Federal Acquisition Regulation; Interest and Other Financial Costs

DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Part 31

[FAC 97-14; FAR Case 98-006; Item XI]

RIN 9000-AI24

Federal Acquisition Regulation; Interest and Other Financial

Costs

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

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

ACTION: Final rule.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense

Acquisition Regulations Council (Councils) have agreed on a final rule

amending the Federal Acquisition Regulation (FAR) to make minor changes

to the cost principle concerning ``interest and other financial

costs.''

EFFECTIVE DATE: November 23, 1999.

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 FAC 97-14, FAR case 98-006.

SUPPLEMENTARY INFORMATION:

A. Background

The Councils published a proposed rule in the Federal Register on

January 29, 1999 (64 FR 4760). The rule proposed amending FAR 31.205-

20, Interest and Other Financial Costs, to add ``interest charges and

other amounts paid as a consequence of late contractor payments'' to

the list of unallowable costs. In addition, the rule proposed several

minor 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.''

Fifteen respondents submitted public comments to the proposed rule.

Many of the respondents expressed the following concerns:

The ruling by the Court of Appeals for the Federal

Circuit (Lockheed Corporation v. Secretary of the Air Force, 113

F.3d 1225 (Fed. Cir. 1997)) did not involve interest charges paid

``as a consequence of late contractor payments,'' but rather as a

consequence of an inadvertent tax deficiency.

The term ``late contractor payments'' is overly broad

and may result in confusion regarding interest allowability.

The rule is inequitable since it proposes to disallow Government

reimbursement of interest costs incurred by a contractor for the

underpayment of State taxes while FAR 31.201-5, Credits, requires

the contractor to credit the Government the applicable portion of

any State tax refunds it receives, together with interest.

The rule incentivizes contractors to be overly

conservative in computing State tax liability.

The rule substantially increases administrative burdens

on the Government and contractors.

While the Councils do not agree with all of the concerns expressed

by the respondents, the Councils have decided not to add ``interest

charges and other amounts paid as a consequence of late contractor

payments'' to the list of unallowable costs in FAR 31.205-20, pending

further study on the issue of interest allowability. Therefore, this

final rule only makes minor changes to the interest cost principle.

This is not a significant regulatory action and, therefore, was not

subject to Office of Management and Budget review under Section 6(b) of

Executive Order 12866, Regulatory Planning and Review, dated September

30, 1993. This rule is not a major rule under 5 U.S.C. 804.

B. Regulatory Flexibility Act

The Department of Defense, the General Services Administration, and

the National Aeronautics and Space Administration certify that this

final rule will not 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 this rule only makes

nonsubstantive changes to the cost principle concerning ``interest and

other financial costs.'' In addition, 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.

C. Paperwork Reduction Act

The Paperwork Reduction Act does not apply because the changes to

the FAR do not impose information collection requirements that 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: September 14, 1999.

Edward C. Loeb,

Director, Federal Acquisition Policy Division.

Therefore, DoD, GSA, and NASA amend 48 CFR Part 31 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. Revise section 31.205-20 to read as follows:

31.205-20 Interest and other financial costs.

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, and costs of preparing and issuing stock rights

are unallowable (but see 31.205-28). However, interest assessed by

State or local taxing authorities under the conditions specified in

31.205-41(a)(3) is allowable.

[FR Doc. 99-24420 Filed 9-23-99; 8:45 am]

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