Federal Acquisition Regulation; Service Contracting

DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 7, 16, 37, 42, 46, and 52

[FAC 97-01; FAR Case 95-311; Item VII]

RIN 9000-AH14

Federal Acquisition Regulation; Service Contracting

AGENCIES: Department of Defense (DoD), General Services Administration

(GSA), and National Aeronautics and Space Administration (NASA).

[[Page 44814]]

ACTION: Final rule.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense

Acquisition Regulations Council have agreed on a final rule amending

the Federal Acquisition Regulation (FAR) to implement Office of Federal

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

OFPP policy letter prescribes policies and procedures for use of

performance-based contracting methods. This regulatory action was not

subject to Office of Management and Budget review under Executive Order

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

5 U.S.C. 804.

EFFECTIVE DATE: October 21, 1997.

FOR FURTHER INFORMATION CONTACT: The FAR Secretariat, Room 4035, GS

Building, Washington, DC 20405 (202) 501-4755 for information

pertaining to status or publication schedules. For clarification of

content, contact Mr. Jack O'Neill, Procurement Analyst, at (202) 501-

3856. Please cite FAC 97-01, FAR case 95-311.

SUPPLEMENTARY INFORMATION:

A. Background

This final rule amends FAR Parts 7, 16, 37, 42, 46, and 52 to

establish policy for the Government's acquisition of services through

the use of performance-based contracting methods.

A proposed rule was published in the Federal Register at 61 FR

40284, August 1, 1996. Thirty-three comments were received from nine

respondents. All comments were considered in developing the final rule.

B. Regulatory Flexibility Act

A Final Regulatory Flexibility Analysis has been performed. The

analysis is summarized as follows:

The rule revises the Federal Acquisition Regulation (FAR) to

implement the Office of Federal Procurement Policy (OFPP) Policy

Letter 91-2, Service Contracting. It also implements the statutory

requirements of Section 834, Public Law 101-510 by adding language

concerning uncompensated overtime and a prescription for use of a

new solicitation provision, ``Identification of Uncompensated

Overtime.'' Offerors are required to identify uncompensated overtime

hours and the uncompensated overtime rate per hour, whether at the

prime or subcontract level, when submitting a proposal responding to

a solicitation estimated at $100,000 or more, for services being

acquired on the basis of the number of hours to be provided rather

than on the task to be performed. The final rule applies to all

businesses, large and small that submit offers of $100,000 or more

on service contracts that are based on the number of hours to be

provided.

The adoption of the DoD provision concerning uncompensated

overtime in the FAR conforms with the goals of the OFPP policy

letter to avoid problems commonly found with service contracts

resulting from: (1) Unnecessarily vague statements of work, which

increase costs or make it difficult to control costs; (2)

Insufficient use of fixed-price and incentive fee pricing

arrangements for repetitive requirements, resulting in increased

costs and inadequate incentive to improve performance; and (3)

Inadequate contract administration plans, which lead to unauthorized

commitments by the Government and delayed contract completion. The

primary purpose for obtaining the information and using it during

the source selection process is to discourage the use of mandatory

uncompensated overtime in proposals from the entire professional and

technical services industry. The provision regarding uncompensated

overtime applies equally to large and small business entities and

provides an additional method to improve the Government's ability to

acquire services of the requisite quality and to assess contractor

performance and price. Because both large and small business

concerns must be dealt with equally in this matter, we believe that

the rule does not create a disproportionate burden on small

entities.

C. Paperwork Reduction Act

The Paperwork Reduction Act is deemed to apply because the final

rule contains information collection requirements. Accordingly, a

request for approval of a new information collection requirement

concerning service contracting was submitted to the Office of

Management and Budget under 44 U.S.C. 3501, et seq., and approved under

OMB Control No. 9000-0152. Public comments concerning this request were

invited through the Federal Register notice published at 61 FR 40288,

August 1, 1996.

List of Subjects in 48 CFR Parts 7, 16, 37, 42, 46, and 52

Government procurement.

Dated: August 7, 1997.

Edward C. Loeb,

Director, Federal Acquisition Policy Division.

Therefore, 48 CFR Parts 7, 16, 37, 42, 46, and 52 are amended as

set forth below:

1. The authority citation for 48 CFR Parts 7, 16, 37, 42, 46, and

52 continues to read as follows:

Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42

U.S.C. 2473(c).

PART 7--ACQUISITION PLANNING

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

follows:

7.103 Agency-head responsibilities.

* * * * *

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

to further refine requirements and acquisition strategies. For

services, greater use of performance-based contracting methods and,

therefore, fixed-price contracts (see 37.602-5) should occur for

follow-on acquisitions.

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

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

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

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

7.105 Contents of written acquisition plans.

* * * Acquisition plans for service contracts shall describe the

strategies for implementing performance-based contracting methods or

shall provide rationale for not using those methods (see subpart 37.6).

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

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

technical and contractual history of the acquisition. Discuss feasible

acquisition alternatives, the impact of prior acquisitions on those

alternatives, and any related in-house effort.

* * * * *

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

performance characteristics of the supplies or the performance

standards of the services being acquired and state how they are related

to the need.

* * * * *

(b) * * *

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

or service description types (including performance-based contracting

descriptions) to be used in the acquisition.

* * * * *

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

administered. In contracts for services, include how inspection and

acceptance corresponding to the work statement's performance criteria

will be enforced.

* * * * *

PART 16--TYPES OF CONTRACTS

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

follows:

16.104 Factors in selecting contract types.

* * * * *

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

requirement is repetitively acquired. Also, product descriptions or

descriptions of services

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to be performed can be defined more clearly.

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

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

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

designated paragraph (e) to read as follows:

16.402-2 Performance incentives.

(a) Performance incentives may be considered in connection with

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

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

specific elements of the contractor's performance. These incentives

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

contractor, compared with specified targets.

(b) To the maximum extent practicable, positive and negative

performance incentives shall be considered in connection with service

contracts for performance of objectively measurable tasks when quality

of performance is critical and incentives are likely to motivate the

contractor.

* * * * *

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

generally essential in order to determine the degree of attainment of

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

possible in establishing test criteria (such as testing conditions,

instrumentation precision, and data interpretation) and performance

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

* * * * *

6. Section 16.405-1 is amended by revising the introductory text of

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

follows:

16.405-1 Cost-plus-incentive-fee contracts.

* * * * *

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

appropriate for services or development and test programs when--

* * * * *

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

the use of both cost and technical performance incentives is desirable

and administratively practical.

* * * * *

PART 37--SERVICE CONTRACTING

7. Section 37.000 is amended by adding the following text as a new

third sentence:

37.000 Scope of part.

* * * This part requires the use of performance-based contracting

to the maximum extent practicable and prescribes policies and

procedures for use of performance-based contracting methods (see

subpart 37.6). * * *

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

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

37.101 Definitions.

* * * * *

Performance-based contracting means structuring all aspects of an

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

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

imprecise statements of work.

* * * * *

9. Section 37.102 is amended by redesignating paragraphs (a)

through (g) as (b) through (h) and adding a new paragraph (a) to read

as follows:

37.102 Policy.

(a) Agencies shall use performance-based contracting methods (see

subpart 37.6), to the maximum extent practicable, for the acquisition

of services, including those acquired under supply contracts, except--

(1) Architect-engineer services acquired in accordance with 40

U.S.C. 541-544, as amended (see part 36);

(2) Construction (see part 36);

(3) Utility services (see part 41); or

(4) Services that are incidental to supply purchases.

* * * * *

10. Section 37.103 is amended by redesignating paragraphs ``(c)''

and ``(d)'' as ``(d)'' and ``(e)'' respectively, and adding a new

paragraph (c) to read as follows:

37.103 Contracting officer responsibility.

* * * * *

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

the maximum extent practicable when acquiring services.

* * * * *

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

follows:

37.106 Funding and term of service contracts.

* * * * *

(c) Agencies with statutory multiyear authority shall consider the

use of this authority to encourage and promote economical business

operations when acquiring services.

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

37.115 Uncompensated overtime.

37.115-1 Scope.

The policies in this section are based on Section 834 of Public Law

101-510 (10 U.S.C. 2331).

37.115-2 General policy.

(a) Use of uncompensated overtime is not encouraged.

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

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

be performed, the solicitation shall require offerors to identify

uncompensated overtime hours and the uncompensated overtime rate for

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

their proposals and subcontractor proposals. This includes

uncompensated overtime hours that are in indirect cost pools for

personnel whose regular hours are normally charged direct.

37.115-3 Solicitation provision.

The contracting officer shall insert the provision at 52.237-10,

Identification of Uncompensated Overtime, in all solicitations valued

above the simplified acquisition threshold, for professional or

technical services to be acquired on the basis of the number of hours

to be provided.

13. Subpart 37.6, consisting of sections 37.600 through 37.602-5,

is added to read as follows:

Subpart 37.6--Performance-Based Contracting

Sec.

37.600 Scope of subpart.

37.601 General.

37.602 Elements of performance-based contracting.

37.602-1 Statements of work.

37.602-2 Quality assurance.

37.602-3 Selection procedures.

37.602-4 Contract type.

37.602-5 Follow-on and repetitive requirements.

Subpart 37.6--Performance-Based Contracting

37.600 Scope of subpart.

This subpart prescribes policies and procedures for use of

performance-based contracting methods. It implements OFPP Policy Letter

91-2, Service Contracting.

37.601 General.

Performance-based contracting methods are intended to ensure that

required performance quality levels are achieved and that total payment

is related to the degree that services performed meet contract

standards. Performance-based contracts--

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

than the methods of performance of the work;

(b) Use measurable performance standards (i.e., terms of quality,

timeliness, quantity, etc.) and quality assurance surveillance plans

(see 46.103(a) and 46.401(a));

(c) Specify procedures for reductions of fee or for reductions to

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

do not meet contract requirements (see 46.407); and

(d) Include performance incentives where appropriate.

37.602 Elements of performance-based contracting.

37.602-1 Statements of work.

(a) Generally, statements of work shall define requirements in

clear, concise language identifying specific work to be accomplished.

Statements of work must be individually tailored to consider the period

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

performance flexibility (see 11.105). In the case of task order

contracts, the statement of work for the basic contract need only

define the scope of the overall contract (see 16.504(a)(4)(iii)). The

statement of work for each task issued under a task order contract

shall comply with paragraph (b) of this subsection. To achieve the

maximum benefits of performance-based contracting, task order contracts

should be awarded on a multiple award basis (see 16.504(c) and

16.505(b)).

(b) When preparing statements of work, agencies shall, to the

maximum extent practicable--

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

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

number of hours to be provided (see 11.002(a)(2) and 11.101);

(2) Enable assessment of work performance against measurable

performance standards;

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

financial incentives in a competitive environment to encourage

competitors to develop and institute innovative and cost-effective

methods of performing the work; and

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

too broad for the agency or a prospective contractor to manage

effectively.

37.602-2 Quality assurance.

Agencies shall develop quality assurance surveillance plans when

acquiring services (see 46.103 and 46.401(a)). These plans shall

recognize the responsibility of the contractor (see 46.105) to carry

out its quality control obligations and shall contain measurable

inspection and acceptance criteria corresponding to the performance

standards contained in the statement of work. The quality assurance

surveillance plans shall focus on the level of performance required by

the statement of work, rather than the methodology used by the

contractor to achieve that level of performance.

37.602-3 Selection procedures.

Agencies shall use competitive negotiations when appropriate to

ensure selection of services that offer the best value to the

Government, cost and other factors considered (see 15.605).

37.602-4 Contract type.

Contract types most likely to motivate contractors to perform at

optimal levels shall be chosen (see subpart 16.1 and, for research and

development contracts, see 35.006). To the maximum extent practicable,

performance incentives, either positive or negative or both, shall be

incorporated into the contract to encourage contractors to increase

efficiency and maximize performance (see subpart 16.4). These

incentives shall correspond to the specific performance standards in

the quality assurance surveillance plan and shall be capable of being

measured objectively. Fixed-price contracts are generally appropriate

for services that can be defined objectively and for which the risk of

performance is manageable (see subpart 16.1).

37.602-5 Follow-on and repetitive requirements.

When acquiring services that previously have been provided by

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

contract to incorporate performance-based contracting methods to the

maximum extent practicable. This will facilitate the use of fixed-price

contracts for such requirements for services. (See 7.105 for

requirement to address performance-based contracting strategies in

acquisition plans. See also 16.104(k).)

PART 42--CONTRACT ADMINISTRATION

14. Section 42.1102 is amended by adding the following sentence to

the end of the paragraph:

42.1102 Applicability.

* * * See part 37, especially subpart 37.6, regarding surveillance

of contracts for services.

PART 46--QUALITY ASSURANCE

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

follows:

46.103 Contracting office responsibilities.

* * * * *

(a) Receiving from the activity responsible for technical

requirements any specifications for inspection, testing, and other

contract quality requirements essential to ensure the integrity of the

supplies or services (the activity responsible for technical

requirements is responsible for prescribing contract quality

requirements, such as inspection and testing requirements or, for

service contracts, a quality assurance surveillance plan);

* * * * *

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

follows:

46.401 General.

(a) Government contract quality assurance shall be performed at

such times (including any stage of manufacture or performance of

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

necessary to determine that the supplies or services conform to

contract requirements. Quality assurance surveillance plans should be

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

The plans should specify--

(1) All work requiring surveillance; and

(2) The method of surveillance.

* * * * *

17. Section 46.407 is amended in the introductory text of paragraph

(f) by adding new second and third sentences to read as follows:

46.407 Nonconforming supplies or services.

* * * * *

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

identifying the value of the individual work requirements or tasks

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

value may be used to determine an equitable adjustment for

nonconforming services. * * *

* * * * *

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

18. Section 52.237-10 is added to read as follows:

52.237-10 Identification of Uncompensated Overtime.

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

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Identification of Uncompensated Overtime (Oct 1997)

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

Uncompensated overtime means the hours worked without additional

compensation in excess of an average of 40 hours per week by direct

charge employees who are exempt from the Fair Labor Standards Act.

Compensated personal absences such as holidays, vacations, and sick

leave shall be included in the normal work week for purposes of

computing uncompensated overtime hours.

Uncompensated overtime rate is the rate that results from

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

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

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

converted to an uncompensated overtime rate of $17.78 per hour

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

(b) For any proposed hours against which an uncompensated

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

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

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

uncompensated overtime rate per hour, whether at the prime or

subcontract level. This includes uncompensated overtime hours that

are in indirect cost pools for personnel whose regular hours are

normally charged direct.

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

uncompensated overtime must be consistent with its cost accounting

practices used to accumulate and report uncompensated overtime

hours.

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

that do not otherwise demonstrate cost realism, will be considered

in a risk assessment and will be evaluated for award in accordance

with that assessment.

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

uncompensated overtime with its proposal.

(End of provision)

[FR Doc. 97-21492 Filed 8-21-97; 8:45 am]

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