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Barry McVay's

FEDERAL CONTRACTS PERSPECTIVE

Federal Acquisition Developments, Guidance, and Opinions


JUNE 2000
Vol. I, No. 6

CONTENTS

SBA Publishes NAICS-Based Size Standards
Exclusion of FSS Vendors Must Have "Reasonable Basis"
Agencies Ordered to Meet 5% Women-Owned Business Goal
Supreme Court Says False Claims Act Constitutional
DOD Proposes Profit Incentives for New Technologies
FY99 Government Spending Remains Steady
Executive Compensation Limit Raised to $353,010
FAR to Implement Energy Efficiency Executive Order



SBA Publishes NAICS-Based Size Standards,
to Replace SIC-Based Standards on October 1, 2000

Effective October 1, 2000, the small business size standards based on industries as defined by the Standard Industrial Classification (SIC) system (and which used to be in Federal Acquisition Regulation (FAR) 19.102, Size Standards) will be replaced by small business size standards that are based on industries as defined by the North American Industry Classification System (NAICS). The Small Business Administration (SBA) establishes the small business size standards, and it has determined that NAICS describes the industries in the U.S. economy better than the SIC system. The NAICS was published in 1997; the SIC system was established in the 1930s and last updated in 1987.

The NAICS is a system that was devised by the United States, Canada, and Mexico to provide a common basis for comparing economic statistical data among the signatories of the North American Free Trade Agreement (NAFTA). Because it is a new classification system, the NAICS reflects the recent changes in technology, as well as the growth and diversification of services, much better than does the SIC.

The NAICS uses a 6-digit hierarchical structure to classify establishments, with each digit more precisely defining the industry. For example, using the beet sugar manufacturing industry as an example, the various levels of the NAICS are as follows:

Sector 31Manufacturing
Subsector 311Food Manufacturing
Industry Group 3113Sugar and Confectionery Product Manu1facturing
NAICS Industry 31131Sugar Cane Mills
National Industry 311313Beet Sugar Manufacturing

In general, the lowest level of compatibility among the three countries is at the five-digit "NAICS Industry" level. The sixth digit provides the necessary detail for national economic statistics, and reflects the fact that the economies of the three countries are structured very differently.

There are 1,175 NAICS industries and 1,004 SIC industries, and SBA tried to made the NAICS small business size standards the same as those for the comparable SIC codes whenever possible. However, in some instances, the NAICS combined two SIC industries with different size standards; in others, the NAICS divided a SIC industry in two or more components and placed the components into NAICS industries with different size standards. For example, the economic activities in SIC 7389, Business Services, Not Elsewhere Classified, have been assigned to 36 separate NAICS industries.

SBA's Internet site at http://www.sba.gov/size/ has a table that shows each NAICS industry and the corresponding SIC industry or industries (select "What's New"). For help in locating the applicable size standards, the following are the NAICS sectors:

Sector 11Agriculture, Forestry and Fishing
Sector 21Mining
Sector 22Utilities
Sector 23Construction
Sectors 31 to 33Manufacturing
Sector 42Wholesale Trade
Sectors 44 and 45Retail Trade
Sectors 48 and 49Transportation
Sector 51Information
Sector 52Finance and Insurance
Sector 53Real Estate and Rental and Leasing
Sector 54Professional, Scientific and Technical Services
Sector 55Management of Companies and Enterprises
Sector 56Administrative and Support, Waste Management and Remediation Services
Sector 61Educational Services
Sector 62Health Care and Social Assistance
Sector 71Arts, Entertainment and Recreation
Sector 72Accommodation and Food Services
Sector 81Other Services

EDITOR'S NOTE: FAR 19.102 requires the contracting officer to identify the industry code that best describes the principal purpose of the solicitation, and to specify in the solicitation the corresponding small business size standard so offerors can properly represent themselves as large or small. In considering the appropriate size standard to assign an industry, SBA evaluates the structural characteristics of the industry, such as (1) the average firm size in the industry; (2) distribution of firms by size; (3) start-up costs; (4) overall competition within the industry; and (5) the amount of competition for federal procurements within the industry.

Small business size standards are used to determine whether a procurement should be "set-aside" exclusively for small business participation (see FAR Subpart 19.5, Set-Asides for Small Business); whether a firm is eligible for any other procurement "preferences" (such as for subcontracts with large prime contractors (see FAR Subpart 19.7, The Small Business Subcontracting Program, and FAR Subpart 19.12, Small Disadvantaged Business Participation Program), or price evaluation adjustments (see FAR Subpart 19.11, Price Evaluation Adjustment for Small Disadvantaged Business Concerns); or whether a firm is eligible for any SBA loan and financial assistance programs.



Exclusion of FSS Vendors Must Have "Reasonable Basis"

In a ruling that could have far-reaching implications for the Federal Supply Schedule (FSS) in particular and "acquisition streamlining" in general, the General Accounting Office (GAO) has decided that an agency must have a "reasonable basis" for concluding that a vendor's items do not meet its needs if the agency excludes the vendor's items from consideration for an FSS order.

GAO's decision, Delta International, Inc., B-284364.2 (May 11, 2000), involved a Federal Bureau of Investigation (FBI) purchase made for its Bomb Data Center, which was to identify and procure appropriate counter-terrorism equipment for local and state bomb technicians. The Bomb Data Center decided that a fully digital system was required because "full digitization would allow greater compatible technological improvements, faster exchange of data information, and significant quality control of resolutions" and such a system "will allow the Bomb Technician on the scene of an incident to digitally transmit images to other locations anywhere in the country for real-time assistance from other experts." The Bomb Data Center selected the Science Applications International Corporation (SAIC) RTR-4 Real Time Imaging Systems as the only "fully digital" portable X-ray system available, and the FBI issued a purchase order to SAIC under its FSS contract worth approximately $9.8 million for 424 RTR-4 systems and associated equipment.

Delta International, Inc., which also had an FSS contract for portable X-ray inspection systems, protested the award of the purchase order, arguing that the FBI improperly determined that Delta's equipment would not meet its needs. Delta's equipment, the foXray II, is essentially digital in nature even though it employs a hybrid analog/digital technology to transmit data. Delta argued that its foXray II does not use an analog filter, coaxial cables, or have other features characteristic of the analog format, so it does not have the problems that the FBI associates with those features. In addition, Delta contended that the foXray II transmits data faster than the RTR-4, that it achieves better quality images than the RTR-4 ("with quality being measured in quantitative forms, such as resolution, penetration and dynamic range"), and that it is wireless. "Each of the products is fully compatible with other digital equipment, and there is absolutely no difference between them in this regard," asserted Delta.

The FBI contended that the protester was arguing that it "should have been given an opportunity to compete for award of the FSS order," and that the protest should be denied because paragraph (a) of FAR 8.404, Using Schedules, states "when placing orders under Federal Supply Schedules, ordering offices need not seek further competition..."

GAO says "if the protest were contending that the agency was required to conduct a competition, it would be dismissed for failure to state a valid basis of protest...however, the question is not whether the agency was required to compete the buy, but rather whether the agency had a reasonable basis for determining that only the RTR-4 met its needs." GAO cites the language in FAR 8.404(b)(7), which states "if an agency's requirement in excess of the micro-purchase threshold is defined so as to require a particular brand name, product, or a feature of a product peculiar to one manufacturer, thereby precluding consideration of a product manufactured by another company, the ordering office shall include an explanation in the file as to why the particular brand name, product, or feature is essential to satisfy the agency's needs." Then, GAO declares its policy: "Where, in connection with an FSS purchase in excess of the micro-purchase threshold, a bid protest challenges an agency's definition of its needs that excludes consideration of supplies or services offered by the protesting FSS vendor, we will review the agency's documentation, including its report to our Office, in order to determine whether the agency's definition of its needs has a reasonable basis."

Regarding the protest itself, the contracting officer's technical representative (COTR) explained in a declaration submitted to the GAO that "the RTR-4, because it transmits only digital data, can alter its speed of transmission, and that the ability to transmit more slowly is in fact an advantage because it allows for the transmission of a more detailed image." GAO concluded that "the FBI lacked a reasonable basis for its determination that the protester's system did not meet the agency's needs" because "the agency originally argued that one advantage of a fully digital system is its higher speed in transmitting data, [but] the agency now argues that it is the ability of a digital system to transmit data more slowly that is an advantage."

EDITOR'S NOTE: This decision could have a big effect on the popularity of the FSS! One of the FSS' allures is that FAR 8.404(a) said that ordering offices "need not seek further competition, synopsize the requirement, make a separate determination of fair and reasonable pricing, or consider small business programs. GSA [General Services Administration, which operates the FSS program] has already determined the prices of items under schedule contracts to be fair and reasonable." This is interpreted by many as "find a suitable product in an FSS catalog, examine two other FSS catalogs, then buy it." However, GAO points out that Title 41 of the U.S. Code, Section 259(b)(3) provides that the FSS program satisfies the requirement to obtain competition if "(A) participation in the program has been open to all responsible sources; and (B) orders and contracts under such procedures result in the lowest overall cost alternative to meet the needs of the government." To GAO, this means "use of the streamlined procedures of the FSS in lieu of conducting a competition is thus premised on a determination regarding what the agency's needs are and which FSS supply or service meets those needs at the lowest overall cost." This mean more justifications and paperwork!

An interesting aspect of the decision is the GAO recommendation that the FBI "contact Delta and SAIC to seek reductions in their schedule prices," then decide which product will meet the FBI's needs at the lowest overall cost. Apparently, the FBI did not do this, though it is addressed in FAR 8.404(b)(3), Orders Exceeding the Maximum Order Threshold, and $9.8 million far exceeds whatever the maximum order threshold is in SAIC's FSS contract. Perhaps GAO is hinting that it believes a $9.8 million acquisition should be subjected to full and open competition?



Agencies Ordered to Meet 5% Women-Owned Business Goal

On May 23, 2000, President Clinton issued Executive Order 13157, Increasing Opportunities for Women-Owned Small Business, ordering agencies to "take the steps necessary to meet or exceed the 5% government-wide goal for participation in procurement by women-owned small businesses." The 5% goal (for both prime contract and subcontract awards) has been in existence for many years, but the government has never come close to meeting it -- in Fiscal Year (FY) 1999 the government awarded 2.47% of its contract dollars to women-owned small businesses.

Among the actions President Clinton has ordered agencies to take are:



Supreme Court Says False Claims Act Constitutional

On May 22, 2000, the Supreme Court handed down a 7 to 2 decision affirming that private individuals may bring suit in federal court on behalf of the federal government under the False Claims Act (called "qui tam" suits), but ultimately dismissed the case on the grounds that a state is not subject to the qui tam provisions because it is not a "person" (Vermont Agency of Natural Resources v. United States ex rel. Stevens, 98-1828).

The False Claims Act (FCA) was enacted in 1863 in response to "massive frauds" perpetrated by federal contractors during the Civil War. The FCA imposes civil liability upon "any person [who] knowingly presents, or causes to be presented, to an officer or employee of the United States Government...a false or fraudulent claim for payment or approval." A defendant is liable for up to treble damages and a civil penalty of up to $10,000 per claim. An FCA action can be brought in two ways: by the government, and by a private individual "in the name of the government." When an individual brings a qui tam suit, he or she receives a share of any proceeds -- generally between 15% and 25% if the government intervenes, and between 25% and 30% if the government declines to intervene. (EDITOR'S NOTE: "Qui tam" are the first two words in the Latin phrase for "who pursues this action on our Lord the King's behalf as well as his own.")

This qui tam suit was brought by Jonathan Stevens against his former employer, the Vermont Agency of Natural Resources, alleging the agency submitted false claims to the Environmental Protection Agency (EPA) under various grant programs. The U.S. government declined to intervene.

Vermont moved to have the suit dismissed because (1) a state (or state agency) is not a "person" subject to the FCA, and (2) if a state is a "person," the 11th Amendment to the Constitution bars qui tam actions in federal court against a state ("the judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by citizens of another state..."). The District Court denied the motion, and the Court of Appeals affirmed the denial.

The Supreme Court decided to hear Vermont's appeal on these two issues, but the Court took the highly unusual action of unilaterally expanding the scope of the appeal to include the question of whether a relator even has standing to bring a qui tam suit under Article III of the Constitution (which addresses the powers and duties of the judicial branch)!

Explaining that qui tam suits originated in England in the 13th century, and that qui tam suits were prevalent in America immediately before and after the framing of the Constitution, the Court concludes that "this history...leaves no room for doubt that a qui tam relator under the FCA has Article III standing."

However, the Court decided to dismiss the case because the FCA does not specifically include "states" within the definition of "persons," stating "we must apply...our longstanding interpretive presumption that 'person' does not include the sovereign...The presumption is, of course, not a 'hard and fast rule of exclusion,' but it may be disregarded only upon some affirmative showing of statutory intent to the contrary." The Court cites another section of the FCA (one which was not at issue in this case) in which "states" are specifically included in the definition of "person," and the Court considers this an indication that "states are not 'persons' for purposes of qui tam liability..."

The Court did not address the 11th Amendment issue.

EDITOR'S NOTE: Since the FCA was amended in 1986 to make it easier for relators to file qui tam suits, the number of qui tam suits has increased dramatically, particularly against firms in the health care and defense industries. Many firms and industry associations have claimed that qui tam suits are unconstitutional because relators are not "appointed officers of the United States" (Article II, Section 2 of the Constitution), and qui tam suits are an improper delegation of the executive branch's obligation to "take care" that the laws are "faithfully executed" (Article II, Section 3 of the Constitution).

In a footnote to the decision, the Court says that "we express no view on the question of whether qui tam suits violate Article II...Petitioner does not challenge the qui tam mechanism under either of these provisions, nor is the validity of qui tam suits under these provisions a jurisdictional issue that we must resolve here." This appears to be an open invitation to challenge the FCA on these grounds, so nothing has been definitively settled!



DOD Proposes Profit Incentives for New Technologies

On February 10, 2000, the Department of Defense (DOD) published an advance notice of proposed rulemaking in response to Congressional direction to review its profit guidelines and determine whether "appropriate modifications, such as placing increased emphasis on technical risk as a factor for determining appropriate profit margins, would provide an increased profit incentive for contractors to develop and produce complex and innovative new technologies." DOD also placed on the Internet draft changes to the Defense FAR Supplement (DFARS) Subpart 215.4, Contract Pricing, for discussion purposes, and announced a public meeting on February 23, 2000 (see the March 2000 FEDERAL CONTRACTS PERSPECTIVE article "DOD Extends Mentor-Protege Program and FAR Deviations on Screening, Proposes Profit Policy Change").

Based on comments received on the draft changes and at the public meeting, DOD has decided to prepare a proposed rule that is practically the same as the draft changes. Most of the significant changes would be made to DFARS 215.404-71-2, Performance Risk:

Comments should be submitted no later than July 21, 2000, to the Defense Acquisition Regulations Council, Attn: Ms. Amy Williams, PDUSD(AT&L) DP(DAR), IMD 3D139, 3062 Defense Pentagon, Washington, DC 20301-3062; e-mail: dfars@acq.osd.mil; fax: 703-602-0350. Cite DFARS Case 2000-D300.



FY99 Government Spending Remains Steady

Fiscal Year (FY) 1999 spending by the federal government increased a tiny bit over the FY 1998 spending -- from $197.2 billion to $198.8 billion, a 0.8% increase. This is the most money spent by the government through contracts since FY 1995, when the government spent $202.3 billion.

The following are the largest agencies' FY99 spending totals (in billions) and the percentage change from FY98:

Defense$133.35.0%
Energy$15.6+3.2%
National Aeronautics and Space Administration$11.2+0.5%
General Services Administration$7.6-7.7%
Health and Human Services$4.9+16.0%
Veterans Affairs$3.8-10.9%
Justice$3.7+15.9%
Agriculture$3.5+21.7%
Treasury$2.9+25.5%
Transportation$2.9-31.6%
State$1.3+37.9%
Environmental Protection Agency$1.3+17.8%
Interior$1.3-15.2%
Commerce$1.2+1.9%
Labor$1.1+19.9%
Housing and Urban Development$0.8+257.4%
Education$0.7+31.5%
Agency for International Development$0.5+20.3%
Social Security Administration$0.5-4.0%
Federal Emergency Management Agency$0.3+30.4%
National Science Foundation$0.2-4.4%
Office of Personnel Management$0.2+3.6%
Miscellaneous Agencies-$0.6*-175.8%*

* Tennessee Valley Authority (TVA) deobligated $1.3 billion more than it spent in FY99 (a 121.7% decrease). Without TVA, the "miscellaneous agencies" spent $0.6 billion, a 24.9% decrease.

The following states received the most federal contract money (in billions), with their FY98 rank and dollar amount change in parentheses:

1. California (1)$24.3 (+$0.3)
2. Virginia (2)$18.6 (+$0.4)
3. Texas (3)$13.6 (+$0.5)
4. Maryland (4)$10.3 (+$0.1)
5. Florida (5)$7.9 (+$1.4)
6. District of Columbia (7)$6.2 (+$1.1)
7. New York (9)$5.1 (+$0.7)
8. Missouri (6)$5.4 (-$0.7)
9. Massachusetts (8)$5.4 (+$0.3)
10. Pennsylvania (11)$5.3 (+$0.7)


Executive Compensation Benchmark Raised to $353,010

Office of Federal Procurement Policy (OFPP) Administrator Deidre Lee had decided to increase the "benchmark compensation amount" for senior executives by more than $10,000, from $342,986 to $353,010. This figure is "the median amount of the compensation provided for all senior executives of all benchmark corporations [those with annual sales in excess of $50 million] for the most recent year..." Ms. Lee settled on that figure based on commercially available surveys and after consultation with the director of the Defense Contract Audit Agency (DCAA).

The $353,010 is the maximum amount of compensation [that is, wages, salary, bonuses, deferred compensation, and employer contributions to defined contribution pension plans] that is allowable under federal contracts for "the five most highly compensated employees in management positions at each home office and each segment of the contractor." However, the benchmark compensation amount is not a limit on the compensation an executive may receive -- $353,010 is the maximum amount the government will reimburse contractors for their senior executives' compensation. See paragraph (p) of FAR 31.205-6, Personal Compensation.

The benchmark compensation amount went into effect January 1, 2000, and will remain in effect until changed by the OFPP administrator, who is required to set the benchmark compensation amount annually.



FAR to Implement Energy Efficiency Executive Order

A proposed FAR change was published on May 10 that would implement Executive Order 13123 of June 3, 1999, Greening the Government Through Efficient Energy Management. It would add definitions of "energy-efficient products" and "energy-savings performance contracts" to FAR 2.101, Definitions; remove the material on energy-efficient products and services from FAR Subpart 23.7, Contracting for Enviornmentally Preferable and Energy-Efficient Products and Services, so the subpart would focus on environmentally preferable products and services only; and move the material to FAR Subpart 23.2, which would be retitled "Energy and Water Efficiency and Renewable Energy" (it is currently titled "Energy Conservation").

Comments must be submitted no later than July 10, 2000, to General Services Administration, FAR Secretariat (MVRS), 1800 F Street, NW, Room 4035, ATTN: Laurie Duarte, Washington, DC 20405, e-mail: farcase.1999-011@gsa.gov. Cite FAR case 1999-011.

EDITOR'S NOTE: See the May 2000 FEDERAL CONTRACTS PERSPECTIVE article "Three 'Greening' Executive Orders Issued" for more on additional "Greening" executive orders that will be addressed in future FAR changes.

Copyright 2000 by Panoptic Enterprises. All Rights Reserved.

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