# Acquisition Regulations; Department of Energy Management and Operating Contracts

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URL: https://www.frixlaw.com/law-library/documents/fr%3A97-16635

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** June 27, 1997
- **Citation:** 62 FR 34842

## Text

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.

-----------------------------------------------------------------------

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

[[Page 34843]]

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

[[Page 34844]]

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

[[Page 34845]]

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

[[Page 34846]]

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

[[Page 34847]]

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 circumstan

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A97-16635. Public record. Not legal advice.