06-3457. Defense Federal Acquisition Regulation Supplement; Incremental Funding of Fixed-Price Contracts

AGENCY:

Defense Acquisition Regulations System, Department of Defense (DoD).

ACTION:

Final rule.

SUMMARY:

DoD has adopted as final, with changes, an interim rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to address the use of incrementally funded fixed-price contracts. The rule contains a contract clause for use in those situations where incremental funding of fixed-price contracts is permitted.

DATES:

Effective Date: April 12, 2006.

FOR FURTHER INFORMATION CONTACT:

Mr. Bill Sain, Defense Acquisition Regulations System, OUSD(AT&L)DPAP(DARS), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062. Telephone [phone]; facsimile [phone]. Please cite DFARS Case 1990-037.

SUPPLEMENTARY INFORMATION:

A. Background

This rule revises and finalizes the interim rule published at 58 FR 46091 on September 1, 1993, regarding incremental funding of fixed-price contracts. Prior to the issuance of the interim rule, incrementally funded fixed-price contracts had been used in limited situations throughout DoD for a number of years. This technique permitted DoD to award fixed-price contracts in specific circumstances where full funding was not available and incremental funding was statutorily permitted. Use of this technique precluded the need to use a cost-type contract when the nature of the requirement was more suitable for a fixed-price contract. To implement this technique, a number of nonstandard clauses had been developed for use within the military departments and defense agencies. In recognition of the need for a standard clause for such contracts, DoD issued an interim rule to specify those situations where incremental funding of fixed-price contracts is permitted. Six sources submitted comments on the interim rule. The following is a discussion of the comments and the issues relating to the development of the final rule.

1. Language permitting use of incremental funding. The interim rule permitted the use of incremental funding only when the contract was funded with research and development appropriations or when Congress had otherwise authorized incremental funding. The interim rule further required that, for either base services or hazardous/toxic waste remediation contracts for which incremental funding had been authorized by Congress, the head of the contracting activity must approve the use of incremental funding. A number of respondents expressed concern regarding this language.

DoD has revised the rule to specifically address contracts for severable services. As provided for in DFARS 232.703-3, contracts crossing fiscal years, the contracting officer may enter into a contract, exercise an option, or place an order under a contract for severable services for a period that begins in one fiscal year and ends in the next fiscal year if the period of the contract awarded, option exercised, or order placed does not exceed one year (10 U.S.C. 2410a). The public comments indicated that this provision may cause confusion with regard to the use of incremental funding for severable services. Therefore, the final rule contains a new paragraph 232.703-1(i) to specifically address incremental funding for severable services.

2. Head of the contracting activity (HCA) approval. The interim rule required the HCA to approve interim funding for base services and hazardous/toxic waste remediation contracts. DoD believes that the language in the final rule precludes the need for HCA approval. In those cases where incremental funding has been authorized by Congress, the contracting officer should have the flexibility to use such funding without requiring the administrative burden of obtaining HCA approval. This is consistent with the DoD policy of empowering contracting personnel to the maximum extent practicable. The final rule is sufficient for the contracting officer to apply the requirements without further approval, as the rule specifies exactly which contracts are eligible for incremental funding. The final rule also emphasizes the preference for full funding by requiring that incrementally funded fixed-price contracts be fully funded as soon as funds are available. Therefore, the final rule eliminates the requirement for HCA approval for base services or hazardous/toxic waste remediation contracts.

3. Work without funding. One respondent asserted that the clause at DFARS 252.232-7007 encourages contractors to work without funding. The respondent stated that the clause is intended as a vehicle for contracting officers to circumvent the Anti-Deficiency Act.

Under the requirements of DFARS 252.232-7007, the contractor agrees to perform up to the point at which the total amount payable by the Government, including reimbursement in the event of termination for convenience, approximates the total amount allotted to the contract; the contractor is not obligated to continue work on those items beyond that point, and the Government is not obligated to reimburse the contractor in excess of the amount allotted to the contract. The clause notifies the contractor that continuing work is at the sole risk of the contractor. Thus, the clause is not, nor is it intended to be, a vehicle for violating the Anti-Deficiency Act. Nevertheless, DoD agrees that it would be helpful to revise the language regarding continued contract performance to emphasize that the contractor is not authorized to continue work. Therefore, the final rule changes the phrase “The Contractor will not be obligated to continue work” to “The Contractor is not authorized to continue work”. In addition, the final rule redesignates paragraph (i) of the clause as paragraph (j) and adds a new paragraph (i) to read “Nothing in this clause shall be construed as authorization of voluntary services whose acceptance is otherwise prohibited under 31 U.S.C. 1342.”

This rule was not subject to Office of Management and Budget review under Executive Order 12866, dated September 30, 1993.

B. Regulatory Flexibility Act

DoD has prepared a final regulatory flexibility analysis consistent with 5 U.S.C. 604. A copy of the analysis may be obtained from the point of contact specified herein. The analysis is summarized as follows:

This rule amends the DFARS to allow incrementally funded fixed-price contracts in certain limited, and clearly defined, situations. The objective of the rule is to encourage the full funding of contracts, while recognizing that there are specific situations where full funding is not possible, and allowing incremental funding to be used in those situations. DoD received no public comments on the initial regulatory flexibility analysis. As a result of comments received on the interim rule, the final rule contains changes that clarify the applicability of the rule and the requirements of the contract clause. The rule applies to all entities with incrementally funded fixed-priced DoD contracts. DoD believes that the rule has little or no economic impact on such entities, since the rule places little cost risk on the contractor. This is especially true of the final rule, which includes revisions that clarify that a contractor is not authorized to continue performance of a contract beyond the amount incrementally funded. The final rule maintains the clear preference for fully funded fixed-priced contracts; and requires the use of a standard clause in clearly defined and limited circumstances permitting DoD to award, and the contractor to begin work under, a contract prior to the availability of full funding. The rule requires that full funding be placed on the contract as soon as funds are available; clearly states that the contractor is not authorized to perform work beyond the available funds allotted to the contract; and provides specific protections to the contractor until full funding is made available. The rule requires the contractor to notify the contracting officer at least 90 days prior to the date when, in the contractor's best judgment, the work under the contract will reach the point at which the total amount payable by the Government, including any cost for termination for convenience, will approximate 85 percent of the total amount allotted to the contract. In addition, the contractor must provide information regarding additional funding needed to continue performance. This information is the minimum needed for the Government to determine the appropriate course of action. The required information should be readily available to the contractor as part of its normal business practices. The policy in the final rule is designed to minimize any economic impact on small entities. There are no practical alternatives to the rule. The rule is consistent with statutory requirements.

C. Paperwork Reduction Act

The information collection requirements of the clause at DFARS 252.232-7007, Limitation of Government's Obligation, have been approved by the Office of Management and Budget under Clearance Number 0704-0359 for use through December 31, 2007.

List of Subjects in 48 CFR Parts 232 and 252

• Government procurement

Michele P. Peterson,

Editor, Defense Acquisition Regulations System.

Accordingly, the interim rule amending 48 CFR Parts 232 and 252, which was published at 58 FR 46091 on September 1, 1993, is adopted as a final rule with the following changes:

1. The authority citation for 48 CFR parts 232 and 252 continues to read as follows:

Authority: 41 U.S.C. 421 and 48 CFR Chapter 1.

PART 232—CONTRACT FINANCING

2. Section 232.001 is added to read as follows:

232.001

Definitions.

Incremental funding means the partial funding of a contract or an exercised option, with additional funds anticipated to be provided at a later time.

3. Section 232.703-1 is revised to read as follows:

232.703-1

General.

(1) A fixed-price contract may be incrementally funded only if—

(i) The contract (excluding any options) or any exercised option—

(A) Is for severable services;

(B) Does not exceed one year in length; and

(C) Is incrementally funded using funds available (unexpired) as of the date the funds are obligated; or

(ii) The contract uses funds available from multiple (two or more) fiscal years and—

(A) The contract is funded with research and development appropriations; or

(B) Congress has otherwise authorized incremental funding.

(2) An incrementally funded fixed-price contract shall be fully funded as soon as funds are available.

PART 252—SOLICITATION PROVISIONS AND CONTRACT CLAUSES

4. Section 252.232-7007 is amended as follows:

a. By revising the clause date;

b. In paragraph (b), by revising the second sentence;

c. By revising paragraph (i); and

d. By adding paragraph (j) to read as follows:

252.232-7007

Limitation of Government's Obligation.

* * * * *

LIMITATION OF GOVERNMENT'S OBLIGATION (APR 2006)

* * * * *

(b) * * * The Contractor is not authorized to continue work on those item(s) beyond that point. * * *

* * * * *

(i) Nothing in this clause shall be construed as authorization of voluntary services whose acceptance is otherwise prohibited under 31 U.S.C. 1342.

(j) The parties contemplate that the Government will allot funds to this contract in accordance with the following schedule:

On execution of contract $__

(month) (day), (year) $__

(month) (day), (year) $__

(month) (day), (year) $__

* * * * *