Federal Acquisition Regulation; Interest and Other Financial Costs

SUMMARY: The Civilian Agency Acquisition Council and the Defense

Acquisition Regulations Council are proposing to amend the Federal

Acquisition Regulation (FAR) to add interest charges or other amounts

as a consequence of late contractor payments to the list of unallowable

costs in the ``Interest and Other Financial Costs'' cost principle, and

to make several editorial revisions.

DATES: Comments should be submitted on or before March 30, 1999 to be

considered in the formulation of a final rule.

ADDRESSES: Interested parties should submit written comments to:

General Services Administration, FAR Secretariat (MVR), Attn: Laurie

Duarte, 1800 F Street, NW, Room 4035, Washington, DC 20405.

E-mail comments submitted over Internet should be addressed to:

[email protected].

Please cite FAR case 98-006 in all correspondence related to this

case.

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 Ms. Linda Nelson, Procurement Analyst, at (202) 501-

1900. Please cite FAR case 98-006.

SUPPLEMENTARY INFORMATION:

A. Background

A ruling by the Court of Appeals for the Federal Circuit has raised

a significant issue regarding the allowability of interest charges paid

as a consequence of late contractor payments. In Lockheed Corporation

v. Secretary of the Air Force, 113 F.3d 1225 (Fed. Cir. 1997), the

court ruled that interest paid on an underpayment of State taxes is not

``interest on borrowings'' within the meaning of FAR 31.205-20,

Interest and Other Financial Costs, and its predecessor provision,

Defense Acquisition Regulation (DAR) 15-205.17, and, therefore, is an

allowable cost.

It is Government policy to encourage contractors to pay their

financial obligations on time. Government reimbursement of contractor

interest charges for underpayment of taxes or other expenses resulting

from late contractor payments of legal obligations is counter to this

policy and an inappropriate expenditure of public funds. Therefore, the

rule proposes to revise FAR 31.205-20, Interest and Other Financial

Costs, to add interest charges or other amounts paid as a consequence

of late contractor payments to the list of unallowable costs.

In addition, the rule proposes several editorial revisions,

including the deletion of ``and directly associated costs.'' This

phrase is unnecessary since FAR 31.201-6(a) indicates that when ``an

unallowable cost is incurred, its directly associated costs are also

unallowable.''

This regulatory action was not subject to Office of Management and

Budget review under Executive Order 12866, dated September 30, 1993,

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

B. Regulatory Flexibility Act

This proposed rule is not expected to have a significant economic

impact on a substantial number of small entities within the meaning of

the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because most

contracts awarded to small entities use simplified acquisition

procedures or are awarded on a competitive, fixed-price basis, and do

not require application of the cost principle contained in this rule.

An Initial Regulatory Flexibility Analysis has, therefore, not been

performed. Comments from small entities concerning the affected FAR

subpart will be considered in accordance with 5 U.S.C. 610 of the Act.

Such comments must be submitted separately and should cite 5 U.S.C.

601, et seq. (FAR case 98-006), in correspondence.

C. Paperwork Reduction Act

The Paperwork Reduction Act does not apply because the proposed

changes to the FAR do not impose recordkeeping or information

collection requirements, or collections of information from offerors,

contractors, or members of the public which require the approval of the

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

List of Subjects in 48 CFR Part 31

Government procurement.

Dated: January 21, 1999.

Edward C. Loeb,

Director, Federal Acquisition Policy Division.

Therefore, it is proposed that 48 CFR Part 31 be amended as set

forth below:

PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES

1. The authority citation for 48 CFR Part 31 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).

2. Section 31.205-20 is revised to read as follows:

31.205-20 Interest and other financial costs.

The following types of costs are unallowable--

(a) Interest on borrowings (however represented), bond discounts,

costs of financing and refinancing capital (net worth plus long-term

liabilities), legal and professional fees paid in connection with

preparing prospectuses, costs of preparing and issuing stock rights

(but see 31.205-28); and

(b) Interest charges and other amounts paid as a consequence of

late contractor payments (except for interest assessed by State or

local taxing authorities under the conditions specified in 31.205-

41(a)(3)).

[FR Doc. 99-1997 Filed 1-28-99; 8:45 am]

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