practices by the

Department and its contract community. Accordingly, the period of

transition to this new approach requires considerable commitment from

both the Department and its contractors. Although the learning curve

has been steep, experience to date has indicated that over the long

term, benefits of applying performance-based management concepts will

exceed the administrative difficulties. Because guidance on the use of

performance-based contracting must be continually updated and developed

as experience is gained, the Department believes that it is impractical

to provide such guidance in a regulation and, further, to do so would

be contrary to the Administration's initiatives to streamline

regulations. The Department has already established several cross-

cutting and independent initiatives to monitor implementation.

C. Comment: One commenter recommended that the Department identify

those contracts which are, or will become, subject to the revised

requirements pertaining to performance-based management contracting

concepts, as expressed in Sections 917.600, 917.601, and 917.1001.

Response: The Department believes that the scope of its policies

pertaining to the use and application of performance-based management

contracting concepts and methodologies is sufficiently clear to

indicate that it is the Department's intent to employ such concepts and

methodologies, to the maximum extent practicable, in all of its

contracts for the management and operation of DOE sites and facilities.

The Department believes that this approach is consistent with, and in

support of, Governmentwide efforts to move to results-oriented

performance under contracts. As such it is unnecessary to specifically

identify each contract and solicitation subject to the policies.

D. Comment: Regarding the scope of the Department's policy on the

use of performance-based management contracting, as set forth in

Section 917.600, one commenter questioned whether the subpart applies

to ``management and integration'' contracts for environmental

restoration work.

Response: As a preface to the response to this comment, it should

be noted that the Department is required by regulation to periodically

review the continued need for the use of a management and operating

type contract (referred to as a performance-based management contract).

This review normally is conducted concurrent with the process of

deciding whether to compete a management and operating contract upon

expiration of the current contract. In conducting this review, the

Department assesses, among other things, whether alternative

contracting approaches to the traditional management and operating

contract may be viable and could present more effective contracting

solutions. Considerations in this assessment include potential changes

to the current and future missions at the site or facility and whether

the nature and scope of the contemplated work effort meets the purpose

of the management and operating contract format. As a result of such

assessments, the Department has, in recent years, converted numerous

management and operating contracts into FAR-based support services and

management and integration contracts. These contracts are not subject

to DEAR Part 970. Nonetheless, certain aspects of the management and

operating contract concept may be applied to management and integration

contracts, if deemed appropriate.

The policies set forth in section 917.600 and Part 970 govern those

contracts that are traditionally considered ``management and operating

contracts.'' Other contracts recently awarded by the Department, such

as those contracts labeled as ``management and integration contracts,''

have a purpose that is different from the traditional management and

operating contract. Accordingly, such contracts are not, per se,

subject to Section 917.600 and other applicable regulations set forth

in Part 970 of the DEAR. As a practical matter, however, these

management and integration contracts may include some terms,

conditions, and features similar to those found in management and

operating contracts. In any case, because these contracts are governed

by other provisions and requirements of the FAR and DEAR, it is the

Department's intent that these contracts also use performance-based

contracting approaches.

The final rule makes the following changes:

1. 917.600, Scope of subpart. This Section is revised to recognize

the applicability of the requirements of the Subpart to performance-

based management contracts.

2. 917.601, Definitions. This Section is added to define the term

``performance-based management contract'' as a form of management and

operating contract to be used by the Department of Energy for the

management and operation of its weapons production and laboratory

facilities, where the contract includes objective performance standards

and

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incentives. This Section also defines ``performance based contracting''

in a manner consistent with Office of Federal Procurement Policy Letter

91-2.

3. 970.10, Specifications, Standards and Other Statement of Work

Descriptions. Section 970.1001 is revised as a new Section entitled,

Performance-based contracting, and Section 970.1002 is retitled,

Additional considerations.

Item II--Fines, Penalties, Third-Party Liability, and Property

Liability

A. Shifting Burden of Proof

Comment: Sixteen of the commenters recommended against creating a

rebuttable presumption of unallowability of costs resulting from third-

party claims or damage to or loss of government property. About half of

these commenters emphasized the increased costs of reporting and record

keeping that would result and some compared this increased

administrative burden with the problems created by the Accountability

Rule, which the Department is eliminating. Nine of the commenters

recommended the Department use the burden of proof standard under FAR

31.201-3, rather than create a new standard inconsistent with

government-wide policy. They believed the FAR standard created a better

balance between the Government's right to question costs and the

administrative burden on the contractor to justify and document, in

advance, the contractor's costs under the contract.

Several commenters believed the Department's proposed rule was

unclear concerning the degree of proof that would be necessary to

overcome the presumption of unallowability since the Department seemed

to be requiring proof of a negative (i.e., that a cost is not

unallowable). Finally, one commenter pointed out that presumptions are

only appropriate where courts and legislatures have extensive

experience with a recurrent set of facts and there is a strong

likelihood of the existence of presumed conclusions.

Response: The Department has considered the comments on this issue

and has decided to adopt the burden of proof requirements articulated

in FAR 31.201-3, Determining reasonableness. The Department has decided

that FAR 31.201-3, combined with a recent amendment to FAR 31.201-2,

Determining allowability, adequately protects the Government's interest

in avoiding the reimbursement of unallowable costs by placing

responsibility for documenting costs on the contractor.

Paragraph (a) of FAR 31.201-3 states in part:

No presumption of reasonableness shall be attached to the

incurrence of costs by a contractor. If an initial review of the facts

results in a challenge of a specific cost by the contracting officer or

the contracting officer's representative, the burden of proof shall be

upon the contractor to establish that such cost is reasonable.

Additionally, FAR 31.201-2, Determining allowability, now clarifies

and expands the contractor's responsibility for documenting costs. More

particularly, paragraph (d) provides:

A contractor is responsible for accounting for costs appropriately

and for maintaining records, including supporting documentation,

adequate to demonstrate that costs claimed have been incurred, are

allocable to the contract, and comply with applicable cost principles

in this subpart and agency supplements. The contracting officer may

disallow all or part of a claimed cost which is inadequately supported.

The Department believes that, taken together, these provisions

appropriately balance the Department's right to question contractor

costs and the administrative burden placed on the contractor to justify

its costs. For these reasons, the language ``demonstrates to the

contracting officer,'' has been deleted from DEAR 970.5204-21(f)(1),

970.5204-31(h), and 970.5204-31(j)(2).

B. Prudent Business Judgment

Comment: Fifteen commenters recommended against the use of the term

``prudent business judgment,'' as used in the proposed rule, since the

Department appeared to be introducing an ambiguous term or standard.

Almost all of the commenters expressed concern about how this term

would be interpreted, particularly since the Department seemed to be

going beyond the standard articulated in FAR 31.201-3. Commenters

questioned how a demonstration of ``prudent business judgment'' would

be made and what would be the basis for a finding that prudent business

judgment had not been exercised. A number of commenters also pointed

out that the Department appeared to be creating a standard which would

allow the Contracting Officer to second guess the judgments of

contractor management. Five of the commenters recommended against

creating a ``cost reasonableness'' definition that differed from that

established by FAR 31.201-3.

Response: There appears to be some confusion on the part of the

commenters. Except for costs related to third-party liabilities under

the Insurance--Litigation and Claims clause, the Department is not

creating a new standard for determining cost reasonableness, beyond

that provided in FAR 31.201-3.

With respect to the allowability of costs arising from third-party

claims, the Department is establishing, in this final rule, a new

requirement that the contractor's managerial personnel exercise prudent

business judgment in order to be reimbursed for costs resulting from

third-party liabilities. This is in addition to the standard (i.e.,

``willful misconduct or lack of good faith'' on the part of contractor

managerial personnel) found in the Federal Acquisition Regulation at 48

CFR 52.228-7, which addresses the unallowability of third-party claims,

and in the current Department of Energy Acquisition Regulation at 48

CFR (DEAR) 970.5204-13(e)(17) and 970.5204-14(e)(15), which address the

unallowability of ``losses.''

The prudent business judgment standard is specifically defined in

the final rule as (1) failure to act in the same manner as a prudent

person in the conduct of a competitive business, or (2) in the case of

a nonprofit educational institution, failure to act in the manner that

a prudent person would have under the circumstances prevailing at the

time the events which resulted in third-party liability occurred or the

decision to incur the cost was made. These are well-established

standards in the Federal Acquisition Regulation and OMB Circular A-21,

Cost Principles for Educational Institutions, for determining the

reasonableness of a cost for purposes of allowability.

The following situation illustrates how this standard will operate

in a typical third-party action. A sexual harassment suit is brought by

an employee against the contractor. The contractor eventually seeks

reimbursement from the Department for costs incurred in defending

against the suit and for any settlement or judgment of the employee's

action. After an initial review of the facts, the contracting officer

may decide that there is reason to believe that the costs resulted from

management's failure to exercise prudent business judgment and so

informs the contractor. In this case, the contracting officer would

then proceed to consider, among other things: whether management has an

effective process for addressing employee discrimination complaints;

whether this process was followed by management in this case; and

whether management had effective notice of previous sexual

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harassment activities by the same individual or in the same work place.

The Department acknowledges that third-party actions, including

employee discrimination complaints, are normal business risks, and is

not seeking to shift all such risk to the contractor. However, the

Department does intend that the contractor assume the risk for

management's unreasonable actions or unreasonable failure to act in

those situations which carry the potential for third-party liability.

The Department is adopting this standard to foster contractor

responsibility and accountability. Unlike the former ``Accountability

Rule,'' this standard is to be applied to the decisions and actions of

the contractor's management, not to the individual actions of

contractor employees who are not managers. In this way the Department

intends to focus the contractor's attention on the quality of its

management and the effectiveness of its management systems and

controls, and to shift the risk of loss arising out of contractor

management deficiencies to the party that can prevent the loss--the

contractor.

Some commenters expressed concern that this approach would permit

contracting officers to second guess decisions made by contractor

management. As a point of fact, contracting officers are often required

to exercise their judgment in determining the allowability or

reasonableness of contractor costs. If the contractor disagrees with

the contracting officer's judgment, and no reasonable settlement can be

reached on the issue, the contractor has recourse to the rights and

procedures established under the Contract Disputes Act, 41 U.S.C.

Sec. 609, et seq. (Federal Acquisition Regulation Subpart 33.2).

C. Fines and Penalties

Comment: Three of the commenters argued that the Department should

exercise its special contracting authority under the Atomic Energy Act

to deviate from government-wide policies on fines and penalties. A

fourth commenter argued that the Department can legitimately defend

reimbursement of criminal fines and penalties resulting from compliance

with specific terms of a contract or written instruction from a

contracting officer.

Response: Congress has repeatedly expressed its position on the

reimbursement of contractor fines and penalties. Most recently, this

cost category was addressed in the Federal Acquisition Streamlining Act

of 1994 (FASA), 41 U.S.C. 256(e)(1)(D). With regard to the Department

of Energy, statutes on this issue can be found at 42 U.S.C. Sec. 7256a,

which contains language similar to that found in FASA, and Sec. 7273a,

which prohibits the use of appropriated funds to pay penalties under

environmental laws.

It should be noted that the Department has retained the rebuttable

presumption of unallowability with respect to fines and penalties. In

order for a civil fine or penalty to be an allowable cost, the

contractor must demonstrate to the contracting officer one of the two

conditions set forth in DEAR 970.5204-13(e)(12).

D. Litigation and Losses From Third-Party Liabilities

Comment: Two commenters thought the Department should expand the

language in 970.5204-31(f), concerning the availability of funds, to

provide that the Department would make its best effort to obtain any

necessary additional funding.

Response: The Department has decided not to include the requested

language in this final rule. The Antideficiency Act (31 U.S.C. 1301)

and Comptroller General decisions restrict expansion of the language on

availability of funds to include the requested phrasing.

Comment: Three commenters stated that the Department should define

``third party'' to include other government agencies. One of the

commenters was concerned about cost recovery or contributory actions by

Federal or state agencies under the Comprehensive Environmental

Response, Compensation, and Liability Act (CERCLA), 42 U.S.C. 9601, et

seq.

Response: Expansion of the term ``third party'' to include

governmental entities would create a conflict with the Major Fraud Act,

41 U.S.C. 256(k). An action for contribution under CERCLA Sec. 107

would not normally result in one of the dispositions listed in the

Major Fraud Act and would be reimbursable unless otherwise made

unallowable under terms of an individual contract. Additionally, legal

actions brought by a state, local or foreign government, such as

ordinary commercial disputes, and not covered by the Major Fraud Act or

the provisions of DEAR 970.5204-61, would be considered a ``third-

party'' action subject to the terms of the Insurance--Litigation and

Claims clause.

Comment: Six of the commenters believed that clarification was

needed on the inclusion of ``employees'' in paragraph (h) of the

Insurance-Litigation and Claims clause. Four of these commenters

recommended, in particular, that worker's compensation claims be

excluded from the cost prohibition.

Response: As pointed out by these commenters, workers' compensation

insurance is a cost area normally covered as an allowable cost under

the Department of Energy and other federal contracts. It was not the

Department's intent to make workers' compensation insurance an

unallowable cost. Clarifying language has been added to 970.5204-31 (h)

in the final rule.

Comment: One commenter noted that there is an inconsistency in the

definition of expenses incidental to litigation liabilities found in

paragraphs (e) and (g) of 970.5204-31 since paragraph (g) also has the

phrase ``* * * counsel fees, judgment and settlements. * * *''

Response: No difference in treatment was intended and correction

has been made in 970.5204-31(g) of this final rule.

Comment: One commenter argued that the requirement for adequate

security for conditional payment of litigation costs is unnecessary

with management and operating contractors, which are large companies.

Response: The Department has revised subparagraph (i)(1) of

970.5204-31 to simplify any necessary exchanges between the contractor

and contracting officer on this issue.

E. Insurance

Comment: One commenter argued that the Department was being

inconsistent by making the costs of insurance for correcting defects in

materials or workmanship unallowable but permitting the reimbursement

of the costs of correction.

Response: The Department included the second sentence in DEAR

970.5204-13(e)(36) and 970.5204-14(e)(34) in order to conform this

final rule with the Federal Acquisition Streamlining Act. The

prohibition against reimbursing these insurance costs was codified at

41 U.S.C. Sec. 256(e)(1)(L) and implemented at FAR 31.205-19(a)(4).

The Department is deleting, in Part 970, language from the

Accountability Rule that specifically addressed the costs of correcting

defects in materials and workmanship, and this area of cost will now

fall under other less-specific terms and conditions in the Department's

contracts. While the cost of insurance for correction will now be

unallowable in all federal contracts, the treatment for the actual

costs of correction will depend on the terms of individual contracts.

Costs of correction will be allowable under most of the Department's

cost reimbursement contracts, as long as the costs are

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reasonable and are not a result of the willful misconduct or lack of

good faith of managerial personnel.

Comment: Three commenters requested that the Department provide

clarification to its Field Offices and contractors on pro-rating

insurance costs. One of these commenters recommended the Department

also permit pro-rating self-insurance costs, and another recommended

pro-rating be specifically provided for in the clause at 970.5204-31.

Response: It is the Department's intent that equitable arrangements

be reached on a case-by-case basis with its contractors to address pro-

rating of insurance costs. The policy of pro-rating the cost of

insurance to reimburse the portion of the premium or cost attributable

to insurance coverage for allowable costs is intended to extend to

self-insurance agreements. Language has been added to this final rule

to provide additional guidance on pro-rating of insurance costs.

F. Environmentally-Related Third-Party Liabilities

Comment: Two commenters pointed out that shifting risks to the

Department's contractors would inhibit innovative and alternative

technologies.

Response: It is the intent of the Department to make exceptions on

a case-by-case basis and agree to reduced risk terms if a situation

warrants such an approach.

Comment: One commenter believed that the Department should require

flowdown of DEAR 970.5204-31, Insurance-Litigation and Claims, to all

environmental subcontractors, in addition to all major subcontractors.

This was done in a recent solicitation at the Department's Hanford

site.

Response: The requirement for flowdown of coverage to special

groups of subcontractors will be addressed on a case by case basis, as

the circumstances warrant such a requirement.

G. Damage to or Loss of Government Property

Comment: Six commenters recommended the Department revise the

language in paragraph (f)(1) of the Property clause so that the

reference in all the subparagraphs was consistent and referred to the

conduct of contractor managerial personnel.

Response: As noted above, this language has been clarified and now

includes the words ``managerial personnel.'' It is the Department's

intent to hold the contractor's corporate entity responsible in those

areas and the Department is seeking to incentivize contractor

management to put in place adequate systems for ensuring compliance

with contracting officer directions and for establishing,

administering, and maintaining an approved property system.

Comment: Two commenters questioned whether the inventory

requirement applied to only government furnished property or to all

government property.

Response: It is the Department's intent to cover all government

property in the inventory requirement. Inventory baselines provide for

reconciliation of records between old and new contractors and are the

basis on which the new or follow-on contractor accepts accountability

and responsibility for the government property to be used under the

contract.

Comment: Three commenters urged the Department to eliminate the

security, classification, and environment, safety and health concerns

from the property clause and limit that provision to traditional

issues.

Response: The Department disagrees with this comment because, in

the Department's view, it is necessary to ensure that contractors

account for, control, and protect the kinds of high-risk property

unique to the Department's contracts.

Comment: Two commenters questioned how the Department would address

any contributory role by federal employees if an unallowable cost was

due in whole or in part to an act or omission by the government or its

agent.

Response: It is not the Department's intent to make a contractor

pay for costs, or the portion of costs, resulting from mistakes it is

not responsible for under the terms of its contract. Where appropriate,

negotiation for apportionment of cost responsibility should occur under

the provisions contained in this rule.

Comment: Two commenters indicated that the term ``fair market

value'' needed additional guidance or definition.

Response: As stated in the Federal Property Management Regulations,

at 41 CFR 101-43.001-8, ``fair market value means the best estimate of

the gross proceeds that would be recovered if the property were sold by

competitive bid.'' The Department intends to rely on that meaning for

purposes of this clause.

H. Preexisting Conditions

Comment: One commenter believed the inspection obligation was

overly broad, while another argued that contractors must be allowed

time to inspect and inspection costs must be allowable under the ``duty

to inspect'' provision.

Response: The Department intends to place a reasonable duty to

inspect upon the contractor. Under most circumstances, this inspection

would occur during the transition period stated under the contract. The

proposed Preexisting Conditions contract clause has been modified to

make the inspection requirement an alternate paragraph for use in

contracts with contractors not previously under contract at the

particular site or facility.

A contractor will not be precluded from recovering costs resulting

from or related to preexisting conditions merely because the inspection

failed to discover the condition. Whether a condition will be

determined to be preexisting and covered under the clause will depend

upon the circumstances in each individual case.

Comment: One commenter advocated that paragraph (a) of the proposed

Preexisting Conditions clause also include medical conditions of

current or past personnel.

Response: While not specifically listed, any liabilities or costs

resulting from medical conditions which arose from pre-existing

conditions would be covered by the clause.

I. Increased Risk and Fee for Nonprofit Contractors

Comment: Five commenters stated that the Department should perform

a cost benefit analysis for provisions covering nonprofit entities.

These commenters pointed out that increased fees would be a direct

charge to program funds and result in less research for the money

available. Two of the commenters pointed out that requiring nonprofit

entities to dedicate funds to protect against liability was contrary to

the usual operating procedures of a nonprofit entity and that payment

of fees could threaten the nonprofit status of these contractors. Three

of the commenters believed it was premature for the Department to

propose new liabilities for contractors when the nature of the fees to

mitigate those liabilities is unknown.

Response: Certain of the liabilities in question (such as those for

fines and penalties and under the Major Fraud Act) are statutorily

imposed. Others are not imposed by statute, but reflect Departmental

policy that its contractors, regardless of business status, should

employ good business practices and mitigate risks associated with

potential liabilities. Nevertheless, the commenters have raised

concerns that the Department believes are best resolved in the context

of individual contract circumstances, given the variability among

nonprofit contractor institutions

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and differences in the nature of the work that they perform for the

Department.

Accordingly, the Department's contracting officers will determine,

on a case-by-case basis in individual contract negotiations, the extent

to which a particular nonprofit institution will be subject to: (1) the

``prudent business judgment'' standard for third-party liabilities; (2)

liability for punitive damages; and (3) liability for loss of or damage

to government property because of a failure to administer or properly

maintain an approved property management system. The Department will

consider ``co-insurance'' provisions (under which the Department of

Energy and the contractor share losses) as well as overall limitations

on an institution's exposure to non-statutory liabilities arising out

of these contracts. The Department will, in addition, consider whether

to accept contractor self-insurance or commercial insurance

arrangements as a substitute for non-statutory liability provisions.

The Department plans to compensate nonprofit educational

institutions consistent with the level of financial and management risk

they assume in connection with their work for the Department. The

Department is amending 48 CFR (DEAR) 970.1509-2(a) in this final rule

to reflect this decision.

Finally, with regard to the commenters' request for a cost benefit

analysis, the Department has responded elsewhere in this final rule to

those comments that argue that Executive Order 12866 is applicable and

requires a regulatory impact analysis. With respect to the more general

requests for a cost benefit analysis, the Department believes that such

an analysis will provide little useful information until it has had

more experience with third-party claims under the new form of contract

and with the level of fees that is likely to be negotiated under these

contracts.

J. Qui Tam

Comment: Five of the commenters stated opposition to the proposed

disallowance of proceeding costs when the United States does not elect

to participate in the action. Some of these commenters stated that

there was no statutory authority for this requirement, since the

statutory provision at 41 U.S.C. Sec. 256(k) is silent on qui tam

costs.

Response: The Department disagrees with these commenters. Qui tam

proceeding costs are subject to the provisions at 41 U.S.C. Sec. 256(k)

because the relator ``stands in the shoes'' of the United States in a

qui tam action. This is true, whether or not the United States elects

to intervene in the action.

Comment: Three commenters opposed adoption of the proposed Federal

Acquisition Regulation amendment (61 FR 31790, June 20, 1996) which

would limit reimbursement of settlement costs in all cases to 80% of

otherwise allowable and allocable proceeding costs. The commenters

argued that contracting officers should have the discretion to approve

full recovery of settlement costs, particularly in those cases in which

the United States has decided that the case does not merit government

intervention.

Response: In this final rule, the Department is adopting the same

provisions as the proposed Federal Acquisition Regulation amendment. In

addition to addressing the allowability of costs incurred for qui tam

suits in which the Government does not intervene, these provisions also

clarify that the maximum reimbursement contractors can receive for

costs incurred in connection with proceedings which are resolved by

consent or compromise is 80% of allowable costs. Based on the analysis

which follows, the Department has concluded that these provisions are

required by 41 U.S.C. Sec. 256(k).

Subsection (k)(1) of section 256 states that, unless otherwise

provided in the section, all costs incurred in connection with any

criminal, civil, or administrative proceeding brought by the United

States or a State are not allowable if the proceeding: (1) relates to a

failure to comply with, or a violation of, Federal or state law; and

(2) results in one of five specified dispositions. Subsection (k)(3)

provides for the allowability of proceeding costs if a matter is

resolved by settlement, provided the settlement agreement specifically

addresses the extent to which such costs are allowable. Subsection

(k)(5) provides that costs not specifically disallowed under subsection

(k)(1) may be allowed, but only up to 80% of the amount of costs

incurred. One category of costs not disallowed by subsection (k)(1) are

those costs made allowable under subsection (k)(3). Therefore,

proceedings costs incurred when a matter is resolved by settlement are

subject to the 80% limitation.

Comment: Four commenters stated that authority to provisionally

allow costs should reside with the contracting officer rather than the

General Counsel.

Response: The Department is adopting the Federal Acquisition

Regulation approach on this issue, which is to allow the contracting

officer to provide conditional payment in appropriate circumstances.

Comment: Six commenters stated that they preferred the Federal

Acquisition Regulation standard for provisionally allowing costs, i.e.,

``very little likelihood that the qui tam plaintiff would have been

successful on the merits'', as opposed to the ``frivolous or devoid of

merit'' standard in the proposed rule.

Response: The Department is adopting the Federal Acquisition

Regulation approach on the standard to be used for provisionally

allowing costs.

The final rule makes the following changes:

1. 950.7101. General contract authority indemnity. Paragraph (c)(2)

is removed.

2. 970.1509-2(a). Is amended to provide for the payment of fees to

nonprofit educational institutions in appropriate circumstances.

3. 970.28. Is amended to add a new section 970.2830, Contract

clause, which prescribes the use of the clause at 970.5204-31,

Insurance--Litigation and Claims.

4. 970.3101-3. General basis for reimbursement of costs.

Subparagraph (a)(1) is amended to add a reference to FAR 31.201-2(d)

and FAR 31.201-3.

5. 970.3102-21. Fines and penalties. This subsection is revised to

reflect the Department's policy on the unallowability of fines and

penalties.

6. 970.3102-22. Avoidable costs for profit making contractors. This

subsection is removed.

7. 970.3103. Contract Clauses. Paragraph (d) is added to address

preexisting conditions.

8. 970.45. Government property, and 970.4501, Contract clause. This

subpart and subsection are added.

9. 970.5204-13. Subparagraph (c)(1) is amended to refer to FAR

31.201-2(d) and FAR 31.201-3; subparagraph (d)(1) is amended to update

the clause reference.

10. 970.5204-13(d)(4). This subparagraph is amended to add

references to Department of Energy approved contractor litigation

management procedures and cost guidelines to be included in an Appendix

to the contract.

11. 970.5204-13(d)(9). This subparagraph is amended to add ``and as

allowable under subparagraph (f) of the clause of this contract

entitled, Property.''

12. 970.5204-13(e)(12). This subparagraph, concerning fines and

penalties, is revised.

13. 970.5204-13(e)(17). This subparagraph is reorganized and

revised.

[[Page 34848]]

14. 970.5204-13(e)(36). This subparagraph is revised to remove most

of the discussion; the statement that the cost of insurance for an

unallowable cost is an unallowable cost is retained.

15. 970.5204-14. Subparagraph (c)(1) is amended to refer to FAR

31.201-2(d) and FAR 31.201-3; subparagraph (d)(1) is amended to update

the clause reference.

16. 970.5204-14(d)(4). This subparagraph is amended to add

references to Department of Energy approved contractor litigation

management procedures and cost guidelines to be included in an Appendix

to the contract.

17. 970.5204-14(d)(10). This subparagraph is amended to add ``and

as allowable under subparagraph (f) of the clause of this contract

entitled Property.''

18. 970.5204-14(e)(10). This subparagraph concerning fines and

penalties for profit making and nonprofit contractors is revised.

19. 970.5204-14(e)(15). This subparagraph is reorganized and

revised.

20. 970.5204-14(e)(34). This subparagraph is revised to remove most

of the discussion; the statement that the cost of insurance for an

unallowable cost is an unallowable cost is retained.

21. 970.5204-18. Definition of nonprofit and profit making

management and operating contractors and subcontractors. This

subsection is removed and reserved.

22. 970.5204-21. Property. Paragraphs (e), (f), (g), (i) and (j)

are revised; the definition of contractor's managerial personnel which

previously appeared at the end of paragraph (f) now appears as

paragraph (j).

23. 970.5204-31. Litigation and claims. This subsection is removed

and a new subsection, Insurance--litigation and claims, is added in its

place.

24. 970.5204-32. Required bond and insurance-exclusive of

Government property. This subsection is removed and reserved.

25. 970.5204-55. Ceiling on certain liabilities for profit making

contractors. This subsection is removed and reserved.

26. 970.5204-56. Determining avoidable costs. This subsection is

removed and reserved.

27. 970.5204-61. Cost prohibitions related to legal and other

proceedings. Paragraphs (b), (c), and (e) are amended.

28. 970.5204-XX. Preexisting Conditions. This subsection is added.

Item III--Make-or-Buy Decisions

A. Comment: Several commenters opined that the Department should be

more prescriptive in describing the nature and extent of the make-or-

buy plan and the attendant analytical approach that will be used by

contractors to accomplish make-or-buy decisions. One commenter

suggested that the rule specify a methodology for comparing the cost-

effectiveness of in-house performance versus outsourcing.

Response: The purpose of the regulatory coverage is to provide a

contractual mechanism to require contractors to establish a make-or-buy

plan, consistent with the Department's needs. Because the

considerations that must be taken into account by a contractor in

making prudent make-or-buy decisions can be complex and may be

different depending on such variables as the mission at the Department

of Energy facility or site, the nature and type of supplies or services

required, local market conditions, and the contractor's buying

practices, the Department does not believe that it should adopt an

overly prescriptive approach in defining a precise methodology to be

followed by contractors through its acquisition regulations.

B. Comment: Regarding Subsection 970.1507-1 and clause 970.5204-XX,

Make-or-Buy plan, addressing the requirements that the contractor

conduct its make-or buy decisions in an environment that promotes

participation with affected stakeholders, three commenters indicated

that the Department should be more prescriptive in requiring that

certain stakeholder groups be included in the process. One commenter

suggested that the clause specifically require that the prime

contractor include environmental contractors as stakeholders. One

commenter suggested that the requirement in subparagraph (b)(1) of the

proposed contract clause at 970.5204-XX, Make-or-Buy plan, be modified

to require the contractor, when implementing in-house productivity

improvement plans, to include participation by the workforce to

optimize in-house productivity efforts prior to outsourcing decision.

Another commenter expressed a similar concern that the rule should be

more prescriptive in its requirements and directions to contracting

officers and contractors regarding public information concerning make-

or-buy decisions.

In addition, a commenter, in addressing the requirements of

970.1507-1(b)(2), expressed concern that the requirement to include

stakeholders in development of make-or-buy plans adds no value, and is,

in any event, vague, because: (1) the term ``stakeholders'' is not

defined; (2) the requirement to include stakeholders is derived from

Section 3161 requirements and therefore can only be applied to defense

nuclear facilities; (3) it is impractical to subject every make-or-buy

decision to public scrutiny; and (4) providing cost analysis

information is unwise and probably illegal since it would convey

proprietary information.

Response: As indicated in the previous response, the Department

believes that the precise requirements of a contractor's make-or-buy

plan, including elements such as appropriate stakeholder identification

and involvement, are subject to great variance and both Department

officials administering the contract and contractors must be given

sufficient latitude in constructing programs to reflect the unique

considerations of the specific site or facility and contract.

Accordingly, the Department believes that it is inappropriate to

provide further regulatory prescription in this matter.

Regarding the specific comment that the Department can require

stakeholder involvement in the make-or-buy process only with regard to

those sites and facilities subject to Section 3161, the Department

disagrees. The Department believes that parties involved in, or

affected by, a make-or-buy decision of a contractor benefit through an

open process of communication and that such a process is in the best

interests of the Department. Accordingly, the Department has elected to

adopt such a requirement as a matter of policy.

Regarding the Department's expectations for openness by the prime

contractor in its make-or-buy program, the Department believes that the

standard of ``maximum practicable regard for open communication'', as

set forth in subparagraph 970.5204-xx(b)(2), Make-or-Buy plan, provides

sufficient flexibility to the contractor to determine the appropriate

nature and extent of stakeholder participation. The inclusion or

exclusion of specific groups is necessarily broad and undefined because

of the need to determine both the identity of the stakeholders and the

most appropriate approach in obtaining their participation based on the

facts and circumstances surrounding an individual make-or-buy decision.

The Department believes that the current language provides contractors

the needed latitude and flexibility to effectively implement the intent

of the provision.

Lastly, it is not the Department's intent that the contractor

release proprietary information protected by law to the public under

its make-or-buy plan or otherwise provide information

[[Page 34849]]

concerning its acquisition approach or costs that might provide one

party with an unfair competitive advantage over another party.

Information falling into this category would not be releasable.

C. Comment: Two commenters recommended that the Department adopt

the Federal Acquisition Regulation (FAR) 15.7 coverage on this subject.

One commenter, while supporting a move to the FAR make-or-buy coverage,

believed that even the FAR is too prescriptive and detailed and that

the Department should move to best commercial practices in this area.

Response: In developing its requirements for contractor make-or-buy

plans, the Department considered whether the FAR make-or-buy (see FAR

15.7) approach could be used. After careful analysis, it was determined

that the make-or-buy requirements of the FAR were only generally

suitable for subcontracting decisions under the Department's management

and operating contracts, and that, in any case, additional

considerations would have to be applied to reflect the special

contractual relationship between the Department and its management and

operating contractors. The basis for this assessment is that the

requirements of the FAR generally apply to the manufacture,

development, and assembly of hardware items (systems, subsystems,

assemblies, etc.) under a typical commercial operation. Although the

FAR guidance concerning make-or-buy plans may be helpful in providing

general instruction in this matter, the decisions regarding make-or-buy

plans by the Department's management contractors are not directly

analogous. In the typical commercial operation, make-or-buy decisions

are generally driven by purely economic considerations in meeting a

one-time contract requirement (or a series of contracts) to fulfill a

Government production or manufacturing need. In these contracts, the

traditional ``arms-length'' buyer-seller relationship between the

contracting parties is preserved. In contrast, the management and

operation of a Department of Energy owned or controlled facility by a

contractor is in direct fulfillment of the Department's mission and is

characterized by a close relationship not usually associated with

Federal contracts. As such, make-or-buy decisions by the contractor

must reflect not only the typical economic considerations, but also

programmatic and policy considerations. Accordingly, it was determined

that a tailored approach to contractor make-or-buy plans was needed to

reflect these considerations.

Regarding the comment that the Department's make-or-buy program

requirements appear to conflict with recent actions by the Department

to move its contractors' buying practices away from the Federal model

to a more commercial-like approach, the Department does not agree. In

crafting the make-or-buy plan requirements, the Department has provided

sufficient leeway to contractors, within the broad parameters set forth

in the contract clause, to acquire appropriate supplies or services

under commercial buying practices.

D. Comment: One commenter noted that subparagraph 970.1507-2(d)(2),

Requirements, directs the contracting officer, when evaluating a

contractor's make-or-buy plan, to consider ``whether small, small

disadvantaged, or other minority-owned businesses will be afforded

maximum practicable opportunity to compete for work that is

subcontracted'' may be in conflict with recent actions stemming from

Adarand Constructors, Inc. v. Pena 115 S.Ct. 2097 (1995).

Response: Public Law 95-507, as implemented at Subpart 19.7 of the

FAR requires that certain contractors, as a condition for receiving a

Federal contract, agree to provide the maximum practicable opportunity

to small business concerns, small disadvantaged business concerns, and

women-owned small business concerns to participate in contract

performance. This subpart requires the apparent successful offeror to

submit and negotiate a subcontracting plan to be eligible for award.

The requirements established by Pub. L. 95-507 remain public policy.

The Department's contracts for the management and operation of its

laboratories and facilities are subject to both the statutory and

regulatory requirements pertaining to the submission of small business

subcontracting plans. Because decisions made by a prime contractor

under the make-or-buy program have a direct impact on the nature and

number of subcontracting opportunities available under the contract,

the Department believes that a natural nexus exists between the

contractor's obligations under the requirements of Pub. L. 95-507 and

its make-or-buy program. Accordingly, it is both appropriate and

necessary that the contracting officer, in evaluating the contractor's

make-or-buy plan, consider the impact of make-or-buy decisions in the

context of the approved subcontracting plan.

In addition, the Department takes this opportunity to reaffirm its

commitment to diversity and the implementation of its diversity-related

authorities, including section 3021 of the Energy Policy Act of 1992

(42 U.S.C. 13556), section 241 and 641 of the Department of Energy

Organization Act (42 U.S.C. 7141, 7256) and Executive Orders 12876,

12900, and 13021. As part of its strategic plan for diversity, the

Department has established performance criteria and measures for

enhanced partnerships with small, small disadvantaged, and small women-

owned businesses; minority educational institutions; employees; and

communities. The Department has expressed publicly on numerous

occasions its intention to evaluate contractor performance consistent

with its policies and authorities as they may be interpreted and

implemented in light of Adarand.

The language at 970.1507-2(d)(5) has been modified to more closely

align the language to Pub. L. 95-507 requirements through the inclusion

of a cross-reference to the clause at FAR 52.219-9, Small, Small

Disadvantaged, and Women-Owned Small Business Subcontracting Plan, a

mandatory clause in the Department's management and operating

contracts. In addition, a new paragraph, 970.2601(b), has been added to

articulate fully the Department's diversity policy.

E. Comment: One commenter believes that the requirement of

paragraph 970.1507-2(a) that Department of Energy programmatic sponsors

develop criteria to override a ``least cost decision'' is in conflict

with the requirement in paragraph 1(a) of the same section that the

objective of the make-or-buy plan is to operate the site at least cost.

Two commenters expressed a similar belief, disagreeing with the

Department's proposed requirement that programmatic sponsors develop

make-or-buy criteria for work under their programs. These commenters

believed that (1) the Department's acquisition regulation is not the

appropriate vehicle to prescribe internal operating procedures, and (2)

conflicts will arise at multi-program sites regarding ultimate

responsibility for make-or-buy criteria.

Response: The Department does not agree with the commenters. The

purpose of the program specific make-or-buy criteria, as stated in

paragraph 970.1507-2(a), Development of program-specific make-or-buy

criteria, is to permit consideration of those factors that would make a

decision based on purely economic analysis inappropriate. To assess

make-or-buy opportunities solely on the basis of an economic analysis

artificially limits flexibility in business judgment and ignores the

reality of important programmatic and

[[Page 34850]]

policy factors that must be considered by both the Department and the

prime contractor.

Regarding the commenters' assertion that the Department's

acquisition regulation is not the appropriate vehicle to prescribe

internal operating procedures, Federal Acquisition Regulation (FAR)

1.301 provides for agency-specific acquisition regulations necessary to

implement and supplement the FAR. The purpose of agency acquisition

regulations, in conjunction with the FAR, is to set out agency

policies, procedures, contract clauses, solicitation provisions, and

forms that govern the agency's contractual relationships. The

Department recently completed an aggressive initiative to reduce its

acquisition regulations that resulted in a regulatory reduction of

approximately 50%. In promulgating new regulations, the Department

carefully considers whether the subject matter is best implemented by

regulation or by another mechanism. This approach was taken with

respect to all of the regulatory proposals set forth in the proposed

rule. The Department has determined that the coverage at Section

970.1507 is appropriately included in its acquisition regulation.

With respect to the concern that potential conflicts will arise

among the various programmatic interests at a particular site or

facility, the Department believes that appropriate mechanisms exist

within the Department's management infrastructure to ensure that the

program specific make-or-buy criteria applicable to a particular

contract will reflect the balanced needs of the facility or site and

its programmatic sponsors.

F. Comment: One commenter identified a potential inconsistency

between language in the preamble citing ``cost efficient and effective

manner'' as the underlying premise of DOE's make-or-buy policy and

language at paragraph 970.1507-1(a), citing ``least cost basis.'' The

commenter notes that ``best value'' approaches as opposed to ``least

cost'' approaches may be better suited under certain make or buy

scenarios. A second commenter expressed confusion over DOE's desire to

operate on a least cost basis as a contradiction to obtaining what the

commenter characterized as the ``best and highest value''.

Response: Paragraph 970.1507-1(a) sets forth the Department's

expectations for a contractor's make-or-buy plan that establishes ``a

preference for providing property or services * * * on a least-cost

basis''. That same paragraph elaborates on the Department's

expectations, as follows: ``[t]he emphasis of this make-or-buy

structure is to eliminate bias for in-house performance where an

activity may be performed at less cost or otherwise more efficiently

through subcontracting.'' (emphasis added).

The Department does not intend to equate the term ``least cost''

with ``low bid.'' Neither ``least cost'' nor ``efficiency'' are

synonymous with ``low bid'' contracting approaches. A work activity,

supply, or service is provided at ``least cost'' when, after

consideration of a variety of appropriate programmatic, business, and

financial factors, it is concluded that performance by either ``in-

house'' resources or by contracting out is likely to provide the

property or service at the lowest overall cost. Programmatic factors

include, but are not limited to, program specific make-or-buy criteria

established by the Department of Energy, the impact of a ``make'' or a

``buy'' decision on mission accomplishment, and anticipated changes to

the mission of the facility or site. Business factors pertain to such

elements as market conditions, past experience in obtaining similar

supplies or services, and overall operational efficiencies that might

be available through either in-house performance or contracting out.

Among the financial factors that may be considered to determine a

least-cost alternative in a make-or-buy analysis are both recurring and

one-time costs attributable to either retaining or contracting out a

particular item, financial risk, and the anticipated contract price. A

new paragraph (b) has been added to subsection 970.1507-1 to

incorporate this explanation of ``least cost'' basis to the regulatory

coverage.

Regarding the use of ``best value'' approaches, the prime

contractor is responsible for determining whether a particular supply

or service can be acquired on the basis of price only, or should be

acquired on a ``best value'' basis with appropriate trade-offs between

price and non-price factors. The Department believes that the policies

and requirements of 970.1507, and the corresponding contract clause at

970.5204-76, Make-or-Buy Plan, do not impinge on a contractor's

responsibility and discretion in this area.

G. Comment: With regard to paragraph 970.1507-2(c), one commenter

believes that the wording of the submission requirement may

contractually require the contractor to submit a make-or-buy plan prior

to the Department having developed its make-or-buy factors.

Response: Paragraph (a) of subsection 970.1507-2, Development of

program specific make-or-buy criteria, directs that the criteria

developed by the Department be provided to a contractor for use in

developing its make-or-buy plan for the facility or site. Paragraph (d)

of the same subsection instructs contracting officers to consider these

criteria in evaluating a contractor's make-or-buy plan. Further,

paragraph (c) of the contract clause provides that the contractor must

consider the program specific make-or-buy criteria in categorizing each

work item subject to inclusion in the plan. Accordingly, the Department

believes that the language of 970.1507, when read in conjunction with

paragraph 970.5204-76(c), clearly conveys the Department's intent that

a critical part of a contractor's make-or-buy plan is consideration of

the program specific make-or-buy criteria developed by the Department.

Indeed, the contractor cannot prepare an acceptable make-or-buy plan

absent consideration of such criteria.

H. Comment: A number of commenters were concerned with the clause

proposed at 970.5204-XX, Displaced Employee Hiring Preference, and its

relationship to the coverage concerning contractor Make-or-Buy Plans at

970.1507. In particular, one commenter recommended that the proposed

clause be modified to parallel the language in proposed clause

970.5204-XX(b)(3), Make-or-Buy Plan, regarding actions that contractors

are to employ to mitigate the social and economic impact of

subcontracting decisions, specifically with regard to retraining. Two

commenters believed that the clause regarding hiring preferences for

displaced workers is unclear, in regard to such matters as the general

scope of the coverage; subcontract flow down requirements; and defining

employees eligible for Section 3161 hiring preferences.

Response: Based on the comments received in response to the

coverage on make-or-buy plans and displaced employee hiring preference,

and after a careful review of the statutes, regulations, and the

Department's internal policies governing Section 3161 of the National

Defense Authorization Act for Fiscal Year 1993, the Department has

concluded that a number of changes are needed in the coverage to more

accurately conform the regulatory coverage with the intent of the

statute. Significant considerations in the Department's decision to

modify its regulatory coverage in this final rule were:

(1) A recognition, from both a policy and practical standpoint,

that a determination by the Secretary of Energy under Section 3161 that

a change in workforce at a defense nuclear facility is necessary is

separate

[[Page 34851]]

and apart from a contractor's make-or-buy decision;

(2) The requirements of Section 3161 apply to Department of Energy

defense nuclear facilities. Such facilities are identified in Appendix

C of the Department's Interim Planning Guidance for Contractor

Workforce restructuring (February 1996);

(3) In cases where the Secretary has determined that a change in

workforce is necessary, pursuant to Section 3161, and a workforce

restructuring plan is to apply to the facility or site, the management

and operating contractor must comply with the plan and use its best

efforts to mitigate the social and economic impacts of workforce

restructuring;

(4) The requirement under Section 3161(c) that a hiring preference

be provided, to the extent practicable, to contractor employees whose

employment in positions at defense nuclear facilities has been

terminated, is not limited to management and operating contracts and

subcontracts awarded thereunder. It applies to all Department of Energy

contracts; and

(5) Workforce restructuring and worker displacement resulting from

a Section 3161 determination are appropriate program specific make-or-

buy criteria that may be applied in certain cases to obviate make-or-

buy decisions based on a purely economic basis.

Accordingly, the Department has determined that the regulatory

coverage concerning Section 3161 should be separated from the

regulatory coverage of contractor make-or-buy plans. The regulatory

coverage regarding Section 3161 in this final rule is substantially the

same as that set out in the proposed rule.

The final rule makes the following changes:

(1) 970.1507, Make-or-buy plans. A section, consisting of 970.1507-

1, 970.1507-2, and 970.1507-3, is added to require management and

operating contractors to develop and implement make-or-buy plans.

(2) 970.5204-76, Make-or-buy plan. A clause is added to address the

make-or-buy plan requirement.

(3) 926.71, Displaced employee hiring preference. A subpart has

been added to 48 CFR Part 926 that implements the requirements of

Section 3161(c)(2) regarding hiring preferences under Department of

Energy contracts for employees whose employment was terminated as a

result of a determination by the Secretary that a change in workforce

was necessary at a Department of Energy defense nuclear facility.

Substantively, the language in Section 926.7101, Policy, of this new

subpart is the same as language in the proposed rule at 970.1705-

1(b)(3).

The definition of ``eligible employee'' found at Section 926.7102

is substantially the same as the definition that was in the proposed

rule at 970.5204-XX, Displaced Employee Hiring Preference.

Modifications were made to the definition to more closely conform the

definition to existing Department of Energy guidance. New Section

926.7103, Requirements, explains the application of the requirements of

Section 3161(c)(2) and identifies the Department of Energy Office of

Worker and Community Transition as the office responsible for matters

relating to implementation of Section 3161. New Section 926.7104

provides contract clause prescriptions.

(4) 952.226-74, Displaced employee hiring preference. This new

subsection contains a contract clause that implements the hiring

preference requirements of Section 3161. The text of the clause is

substantially the same as the clause in the proposed rule at 970.5204-

XX, Displaced Employee Hiring Preference. Modifications were made to

the definition of ``eligible employee'' in paragraph (a) to more

closely conform the definition to existing Department of Energy

guidance.

(5) 970.2601, Implementation of Section 3021 of the Energy Policy

Act of 1992. The existing paragraph is designated (a) and a new

paragraph (b) is added to state the goals of the Department's diversity

policy.

(6) 970.2602-1, Implementation of Section 3161 of the National

Defense Authorization Act for Fiscal Year 1993. Subsection 970.2602-1

has been added to 970.26, Other Socioeconomic Programs. This new

subsection recognizes that Department of Energy contractors and

subcontractors at Department of Energy defense nuclear facilities have

a responsibility to mitigate the social and economic impacts of

workforce restructuring and displacement resulting from a determination

by the Secretary that a change in workforce is necessary pursuant to

Section 3161. The new subsection requires a hiring preference for

employees whose employment has been terminated under a Section 3161

restructuring action and applies the hiring preference requirements of

48 CFR (DEAR) 926.71 to management and operating contracts. The new

subsection captures the intent of the language in the proposed rule

under 970.1507-1(b)(3), which stated in pertinent part: ``[p]otential

displacement may require the Department of Energy to prepare a work

force restructuring plan. The contractor shall implement the plan,

which may require the following initiatives for eligible workers

consistent with the objectives of Section 3161: retraining, early

retirement, or other options to avoid lay-offs; retraining for new

missions; out-placement assistance, including tuition reimbursement;

relocation assistance; and 60 days individual layoff notice.''

(7) 970.5204-77, Workforce Restructuring Under Section 3161 of the

National Defense Authorization Act for Fiscal Year 1993. A new contract

clause has been added that requires the contractor to comply with the

applicable Department of Energy Restructuring Plan for the Defense

Nuclear Facility and use its best efforts to mitigate the social and

economic impacts of workforce restructuring or displacement. This new

clause captures the intent of language in the proposed rule under

970.5204-XX(b)(3), Make-or-Buy Plan.

Item IV--Payment of Fee

Comment: One commenter requested that the Department limit the

contracting officer's authority to offset fee payments against

``amounts owed to the government by the contractor.'' This commenter

suggested offsets only be allowed against amounts owed to the

government on or under the specific management and operating contract.

The commenter stated that adopting this approach would conform the

Department's rule to the ``recently reauthorized Alternate I at FAR

Clause 52.232-23, Assignment of Claims,'' cited at 61 FR 29539 (June

11, 1996).

Response: The Department does not agree. The Federal Register

citation provided by the commenter addresses the need to facilitate the

private financing of defense contracts, particularly contracts to be

performed by small businesses. Management and operating contracts are

generally not performed by small businesses and typically provide for

advance payments. Department sees no reason to restrict its ability to

offset fee payments against any amounts owed to the government.

The final rule adopts the changes in the proposed rule, as follows:

970.5204-16, Payments and advances. This subsection is revised to

permit the contracting officer to either pay fee through draw downs

against special financial institution accounts or by direct payments.

In addition, contracting officer approval is required for fee payment

to be withdrawn against a letter of credit.

[[Page 34852]]

Item V--Laws, Regulations, and DOE Directives

A. Summary of 48 CFR (DEAR) 970.5204-78--Laws, Regulations, and DOE

Directives in This Final Rule

Paragraph (a) provides that the contractor is obligated to comply

with applicable Federal, state, and local laws and regulations, unless

relief has been granted in writing by the appropriate regulatory

agency. In addition, this paragraph provides that a List of Applicable

Laws and Regulations (to be labeled List A) identifying all applicable

Federal, state, and local laws and regulations, including Department of

Energy regulations, may be appended to the contract, but the contractor

is not excused from compliance with applicable laws and regulations in

the event a law or regulation is omitted from the List.

Paragraph (b) provides for the inclusion of a List of Applicable

Directives (to be labeled List B) containing a listing of Department of

Energy directives, or parts thereof, applicable to a particular

contract on the effective date of the contract, and explains the

mechanism to be used by the Department to revise List B. (Compliance

with applicable Department of Energy regulations is required under

paragraph (a), and these regulations should be included in List A when

such a list is prepared by the contracting officer.) When the

contracting officer decides to revise List B, the contractor is given

an opportunity to assess and advise the contracting officer of the

potential impact of such a revision. When revisions to List B are

necessary, they are made in accordance with the Changes clause of the

contract.

With regard to paragraph (c), revisions in the language now provide

that a contractor may develop tailored environment, safety, and health

requirements as appropriate for the work and associated hazards at a

facility or site using any Department-approved process. This may

include Work Smart Standards (WSS) (formerly the Necessary and

Sufficient Process), the Standards/Requirements Identification Document

(S/RID) Process, or any other approved tailoring process as described

in a contractor's Safety Management System. The Integration of

Environment, Safety, and Health into Work Planning and Execution clause

published in this final rule describes the Safety Management System and

tailoring of requirements at subparagraphs (b)(5) and (c). Finally, the

clause makes clear that when the appropriate set of ES&H requirements

identified by using any Department-approved process does not include a

requirement of an applicable law or regulation, a contractor must

request and obtain an exemption from the law or regulation and must

abide by the requirement until relief is granted by the appropriate

regulatory agency.

The Department expects that when the clause describing the Safety

Management System and the Directives clause are included in the

contract, the contractor will develop a Safety Management System. One

essential element of the Safety Management System is the evaluation of

the work and associated hazards by use of a Department-approved

tailoring process such as WSS or S/RIDs. As discussed above, the

Department also recognizes that other tailoring processes may be

developed and, when approved for use by the Department, may be used.

Moreover, the Department plans to actively participate in the tailoring

process. Among other responsibilities, the Department must approve the

use of any tailoring process and the final set of ES&H requirements

produced by use of the process. The Department anticipates working

cooperatively with the contractor in the evaluation of the work and

hazards and identification and selection of the ES&H requirements.

This clause provides a uniform contractual mechanism by which sets

of tailored ES&H requirements produced by any Department-approved

process could be incorporated into contracts. If any Department-

approved tailoring process concludes before a contract is executed, the

resulting set of standards should be used as the basis for developing

the initial list of environment, safety, and health requirements. If

the set of standards is developed and approved after execution of the

contract, it would be incorporated into the contract pursuant to

paragraph (c), and would substitute for environment, safety, and health

requirements identified in List B.

Information and background on the S/RID development process may be

found in the Department of Energy Implementation Plan in response to

the Defense Nuclear Facilities Safety Board Recommendation 90-2

(Revision 5; November 1994), and in Standards/Requirements

Identification Document Development and Approval Instruction (September

1994). The Work Smart Standards Process (formerly the Necessary and

Sufficient Closure Process) is described in Department of Energy

Closure Process for Necessary and Sufficient Set of Standards (DOE M

450.3-1, January 25, 1996). The Safety Management System is described

in ``Safety Management System Policy,'' (DOE P 450.4, October 15,

1996).

B. Compliance With List of Applicable Laws and Regulations (Para. a of

Directives Clause)

Comment: Two commenters opposed the inclusion of the list of

applicable laws and regulations because they believed the clause was

overly burdensome and unnecessary. One commenter stated that a

requirement to obtain written confirmation of what laws and regulations

were applicable was too burdensome. Another commenter contended that

the list was unnecessary because contractors were expected to comply

with applicable laws and regulations regardless of whether or not they

were included in the list.

Response: The Department does not believe that providing the list

places a burden on the contractor. The clause does not require a

contractor to seek confirmation from Federal, state, or local

authorities as to whether a law or regulation is applicable or not. In

contrast, exemption relief from a law or regulation that is applicable

must be granted in writing by the appropriate authority.

C. Compliance With List of DOE Directives (Para. b of Directives

Clause)

Comment: One commenter objected to the list of directives because

it believed that the clause requires the contractor to determine which

directives are applicable to the contract and that the list would

become a ``moving target'' because the Department expected compliance

with both existing and future versions of a directive. Two commenters

stated that changes within DOE directives amount to changes in the

contract and must be subject to mutual agreement between the parties.

Unilateral modification of the list of directives would increase the

cost of performance. Another commenter believed that a list of

directives was counterproductive and inconsistent with the National

Performance Review objectives. The commenter also opined that the

process was micro-management and argued that the list of directives

could contain not only the order requirements but also guidance

documents as well. Two commenters stated that the Department should be

limited in its ability to impose contractual requirements if it failed

to provide adequate funding to perform the work. They argued that some

type of dispute resolution process should be added to resolve questions

regarding the applicability of a directive or on adequate funding.

Finally, one commenter believed that the suggested 30-day assessment

period given when

[[Page 34853]]

the contracting officer proposed to add or revise the list of

directives was too short.

Response: The clause published today does not require a contractor

to determine the applicability of a directive. Applicability will be

determined based on the List of Applicable Directives. Substantive

revisions or updates to a listed directive do not automatically become

contract requirements. The clause provides for the contractor to assess

the impact of a directive's revision and to discuss the impact with the

Department. However, it remains the Department's prerogative to impose

requirements by listing a directive. The Department anticipates that it

will make every effort to consider contractor concerns regarding a

change but fundamentally disagrees that mutual agreement on changes to

what is contained in the list of directives is necessary before such

changes may be imposed as contract requirements. The Department

reiterates its commitment to streamline its directives and believes

that its efforts to date are consistent with National Performance

Review objectives. Moreover, efforts to include guidance documents as

mandatory requirements will be actively discouraged. Finally, based on

past experience, the Department believes that a 30-day assessment

period is sufficient time to perform a review of a revised directive

and points out that nothing in the clause prevents a contractor from

asking the contracting officer for more time, if needed.

D. Use of Department-Approved Processes for Tailoring Environment,

Safety, and Health Requirements (Para. c of the Directives Clause)

Comment: One commenter objected to being forced to use the S/RID

Process because it was not a defense nuclear facility. Another

commenter advised that use of the S/RID and the Necessary and

Sufficient Processes should be clarified to include a review of the set

of standards by the contractor prior to the incorporation into the

contract. A third commenter advised that, based on a Department

Standards Committee decision, the S/RID process was not available for

use after April 1, 1996. Finally, a commenter objected to the

incorporation of the set of standards derived from the use of the S/RID

and Necessary and Sufficient Processes unless the Department approved

the sets.

Response: The clause does not compel the use of either the S/RID or

the Work Smart Standards Process (formerly the Necessary and Sufficient

Process). Other Department-approved processes for tailoring

environment, safety, and health requirements to the particular work and

associated hazards may be used as part of, and in concert with, the

development of a Safety Management System. There also appears to be a

basic misunderstanding of how the Work Smart Standards process is

conducted. The process contemplates contractor and Department

cooperation in every aspect of selecting standards. Accordingly, prior

to incorporation of the results of such a process into the contract,

both the contractor and the Department will have reviewed the selected

standards. Finally, with regard to Department approval of the set prior

to incorporation into the contract, the Work Smart Standards Process

and the S/RID Process provide that Department approval of the final set

is mandatory.

The final rule makes the following changes:

1. 970.04, Administrative Matters. Section 970.0470, Department of

Energy directives, is added, describing the Department of Energy

directives system.

2. 970.5204-78, Laws, Regulations, and DOE Directives. A clause is

added to identify directives and related requirements applicable to a

specific contract.

Item VI--Environment

A. As indicated in the ``Background'' section to this rulemaking,

the notice of proposed rulemaking was re-opened on October 15, 1996,

(61 FR 32588). That notice proposed further changes to 48 CFR (DEAR)

970.5204-2, Safety and Health reflecting the Defense Nuclear Facilities

Safety Board's (DNFSB) Recommendation 95-2, Integrated Safety

Management and the Department of Energy's Implementation Plan, dated

April 18, 1996, responding to that recommendation. The revisions to the

clause proposed at that time included: (1) a change in the title of the

clause; (2) the addition of guiding principles for contractors to

follow in the performance of work as outlined in the Department's

Implementation Plan dated April 18, 1996, for DNFSB Recommendation 95-2

and the Department's Safety Management System (SMS) Policy, DOE P

450.4; and (3) a requirement for submission of a documented SMS. Safety

was defined to include environment, safety, and health (ES&H).

The requirement for an SMS is intended to be the cornerstone of the

95-2 implementation effort of integrating environment, safety and

health into business systems and work management processes throughout

the Department's complex. The clause describes the Department's

expectations for contractors and subcontractors to perform work safely.

While these expectations for performing work safely are contract

requirements, the Department anticipates that each facility or site

will tailor the efforts commensurate with the work and associated

hazards.

The submission of an SMS description does not conflict with, or

create a greater burden than, the submission of the ES&H Management

Plan described in the ES&H clause published in the original proposed

rule of June 24, 1996. Submission of an SMS description expands the

submission of an ES&H Management Plan, and the SMS encompasses the same

integrated safety management functions (e.g. work planning, budgeting,

priority-setting, and work execution). The clause expands and modifies

the original language to assure that contractors understand Department

expectations regarding integrated safety management. Specifically, the

clause requires documentation of the contractor's SMS for approval by

the Department. This establishes an agreement between the contractor

and the Department on how the contractor will ensure the protection of

employees, the public, and the environment.

The submission and approval of an SMS description would likely be

done on a one-time basis at the start of a contract. The clause also

requires that the contractor provide annual documented updates and that

the Department and the contractor mutually agree on ES&H performance

objectives, performance measures tied to contract incentives, and

performance commitments. Such commitments are intended to highlight the

contractor's most significant ES&H priorities specific to work to be

accomplished, as well as assure that major obligations to external

oversight and regulatory bodies are met within budget constraints.

Accordingly, the contractor, in its annual updates, must identify the

resources needed to conduct work safely in terms of ES&H support and

assure appropriate skill mix and numbers of personnel in the ES&H area.

The clause requires documentation of the SMS, including development

and implementation of hazard controls and the establishment of an

agreed-upon set of ES&H standards and requirements. The contractor,

with Department approval and active participation, may use Department-

approved tailoring processes that evaluate the work and the hazards at

individual facilities or sites, such as Work Smart Standards (WSS) or

Standards/Requirements Identification Document (S/RID). Paragraphs (b)

and (c) of this clause and the contract clause

[[Page 34854]]

entitled Laws, Regulations and DOE Directives describe the use of

processes for tailoring requirements for a facility or site and provide

the contract mechanism by which the tailored set of environment,

safety, and health requirements is to be incorporated into the

contract.

The contractor may also require subcontractors to submit an SMS

description, depending on the complexity and nature of the hazards

associated with their work. The contracting officer will provide

guidance for the flowdown of ES&H requirements in subcontracts.

B. Integrated Safety Management, DNFSB Recommendation 95-2

Comment: Three commenters to the original proposed rule stated that

the proposed environment, safety, and health clause needed to address

the Defense Nuclear Facilities Safety Board (DNFSB) Recommendation 95-

2. One commenter stated that including a reference in the clause to the

guidance document for DNFSB Recommendation 95-2 would make that

document mandatory when, in fact, it is not and should be guidance. One

commenter noted that the guidance is yet to be developed and

recommended it be removed as a reference. One commenter stated that by

adding the seven guiding principles to the clause, they become

mandatory requirements. The commenter explained that the original seven

principles were meant as guidance and recommended language providing

that contractors should conduct business consistent with the principles

instead of requiring their implementation. The same commenter

recommended that dates for submittal of the Safety Management System

(SMS) be mutually agreed upon by the contracting officer and the

contractor.

Response: The Department agrees with the commenters on addressing

DNFSB Recommendation 95-2 and the clause has been revised to

incorporate those concepts. The clause includes the principles outlined

in the Department's Implementation Plan for DNFSB 95-2 and adopted in

the Department's SMS Policy 450.4; it requires the development and

maintenance of an SMS that fulfills the conditions of those principles.

The Department also agrees that referring to the guidance document, DOE

Guide G 450.4, may be confusing and has deleted it from the clause. The

Department expects that contractors will adhere to the seven principles

during the performance of work and, therefore, has laid out the

essential elements of a Safety Management System. In addition,

paragraph (c) of the clause provides that an SMS shall fulfill all the

conditions stated in the guiding principles. Finally, the Department

expects that contracting officers will set reasonable dates for

document submittal based upon discussions between the contracting

officer and the contractor. Therefore, mutual agreement between the

contractor and the Department regarding submittal dates is not needed.

C. Clarification of Requirements and Terms

Comment: Three commenters stated that the requirement in the clause

to comply with all applicable Federal and non-Federal environment,

safety, and health laws, regulations, and applicable directives needed

to be clarified. The commenters explained that the Department should

identify the specific laws, regulations, and directives are applicable

to contractors. One commenter stated that one way to be clearer about

how directives are identified is to identify or reference,

specifically, the Laws, Regulations, and DOE Directives clause in this

clause.

Another commenter recommended that the Department make clear that

the Necessary and Sufficient and Standards/Requirements Identification

Document (S/RID) processes were not the only methods by which

environment, safety, and health (ES&H) requirements could be

identified. The commenter proposed additional language that permits the

Department and the contractor to mutually agree upon alternate

processes for identification of ES&H requirements.

One commenter stated that the use of the terms ``workers'' and

``employees'' in the clause could cause confusion by implying two

different sets of personnel. Another commenter stated that using the

phrase ``ensuring ES&H'' was too vague and the phrase ``hazard

controls'' was too narrow in context. The commenter recommended using

language such as ``managing ES&H'' and ``work controls'' respectively.

One commenter found the inclusion of subcontractor employees in the

definition of the terms ``employees'' and ``line management''

troublesome. The commenter believed that the language could be used to

assert that contractors have a legal duty of care to protect

subcontractor employees from harm thus exposing contractors, as well as

the Department, to liability for subcontractor employee injuries where

ordinarily none would exist. One commenter stated that paragraph (h) of

the proposed clause required a language modification because

contractors cannot be responsible for the ES&H performance of a third

party.

Another commenter recommended deletion of the requirement in the

clause that the contractor cooperate with Federal and non-Federal

agencies having jurisdiction over ES&H matters or changing the clause

so that a contractor would retain the right to contest agency

allegations that it has failed to comply with laws, regulations, or

directives.

Response: The Department generally agrees with these comments and

has referenced 970.5204-78, Laws, Regulations, and DOE Directives, in

this clause. In response to the comment about the use of alternative

tailoring processes other than Work Smart Standards (WSS) or S/RIDs,

the Department has changed the language in the clause to allow a

contractor to use any Department-approved tailoring process. See II--

Disposition of Comments, Item V, of this rulemaking for further

discussion.

The Department agrees with the comment regarding the use of the

terms ``workers'' and ``employees'' and has revised the clause to use

only the term ``employees''; however, no changes were made to

``ensuring ES&H'' and ``hazard controls'' because these phrases appear

in the Department's Implementation Plan for DNFSB Recommendation 95-2

and have gained general acceptance by the Department of Energy complex.

In response to the comment that the Department has created a new

duty of protection for subcontractor employees, the Department believes

that the language does not create a legal duty of care.

The Department does not agree that paragraph (h) of the clause

needs to be modified. This paragraph establishes the requirement for

contractors to be responsible for compliance with ES&H requirements

regardless of the performer of the work. The Department's intent in

this paragraph is that contractors be responsible for ensuring

compliance with ES&H requirements for all parties who are doing work at

the Department's facilities, including visiting scientists and students

for whose activities the contractor is responsible.

The Department retained the requirement for cooperating with

Federal and non-Federal agencies. ``Cooperation'' with an agency does

not mean that a contractor loses its right to contest non-compliance

allegations.

D. Stop Work Order

Comment: Two commenters concluded that contractors should be

entitled to an extension of time or additional fee if a contracting

officer mistakenly issues a stop work order. One commenter believed

that the clause

[[Page 34855]]

should state that a stop work order should be issued only after the

contracting officer has notified the contractor in writing and after

the contractor has had a reasonable opportunity to take corrective

action. This same commenter also stated that a stop work order should

only be issued for a substantial noncompliance, imminent danger, or

substantial harm to the environment. In any event, the commenter

explained, the contracting officer should only stop the specific work

that has experienced the noncompliance and should allow restart of this

work after that noncompliance has been abated. One commenter stated

that the clause permits only the Department to restart work even if it

is stopped by the contractor. The commenter suggested that authority

should be given to contractors to restart work that they have stopped.

Another commenter requested that the Department establish time frames

in the contract clause during which the contractor will have the

ability to evaluate non-compliances and initiate remedies without the

threat of a stop work order.

Response: The Department places its highest priority on performing

work safely and has determined that contractors who act or fail to act

causing a danger to employees or to the public should not be entitled

to an additional fee or extension of time in the event the contracting

officer issues a stop work order. When a contracting officer issues a

stop work order under this clause, it is intended that sufficient

Department review of cause occurs. The Department must retain the

authority to stop work in whole or in part based on the unsafe conduct

of work on the part of the contractor. The Department agrees with the

suggestion that when contractors have issued a stop work order, they

should be able to restart work; the clause has been revised

accordingly.

E. Exercising Care Commensurate With Hazards

Comment: One commenter stated that paragraph (b) of the SMS clause,

requiring a contractor to exercise a degree of care commensurate with

the harm involved, goes beyond the protection afforded by applicable

law. The commenter suggested that the clause specify that the care

exercised by contractors is limited to requirements of applicable law.

Response: The Department does not agree with the commenter's

suggestion. The variety of missions assigned to the Department and the

number of hazardous materials controlled and managed by the Department

warrant the exercising of care associated with the particular hazard of

any operation or material. The SMS helps to ensure that contractors

will focus on work planning and make all reasonable attempts to perform

work safely.

F. Use of Authorization Agreement

Comment: A commenter expressed concern about the use and timing of

authorization agreements.

Response: The Department understands the concern expressed by the

commenter and is deleting the term, ``authorization agreement,'' from

the clause. In accordance with subparagraph (b)(7), depending upon the

hazards existing at a facility or site, certain contractors and the

Department may also execute additional agreements for highly hazardous

operations. Guidance on these agreements will be furnished by the

contracting officer.

The final rule makes the following changes:

1. 952.223-71, Safety and health. The title of this subsection for

non-management and operating contracts is changed to be consistent with

970.5204-2, Integration of environment, safety, and health into work

planning and execution.

2. 952.223-74, Nuclear facility safety applicability. This

subsection is removed.

3. 952.223-75, Preservation of individual occupational radiation

exposure records. The clause prescription is revised.

4. 970.2303-2, Clauses. Paragraphs (c), (d), and (e), prescribing

clauses at 970.5204-26, 970.5204-41, and 970.5204-62, respectively, are

removed, since these clauses are also being removed.

5. 970.5204-2, Integration of environment, safety, and health into

work planning and execution. Environmental requirements are added to

those for safety and health in this clause. A requirement for a Safety

Management System is also added.

6. 970.5204-26, Nuclear facility safety. This clause is removed.

7. 970.5204-41. Preservation of individual occupational radiation

exposure records. This clause is removed.

8. 970.5204-62, Environmental protection. This clause is removed.

Item VII--Ownership of Records

Nine commenters provided views on this issue.

A. Title of the Clause

Comment: One commenter believed that the title of this portion of

the regulation should be revised to read ``Access to and Ownership of

Records.'' This suggestion reflects the view that the real issue being

addressed is who has a right of access to records maintained by the

Department's contractors. The commenter believed that the Department

should avoid any implication that contractor records in the possession

of a contractor are subject to the Freedom of Information Act (FOIA)

merely because they are available to the Department. Another commenter

requested that the Department clarify the right of access that the

public would have to records covered by paragraph (b) of the clause.

Response: The title of the clause has been changed to read,

``Access to and Ownership of Records,'' to reflect the fact that this

clause delineates the government's rights of access to, and ownership

of, records acquired or generated in the performance of the contract.

The public's right of access to government-owned records in the

possession of the contractor is described in section 1004.3(e) of the

Department of Energy Freedom of Information Regulation, 10 CFR Part

1004. Under section 1004.3(e), government-owned records in the

possession of the contractor may be subject to disclosure under FOIA,

if they meet the requirements enumerated in the regulation. However,

contractor-owned records in the possession of the contractor are not

subject to FOIA, even though they are accessible to the Department.

Although records that come within the Department's possession generally

are subject to FOIA, such records also are subject to withholding under

the FOIA's nine exemptions, as appropriate. The Department will protect

sensitive records from disclosure in accordance with the FOIA and other

applicable laws. Also, in the interest of clarity, the title of

paragraph (a) has been revised to read ``Government-owned Records,''

and the title of paragraph (b) has been revised to read ``Contractor-

owned Records.''

B. Paragraph (a) of the Clause

Comment: Three commenters disagreed with the Department's view that

records created or acquired by the contractor in connection with work

performed under management and operating contracts, and thus paid for

by the government, are the property of the government. In addition, one

of these commenters believed that it was inappropriate to view as

government property, documents that were paid for through overhead

charges under the contract, while another believed that the entire

concept of ownership of records

[[Page 34856]]

is unworkable and needs to be reconsidered. Another commenter believed

that the language in paragraph (a) of the clause which provides that

``all records acquired or generated by the contractor in the

performance of the contract shall be the property of the Government''

could be interpreted to include records created at the contractor's

expense and, therefore, recommended that the matter be clarified.

Response: Through this clause, the Department seeks to standardize

the manner in which records acquired or generated under its management

and operating, and similar, contracts are treated. Generally, all

records generated or acquired by the contractor in connection with work

performed under management and operating contracts or similar contracts

for the management of the Department's owned or leased facilities have

been considered the property of the government. This view stems from

the unique nature of these contracts. Under management and operating

contracts and similar contracts, the work is performed at government

facilities and is closely related to the Department's mission. Separate

companies or subsidiaries that are wholly or substantially separate

from the company's other business generally are established to conduct

the work at these facilities. The contractors at these facilities are

performing work identified and approved by the government. The work is

of a long-term and continuing nature, often far exceeding the term of

any one contractor. Therefore, the Department needs to be able to

preserve all records in order to ensure a continuity of functions and

the orderly transition of the personnel and the work in the event of a

change of contractors. Documents generated or acquired in the

performance of these contracts provide a record of the activities

undertaken by the Department in furtherance of its mission. Under these

circumstances, it is not surprising that the government has asserted an

ownership interest in all records that the Department pays for under

these contracts. To the extent that the Department has granted

contractors the option to own certain types of these records, it does

so only under the explicit condition of an absolute right of access to

the records during the course of the contract and of complete reversion

of the records to the Department upon termination of the contract. In

this context, the term ``contractor-owned records'' must be understood

to include the right of access by, and reversion to, the government.

Conversely, records for which the contractor is not reimbursed,

directly or indirectly, under the contract are not considered to be

records ``acquired or generated in the performance of the contract''

and would not be covered by this clause.

C. Paragraph (b) of the Clause

Comment: Six commenters believed that the list of records owned by

contractors should be expanded to include legal documents, including

those that are covered by the attorney-client and attorney work product

privileges. Another commenter believed that all records related to

claims and complaints should be included in the list of contractor-

owned documents. One commenter believed that the list of contractor-

owned records should be expanded to include documents related to

ethics, employee concerns, and other investigations conducted under an

expectation of confidentiality.

Response: As a preliminary matter, the Department notes that the

categories of records listed in paragraph (b) are the maximum types of

records that during the term of the contract may be considered the

property of the contractor. When negotiating the contract with the

government, the contractor may choose not to include any or all of the

categories listed from coverage under paragraph (b). The parenthetical

language in the introduction to paragraph (b) has been revised to

clarify this matter. With respect to legal records, the Department

believes that privileges are best protected in the event of a change in

contractors by maintaining them as government-owned. Nonetheless, so

long as the government retains an absolute right of access and

reversion, the Department agrees to allow contractors the option to

assert ownership. Accordingly, paragraph (b) is amended to include

legal records among those that the contractor may choose to own. In

response to the other comments, subparagraph (b)(1) has been revised to

include ``records on ethics, employee concerns, and other employee

related investigations conducted under an expectation of

confidentiality'' and ``employee assistance program records.''

Comment: Another commenter noted that, under some management and

operating contracts, certain employment related records are required to

be maintained under a Privacy Act system of records. The commenter

further stated that the Privacy Act only covers records maintained by,

or on behalf of, a federal agency, and, therefore, concluded that, when

records maintained by the contractor must be kept in a Privacy Act

system of records, they must be considered government property. The

commenter recommended that subparagraph (b)(1) of the clause be revised

to clarify this matter.

Response: The Department agrees that Privacy Act records that are

maintained by contractors on behalf of the Department are government-

owned. Therefore, subparagraph (b)(1) has been revised to make clear

that records that, under the contract, are being maintained in a

Privacy Act system of records are not covered by subparagraph (b)(1).

Comment: Another commenter suggested that subparagraph (b)(3) be

revised to cover all records related to any procurement action by the

contractor. The commenter believed that the term ``non-accounting

records'' is ambiguous and could create confusion in the event of

Freedom of Information Act requests.

Response: The term ``nonaccounting'' records was used to ensure

consistency between the provisions of the proposed Ownership of Records

clause and paragraph (d) of DEAR clause 970.5204-9, Accounts, records,

and inspection. DEAR 970.5204-9(d) provides that, unless the parties

agree otherwise, ``all financial and cost reports, books of account and

supporting documents, and other data evidencing costs allowable,

revenues, and other applicable credits under this contract, shall be

the property of the Government * * *'' The reference to

``nonaccounting'' records was included in the proposed rule to clarify

that subparagraph (b)(3) is not intended to change the designation of

records described in DEAR 970.5204-9(d) from government-owned to

contractor-owned. To further clarify this matter, the language in

paragraph (b)(3) has been revised by deleting the word

``nonaccounting'' and including a specific reference to the exception

contained in DEAR clause 970.5204-9.

D. Paragraphs (c) and (d) of the Clause

Comment: Four commenters had varying, but related, suggestions for

revising paragraphs (c) and (d) of the proposed clause. In general,

they recommended that paragraphs (c) and (d) be revised to provide that

copies of certain contractor-owned records (e.g., legal opinions,

litigation files, and other documents covered by the attorney work

product and attorney-client privileges, investigations of employee

related concerns conducted under an expectation of confidentiality, and

confidential contractor financial information and correspondence

between the contractor and its parent, affiliates, and divisions

located away from the Department facility) be

[[Page 34857]]

excluded from the audit, inspection, copying, and delivery authorities

provided in these paragraphs. The concern is that once copies of these

documents are provided to the Department, they will be available to the

public under the Freedom the Information Act, and any privileges

against disclosure will be lost. Some commenters also believed that the

breadth of disclosure required by paragraphs (c) and (d) would have a

chilling effect on a contractor's operations, because it would

discourage the free exchange of ideas among contractor employees and

between the contractor and its counsel. Also, two commenters suggested

that these paragraphs should be revised to clarify that records

generated without reimbursement from the Department would not be

subject to copying and delivery under paragraph (c) or audit,

inspection, and copying under paragraph (d). Another commenter

requested that paragraph (c) be revised to provide expressly for the

contractor's right of access to records after termination of the

contract. Another commenter requested that the paragraphs be revised to

clarify that the government's use of personnel records or other

personal information would be consistent with applicable federal laws,

including the Privacy Act. This commenter and one other also suggested

that the regulation provide that the government's right of access to

contractor records may be negotiated on a case-by-case basis to enable

the parties to address a contractor's obligations under state law.

Finally, in contrast to the comments provided above on paragraphs (c)

and (d) by private companies and nonprofit organizations, the National

Institute for Occupational Safety and Health (NIOSH) believed that the

government's right to inspect, audit, and copy contractor-owned records

must be maintained. NIOSH emphasized the importance of the Department

maintaining access to records needed to conduct exposure assessment and

epidemiologic research, including contractor-owned records that have

personal identifiers.

Response: As indicated above, this clause is being promulgated to

facilitate uniform treatment of records acquired or generated in the

performance of the Department's management and operating and similar

contracts. Records for which the contractor is not reimbursed, directly

or indirectly, under the contract are not considered records ``acquired

or generated in the performance of the contract'' and would not be

covered by this clause. Records that the Department pays for, directly

or indirectly, under the contract are considered the property of the

government. Also, as previously noted, the government can and will

protect records that come into its possession from disclosure under the

Freedom of Information Act, as appropriate. With respect to the

suggestion to exclude certain categories of records from the coverage

of paragraphs (c) and (d), the Department disagrees. The Department

believes that the right to audit, inspect, and obtain copies or records

is essential to ensure continuity and to enable the government to carry

out responsibilities imposed by statute and regulation. For example,

access to, and copies of, contractor-owned medical records may be

necessary to enable the Department to carry out its public health and

safety responsibilities under existing law. The right to obtain copies

of records is not intended to discourage the free exchange of ideas

among contractor employees, but rather to ensure that the Department

can perform its functions. As noted above, the government will withhold

records from disclosure under the Freedom of Information Act, as

appropriate. Moreover, most records that are transferred to successor

contractors under paragraph (c) do not come into the possession of the

government, and therefore access to such records under the Freedom of

Information Act is not increased. With respect to personnel records,

the government's use and disclosure of such information will be

consistent with applicable laws. To the extent the government under

paragraphs (c) or (d) obtains copies of contractor-owned records that

are covered by subparagraph (b)(1), such as personnel, medical, or

other employment-related records, such records will be maintained in

Privacy Act systems of records, and the use and disclosure of these

records would be covered by that Act. Paragraphs (c) and (d) have been

revised to make clear that the government's use of records obtained

pursuant to paragraphs (c) or (d) shall be in accordance with

applicable federal laws, including the Privacy Act. If, in an unusual

situation, additions or changes to these paragraphs are necessary or

appropriate, section 901.403 of the Department of Energy Acquisition

Regulation, entitled ``Individual Deviations,'' provides authority for

approval of deviations that are clearly in the best interests of the

government. Finally, paragraph (c) does not preclude the contractor

from keeping copies of any or all of the records generated or acquired

under the contract upon termination or completion of the contract. The

Department, therefore, believes that this paragraph provides ample

opportunity for the contractor to maintain access to contract records.

Comment: One commenter requested that the term ``designee'' be

limited to other federal agencies, to address its concern that

contractor-owned records could be turned over to a private party

without compensation to the contractor and with no restrictions on the

use of the information by the private party.

Response: As noted above, the government has asserted an ownership

interest in all records that the Department pays for, directly or

indirectly, under the contract. The contractor is not entitled to

additional compensation for providing copies of these records to the

Department or its designee, nor is it entitled to impose restrictions

on the use of this information. The term ``designee'' must remain

sufficiently broad to encompass private parties, because the Department

sometimes requires the services of private parties to help carry out

its functions. For example, the Department must be able to provide to

successor contractors the documents necessary to carry out their

responsibilities under the contract. Also, federal agencies frequently

rely on the services of academic researchers to carry out

epidemiological studies.

E. Paragraph (e) of the Clause

Comment: Two commenters believed that the Department is attempting

to assert ownership of records that it has no legal right to claim

(e.g., records that the contractor may have brought with it at the

start of performance of the contract or records provided to the

contractor by its corporate headquarters or affiliates during

performance of the contract). One of the commenters requested that the

clause be revised to make it clear that requirements of this paragraph

do not apply to records that were created with funds that are not

related to the current contract.

Response: Paragraph (e) is intended to ensure that management and

operating contract records provided to the contractor during the

transition from one management and operating contractor to another

remain available to the government for audit, inspection, and copying.

As indicated above, this clause does not apply to records that the

contractor pays for with its own funds.

F. Paragraph (f) of the Clause

Comment: One commenter recommended that contractor-owned records be

exempt from the record retention schedules referenced in this

[[Page 34858]]

paragraph. The commenter believed that this requirement is inconsistent

with the concept of ownership and could conflict with corporate

retention schedules that in some cases may exceed the government's

requirements. Another commenter observed that the imposition of

Department of Energy record retention schedules on contractor records

will involve substantial storage costs and further noted that DEAR

970.5204-13(e)(23) provides that, after completion of the contract,

costs associated with the storage of records pertaining to the contract

are unallowable. The commenter recommended that DEAR 970.5204-13(e)(23)

be revised to allow the contractor to recoup any increase in storage

costs that would result from this requirement.

Response: The Department believes that application of the records

retention schedules are necessary to ensure that the Department's

contractors employ uniform approaches to the collection, maintenance,

and disposition of records that the government pays for under its

management and operating and similar contracts. When a contract is

terminated or completed, the government may exercise its right to

obtain copies and delivery of certain contract records. Once acquired,

the Department does not anticipate that the government would continue

to require that the contractor maintain its copy of those records.

Accordingly, paragraph (f) is revised to provide that the government

may waive the application of the records retention schedules when,

under paragraph (c), the government requests copies and takes delivery

of the records described in paragraphs (a) and (b).

G. Paragraph (g) of the Clause

Comment: One commenter believed that the requirement to flow down

the terms of this clause to certain subcontracts will reduce the pool

of eligible subcontractors because they will not want to risk the

Department's claim of an ownership interest in company records. Another

commenter believed that the flow down requirement will increase

significantly the operating costs of management and operating

contractors and their subcontractors. In the view of this commenter,

the increased costs are related to additional requirements to create,

maintain, and ship records as well as additional storage space that may

be required to house the documents delivered to the Department. This

commenter believed that this requirement was inconsistent with the

Paperwork Reduction Act. A third commenter believed that this paragraph

would be difficult, if not impossible, to implement, but offered no

reasons for this view.

Response: The Department received no comments from potential

subcontractors objecting to the flow down of this clause. In light of

this fact, the Department has no reason to believe that the pool of

eligible subcontractors will be significantly affected by this

requirement. With respect to the view that this requirement will

substantially increase the cost of these contracts and the paperwork

burden imposed on the contractor, the Department has revised paragraph

(c) to provide that, upon termination or completion of the contract,

contractors will be required to deliver only those records that the

Department requests. In addition, paragraph (f) has been revised to

provide that, if the government exercises its right under paragraph (c)

to obtain copies and delivery of the records, the government also may

waive record retention schedules that apply to records in the

possession of the contractor. With respect to the Paperwork Reduction

Act issue raised, the Department notes that this clause does not

require the contractor or its subcontractors to create any records or

collect any information. It merely addresses the ownership and

disposition of records that are acquired or generated in performance of

the contract.

The final rule makes the following changes:

1. 970.0407, Alternate retention schedules. This section is

redesignated 970.0407-1.

2. 970.0407-2, Access to and ownership of records. This subsection

is added to explain the circumstances under which contractor ownership

of certain records may be appropriate.

3. 970.5204-79, Access to and ownership of records. A clause is

added to identify government-owned records; contractor-owned records;

the government's rights to inspection, copying, use, and audit of

records; and records retention requirements under the contract.

Item VIII--Management and Operating Contract Overtime Practices

A. Overtime Control Plan Requirement

Comment: Six commenters provided information related to the

requirement for an overtime control plan. Five commenters opposed the

requirement for an overtime control plan. Four of these five believed

that this requirement was micro-management, unnecessarily prescriptive,

and/or antithetical to the Department's philosophy of contract reform.

One commenter believed that achieving control of overtime costs would

be better achieved through the use of contract incentives or the award

fee process because the preparation of an overtime control plan would

be costly, the plan would not guarantee control of overtime costs, and

adherence to a plan would reduce contractor flexibility to cope with

changing workloads.

Response: Based on comments received and further review of this

subject, the Department has significantly simplified its policy on

overtime management in this final rule.

B. Use of the Median Overtime Usage Rate

Comment: Two commenters addressed the Department's use of the

median overtime usage rate as a percentage of payroll. One commenter

stated, `` the DOE should revise and expand the clause because its

reliance on a median overtime usage figure is unclear * * * the median

figure is a calculation only the DOE can perform, meaning that DOE

would have to provide this figure to the contractor. The [rule] should

be revised to require DOE to make this information available, so

contractors on an ongoing basis can monitor their overtime usage.''

Both commenters believed that the Department should elaborate on the

definition of median overtime usage and how it is computed.

Response: The Department has removed the median overtime usage rate

as a standard and has provided that the contracting officer may require

an overtime control plan when contractor overtime usage as a percentage

of payroll has exceeded, or is likely to exceed, 4%, or the contracting

officer otherwise deems overtime expenditures excessive.

C. Consistency With Draft DOE Order 350.1, Contractor Human Resource

Management Programs

Comment: One commenter stated that the Department should make this

rule consistent with the draft DOE Order 350.1.

Response: The Department agrees that the final rule and the order

must be consistent. Revisions have been made accordingly.

The final rule adopts the changes in the proposed rule, as follows:

1. 970.2275. A new section, Overtime management, is added.

2. 970.2275-1. A new subsection, General, is added to state the

Department's overtime management policy.

3. 970.2275-2. A new subsection, Contract clause, is added to

prescribe

[[Page 34859]]

the use of the overtime management clause.

4. 970.5204-80. The clause, Overtime Management, is added.

Item IX--Procedural Matters

A. Review Under Executive Order 12866

Comment: One commenter opined that the notice of proposed

rulemaking was a ``significant regulatory action'' that should have

been reviewed by the Office of Management and Budget in accordance with

Executive Order 12866, Regulatory Planning and Review. The commenter

noted a recent Department of Energy Inspector General Report indicating

certain approaches to determining fees on management and operating

contracts could increase available fees by as much as $218 million per

year.

Response: Since the subject of the Inspector General's report

referred to by the commenter, determination of fees, was not a part of

the proposed rule, the Inspector General's estimate is irrelevant as to

whether this rulemaking is a ``significant regulatory action'' under

Executive Order 12866. The Department estimates that the incremental

effect on the economy of the changes to the existing regulations made

by this final rule will be well under $100 million.

Based on this estimate, the Department determined that the proposed

rulemaking was not a ``significant regulatory action,'' and,

consequently, was not required to be reviewed by the Office of

Information and Regulatory Affairs in the Office of Management and

Budget. Nevertheless, the Department sought review by and accommodated

comments from the Office of Management and Budget and its Office of

Federal Procurement Policy at both the proposal and final rule stage.

B. Review Under Executive Order 12988

Comment: One commenter questioned the legal clarity, as described

in Executive Order 12988, ``Civil Justice Reform,'' of three clauses

(Insurance--Litigation and Claims; Property; and Laws, Regulations, and

DOE Directives).

Response: Most of the issues raised are dealt with in the

discussion of specific topics above and the responses should satisfy

the commenter. The Office of Federal Procurement Policy in the Office

of Management and Budget agrees with the Department that the clarity in

the clauses published today is sufficient for negotiation purposes. If

ambiguities are identified that warrant further clarification, they can

be resolved during negotiations.

III. Procedural Requirements

A. Review Under Executive Order 12866

This regulatory action has been determined not to be a

``significant regulatory action'' under Executive Order 12866,

``Regulatory Planning and Review,'' (58 FR 51735, October 4, 1993).

Accordingly, this action was not subject to review, under that

Executive Order, by the Office of Information and Regulatory Affairs of

the Office of Management and Budget (OMB).

B. Review Under Executive Order 12988

With respect to the review of existing regulations and the

promulgation of new regulations, section 3(a) of Executive Order 12988,

``Civil Justice Reform,'' 61 FR 4729 (February 7, 1996), imposes on

Executive agencies the general duty to adhere to the following

requirements: (1) eliminate drafting errors and ambiguity; (2) write

regulations to minimize litigation; and (3) provide a clear legal

standard for affected conduct rather than a general standard and

promote simplification and burden reduction. With regard to the review

required by section 3(a), section 3(b) of Executive Order 12988

specifically requires that Executive agencies make every reasonable

effort to ensure that the regulation: (1) clearly specifies the

preemptive effect, if any; (2) clearly specifies any effect on existing

Federal law or regulation; (3) provides a clear legal standard for

affected conduct while promoting simplification and burden reduction;

(4) specifies the retroactive effect, if any; (5) adequately defines

key terms; and (6) addresses other important issues affecting clarity

and general draftsmanship under any guidelines issued by the Attorney

General. Section 3(c) of Executive Order 12988 requires Executive

agencies to review regulations in light of applicable standards in

section 3(a) and section 3(b) to determine whether they are met or it

is unreasonable to meet one or more of them. The Department of Energy

has completed the required review and determined that, to the extent

permitted by law, the regulations meet the relevant standards of

Executive Order 12988.

C. Review Under the Regulatory Flexibility Act

This rule was reviewed under the Regulatory Flexibility Act of

1980, 5 U.S.C. 601, et seq., which requires preparation of a regulatory

flexibility analysis for any rule that is likely to have a significant

economic impact on a substantial number of small entities. This rule is

intended to provide policies for the Department of Energy's management

and operating contractors, who have traditionally been large

businesses. There are three clauses which identify flowdown

requirements to subcontractors, some of whom may be small businesses.

(1) The clause at 970.5204-2, Integration of Environment, Safety, and

Health into Work Planning and Execution, provides for the flowdown of

``appropriate requirements'' to subcontractors performing work on-site

at a Department-owned or -leased facility. (2) The clause at 970.5204-

78, Laws, Regulations, and DOE Directives, provides for subcontract

compliance with ``necessary provisions'' as determined by the prime

contractor. (3) The clause at 970.5204-79, Ownership of Records,

specifies requirements for certain subcontractors meeting specific

thresholds. The first two clauses do not impose a significant economic

impact since nearly all of the prime and subcontracts in which these

clauses are used have been cost reimbursement contracts. The third

clause has considered the needs of small business in establishing

thresholds above which requirements must be met. The Department

anticipates that most small businesses will not meet these threshold

requirements for compliance. Based on this review, the Department

certifies that this rulemaking will not have a significant economic

impact on a substantial number of small entities and, therefore, no

regulatory flexibility analysis has been prepared.

D. Review Under the Paperwork Reduction Act

The Office of Management and Budget has determined that the Safety

Management System description submissions required by the clause at

revised section 970.5204-2, Integration of Environment, Safety, and

Health Into Work Planning and Execution, and the Make-or-Buy Plan

required by section 970.1507 and clause 970.5204-76, Make-or-Buy Plan,

are new collections of information. Accordingly, the Department

submitted these requirements to OMB for review under the Paperwork

Reduction Act, 44 U.S.C. 3501 et seq., and OMB's regulations at 5 CFR

Part 1320.

1. Safety Management System Description

In the June 24, 1996 notice of proposed rulemaking, the Department

proposed revising the Safety and Health clause at DEAR 970.5204-2 to

require contractor compliance with applicable laws, regulations, and

directives pertaining to the environment as well as to safety and

health. The Department

[[Page 34860]]

also proposed revising the current safety and health implementation

plan requirement to: (1) change from 30 days to 60 days the period for

submitting a plan; (2) provide for periodic updating of the plan; and

(3) make plan changes subject to the change control process applicable

to the contract. On October 15, 1996, the Department published a notice

reopening the comment period on revised proposals for contractor

compliance with environment, safety, and health (ES&H) requirements

which reflected DNFSB Recommendation 95-2, Integrated Safety

Management, and the Department's Implementation Plan. As the notice of

reopening proposed, this final rule will require management and

operating contractors to submit a Safety Management System (SMS)

description that addresses principles of integrated safety management.

The process of preparing and submitting a SMS description is

similar to that currently required for submission of a safety and

health implementation plan. It does not conflict with or create a

greater burden than the originally proposed submission of an ES&H

Management Plan. The SMS encompasses the same integrated safety

management functions (e.g., work planning, budgeting, priority-setting,

and work execution). As discussed earlier in this preamble, the

Department received a number of comments on the original proposal for

submission of an ES&H Management Plan and on the reopening proposal for

submission of an SMS description. While commenting on the specifics of

the proposals, none of the commenters questioned the need for such a

requirement.

Preparation of the initial SMS description will usually be a one-

time action completed at the start of a five-year management and

operating contract. The clause also requires contractors to review the

description and provide annual updates to the Department. The updates

are not a new requirement and have been a part of the Department's

planning and budgeting process. Approximately 36 contractors will be

subject to the SMS description submission requirement. The Department

estimates that in any one year approximately 20% or 7 SMS descriptions

will be submitted to the Department for approval. The Department's best

estimate is that the burden will average 350 hours per contractor. This

estimate is based on discussions with contractors about the burden of

meeting the current safety and health implementation plan requirement.

The burden of compliance for any contractor will depend upon the

particular considerations and circumstances applicable to the site or

facility. The total annual paperwork burden that will result from this

requirement is estimated to be approximately 2450 hours.

The Office of Management and Budget approved the SMS description

information collection on May 28, 1997, and assigned to it OMB Number

1910-5103.

2. Make-or-Buy Plans

In the proposed rule, the Department proposed that contracts for

the management and operation of Department facilities require the

preparation and administration of a make-or-buy plan. The Department

considers this to be necessary for identifying the most efficient and

cost effective manner for performing the functions at its facility. As

discussed earlier in this preamble, the Department received a number of

comments on the proposed make-or-buy plan requirement, but no commenter

questioned the need for such a plan.

Preparation of the initial make-or-buy plan will usually be a one-

time action. The plan will be effective for the term of the contract.

Contractors are required to review the plan annually to ensure that it

reflects current conditions and must propose changes when appropriate.

Approximately 36 management and operating contractors will be subject

to the make-or-buy plan requirement. Based on experience, the

Department estimates that in any one year, 20% or approximately 7

initial make-or-buy plans will be submitted to the Department for

approval. The Department expects great variance in make-or-buy plans

because of the different considerations and circumstances present at

Department facilities. The Department also expects these differences

among Department facilities to affect the burden hours required to

complete make-or-buy plans. The Department's best estimate is that the

burden will range from 25 hours to 350 hours per contractor. The

Department expects less variance in the burden of conducting the annual

make-or-buy plan review; the Department estimates the burden of annual

review will be approximately 100 hours per contractor. The total annual

paperwork burden that will result from this requirement is estimated to

be 5350 hours.

The Office of Management and Budget approved the Make-or-Buy Plan

information collection on June 5, 1997, and assigned to it OMB Number

1910-5102.

An agency may not conduct or sponsor a collection of information

unless the collection of information displays a currently valid OMB

control number. 5 CFR Sec. 1320.5(b).

E. Review Under Executive Order 12612

Executive Order 12612, entitled ``Federalism,'' 52 FR 41685

(October 30, 1987), requires that regulations, rules, legislation, and

any other policy actions be reviewed for any substantial direct effects

on States, on the relationship between the Federal Government and the

States, or in the distribution of power and responsibilities among

various levels of government. If there are sufficient substantial

direct effects, then the Executive Order requires preparation of a

federalism assessment to be used in all decisions involved in

promulgating and implementing a policy action. The Department has

determined that this rulemaking will not have a substantial direct

effect on the institutional interests or traditional functions of

States.

F. Review Under the National Environmental Policy Act

Pursuant to the Council on Environmental Quality Regulations (40

CFR 1500-1508), the Department has established guidelines for its

compliance with the provisions of the National Environmental Policy Act

(NEPA) of 1969 (42 U.S.C. 4321, et seq.). Pursuant to Appendix A of

Subpart D of 10 CFR 1021, National Environmental Policy Act

Implementing Procedures (Categorical Exclusion A6), the Department has

determined that this rulemaking is categorically excluded from the need

to prepare an environmental impact statement or environmental

assessment.

G. Review Under Small Business Regulatory Enforcement Fairness Act of

1996

As required by 5 U.S.C. 801, the Department of Energy will report

to Congress promulgation of the rule prior to its effective date. The

report will state that it has been determined that the rule is not a

``major rule'' as defined by 5 U.S.C. 804(3).

H. Review Under the Unfunded Mandates Reform Act of 1995

The Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4) generally

requires a Federal agency to perform a detailed assessment of costs and

benefits of any rule imposing a Federal Mandate with costs to State,

local or tribal governments, or to the private sector, of $100 million

or more. This rulemaking only affects private sector entities, and the

impact is less than $100 million.

[[Page 34861]]

List of Subjects in 48 CFR Parts 901, 917, 926, 950, 952 and 970

Government procurement.

Issued in Washington, D.C., on June 13, 1997.

Richard H. Hopf,

Deputy Assistant Secretary for Procurement and Assistance Management.

For the reasons set forth in the preamble, Chapter 9 of Title 48 of

the Code of Federal Regulations is amended as set forth below.

PART 901--FEDERAL ACQUISITION REGULATIONS SYSTEM

1. The authority citation for Part 901 continues to read as

follows:

Authority: 42 U.S.C. 7254; 40 U.S.C. 486(c).

2. Section 901.105, OMB control numbers, is amended by deleting the

last sentence and adding the following sentence at the end of the

paragraph:

901.105 OMB control numbers.

* * * The OMB control number for the collection of information

under 48 CFR chapter 9 is 1910-4100, except for the following:

Reporting and Recordkeeping Requirements for Make-or-Buy Plans (see 48

CFR (DEAR) 970.5204-76)--OMB number 1910-5102; Reporting and

Recordkeeping Requirements for Safety Management (see 48 CFR (DEAR)

970.5204-2)--OMB number 1910-5103.

PART 917--SPECIAL CONTRACTING METHODS

3. The authority citation for Part 917 continues to read as

follows:

Authority: 42 U.S.C. 7254; 40 U.S.C. 486(c).

4. Section 917.600 is amended by adding the following sentences at

the end of the paragraph:

917.600 Scope of subpart.

* * * The requirements of this subpart apply to any Department of

Energy management and operating contract, including performance-based

management contracts as defined in 48 CFR (DEAR) 917.601. References in

this subpart to ``management and operating contracts'' shall be

understood to include ``performance-based management contracts.''

5. Subpart 917.6, Management and Operating Contracts, is amended to

add new section 917.601, Definitions, to read as follows:

917.601 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 or

imprecise statements of work.

Performance-based management contract means a management and

operating contract that employs, to the maximum extent practicable,

performance-based contracting concepts and methodologies through the

application of results-oriented statements of work; clear, objective

performance standards and measurement tools; and incentives to

encourage superior contractor performance.

PART 926--OTHER SOCIOECONOMIC PROGRAMS

6. The authority citation for Part 926 continues to read as

follows:

Authority: 42 U.S.C. 7254; 40 U.S.C. 486(c).

7. Part 926, Other Socioeconomic Programs, is amended by adding a

new Subpart 926.71, Implementation of Section 3161 of the National

Defense Authorization Act for Fiscal Year 1993, to read as follows:

Subpart 926.71--Implementation of Section 3161 of the National

Defense Authorization Act for Fiscal Year 1993

926.7101 Policy.

926.7102 Definition.

926.7103 Requirements.

926.7104 Contract Clause.

926.7101 Policy.

Consistent with the requirements of Section 3161(c)(2), 42 U.S.C.

7474h(c)(2), in instances where DOE has determined that a change in

workforce at a DOE Defense Nuclear Facility is necessary, the

Department, to the extent practicable, is required to provide employees

under Department of Energy contracts whose employment in positions at

such a facility is terminated with a preference in any hiring of the

Department. Consistent with published DOE guidance regarding Section

3161, such preference in hiring extends to hiring by DOE contractors

and subcontractors.

926.7102 Definition.

Eligible employee means a current or former employee of a

contractor or subcontractor employed at a DOE Defense Nuclear

Facility--

(1) Whose position of employment has been, or will be,

involuntarily terminated (except if terminated for cause),

(2) Who has met the eligibility criteria contained in Department of

Energy guidance for contractor work force restructuring, as may be

amended or supplemented from time to time, and

(3) Who is qualified for a job vacancy with the Department or one

of its contractors with respect to work under its contract with the

Department at the time a position is available.

926.7103 Requirements.

(a) Section 3161, 42 U.S.C. 7474h, confers a continuing right to a

preference in hiring to an eligible employee of Department of Energy

Defense Nuclear Facilities. This right to a preference in hiring

includes employment opportunities of any Department of Energy

contractor, regardless of the place of performance of the contract.

Accordingly, eligible former employees of contractors and

subcontractors employed at Department of Energy Defense Nuclear

Facilities, to the extent practicable, shall be provided a hiring

preference in employment opportunities of other Department of Energy

contractors for work under their contracts.

(b) The Office of Worker and Community Transition (WT) is

responsible for establishing policies and procedures relating to the

Department of Energy implementation of Section 3161. Contracting

Officers, in concert with representatives of the field office

responsible for implementation of Section 3161 at the Department of

Energy Defense Nuclear Facility and local counsel, should consult with

the Office of Worker and Community Transition to determine

applicability of Section 3161 requirements, including hiring preference

requirements, for displaced workers.

926.7104 Contract clause.

The contracting officer shall insert the clause at 48 CFR (DEAR)

952.226-74, Displaced Employee Hiring Preference, in contracts (except

for contracts for commercial items, pursuant to 41 U.S.C. 403) which

exceed $500,000 in value.

PART 950--EXTRAORDINARY CONTRACTUAL ACTIONS

8. The authority citation for Part 950 continues to read as

follows:

Authority: 42 U.S.C. 7254; 40 U.S.C. 486(c).

950.7101 [Amended]

9. Section 950.7101 is amended by removing paragraph (c)(2) and

redesignating paragraph (c)(1) as paragraph (c).

[[Page 34862]]

PART 952--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

10. The authority citation for Part 952 is revised to read as

follows:

Authority: 42 U.S.C. 7254; 40 U.S.C. 486(c).

11. Section 952.223-71 is amended by revising the section heading

to read as follows:

952.223-71 Integration of environment, safety, and health into work

planning and execution.

952.223-74 [Removed and Reserved]

12. Subsection 952.223-74, Nuclear facility safety applicability,

is removed and reserved.

13. Subsection 952.223-75, Preservation of individual occupational

radiation exposure records, is amended by revising the introductory

paragraph to read as follows:

952.223-75 Preservation of individual occupational radiation exposure

records.

The contracting officer shall insert this clause in contracts

containing 952.223-71, Integration of environment, safety, and health

into work planning and execution, or 952.223-72, Radiation protection

and nuclear criticality.

* * * * *

14. Subpart 952.2, Text of Provisions and Clauses, is amended to

add a new section 952.226-74, Displaced Employee Hiring Preference, to

read as follows:

952.226-74 Displaced employee hiring preference.

As prescribed in 48 CFR (DEAR) 926.7104, insert the following

clause.

Displaced Employee Hiring Preference (June 1997)

(a) Definition.

Eligible employee means a current or former employee of a

contractor or subcontractor employed at a Department of Energy

Defense Nuclear Facility (1) whose position of employment has been,

or will be, involuntarily terminated (except if terminated for

cause), (2) who has also met the eligibility criteria contained in

the Department of Energy guidance for contractor work force

restructuring, as may be amended or supplemented from time to time,

and (3) who is qualified for a particular job vacancy with the

Department or one of its contractors with respect to work under its

contract with the Department at the time the particular position is

available.

(b) Consistent with Department of Energy guidance for contractor

work force restructuring, as may be amended or supplemented from

time to time, the contractor agrees that it will provide a

preference in hiring to an eligible employee to the extent

practicable for work performed under this contract.

(c) The requirements of this clause shall be included in

subcontracts at any tier (except for subcontracts for commercial

items pursuant to 41 U.S.C. 403) expected to exceed $500,000.

PART 970--DOE MANAGEMENT AND OPERATING CONTRACTS

15. The authority citation for Part 970 continues to read as

follows:

Authority: Sec. 161 of the Atomic Energy Act of 1954 (42 U.S.C.

2201), sec. 644 of the Department of Energy Organization Act, Public

Law 95-91 (42 U.S.C. 7254).

970.0407 [Removed]

16. The text of section 970.0407, Record retention requirements, is

removed.

17. New subsection 970.0407-1, Alternate retention schedules, is

added to read as follows:

970.0407-1 Alternate retention schedules.

Records produced under the Department's contracts involving

management and operation responsibilities relative to DOE-owned or -

leased facilities are to be retained and disposed of in accordance with

the requirements of DOE Order 1324.5B, Records Management Program and

DOE Records Schedules, (see current version) rather than those set

forth at FAR subpart 4.7, Contractor Records Retention.

18. New section 970.0407-2, Access to and ownership of records, is

added to read as follows:

970.0407-2 Access to and ownership of records.

Contracting officers may agree to contractor ownership of the

categories of records designated in the instruction in paragraph (b) of

48 CFR (DEAR) 970.5204-79, Access to and Ownership of Records, provided

the Government's rights to inspect, copy, and audit these records are

not limited. These rights must be retained by the Government in order

to carry out the Department's legal responsibilities under the Atomic

Energy Act and other statutes in overseeing its contractors, including

compliance with the Department's health and safety and reporting

requirements, and to protect the public interest.

19. New section 970.0407-3, Contract clause, is added to read as

follows:

970.0407-3 Contract clause.

The contracting officer shall insert the clause at 48 CFR (DEAR)

970.5204-79, Access to and Ownership of Records, in management and

operating contracts.

20. New section 970.0470, Department of Energy directives,

consisting of subsections 970.0470-1 and 970.0470-2, is added to read

as follows:

970.0470 Department of Energy directives.

970.0470-1 General.

(a) The Department of Energy Directives System is a system of

instructions, including orders, notices, manuals, guides, and

standards, for Departmental elements. In certain circumstances,

requirements contained in these directives may apply to a contractor

through operation of a contract clause. Program and requirements

personnel are responsible for identifying requirements in the

Directives System applicable to a contract, and developing a list of

applicable requirements and providing it to the contracting officer for

inclusion in the contract.

(b) Where directives requirements are established using either the

Standards/Requirements Identification Process or the Work Smart

Standards Process, the applicable process should also be used to

establish the environment, safety, and health portion of the list

identified in paragraph (a) of this section.

970.0470-2 Contract clause.

The contracting officer shall insert the clause at DEAR 970.5204-

78, Laws, Regulations, and DOE Directives, in management and operating

contracts.

21. Section 970.1001 is revised to read as follows:

970.1001 Performance-based contracting.

(a) It is the policy of the Department of Energy to use, to the

maximum extent practicable, performance-based contracting methods in

its management and operating contracts. Office of Federal Procurement

Policy Letter 91-2 provides guidance concerning the development and use

of performance-based contracting concepts and methodologies that may be

generally applied to management and operating contracts. Performance-

based contracts: describe performance requirements in terms of results

rather than methods of accomplishing the work; use measurable (i.e.,

terms of quality, timeliness, quantity) performance standards and

objectives and quality assurance surveillance plans; provide

performance incentives (positive or negative) where appropriate; and

specify procedures for award or incentive fee reduction when work

activities are not performed or do not meet contract requirements.

(b) The use of performance-based statements of work, where

feasible, is the preferred method for establishing

[[Page 34863]]

work requirements. Such statements of work and other documents used to

establish work requirements (such as work authorization directives)

should describe performance requirements and expectations in terms of

outcome, results, or final work products, as opposed to methods,

processes, or design.

(c) Contract performance requirements and expectations should be

consistent with the Department's strategic planning goals and

objectives, as made applicable to the site or facility through

Departmental programmatic and financial planning processes. Measurable

performance criteria, objective measures, and where appropriate,

performance incentives, shall be structured to correspond to the

performance requirements established in the statement of work and other

documents used to establish work requirements.

(d) Quality assurance surveillance plans shall be developed to

facilitate the assessment of contractor performance and ensure the

appropriateness of any award or incentive fee payment. Such plans shall

be tailored to the contract performance objectives, criteria, and

measures, and shall, to the maximum extent practicable, focus on the

level of performance required by the performance objectives rather than

the methodology used by the contractor to achieve that level of

performance.

970.1002 [Amended]

22. The Section heading for Section 970.1002 is revised to read,

``Additional considerations.''

23. Subpart 970.15 is amended by adding new Section 970.1507, Make-

or-buy plans, consisting of 970.1507-1, 970.1507-2, and 970.1507-3, to

read as follows:

970.1507 Make-or-buy plans

970.1507-1 Policy.

970.1507-2 Requirements.

970.1507-3 Contract clause.

970.1507 Make-or-buy plans.

970.1507-1 Policy.

(a) Contracting officers shall require management and operating

contractors to develop and implement make-or-buy plans that establish a

preference for providing supplies or services (including construction

and construction management) on a least-cost basis, subject to program

specific make-or-buy criteria. The emphasis of this make-or-buy

structure is to eliminate bias for in-house performance where an

activity may be performed at less cost or otherwise more efficiently

through subcontracting.

(b) A work activity, supply or service is provided at ``least

cost'' when, after consideration of a variety of appropriate

programmatic, business, and financial factors, it is concluded that

performance by either ``in-house'' resources or by contracting out is

likely to provide the property or service at the lowest overall cost.

Programmatic factors include, but are not limited to, program specific

make-or-buy criteria established by the Department of Energy, the

impact of a ``make'' or a ``buy'' decision on mission accomplishment,

and anticipated changes to the mission of the facility or site.

Business factors pertain to such elements as market conditions, past

experience in obtaining similar supplies or services, and overall

operational efficiencies that might be available through either in-

house performance or contracting out. Among the financial factors that

may be considered to determine a least-cost alternative in a make-or-

buy analysis are both recurring and one-time costs attributable to

either retaining or contracting out a particular item, financial risk,

and the anticipated contract price.

(c) In developing and implementing its make-or-buy plan, a

contractor shall be required to assess subcontracting opportunities and

implement subcontracting decisions in accordance with the following:

(1) The contractor shall conduct internal productivity improvement

and cost-reduction programs so that in-house performance options can be

made more efficient and cost-effective.

(2) The contractor shall consider subcontracting opportunities with

the maximum practicable regard for open communications with potentially

affected employees and their representatives. Similarly, a contractor

will communicate its plans, activities, cost-benefit analyses, and

decisions with those stakeholders likely to be affected by such

decisions, including representatives of the community and local

businesses.

970.1507-2 Requirements.

(a) Development of program-specific make-or-buy criteria. DOE

program offices responsible for the work conducted at the facility or

site shall develop program specific make-or-buy criteria. Program

specific make-or-buy criteria are those factors that reflect specific

mission or program objectives (including operational efficiency,

contractor diversity, environment, safety and health, work force

displacement and restructuring, and collective bargaining agreements)

and that, upon their application to a specific work effort, would

override a decision based on a purely economic rationale. These

criteria are to be used to assess each work effort identified in a

facility's or site's make-or-buy plan to determine the appropriateness

of a contractor's make-or-buy decisions. Program specific make-or-buy

criteria shall be provided to the contractor for use in developing a

make-or-buy plan for the facility, site, or specific program, as

appropriate.

(b) Make-or-buy plan property and services. Supplies or services

estimated to cost less than one (1) percent of the estimated total

operating cost for a year or $1 million for the same year, whichever is

less, need not be included in the contractor's make-or-buy plan.

However, adjustments may be made to these thresholds where programmatic

or cost considerations would indicate that a particular supply or

service should be included in the make-or-buy plan.

(c) Competitive solicitation requirements. (1) To the extent

practicable, a competitive solicitation for the management and

operation of a Department of Energy facility or site should:

(i) Identify those programs, projects, work areas, functions or

services that the Department intends for the successful offeror to

include in any make-or-buy plan; and

(ii) Require the submission of a preliminary make-or-buy plan for

the period of performance of the contract from each offeror as part of

its proposal submitted in response to the competitive solicitation.

(2) If the requirement for each offeror to submit a preliminary

make-or-buy plan as part of its proposal is impractical or otherwise

incompatible with the acquisition strategy, consideration should be

given to structuring the evaluation criteria for the competitive

solicitation in such a manner as to permit the evaluation of an

offeror's approach to conducting its make-or-buy program within the

context of the contractual requirements.

(3) The successful offeror's preliminary make-or-buy plan shall be

submitted for final approval within 180 days after contract award,

consistent with the requirements of 48 CFR (DEAR) 970.5204-76(c), Make-

or-buy Plan.

(d) Evaluation of the contractor's make-or-buy plan. In evaluating

the contractor's make-or-buy plan, the contracting officer shall

consider the following factors:

(1) The program specific make-or-buy criteria (such as operational

efficiency, contractor diversity, environment, safety and health, work

force displacement and restructuring, and collective bargaining

agreements) with particular attention to the effect of a ``buy''

decision on the contractor's ability to maintain core competencies

needed to

[[Page 34864]]

accomplish mission-related program and projects;

(2) The impact of a ``make'' or ``buy'' decision on contract cost,

schedule, and performance and financial risk;

(3) The potential impact of a ``make'' or ``buy'' decision on known

future mission or program activities at the facility or site;

(4) Past experience at the facility or site regarding ``make-or-

buy'' decisions for the same, or similar, supplies or services;

(5) Consistency with the contractor's approved subcontracting plan,

as required by the clause entitled ``Small, Small Disadvantaged and

Women-Owned Small Business Subcontracting Plan (FAR 52.219-9), of the

contract and implementation of Section 3021 of the Energy Policy Act of

1992.

(6) Local market conditions, including contractor work force

displacement and the availability of firms that can meet the work

requirements with regard to quality, quantity, cost, and timeliness;

(7) Where the construction of new or additional facilities is

required, that the cost of such facilities is in the Government's best

interest when compared to subcontracting or privatization alternatives;

and

(8) Whether all relevant requirements and costs of performing the

work by the contractor and through subcontracting are considered and

any different requirements for the same work are reconciled.

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