Defense Federal Acquisition Regulation Supplement: Architect and Engineering Service Fees (DFARS Case 2024-D019)

<RULE> DEPARTMENT OF DEFENSE <SUBAGY>Defense Acquisition Regulations System</SUBAGY> <CFR>48 CFR Part 236</CFR> <DEPDOC>[Docket DARS-2024-0019]</DEPDOC> <RIN>RIN 0750-AM16</RIN> <SUBJECT>Defense Federal Acquisition Regulation Supplement: Architect and Engineering Service Fees (DFARS Case 2024-D019)</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Defense Acquisition Regulations System, Department of Defense (DoD). <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> DoD is issuing a final rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to implement a section of the National Defense Authorization Act for Fiscal Year 2024 that increases the statutory fee limit for architect and engineering services. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Effective August 26, 2024. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Mr. Jon Snyder, telephone 703-945-5341. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Background</HD> This final rule revises the DFARS to implement section 2881 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2024 (Pub. L. 118-31). Section 2881 increases the statutory fee limitation at 10 U.S.C. 7540, 8612, and 9540 from six to 10 percent that may be earned by contractors providing certain architect and engineering services under contracts with the Departments of the Army, Navy, and Air Force. At DFARS 236.606-70, Statutory fee limitation, DoD increased the statutory fee that contractors may earn under contracts for architect-engineer services for the preparation of designs, plans, drawings, and specifications. The fee is increased to 10 percent of the project's estimated construction cost. Minor editorial revisions are made to the text of section 236.606-70 to comply with drafting conventions. <HD SOURCE="HD1">II. Publication of This Final Rule for Public Comment Is Not Required by Statute</HD> The statute that applies to the publication of the Federal Acquisition Regulation (FAR) is 41 U.S.C. 1707, Publication of Proposed Regulations. Subsection (a)(1) of the statute requires that a procurement policy, regulation, procedure, or form (including an amendment or modification thereof) must be published for public comment if it relates to the expenditure of appropriated funds, and has either a significant effect beyond the internal operating procedures of the agency issuing the policy, regulation, procedure, or form, or has a significant cost or administrative impact on contractors or offerors. This final rule is not required to be published for public comment, because the rule addresses internal operating procedures of the Government. <HD SOURCE="HD1">III. Applicability to Contracts at or Below the Simplified Acquisition Threshold (SAT), for Commercial Products (Including Commercially Available Off-the-Shelf (COTS) Items), and for Commercial Services</HD> This final rule does not create any new solicitation provisions or contract clauses. It does not impact any existing solicitation provisions or contract clauses or their applicability to contracts valued at or below the simplified acquisition threshold, for commercial products including COTS items, or for commercial services. <HD SOURCE="HD1">IV. Expected Impact of the Rule</HD> Architects and engineers are limited in the amount they can charge the Departments of the Army, Navy, and Air Force for producing and delivering designs, plans, drawings, and specifications. The limitation is a percentage of the architect and engineer's estimate of the construction costs for the project. The limitation is specified at 10 U.S.C. 7540, 8612, and 9540; the limitation has been 6 percent of the estimated construction costs. Section 2881 of the National Defense Authorization Act for Fiscal Year 2024 increases the percentage at 10 U.S.C. 7540, 8612, and 9540 to 10 percent of the estimated construction costs. This updated statutory limit only applies to requirements of the Departments of the Army, Navy, and Air Force; it does not apply to the rest of DoD or to civilian agencies. Currently, DoD contracting officers evaluate architect and engineering proposals in accordance with FAR 36.602 and DFARS 236.602. Army, Navy, and Air Force contracting officers conduct an additional evaluation of proposals or portions of proposals for producing and delivering designs, plans, drawings, and specifications in accordance with DFARS 236.606-70, to ensure that the proposed price does not exceed the 6 percent statutory limit of the architect and engineer's estimated construction costs. The contracting officer divides the total proposed price for producing and delivering designs, plans, drawings, and specifications by the total estimated construction costs. The resulting percentage may not exceed the statutory limitation. This rule, which implements section 2881, merely changes each of the occurrences of “six percent” in DFARS 236.606-70 to “10 percent.” The way the contracting workforce implements the limitation will be unchanged, but the limitation will be a higher percentage. This increase will allow architect and engineering entities, with particular benefit to those with smaller contracts, to cover labor, overhead, indirect, and other direct cost increases since the 6 percent rate was put in place over 80 years ago on contracts for producing and delivering designs, plans, drawings, and specifications. The increase will also benefit architect and engineering entities with contracts for producing and delivering designs, plans, drawings, and specifications for large horizontal and complex vertical construction projects. While costs have increased for architects and engineers, construction costs have increased more dramatically, which results in a higher cost limit. For example, if a particular construction project in the past cost $900,000, the statutory fee limit was $54,000. If the same construction project today costs $1.8 million, the prior statutory fee limit would be $108,000 for the same effort, and with the increased statutory limit, the fee would be limited to $180,000. The implementation of this rule will increase the amount the Government will pay for contracts that include producing and delivering designs, plans, drawings, and specifications. However, this rule may also encourage more architect and engineering entities to submit proposals for DoD contracts. Data was obtained from the Federal Procurement Data System (FPDS) on Army, Navy, and Air Force construction contracts awarded for the last three fiscal years. FPDS data shows that from FY 2021 through FY 2023, there was an average of 1,857 construction contracts awarded with an average annual value of approximately $25 billion for all of the contracts. DoD subject matter experts established that DoD considers projects valued at less than $5 million as small projects and projects over $5 million as large projects. Data obtained from FPDS shows that from FY 2021 through FY 2023, there was an average of 1,420 small construction contracts awarded with an average annual value of approximately $1.4 billion. Information obtained from DoD subject matter experts establishes that the historical average price for architect and engineering entities to produce and deliver designs, plans, drawings, and specifications is 3.25 percent of the estimated construction costs. DoD expends on average approximately $811 million ($25 billion x 3.25 percent) annually for producing and delivering designs, plans, drawings, and specifications. Once section 2881 is implemented, the statutory limit for architects and engineers to produce and deliver designs, plans, drawings, and specifications will be raised to 10 percent of the estimated construction costs. The historical average architect and engineer's price for producing and delivering designs, plans, drawings, and specifications is 45 percent less than the statutory limit, at 3.25 percent of the estimated construction costs. This is because, architects and engineers must justify their proposed costs to accomplish the work. They cannot simply state in their proposals that the fee is 6 percent; they must negotiate the fee with the contracting officer. Given this historical average while the statutory limit was 6 percent, it is unlikely that the price for this work would increase to the new statutory limit of 10 percent of the estimated construction costs. According to DoD subject matter experts, the statutory increase will have the greatest benefit to projects involving large horizontal projects and complex vertical projects with multi-disciplinary teams. DoD expects that architect and engineering contracts associated with large construction projects ( <E T="03">i.e.,</E> estimated construction costs of more than $5 million) will experience only a small increase within the range of about 3.25 percent to about 3.75 percent of the estimated construction costs, based on information provided by DoD subject matter experts. From FY 2022 to FY 2023, the military departments' spending on construction projects more than doubled, mainly due to inflation in construction costs, and most of the dollars spent were for large construction projects. As a result, even at 3.25 percent of the estimated construction costs, the price for architect and engineering contracts associated with large construction projects is substantially more today than it was three or more years ago. While costs have also increased for architects and engineers, construction costs have increased more dramatically, which results in a substantially higher fee limit. For example, if a particular construction project in the past cost $6 million, the statutory fee limit was $360,000. If the same construction project today costs $10 million, the prior statutory fee limit would be $600,000 for the same architect and engineering ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 19k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━