[Federal Register: May 13, 2008 (Volume 73, Number 93)]
[Rules and Regulations]               
[Page 27464-27473]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13my08-6]                         

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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 215, 231, and 252

RIN 0750-AF67

 
Defense Federal Acquisition Regulation Supplement; Excessive 
Pass-Through Charges (DFARS Case 2006-D057)

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

ACTION: Interim rule with request for comments.

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SUMMARY: DoD has issued an interim rule amending the Defense Federal 
Acquisition Regulation Supplement (DFARS) to implement Section 852 of 
the National Defense Authorization Act for Fiscal Year 2007. Section 
852 requires DoD to prescribe regulations to ensure that pass-through 
charges on contracts or subcontracts that are entered into for or on 
behalf of DoD are not excessive in relation to the cost of work 
performed by the relevant contractor or subcontractor.

DATES: Effective date: May 13, 2008.
    Comment date: Comments on the interim rule should be submitted in 
writing to the address shown below on or before July 14, 2008, to be 
considered in the formation of the final rule.

ADDRESSES: You may submit comments, identified by DFARS Case 2006-D057, 
using any of the following methods:
    [cir] Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    [cir] E-mail: dfars@osd.mil. Include DFARS Case 2006-D057 in the 
subject line of the message.
    [cir] Fax: 703-602-7887.
    [cir] Mail: Defense Acquisition Regulations System, Attn: Ms. 
Sandra Morris, OUSD (AT&L) DPAP (CPF), IMD 3D139, 3062 Defense 
Pentagon, Washington, DC 20301-3062.
    [cir] Hand Delivery/Courier: Defense Acquisition Regulations 
System, Crystal Square 4, Suite 200A, 241 18th Street, Arlington, VA 
22202-3402.
    Comments received generally will be posted without change to http:/
/www.regulations.gov, including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Ms. Sandra Morris, 703-602-0296.

SUPPLEMENTARY INFORMATION: 

A. Background

    DoD published an interim rule at 72 FR 20758 on April 26, 2007, to 
implement Section 852 of the National Defense Authorization Act for 
Fiscal Year 2007 (Pub. L. 109-364). Section 852 requires DoD to 
prescribe regulations to ensure that pass-through charges on contracts 
or subcontracts (or task or delivery orders) that are entered into for 
or on behalf of DoD are not excessive in relation to the cost of work 
performed by the relevant contractor or subcontractor. To enable DoD to 
ensure that pass-through charges are not excessive, the interim rule 
included a solicitation provision and a contract clause requiring 
offerors and contractors to identify the percentage of work that will 
be subcontracted and, when subcontract costs will exceed 70 percent of 
the total cost of work to be performed, to provide information on 
indirect costs and profit and value added with regard to the 
subcontract work.
    General Response to Comments: Fourteen sources submitted comments 
on the interim rule. In general, the public comments expressed concern 
that the rule discourages use of subcontractors and will lead to 
inappropriate application or adjustment of indirect costs. The comments 
also expressed concern that the contract is always open to oversight 
and opinions on excessive pass-through charges.
    DoD points out that the statute requires that DoD not pay excessive 
pass-through charges, and DoD believes that the rule represents 
appropriate implementation of the statute. The rule is intended to 
protect the Government from those situations where there appears to be 
an agreement with a contractor to perform the contract scope of work, 
including ``managing'' subcontractors, then after award, the contractor 
subcontracts substantially all the effort without providing the 
required value-added subcontract management functions that were 
expected. There is no intent in this rule to disrupt the subcontracting 
process or other arrangements for firms that furnish supplies and 
services.

[[Page 27465]]

    The rule is to be applied consistent with existing Cost Accounting 
Standard (CAS) and Federal Acquisition Regulation (FAR) rules related 
to subcontract management, indirect cost allocation, and profit 
analysis.
    Adding value to the contract includes contractor performance of 
subcontract management functions that are consistent with the 
contractor's subcontract management policies and procedures (these 
functions are normally described in the contractor's CAS disclosure 
statement and/or accounting policies). When subcontract management is 
part of the contractor's proposal and scope of work, indirect costs 
must be applied consistent with existing CAS and FAR allocation rules. 
This rule does not discourage other business practices (e.g., 
distributors, vendors) when the contracting officer determines that 
these arrangements add value, which will be determined on a case-by-
case basis using business judgment (FAR 1.602-2).
    To ensure that the Government can make a determination as to 
whether or not excessive pass-through charges exist, the rule 
incorporates a reporting threshold that affords the contracting officer 
the ability to understand what functions the contractor will be 
performing (e.g., consistent with the contractor's disclosed practice) 
and will be providing ``added value,'' whether it be before award, or 
if the contractor subsequently decides to subcontract substantially all 
of the effort. The rule provides a recovery mechanism for those 
situations where a contractor subcontracts all or substantially all the 
performance of the contract and does not perform the subcontract 
management functions, or other value-added functions, that were charged 
to the Government through indirect costs and related profit.
    The intent of the reporting threshold is for the contracting 
officer to make a determination that excessive pass-through charges do 
not exist at the time of award when at least 70 percent of the work 
will be subcontracted, based on contractor demonstrated functions, and 
to not re-address this determination during contract performance. To 
that end, this interim rule includes an Alternate I to the clause at 
252.215-7004 to address those instances in which the contracting 
officer has made a determination prior to contract award. It also 
incorporates a requirement for the contractor to notify the contracting 
officer in writing if the contractor decides after award to subcontract 
more than 70 percent of the total cost of the work to be performed, and 
to verify in that document that the contractor will add value 
consistent with the definition in the contract clause. If the 
contractor does not perform the demonstrated functions or does not add 
value, the rule makes the excessive pass-through charges unallowable 
and provides for recoupment of the excessive pass-through charges 
consistent with the legislation.
    DoD recognizes that there are acquisition strategies where 
substantial subcontracting will exist, and this rule provides for early 
notification so that the parties have an understanding of the value 
that will be added by the contractor. DoD also recognizes that there 
will be business arrangements, such as buying from a distributor, where 
the contracting activity has determined there is ``added value'' by the 
distributor or there is no other method for obtaining the parts. The 70 
percent threshold is a reporting mechanism so that the parties have an 
opportunity to address potential excessive pass-through charges either 
before award, or before subcontract award if a decision (e.g., make/
buy) to subcontract more than 70 percent was made by the contractor 
after award. Once the contracting officer determines there are no 
excessive pass-through charges (e.g., the contractor is performing 
acceptable subcontract management functions or otherwise adds value), 
there is no subsequent review for excessive pass-through charges unless 
the contractor did not perform subcontract management functions.
    The 70 percent reporting threshold is meant to capture those 
contracting situations where there is a higher risk that substantially 
all of the effort could be subcontracted without providing the required 
subcontract management or other value-added functions. Excessive pass-
through charges are unallowable on any subcontracting effort when the 
contractor or subcontractor does not provide subcontract management 
consistent with its policies and procedures or does not otherwise 
provide value to the contract or subcontract.
    The following is a discussion of the specific comments received in 
response to the interim rule published at 72 FR 20758 on April 26, 
2007:
1. Impact on Indirect Costs
    a. Comment: The legislative history accompanying Section 852 (i.e., 
Section 844 of the Senate Report) is entirely focused on contractors 
that provide ``no value'' to the Government. Therefore, the focus of 
the rule should not be overhead rates, costs, allocation of costs, 
accounting practices, etc.
    DoD Response: The legislation clearly requires that the regulation 
ensure that the Government does not pay excessive pass-through charges, 
and defines excessive pass-through charges as overhead and profit 
related to contractors or subcontractors that add ``* * * no, or 
negligible, value * * *'' This interim rule adds a definition of 
``added value'' to make it clear that subcontract management functions 
are included in the types of functions that represent ``added value.''
    b. Comment: Because indirect costs are handled differently from 
company to company (or even business unit to business unit), excessive 
pass-through should focus on excessive profit. The regulations must be 
conformed to the legislation by deleting the phrase ``indirect costs'' 
each place it appears in the contract clause and the solicitation 
provision and by substituting in each case the word ``overhead,'' 
consistent with the language used in the legislation.
    DoD Response: The legislation explicitly requires a regulation that 
ensures the Government does not pay overhead and related profit when 
the contractor adds no or negligible value. This rule is intended to be 
used consistent with disclosed accounting practices and does not 
require special treatment of subcontract management costs. DoD believes 
that the new definition of what is ``added value'' is needed and has 
made the appropriate revision, as mentioned in the response to comment 
1.a. above. ``Indirect cost'' is the more appropriate term for the 
costs DoD does not intend to pay if the scope of work was subcontracted 
with no ``added value'' by the contractor; but see the response to 
comment 1.a. for clarification of what is value-added effort.
    c. Comment: The application of the cost disallowance for excessive 
pass-through charges appears to penalize contractors that classify 
their activities for ``managing subcontracts'' as indirect, while 
rewarding contractors that classify those activities as direct. The 
rule specifies that the charges for ``managing subcontracts and 
applicable indirect costs and profits based on such costs'' are 
excluded from any excessive pass-through disallowance. In other words, 
if a contractor's accounting practices include subcontract management 
in an indirect cost pool, rather than direct, all of these costs could 
become unallowable when allocated to subcontractor work performed, 
i.e., if and when the excessive pass-through provision--when no or 
negligible value is added--is triggered. Also, the rule violates FAR

[[Page 27466]]

31.203 and 31.204, which state that general and administrative costs 
are allowable and allocable, while the rule implies they are not 
allowable costs.
    DoD Response: The statutory language prohibits payment of excessive 
pass-through charges, which includes overhead costs. The rule is 
consistent with the statute by disallowing the costs, or obtaining a 
price reduction, for excessive pass-through charges, including indirect 
costs.
    d. Comment: The rule may require contractors to submit proposals 
that are inconsistent with their CAS Disclosure Statements. Under CAS-
covered contracts, contractors do not have the option to book costs 
differently than as stated in their CAS Disclosure Statements.
    DoD Response: The rule does not provide any allocation 
requirements. It only makes excessive pass-through charges unallowable. 
The rule does not require contractors to submit proposals that are 
inconsistent with their CAS Disclosure Statements.
2. Pre-Award Determination
    a. Comment: The rule should focus on whether or not contractors 
and/or subcontractors ``add value'' with a disclosure, discussion, 
resolution, determination, and documentation that should be made up 
front, pre-award by the contracting officer, who either negotiates 
appropriate costs or does not award the contract. In DFARS 252.215-
7004(b), after ``determine,'' the phrase ``prior to the award of a 
contract'' should be added. Also, there is no direction about what the 
contracting officer does with this information or which contracting 
officer makes the determination.
    DoD Response: DoD expects that, during pre-award discussions, the 
contractor will disclose its intent to subcontract more than 70 percent 
of the total cost of the work to be performed and its intent to perform 
the subcontract management or other functions that provide ``added 
value'' per its disclosure statement, accounting polices, or otherwise 
(e.g., the functions that make up the subcontract management costs 
being allocated to the effort). DoD expects the contracting officer to 
make a determination that there is ``added value'' and that excessive 
pass-through charges do not exist based on the expectation of 
performance of the disclosed functions that will add value. Under these 
conditions, there will be no further challenge to demonstrate ``added 
value.'' This interim rule includes an Alternate I to the contract 
clause to address those instances in which the contracting officer has 
made a determination prior to contract award that there is ``added 
value'' and, therefore, there are no excessive pass-through charges 
based on performance of those functions that will add value.
    However, a post-award notification is required when a contractor 
changes its decision to subcontract (e.g., make/buy) after award from 
subcontracting less than 70 percent to a subsequent decision to 
subcontract more than 70 percent. Upon written notification, the 
contracting officer will rely on the contractor's written notice that 
the contractor will provide ``added value'' consistent with the 
definition in the clause.
    Implementation of the statute requires that DoD ``not pay'' 
excessive pass-through charges. Post-award adjustments are required in 
the clause should a contractor decide after contract award to 
subcontract all the effort without providing ``added value'' to the 
contract or subcontract.
    b. Comment: Should the contracting officer determine that pass-
through charges are not excessive (considering the contractor's 
established and disclosed accounting practices), that assessment should 
be determinative and the need for post-award audits eliminated.
    DoD Response: Post-award audit rights are required and remain to 
provide the needed audit rights in situations where award was based on 
the contractor performing more than 30 percent of the effort, but the 
contractor later subcontracts substantially all of the work (or more 
than 70 percent), including delivery, and does not provide ``added 
value'' (subcontract management functions).
    c. Comment: The rule should be written solely as direction to the 
contracting officer. A new subparagraph at DFARS 215.404-1 entitled 
``Excessive Pass-Through Charges'' could be added that includes policy 
direction that contracts should not be entered into when the 
contracting officer believes the offeror adds no or negligible value to 
the proposed acquisition. Alternatively, the entire excessive pass-
through cost issue can be better addressed by better acquisition 
strategies and revised profit policies.
    DoD Response: The rule should not be directed solely to the 
contracting officer. The legislation requires a ``regulation'' to 
prevent the Government from paying excessive pass-through charges. DoD 
plans to monitor implementation and to provide guidance as required. It 
is not sufficient to address this issue only in acquisition strategies 
and profit policies, as they will not prevent the Government from 
paying excessive pass-through charges in situations where contracts are 
awarded anticipating very little subcontracting, then subsequently the 
contractor subcontracts all or substantially all of the effort and 
provides no ``added value''--the situations that generated this 
legislation.
    d. Comment: The rule should include guidance that permits the 
contracting officer to enter into an advance agreement with respect to 
the contracting officer's determination that the requirements of the 
clause at 252.215-7004 have been complied with and that the contractor 
(or subcontractor) has not incurred ``excessive pass-through charges.''
    DoD Response: This interim rule includes an Alternate I to the 
contract clause to address those instances where the contracting 
officer determines there will be no excessive pass-through charges 
provided the contractor performs the disclosed value-added functions.
3. Impact on Fixed-Price Contracts
    Comment: The rule does not detail how it would be implemented for 
fixed-price noncompetitive contracts. For example, if at the time the 
contract was negotiated, the contractor did not exceed the 70 percent 
threshold, no adjustment would have been considered in negotiating the 
price of the contract. However, if during the contract performance 
there were make/buy business decisions or cost fluctuations that 
resulted in the 70 percent threshold being exceeded, there is no clear 
way to determine the excessive pass-through charges, as a price was 
negotiated, not elements of cost.
    DoD Response: Similar to CAS noncompliance cost impact situations 
and defective pricing, a determination of a price adjustment will be 
made on a case-by-case basis considering the facts and circumstances.
4. Statutory Exclusions and Exception
    a. Comment: The statute is explicit that the excessive pass-through 
requirement does not apply to any firm-fixed-price subcontract or task 
or delivery order awarded based on adequate price competition or when 
the award is for the acquisition of commercial items. This statutory 
exclusion has not been properly included in the regulations; its 
coverage as a flow-down limitation in 252.215-7004(f) is an 
insufficient implementation of the statute.
    DoD Response: The prescription at DFARS 215.408(4) clearly reflects 
the requirements and exclusions of the legislation. As required by the

[[Page 27467]]

legislation, this rule must flow down to subcontracts, and the flow-
down requirement at 252.215-7004 appropriately excludes those 
subcontracts that meet the exclusion in the legislation.
    b. Comment: An exception should be made for any proposal based on 
cost data. When the Truth in Negotiations Act (TINA) and Cost 
Accounting Standards (CAS) apply, there should be every opportunity for 
the contracting officer (as well as any audit assistance that may be 
utilized) to understand the value being added by the offeror and to 
raise any objections at that point to any ``excessive'' costs.
    DoD Response: DoD believes the new definition of ``added value'' 
will clear up any misunderstanding of the expected implementation. TINA 
and CAS do not ensure the Government does not pay excessive pass-
through charges, as required by the legislation. For example, at the 
time of award it may not be known that the contractor will subcontract 
the effort. Subsequent to award, the contractor may subcontract all 
effort, including delivery, and not perform its subcontract management 
functions, or any other ``added value'' functions, yet the contractor 
applies its indirect costs and profit to the subcontractor costs when 
billing the Government for the effort. Without the requirement to 
notify the contracting officer of the change in the level of 
subcontracting (e.g., make/buy decision), the Government does not have 
the ability to discuss/negotiate the value added by the contractor, nor 
the opportunity to change its procurement strategy and go directly to 
the subcontractor, since there was no ``added value'' from the 
contractor.
    c. Comment: The rule should have some reasonable parameters with 
regard to the number of subcontractors to whom this requirement flows 
down. It seems reasonable that subcontracts that are minimal in value 
or less than 1-2 percent of the cost of the contract should be exempt.
    DoD Response: DoD agrees that a minimum threshold is required and 
has established a threshold tied to the cost or pricing data threshold.
    d. Comment: CAS-covered contractors should be excluded from the 
coverage of the rule. In complying with CAS, contractors allocate 
indirect costs to final cost objectives on a causal/beneficial basis in 
accordance with CAS 418 and CAS 410. Based on these standards, final 
cost objectives would not have excessive pass-through costs applied to 
them. If the indirect costs have less benefit to a final cost objective 
than would be achieved through the contractor's normal allocation 
process, CAS provides for special allocations to achieve the proper 
allocation of costs, which could be a reduced allocation or no 
allocation at all.
    DoD Response: DoD does not agree that CAS-covered contractors 
should be excluded. Cost allocation principles in CAS are separate from 
allowability provisions in this rule. This rule implements the 
statutory provision to prohibit excessive pass-through charges.
    e. Comment: The rule should explicitly exclude competitively 
awarded time-and-materials (T&M) contracts from its applicability; 
contractors are already prohibited from applying profit to material 
costs, and the contractor is required to propose separate rate tables 
for subcontractors. In addition, the exceptions to the rule should 
include all current regulatory exceptions to the submission of cost or 
pricing data specified at FAR 15.403-1, as well as those pricing 
actions below the Truth in Negotiations Act threshold specified at FAR 
15.403-4. For example, the exceptions in current regulations to 
submitting cost or pricing data based on ``adequate price competition'' 
and ``commercial item'' are not limited to fixed-price type contracts 
as specified in the interim rule.
    DoD Response: DoD disagrees with the suggestion to exclude 
additional contract types for the reasons stated in the response to 
comment 4.b. above. The same potential risk for T&M contracts exists as 
for cost-type contracts, if award was made with the intent to 
subcontract little of the work and subsequently the contractor decides 
to have a subcontractor perform substantially all the work without 
providing the value-added subcontract management functions. In 
addition, while the statute specifically excluded certain contract 
types, it did not exclude T&M contracts.
    f. Comment: DoD should consider an exception for small business, as 
the rule's Regulatory Flexibility Act comments indicate a relatively 
minor impact on small businesses.
    DoD Response: The exclusion would not be appropriate, since the 
statute did not provide an exclusion. Considering the clarification 
addressed in the response to comment 1.a. above, DoD does not believe 
it is burdensome for a contractor or lower-tier subcontractor, whether 
small business or otherwise, to demonstrate its planned subcontract 
management functions. Also see the response to comment 6.b above.
    g. Comment: In the clause at 252.215-7004, paragraph (d), Recovery 
of Excessive Pass-Through Charges, a retroactive adjustment to 
previously determined firm-fixed prices based on changes during 
contract performance has no basis in the law and must be eliminated. 
Also, the only recovery possible for such a negotiated fixed-price 
contract would have to have occurred because the contracting officer 
agreed to a price that included ``excessive pass-through charges'' and 
then later changed his/her mind about that price agreement, which is 
inequitable.
    DoD Response: DoD believes the rule is consistent with the 
statutory requirement prohibiting payment of excessive pass-through 
charges. However, DoD has revised the rule to include an Alternate I to 
the clause for use when a contracting officer makes a determination 
that there is ``added value.'' DoD disagrees that a fixed-price 
adjustment must be eliminated, and also disagrees with the premise that 
the contracting officer would have agreed to excessive pass-through 
charges. If a contractor, after contract award, decides to subcontract 
all the contract effort and does not perform any subcontract management 
or any other functions that add value, DoD receives no benefit for the 
indirect costs and profit added on by the contractor or subcontractor, 
and DoD expects to re-coup those costs. The rule includes a reporting 
mechanism (i.e., 70 percent) for circumstances that pose a higher risk 
of excessive pass-through charges, so that the parties have an 
opportunity to address potential excessive pass-through charges either 
before award, or before subcontract award if a decision subsequently 
changes after contract award.
    h. Comment: In the clause at 252.215-7004, paragraph (e) adds an 
access to records provision ``to determine whether the contractor 
proposed, billed, or claimed excessive pass-through charges.'' This 
provision introduces new and unnecessary rules on access to records, 
and there is no need for a special access to records provision for this 
regulation; audit rights under this provision can and should be based 
on the existing Audit and Records--Negotiation contract clause at FAR 
52.215-2. The Audit and Records clause is already included in the 
contracts to which the interim rule is applicable.
    DoD Response: The Audit and Records clause at FAR 52.215-2 does not 
provide the Government access to all records that might show excessive 
pass-through charges. The rule's access to records provision is needed 
to fully implement Section 852 and to ensure the Government is not 
paying excessive pass-through charges.

[[Page 27468]]

5. Unallowable Costs
    a. Comment: Requiring these costs to be ``unallowable'' is too 
draconian and should be abandoned in favor of requiring the contracting 
officer to make a preaward determination of reasonableness.
    DoD Response: DoD believes making these costs unallowable is 
required to comply with the statutory requirements. Furthermore, a 
preaward determination will not prevent potential excessive pass-
through charges when a contractor changes its decision to subcontract 
after contract award.
    b. Comment: The determination of an excessive pass-through charge 
should not be defined as a ``cost principle.'' The cost principles 
generally define various types of costs, and some of those costs are 
unallowable regardless of the amount of such costs incurred. For the 
costs addressed in the interim rule, the underlying costs are 
presumably allowable as to the type of cost, but it is only the amount 
of such cost that is considered excessive.
    DoD Response: This interim rule clarifies the definitions of 
``excessive pass-though charge'' and ``added value.'' If a contractor 
bills the Government excessive pass-through costs by subcontracting the 
contract effort without adding value (consistent with its subcontract 
management function), the entire indirect cost and profit should not be 
paid. The rule does not provide for questioning only a portion of the 
indirect costs for subcontract management charged to the Government 
when it is determined that the costs are excessive pass-through 
charges.
    c. Comment: It is questionable to include that excessive pass-
through charges are unallowable in a section (DFARS 231.201-2) that 
deals with ``Determining allowability'' of all costs. However, the 
requirements in FAR 3l.201-2(a)(2) (Allocability) and (a)(4) (Terms of 
the contract) already cover this, so adding this language is both 
unnecessary and redundant.
    DoD Response: DoD believes this language is required to ensure 
implementation of the statute, which prohibits payment of excessive 
pass-through charges.
    d. Comment: The language added to DFARS 231.203 appears to be 
misplaced, i.e., ``(d) Excessive pass-through charges, as defined in 
the clause at 252.215-7004, are unallowable.'' The added statement is 
purely an allowability statement and is added to a section of the DoD 
supplement to FAR 31.203, which deals exclusively with allocability of 
costs. One wonders whether the intent of this addition to 231.203 is to 
require those subcontract costs which are not benefited by G&A expenses 
remain as part of the G&A base. If so, it would be inequitable to 
eliminate unallocable G&A costs from the G&A pool and leave the costs 
to which no G&A is allocable in the G&A base.
    DoD Response: FAR 31.203 deals with indirect costs. DoD will not 
pay indirect costs when a contractor does not add value (for example, 
adding value includes performing subcontract management functions in 
accordance with a contractor's disclosed accounting practices or 
policies or other value-added functions as determined by the 
contracting officer). The intent is to maintain compliance with 
existing cost allocation laws and regulations. The rule includes a 
reporting mechanism (i.e., 70 percent) so that the parties have an 
opportunity to address potential excessive pass-through charges either 
before award, or before subcontract award if a decision to subcontract 
subsequently changes after contract award. If it is determined that 
excessive pass-through charges will occur, the contracting officer has 
the opportunity to change the procurement strategy or to work with the 
contractor to ensure proper application of indirect costs in accordance 
with CAS and/or FAR requirements.
    e. Comment: The interim rule makes a unique distinction between 
fixed-priced contracts and all other contracts regarding unallowable 
costs. The contract clause states that excessive pass-through charges 
are only considered ``unallowable'' when associated with non-fixed-
price contracts. When associated with a fixed-price contract, they are 
not considered ``unallowable,'' but instead are an after-the-fact 
contract price reduction. This is contrary to the FAR provisions 
applicable to fixed-price contracts (i.e., FAR 31.102). Costs 
determined to be unallowable in accordance with FAR Subpart 31.2 or 
DFARS Subpart 231.2 are unallowable whether the contract being priced 
is a cost-type or flexibly priced contract or a competitively awarded 
fixed-price contract. If a contract cost is not determined to be 
unallowable prior to the award of a competitively awarded fixed-priced 
contract, there is no regulatory basis for making an after-the-fact 
contract price reduction if the contracting officer determines after 
award that incurred pass-through costs were excessive.
    DoD Response: See response to comment 4.g. above.
    f. Comment: It is unclear whether an excessive pass-through charge 
is intended to be ``expressly unallowable'' (e.g., specifically named 
and stated to be unallowable as defined in 48 CFR 9904.405-30(a)(2)) or 
unallowable based on ``reasonableness'' (e.g., as defined at FAR 
31.201-3). It appears that the intent of the legislation is to treat 
the cost determination on the basis of ``reasonableness.''
    DoD Response: See the ``General Response to Comments'' and the 
response to comment 1.a. above. The rule does not make indirect costs 
that are determined to be excessive pass-through charges expressly 
unallowable.
    g. Comment: The rule defines an excessive pass-through charge to be 
made up of indirect costs and profit. However, DFARS Part 231 or FAR 
Part 31 does not address profit; they only address costs. Therefore, 
including statements in the DFARS relative to unallowable profit is 
inconsistent with the related FAR provision.
    DoD Response: DFARS Part 231 simply refers to the definition at 
252.215-7004, thereby addressing the indirect costs (DFARS 231.203). 
DoD has clarified the language to read ``Indirect costs related to 
excessive pass-through charges, as defined in the clause at 252.215-
7004, are unallowable.''
6. Identification/Threshold of Subcontract Effort
    a. Comment: The 70 percent supplier content threshold is arbitrary 
and is not a legislative requirement and is contrary to other FAR 
thresholds (e.g., that only a small business can only perform 50 
percent or more of the work). It is unrealistic for construction 
activities where the contractor for construction work serves primarily 
as a project manager. Some contracts require that a certain percentage 
of work be subcontracted. Use of this 70 percent threshold is causing 
confusion, and some think the limitation on excessive pass-through 
charges only pertains to contracts with 70 percent or more 
subcontracting. Also, teaming is a common practice and 70 percent is 
too low. The contractor on such teams always adds significant value and 
should not be required to demonstrate that fact where it is performing 
30 percent of the work. If retained, recommend increasing to 80-90 
percent.
    DoD Response: This rule does not affect subcontracting and teaming 
arrangements. See the ``General Response to Comments'' above. The 70 
percent threshold is a reporting mechanism so that the parties have an 
opportunity to address potential excessive pass-through charges either 
before award, or before subcontract award if a decision changes after 
award

[[Page 27469]]

in those circumstances where there is a higher risk that excessive 
pass-through charges could exist (e.g., subcontracting all or 
substantially all of the work). Once the contracting officer determines 
there is ``added value'' (e.g., the contractor will perform acceptable 
subcontract management functions), there is no subsequent review for 
determining ``added value.'' This rule does not affect subcontracting 
and teaming arrangements; it simply provides a remedy to the Government 
when a contractor bills for work that is not ``added value'' as 
stipulated in the rule. The rule is intended to provide the Government 
the means to identify, determine, and seek recovery of charges for non-
value-added functions as stipulated in the rule.
    b. Comment: The final rule should include a contract threshold that 
triggers the applicability of the rule (e.g., $100,000 for construction 
contracts and $50 million for major systems acquisition, or $650,000).
    DoD Response: This interim rule includes a threshold tied to the 
cost or pricing data threshold, which provides for periodic inflation 
adjustment. In addition, the clause also allows for contracting officer 
discretion below that threshold based on potential risks or other 
considerations.
    c. Comment: The regulation should be clarified so as to treat the 
70 percent amount as a binary, triggering, condition at the time of 
contract award. Thus, if the offeror's proposal does not identify 70 
percent or more of the total cost of work to be performed, the 
contracting officer's one time determination--at the time of contract 
award--must be that there is no excessive pass-through of costs and no 
further action is required by either the contractor or the contracting 
officer, absent a change in the amount of subcontract effort (as 
identified by any one of the three circumstances described in 252.215-
7004(c)). The rule does not address situations where the prime 
contractor underruns its portion of the effort so that the 
subcontracted value exceeds 70 percent of the final cost, but is not 
known at award. Also, how do you measure the 70 percent, especially 
when it happens after initial award?
    DoD Response: See the ``General Response to Comments'' above. This 
interim rule includes an Alternate I to the contract clause for use 
when the contracting officer has determined that the contractor's 
functions are value-added and that excessive pass-through charges do 
not exist based on the performance of those functions.
    d. Comment: The use of a fixed percentage factor excludes other 
potential situations where excessive pass-through costs may exist and, 
therefore, may not be consistent with the legislative purpose. 
Contractors and subcontractors should be required to provide pass-
through cost detail on all subcontracts regardless of the total percent 
of subcontract costs in the proposal, e.g. direct/drop shipments.
    DoD Response: DoD believes the significant risks for excessive 
pass-through charges are at the total contract/subcontract level (e.g., 
subcontracting all effort without providing subcontract management 
functions), and the use of a reporting threshold for a contracting 
officer decision on excessive pass-through charges is sufficient. CAS 
and FAR already address proper allocations when there is not a causal/
beneficial relationship between indirect expenses and the allocation 
base, e.g., a special allocation for significant direct/drop shipments.
    e. Comment: What does the phrase ``percentage of effort the offeror 
intends to perform'' in 252.215-7003(c) mean? Are the percentage 
measures at cost for both the contractor and subcontractor, price for 
both, or cost for contractor and price for subcontractor? There is an 
inconsistency between (c)(1) and (c)(2) of that provision.
    DoD Response: The language has been revised to read `` * * * total 
cost of the work to be performed * * * '' to be consistent with the 
remainder of the provision and the corresponding contract clause.
    f. Comment: If there is a change proposed to the scope of work or 
the contractor subsequently decides to increase the amount of 
subcontracting to more than 70 percent, the clause offers no guidance 
regarding the dollar threshold for launching the pass-through charge 
analysis. Is the calculation to be based on the change only, or on the 
entire contract?
    DoD Response: At any point the contractor decides to subcontract 
more than 70 percent of the cost of work to be performed, whether or 
not the decision results from a change in the scope of work, the 
contractor must notify the contracting officer and identify the value-
added functions (i.e., subcontract management functions) that benefit 
the Government. DoD believes that 252.215-7004(c)(1) and (2) adequately 
explain the reporting requirement.
    g. Comment: It is unclear how the interim rule treats situations in 
which the definitized contract contains options which could 
significantly alter contract value when exercised at a later date. 
Would the contracting officer include the potential value of exercised 
options in the initial calculation, just rely on the firm business 
portion of the contract, or need to recalculate later at the time of 
option execution?
    DoD Response: Priced options would be included.
    h. Comment: All directed subcontractor cost of work should be 
subtracted from the percentage calculation, because the analysis of 
whether the prime contractor adds value should be made by the 
Government at the time the directed subcontract is designated. If there 
were no added value, the Government would logically procure that item 
and provide it as Government-furnished equipment.
    DoD Response: The statutory provisions prohibit excessive pass-
through charges when a contractor or subcontractor is providing no or 
negligible value. This applies to all subcontracts except those 
specifically excluded in the statute.
    i. Comment: The rule does not take into consideration emergency and 
contingency contracts that might require extensive subcontracting to 
achieve the desired result, to include the Stafford Act requirement 
that mandates work be awarded to local companies when possible.
    DoD Response: DoD expects contractors to provide ``added value'' 
functions under any conditions for which it subcontracts part of the 
contract effort.
7. Definitions and Contract Clause
    a. Comment: At DFARS 252.215-7004(a), the definition of each of the 
following terms should be clarified to provide objective and uniform 
standards:
    (i) No value.
    (ii) Negligible value. The definition of this term should be 
expanded to link it to the specific work to be performed, based on the 
facts and circumstances of each such contract or subcontract. Thus, the 
definition would state: ``No or negligible value'' means the Contractor 
or subcontractor cannot demonstrate to the Contracting Officer that its 
effort will add substantive value to accomplishing the work to be 
performed under the specific contract or subcontract, based on the 
facts and circumstances of each contract or subcontract (e.g., 
statement of work).''
    (iii) Costs of managing subcontracts.
    (iv) Applicable indirect costs or profit.
    (v) Demonstrate.
    (vi) Substantive value.
    (vii) ``Value'' in ``value added.''
    (viii) Excessive. ``Excessive pass-through charge'' needs to be 
more clearly defined, and specific examples

[[Page 27470]]

should be added for clarifying the definition of ``excessive''.
    DoD Response: Although public comments did not provide alternative 
definitions, DoD believes the definition of ``added value'' in this 
interim rule clarifies the misunderstandings apparent in public 
comments and provides sufficient perspective for the terms identified 
by the respondent. Consistent with the requirements at FAR 1.602-2, the 
rule is written to allow wide latitude for the contracting officer to 
exercise business judgment in determining whether the subcontract 
management provides ``added value'' consistent with the contractor's 
practices and the expectations of the contracting officer.
    b. Comment: In the definition of ``no or negligible value,'' 
``added'' should be changed to ``will add,'' because the determination 
of DFARS 252.215-7004(b) should be made prior to contract performance 
and prior to the contractor certifying that it has only submitted 
allowable costs.
    DoD Response: See the response to comment 7.a. above.
    c. Comment: The phraseology in the solicitation provision at 
252.215-7003(b) states: ``the offeror's proposal shall exclude 
excessive pass-through charges.'' This is not the proper statement of 
the law or the regulatory intent. Furthermore, the formulation of this 
subsection unnecessarily and inappropriately differs from the 
formulation of the related contract clause at 252.215-7004(b) that 
states: ``The Government will not pay excessive pass-through charges.'' 
The excessive pass-through charges must be excluded from the negotiated 
contract prices, not merely from proposals.
    DoD Response: Section 852 states that the Government will not pay 
excessive pass-through charges. DoD believes that Section 852 is best 
implemented by making excessive pass-through charges unallowable. By 
requiring these unallowable costs to be excluded from proposals, DoD is 
ensuring that the Government will not pay excessive pass-through 
charges.
    d. Comment: Paragraph (c) of the clause at 252.215-7004 improperly 
formulates a set of rules applicable to lower-tier subcontracting, 
without adopting the limitations on flow-down provided for at 252.215-
7004(f); it also retains the coverage for ``indirect costs'' rather 
than for ``overhead'' costs as provided in the statute. Finally, it 
discusses the requirement for ``value added'' but improperly ignores 
the statutory test of ``no or negligible value'' expressly provided for 
in the statute and properly addressed in the definition in paragraph 
(a) of the clause at 252.215-7004.
    DoD Response: Relative to paragraph (c) of the clause at 252.215-
7004, the prescription for the clause at 215.408(4) properly accounts 
for all exceptions for use of the clause, and 252.215-7004(f) provides 
the exceptions for flowdown of the clause. ``Indirect costs'' is the 
more appropriate term for the costs DoD will not pay if the scope of 
work was subcontracted with no ``added value'' by the contractor. See 
the response to comment 1.a. above for a clarification of what is 
``added value.''
    e. Comment: To avoid further inconsistencies, errors, and 
confusion, the provision at 252.215-7003 should be deleted in its 
entirety as well as the cross-reference to this provision at 
215.408(3).
    DoD Response: DoD believes the changes in this interim rule address 
the confusion expressed in public comments and has retained the 
solicitation provision.
    f. Comment: A better definition of what is considered a 
``subcontract'' for the purposes of the rule's analysis is needed in 
order to establish the base upon which the currently proposed 70 
percent will be evaluated. FAR defines ``subcontract'' in two places, 
in FAR 44.101 and FAR 15.401.
    DoD Response: The rule is revised to incorporate definitions of 
``subcontract'' and ``subcontractor'' consistent with the definitions 
at FAR 44.101.
    g. Comment: There are a number of commercial and Government 
practices which should be clarified with regard to the determination of 
subcontract. The following are some examples:
    (i) Inter-organizational transfers, while considered a subcontract 
with regard to pricing, should not be considered a subcontract for the 
purpose of pass-through charges, as they are not considered 
subcontracts within a company.
    (ii) Many firms employ contract labor to supplement their own 
staff. These subcontract laborers are integrated into the contractor's 
work staff and report directly to and are supervised by company 
managers in much the same manner as its own employees. Accordingly, it 
is our belief that these categories of employees should be excluded 
from the subcontracting base.
    (iii) Will the analysis of subcontract labor hours be made on the 
basis of the number of labor hours involved or the cost of those labor 
hours? In general, there is a tendency to subcontract work which 
involves routine labor categories while retaining more highly skilled 
and highly paid labor categories in-house. There are different types of 
material and supply purchases. Formerly Government-furnished property 
has been shifted to contractor-acquired; the rule may result in 
contractors being unwilling to continue this process.
    DoD Response: The rule is intended to protect the Government from 
those situations where there appeared to be an agreement with a 
contractor to perform the contract scope of work, including 
``managing'' subcontractors, then after award, the contractor 
subcontracts substantially all the effort without providing ``added 
value.'' There is no intent in this rule to disrupt the subcontracting 
process or other arrangements for firms that furnish supplies and 
services. The definitions of ``subcontract'' and ``subcontractor'' at 
FAR 44.101 apply and have been incorporated into the rule.
    h. Comment: The definition at 252.215-7004(a) fails to adopt the 
``70 percent standard'' as one of the key regulatory triggers for 
determining whether there is an ``excessive pass-through charge.'' The 
definition in 252.215-7004(a) should be modified to add, before the 
period at the end thereof, the phrase ``if the contractor intends to 
subcontract more than 70 percent of the total cost of work to be 
performed by each subcontractor, under the contract, task order or 
delivery order''.
    DoD Response: The 70 percent threshold is just a reporting 
mechanism. See the ``General Responses to Comments'' and the response 
to comment 1.a. above.
8. Impact on Business Strategy, Spares Contracting, and Indefinite-
Delivery Indefinite-Quantity or Delivery Order Contracts
    a. Comment: A possible outcome of an overly broad application of 
the interim rule may be a reduction in the number of opportunities for 
lower-tier contractors to provide a best value solution, as prime 
contractors are encouraged to keep work in house to avoid the 
possibility of encountering arbitrary cost disallowance and price 
reductions. Make-or-buy decisions will be skewed in favor of ``Make'' 
as a way to reduce risk. Additionally, many small businesses that 
manage large subcontractors may simply decline to do business with a 
customer that is arguably hostile to their business model.
    DoD Response: The rule implements the statutory requirement to 
prohibit excessive pass-through charges. The rule should have no impact 
on teaming, subcontracting, and other business arrangements (e.g., 
distributors, vendors) when the contractor demonstrates ``added 
value.''

[[Page 27471]]

    b. Comment: The rule may impact team assembly and formation 
decisions, due to emphasis on excessive pass-through charges on the 
amount of work subcontracted out, and is inconsistent with the July 12, 
2004, DoD Acquisition, Technology, and Logistics (AT&L) memorandum 
entitled, ``Selection of Contractors for Subsystems and Components,'' 
which provides a reason to look outward and add non-affiliated 
subcontractors.
    DoD Response: The rule is not inconsistent with the AT&L memorandum 
or other subcontracting or teaming initiatives. The rule is intended to 
protect the Government from those situations where there appeared to be 
an agreement with a contractor to perform the contract scope of work, 
including ``managing'' subcontractors, then after award, the contractor 
subcontracts substantially all the effort without providing the 
required ``added value.'' There is no intent in this rule to disrupt 
the subcontracting process.
    c. Comment: For spares contracting, the Government will be required 
to contract directly with component and subsystems suppliers if the 
Government possesses sufficient data rights to do so. Prime contractors 
most likely will not pursue spares contracting if they receive 
virtually no profit for doing so. In addition, the rule will 
significantly increase administrative burden on indefinite-delivery 
indefinite-quantity (IDIQ) and requirements-type contracts. If a 
business cannot capture its allowable costs, why should it manage 
subcontracts for the Government?
    DoD Response: This rule in no way changes the indirect costs or 
profit a contractor receives for subcontract effort. See the ``General 
Responses to Comments'' above. On IDIQ and other contracts, once the 
contractor demonstrates the ``added value'' of the subcontract 
management functions it will perform, and the contracting officer 
determines that the Government derives a benefit from the ``added 
value'' functions, there should be no issue related to excessive pass-
through charges. DoD recognizes that, as part of performing IDIQ and 
requirements contracts, a contractor must perform subcontract 
management functions consistent with its disclosed accounting practices 
and policies, and in some cases may award more than 70 percent of a 
particular effort to a subcontractor. This rule is intended to ensure 
that any payments for indirect costs and profit to the contractor (or 
subcontractor) are consistent with ``added value'' of subcontract 
management functions performed.
    d. Comment: Implementation of the rule may be extremely problematic 
when IDIQ task order/delivery order contracts are involved. These 
contract types for services routinely involve a general statement of 
work with a large proportion of subcontractors to fulfill a wide 
variety of requirements for the customer. It is very unlikely that the 
contractor or the Government will be able to clearly define the 
required tasks such that the actual usage of subcontractors in terms of 
work performed or overall percentage of the contract can be defined in 
advance of performance.
    DoD Response: See response to comment 8.c. above.
    e. Comment: If a firm-fixed-price IDIQ contract is awarded based on 
adequate price competition, must the clauses be incorporated into 
delivery and task orders? What if the IDIQ contract contains fixed 
labor rates for a prime and subcontractors? Most likely, the fixed 
subcontractor rates contain prime indirects and profit. If the 
contracting officer negotiates a task order consisting mostly of 
subcontract labor but concludes that the prime adds no or negligible 
value (since the subcontractor is doing most of the work), is the 
contracting officer expected to remove all costs and profit not related 
to subcontract management?
    DoD Response: See the ``General Responses to Comments'' and the 
response to comment 8.c. above. Unless a contract meets the exclusions 
in the rule, the clause is required. Also see the response to comment 
4.e. above. When the contracting officer determines that the contractor 
is providing subcontract management functions necessary to complete the 
contract requirements and consistent with its subcontract management 
functions, there are no excessive pass-through charges.
9. Planning and Guidance
    Comment: This rule is no substitute for adequate contract planning 
and administration on the part of the Government. Without adequate 
guidance, the potential for mischief could become an issue.
    DoD Response: DoD will monitor implementation and will provide 
guidance when necessary.
10. Profit
    Comment: Contractor's assumption of risk is not discussed. 
Eliminating all profit on a subcontract is not equitable; profit should 
largely be a function of the risk assumed by the contractor.
    DoD Response: DoD has added a definition of ``added value'' to 
clarify misunderstandings of the rule. The rule in no way prohibits or 
inhibits contracting officers from considering contractor risks when 
negotiating profit under existing regulations. Profit would only be 
eliminated (or possibly an award not made) if the scope of work was 
being subcontracted and the contractor or subcontractor did not perform 
any ``added value'' functions.
    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 does not expect this rule 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 DoD does not 
expect a significant number of entities to propose excessive pass-
through charges under DoD contracts or subcontracts, and the 
information required from offerors and contractors regarding pass-
through charges is minimal. Therefore, DoD has not performed an initial 
regulatory flexibility analysis. DoD invites comments from small 
businesses and other interested parties. DoD also will consider 
comments from small entities concerning the affected DFARS subparts in 
accordance with 5 U.S.C. 610. Such comments should be submitted 
separately and should cite DFARS Case 2006-D057.

C. Paperwork Reduction Act

    This interim rule contains an information collection requirement. 
The Office of Management and Budget (OMB) has approved the information 
collection requirement for use through October 31, 2008, under OMB 
Control Number 0704-0443. DoD proposes that OMB extend its approval for 
use for three additional years and invites comments on the following: 
(a) Whether the collection of information is necessary for the proper 
performance of the functions of DoD, including whether the information 
will have practical utility; (b) the accuracy of the estimate of the 
burden of the information collection; (c) ways to enhance the quality, 
utility, and clarity of the information to be collected; and (d) ways 
to minimize the burden of the information collection on respondents, 
including the use of automated collection techniques or other forms of 
information technology. The following is a summary of the information 
collection requirement:
    Title: Defense Federal Acquisition Regulation Supplement (DFARS); 
Excessive Pass-Through Charges.

[[Page 27472]]

    Type of Request: Extension of a currently approved collection.
    Number of Respondents: 12,650.
    Responses Per Respondent: Approximately 1.
    Annual Responses: 12,800.
    Average Burden Per Response: .51 hour.
    Annual Burden Hours: 6,550.
    Needs and Uses: DoD needs this information to ensure that pass-
through charges under DoD contracts and subcontracts are not excessive, 
in accordance with Section 852 of Public Law 109-364. DoD contracting 
officers will use the information to assess the value added by a 
contractor or subcontractor in relation to proposed, billed, or claimed 
indirect costs or profit on work performed by a subcontractor.
    Affected Public: Businesses or other for-profit institutions.
    Respondent's Obligation: Required to obtain or retain benefits.
    Frequency: On occasion.
    Written comments and recommendations on the information collection 
should be sent to Ms. Jasmeet Seehra at the Office of Management and 
Budget, Desk Officer for DoD, Room 10236, New Executive Office 
Building, Washington, DC 20503, with a copy to the Defense Acquisition 
Regulations System, Attn: Ms. Sandra Morris, OUSD (AT&L) DPAP (CPF), 
IMD 3D139, 3062 Defense Pentagon, Washington, DC 20301-3062. Comments 
can be received from 30 to 60 days after the date of this notice, but 
comments to OMB will be most useful if received by OMB within 30 days 
after the date of this notice.
    To request more information on this proposed information collection 
or to obtain a copy of the proposal and associated collection 
instruments, please write to the Defense Acquisition Regulations 
System, Attn: Ms. Sandra Morris, OUSD (AT&L) DPAP (CPF), IMD 3D139, 
3062 Defense Pentagon, Washington, DC 20301-3062.

D. Determination To Issue an Interim Rule

    A determination has been made under the authority of the Secretary 
of Defense that urgent and compelling reasons exist to publish an 
interim rule prior to affording the public an opportunity to comment. 
This interim rule implements Section 852 of the National Defense 
Authorization Act for Fiscal Year 2007 (Pub. L. 109-364). Section 852 
requires DoD to prescribe regulations to ensure that pass-through 
charges on contracts or subcontracts (or task or delivery orders) that 
are entered into for or on behalf of DoD are not excessive in relation 
to the cost of work performed by the relevant contractor or 
subcontractor. Public comments received on the previous interim rule 
indicate that there is an immediate need to amend DFARS policy on this 
subject, to eliminate significant misunderstandings that could cause 
serious contracting problems. Comments received in response to this 
interim rule will be considered in the formation of the final rule.

List of Subjects in 48 CFR Parts 215, 231, and 252

    Government procurement.

Michele P. Peterson,
Editor, Defense Acquisition Regulations System.

0
Therefore, 48 CFR parts 215, 231, and 252 are amended as follows:
0
1. The authority citation for 48 CFR parts 215, 231, and 252 continues 
to read as follows:

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

PART 215--CONTRACTING BY NEGOTIATION

0
2. Section 215.408 is amended by revising paragraph (3) and adding 
paragraph (4) to read as follows:


215.408  Solicitation provisions and contract clauses.

* * * * *
    (3) Use the provision at 252.215-7003, Excessive Pass-Through 
Charges--Identification of Subcontract Effort, in solicitations 
(including task or delivery orders)--
    (i) With a total value that exceeds the threshold for obtaining 
cost or pricing data in accordance with FAR 15.403-4, except when the 
resulting contract is expected to be--
    (A) A firm-fixed-price contract awarded on the basis of adequate 
price competition;
    (B) A fixed-price contract with economic price adjustment, awarded 
on the basis of adequate price competition;
    (C) A firm-fixed-price contract for the acquisition of a commercial 
item; or
    (D) A fixed-price contract with economic price adjustment, for the 
acquisition of a commercial item; or
    (ii) With a total value at or below the threshold for obtaining 
cost or pricing data in accordance with FAR 15.403-4, when the 
contracting officer determines that inclusion of the provision is 
appropriate.
    (4)(i) Use the clause at 252.215-7004, Excessive Pass-Through 
Charges, in solicitations and contracts (including task or delivery 
orders)--
    (A) With a total value that exceeds the threshold for obtaining 
cost or pricing data in accordance with FAR 15.403-4, except for--
    (1) Firm-fixed-price contracts awarded on the basis of adequate 
price competition;
    (2) Fixed-price contracts with economic price adjustment, awarded 
on the basis of adequate price competition;
    (3) Firm-fixed-price contracts for the acquisition of a commercial 
item; or
    (4) Fixed-price contracts with economic price adjustment, for the 
acquisition of a commercial item; or
    (B) With a total value at or below the threshold for obtaining cost 
or pricing data in accordance with FAR 15.403-4, when the contracting 
officer determines that inclusion of the clause is appropriate.
    (ii) Use the clause with its Alternate I when the contracting 
officer determines that the prospective contractor has demonstrated 
that its functions provide added value to the contracting effort and 
there are no excessive pass-through charges.

PART 231--CONTRACT COST PRINCIPLES AND PROCEDURES

0
3. Section 231.203 is revised to read as follows:


231.203  Indirect costs.

    (d) Indirect costs related to excessive pass-through charges, as 
defined in the clause at 252.215-7004, are unallowable.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
4. Sections 252.215-7003 and 252.215-7004 are revised to read as 
follows:


252.215-7003  Excessive pass-through charges--identification of 
subcontract effort.

    As prescribed in 215.408(3), use the following provision:

EXCESSIVE PASS-THROUGH CHARGES--IDENTIFICATION OF SUBCONTRACT EFFORT 
(MAY 2008)

    (a) Definitions. Added value, excessive pass-through charge, 
subcontract, and subcontractor, as used in this provision, are 
defined in the clause of this solicitation entitled ``Excessive 
Pass-Through Charges'' (DFARS 252.215-7004).
    (b) General. The offeror's proposal shall exclude excessive 
pass-through charges.
    (c) Performance of work by the Contractor or a subcontractor. 
    (1) The offeror shall identify in its proposal the total cost of 
the work to be performed by the offeror, and the total cost of the 
work to be performed by each subcontractor, under the contract, task 
order, or delivery order.
    (2) If the offeror intends to subcontract more than 70 percent 
of the total cost of work

[[Page 27473]]

to be performed under the contract, task order, or delivery order, 
the offeror shall identify in its proposal--
    (i) The amount of the offeror's indirect costs and profit 
applicable to the work to be performed by the subcontractor(s); and
    (ii) A description of the added value provided by the offeror as 
related to the work to be performed by the subcontractor(s).
    (3) If any subcontractor proposed under the contract, task 
order, or delivery order intends to subcontract to a lower-tier 
subcontractor more than 70 percent of the total cost of work to be 
performed under its subcontract, the offeror shall identify in its 
proposal--
    (i) The amount of the subcontractor's indirect costs and profit 
applicable to the work to be performed by the lower-tier 
subcontractor(s); and
    (ii) A description of the added value provided by the 
subcontractor as related to the work to be performed by the lower-
tier subcontractor(s).


(End of provision)


252.215-7004  Excessive pass-through charges.

    As prescribed in 215.408(4), use the following clause:

EXCESSIVE PASS-THROUGH CHARGES (MAY 2008)

    (a) Definitions. As used in this clause--
    Added value means that the Contractor performs subcontract 
management functions that the Contracting Officer determines are a 
benefit to the Government (e.g., processing orders of parts or 
services, maintaining inventory, reducing delivery lead times, 
managing multiple sources for contract requirements, coordinating 
deliveries, performing quality assurance functions).
    Excessive pass-through charge, with respect to a Contractor or 
subcontractor that adds no or negligible value to a contract or 
subcontract, means a charge to the Government by the Contractor or 
subcontractor that is for indirect costs or profit on work performed 
by a subcontractor (other than charges for the costs of managing 
subcontracts and applicable indirect costs and profit based on such 
costs).
    No or negligible value means the Contractor or subcontractor 
cannot demonstrate to the Contracting Officer that its effort added 
value to the contract or subcontract in accomplishing the work 
performed under the contract (including task or delivery orders).
    Subcontract means any contract, as defined in section 2.101 of 
the Federal Acquisition Regulation, entered into by a subcontractor 
to furnish supplies or services for performance of the contract or a 
subcontract. It includes but is not limited to purchase orders, and 
changes and modifications to purchase orders.
    Subcontractor means any supplier, distributor, vendor, or firm 
that furnishes supplies or services to or for the Contractor or 
another subcontractor.
    (b) General. The Government will not pay excessive pass-through 
charges. The Contracting Officer shall determine if excessive pass-
through charges exist.
    (c) Required reporting of performance of work by the Contractor 
or a subcontractor. The Contractor shall notify the Contracting 
Officer in writing if--
    (1) The Contractor changes the amount of subcontract effort 
after award such that it exceeds 70 percent of the total cost of 
work to be performed under the contract, task order, or delivery 
order. The notification shall identify the revised cost of the 
subcontract effort and shall include verification that the 
Contractor will provide added value; or
    (2) Any subcontractor changes the amount of lower-tier 
subcontractor effort after award such that it exceeds 70 percent of 
the total cost of the work to be performed under its subcontract. 
The notification shall identify the revised cost of the subcontract 
effort and shall include verification that the subcontractor will 
provide added value as related to the work to be performed by the 
lower-tier subcontractor(s).
    (d) Recovery of excessive pass-through charges. If the 
Contracting Officer determines that excessive pass-through charges 
exist--
    (1) For fixed-price contracts, the Government shall be entitled 
to a price reduction for the amount of excessive pass-through 
charges included in the contract price; and
    (2) For other than fixed-price contracts, the excessive pass-
through charges are unallowable in accordance with the provisions in 
Subpart 31.2 of the Federal Acquisition Regulation (FAR) and Subpart 
231.2 of the Defense FAR Supplement.
    (e) Access to records. (1) The Contracting Officer, or 
authorized representative, shall have the right to examine and audit 
all the Contractor's records (as defined at FAR 52.215-2(a)) 
necessary to determine whether the Contractor proposed, billed, or 
claimed excessive pass-through charges.
    (2) For those subcontracts to which paragraph (f) of this clause 
applies, the Contracting Officer, or authorized representative, 
shall have the right to examine and audit all the subcontractor's 
records (as defined at FAR 52.215-2(a)) necessary to determine 
whether the subcontractor proposed, billed, or claimed excessive 
pass-through charges.
    (f) Flowdown. The Contractor shall insert the substance of this 
clause, including this paragraph (f), in all subcontracts under this 
contract, except for--
    (1) Firm-fixed-price subcontracts awarded on the basis of 
adequate price competition;
    (2) Fixed-price subcontracts with economic price adjustment, 
awarded on the basis of adequate price competition;
    (3) Firm-fixed-price subcontracts for the acquisition of a 
commercial item; or
    (4) Fixed-price subcontracts with economic price adjustment, for 
the acquisition of a commercial item.


(End of clause)

    Alternate I (MAY 2008). As prescribed in 215.408(4)(ii), substitute 
the following paragraph (b) for paragraph (b) of the basic clause:
    (b) General. The Government will not pay excessive pass-through 
charges. The Contracting Officer has determined that there will be no 
excessive pass-through charges, provided the Contractor performs the 
disclosed value-added functions.

 [FR Doc. E8-10666 Filed 5-12-08; 8:45 am]

BILLING CODE 5001-08-P