Barry McVay's


Federal Acquisition Developments, Guidance, and Opinions

Vol. I, No. 8


FAC 97-19 Applies SCA to Subcontracts
DOD Proposes Changes to Profit Policy
Cost Data Threshold of $550,000 Proposed
NASA Unique Clauses to be in Full-Text
SBA Expands PRO-Net Capabilities
DOJ Publishes Fraud Guide

FAC 97-19 Applies SCA to Commercial Subcontracts,
Revises Construction Payment Rules

Federal Acquisition Circular (FAC) 97-19, published July 26, is another little clean-up of the Federal Acquisition Regulation (FAR). For the most part, FAC 97-19 ties up loose ends, finalizes interim rules, and brings the FAR into conformity with other agencies' regulations. The most important of the nine items are the recision of the Service Contract Act (SCA) exemption for commercial subcontracts, the rewrite of liquidated damages guidance, and the increase in payment bonds for construction contracts from a maximum of $2.5 million to an amount equal the total amount of the contract.

The following are the most noteworthy FAR changes contained in FAC 97-19:

Service Contract Act Application to Commercial Item Subcontracts: The Federal Acquisition Streamlining Act of 1994 (FASA) required the FAR to include a list of laws that are inapplicable to subcontracts for commercial items. FAC 90-32, published September 18, 1995, included FAR 12.504, Applicability of Certain Laws to Subcontracts for the Acquisition of Commercial Items, which contained the list of inapplicable laws. Among those was the Service Contract Act (SCA).

The Department of Labor (DOL) administers the SCA, and claimed that it has the sole authority to determine its scope and coverage. The FAR Council has agreed, and has removed the SCA from FAR 12.504. In addition, the SCA is added to FAR 52.212-5, Contract Terms and Conditions Required to Implement Statutes or Executive Orders -- Commercial Items, as a law that must be included in subcontracts for commercial items or components.

Meanwhile, the FAR Council submitted to DOL recommendations for exempting certain commercial service contracts (both prime contracts and subcontracts) from SCA coverage. These service contracts are ones which "the government is having difficulty acquiring or for which the government is getting limited competition, or where the government is unable to acquire the quality of services needed because commercial sources are reluctant to do business with the government..." DOL concurred, and also proposed on July 26 to revise its regulations in Title 29 of the Code of Federal Regulations, Part 4, Labor Standards for Federal Service Contracts, Section 4.123, Administrative Limitations, and Exemptions, to: (1) extend the current prime contract SCA exemption in paragraph (e)(1) for maintenance and repair of automated data processing equipment and office information/word processing systems to subcontracts; and (2) exempt from SCA both prime contracts and subcontracts for specific commercial services that meet certain requirements. Some of the services are: automobile or other vehicle maintenance services; financial services involving the issuance and servicing of credit cards; lodging at hotels and motels; maintenance, calibration, repair, or installation services (where the installation is not subject to the Davis-Bacon Act) for all types of equipment; transportation of persons by air, motor vehicle, rail, or marine vessel on regularly scheduled routes; real estate services; and relocation services.

Because subcontracts for commercial items had been exempt from the SCA until the publication of FAC 97-19, and DOL expects that it will take six months to process the proposed rule through the review process and issue a final rule, DOL is issuing a temporary rule that almost mirrors the proposed rule. This temporary rule will eliminate the "exempt, then not exempt, then exempt again" disruption that would have be experienced by subcontractors in the service industries proposed for SCA exemption. This temporary rule will be in effect for one year or until the publication of a final rule, whichever occurs first, but it will not apply to prime contractors in the covered service industries even though the proposed rule would apply to them as well. This is because the exemption in FAR 12.504 did not apply to prime contracts, so prime contractors will not experience any similar disruption by waiting until the final rule is issued.

Construction Industry Payment Protection Act of 1999 (CIPP Act): The CIPP Act amended the Miller Act of 1935 to require that payment bonds on construction contracts over $100,000 equal the total amount of the contract unless the contracting officer determines that a payment bond in that amount is impractical. Previously, the Miller Act had required that the payment bond be for 50% of the contract price, but not to exceed $2.5 million. While a $2.5 million payment bond was adequate to protect subcontractors and vendors for all but the largest construction projects in 1935, that amount is woefully inadequate today, so the CIPP Act was enacted.

On December 28, 1999, a proposed rule was published to revise FAR 28.102-2, Amount Required, and the related clauses at FAR 52.228-13, Alternative Payment Protections, FAR 52.228-15, Performance and Payment Bonds -- Construction, and FAR 52.228-16, Performance and Payment -- Bonds Other Than Construction, to reflect the CIPP Act changes. In addition, the proposed rule would have extended the payment protections to contracts between $25,000 and $100,000, even though these contracts are not subject to the Miller Act and are not addressed by the CIPP Act, to add consistency to the rule and to provide added protection to subcontractors and suppliers on contracts less than $100,000. (EDITOR'S NOTE: For more on the proposed rule, see the January 2000 FEDERAL CONTRACTS PERSPECTIVE article "FAR Changes Proposed: Construction, Competition Under Multiple-Award Contracts, Veterans' Employment.")

Ten comments were received on the proposed rule, and it is finalized with minor changes.

Liquidated Damages: Because many found the FAR guidance for administering liquidated damages to be difficult to understand, a proposed rule was published on January 13, 2000, to rewrite in "plain language" several portions of the FAR: FAR Subpart 11.5, Liquidated Damages; FAR 22.302, Liquidated Damages and Overtime Pay; FAR 22.406-8, Investigations; FAR 22.406-9, Withholding From or Suspension of Contract Payments; and the associated clauses in FAR Part 52 (see the February 2000 FEDERAL CONTRACTS PERSPECTIVE article "FAR Changes Would Simplify Government Property, Liquidated Damages, Deferred R&D Costs Language"). Four comments were submitted, so the proposed rule is finalized with minor editorial changes.

North American Industry Classification System (NAICS): This interim rule amends FAR Part 19, Small Business Programs, and the related provisions and clauses in FAR Part 52 to reflect the Small Business Administration's (SBA) conversion of its small business size standards, which are currently based on the Standard Industrial Classification (SIC) system, to the NAICS, effective October 1, 2000 (see the June 2000 FEDERAL CONTRACTS PERSPECTIVE article "SBA Publishes NAICS-Based Size Standards, to Replace SIC-Based Standards on October 1, 2000"). Essentially, all FAR references to "SIC" are replaced with "NAICS". In addition, paragraph (b)(1) of FAR 19.102, Size Standards, is revised to provide the Internet site for the NAICS manual (http://www.census.gov/epcd/www/naics.html), and paragraph (h) provides the Internet site for the SBA's industry size standards (http://www.sba.gov/size/NAICS-cover-page.htm). Also, paragraph (a) of FAR 19.1005, Applicability, contains the NAICS codes for the designated industry groups under the Small Business Competitiveness Demonstration Program. Finally, Standard Form 279, Federal Procurement Data System (FPDS) Individual Contract Action Report, and Standard Form 281, Federal Procurement Data System (FPDS) Summary Contract Action Report ($25,000 or Less), are revised to reflect the change from SIC to NAICS. (EDITOR'S NOTE: Regarding the Small Business Competitiveness Demonstration Program, FAC 97-16 included an interim rule which revised FAR Subpart 19.10 to make the program permanent and make other changes. FAC 97-19 finalizes the interim rule without change. For more on FAC 97-16, see the April 2000 FEDERAL CONTRACTS PERSPECTIVE article "FAC 97-16 Revises Contract Financing Rules, Small Business Competitiveness Demo Program.")

Contract Bundling: FAC 97-15 contained an interim rule which amended various sections of the FAR to implement the Small Business Reauthorization Act of 1997 provisions that required agencies to avoid unnecessary contract bundling (see the January 2000 FEDERAL CONTRACTS PERSPECTIVE article "FAC 97-15 Addresses Foreign Acquisition, Contract Bundling, Award Fee Determination"). Six comments were received, and the interim rule is being finalized with minor changes. One change is somewhat notable, and it is being made to bring the FAR into conformance with the SBA's contract bundling regulations, also finalized on July 16: FAR 7.107, Additional Requirements for Acquisitions Involving Bundling, and the SBA interim regulations both stated that bundling was justified if savings exceed 10% for contracts $75 million or less and 5% for contracts over $75 million. Several commentors pointed out that this produced the anomalous situation in which a $75 million contract would have to demonstrate $7.5 million in savings while contracts between $75 million and $150 million would have to demonstrate merely $3.25 million to $7.5 million in savings. So FAR 7.107 and the SBA final rules now state that bundling may be justified for contracts over $75 million if the savings exceed 5% or $7.5 million, whichever is greater.

In addition, two proposed rules are being finalized without change: Deferred Research and Development Costs, which clarified and simplified FAR 31.205-48; and Time-and-Materials or Labor-Hours Contracts, which brought FAR 52.243-3, Changes -- Time-and-Materials or Labor-Hours, into conformance with Alternate II of FAR 52.243-1, Changes -- Fixed-Price (for more on these, see the February 2000 FEDERAL CONTRACTS PERSPECTIVE article "FAR Changes Would Simplify Government Property, Liquidated Damages, Deferred R&D Costs Language").

DOD Proposes More Changes to Profit Policy

The basis for the current Department of Defense (DOD) profit policy was developed in 1985, when one of the objectives was to encourage defense contractors to invest in new and more efficient facilities. However, the defense industry has consolidated and downsized since then, and the industry has excess capacity, so the profit policy has become counterproductive. Therefore, DOD is proposing to amend Defense FAR Supplement (DFARS) 215.404-71, Weighted Guidelines Method, to eventually eliminate facilities investment as a factor in determining profit objectives on sole source contracts. (EDITOR'S NOTE: This proposed rule also incorporates the earlier proposed DFARS profit changes intended to encourage contractors to develop and produce complex and innovative new technologies. See the June 2000 FEDERAL CONTRACTS PERSPECTIVE article "DOD Proposes Profit Incentives for New Technologies.")

The following are the proposed changes to DFARS 215.404-71:

Comments must be submitted by September 22, 2000, to Defense Acquisition Regulations Council, ATTN: Ms. Amy Williams, OUSD (AT&L) DP (DAR), IMD 3D139, 3062 Defense Pentagon, Washington, DC 20301-3062. Cite DFARS case 2000-D018.

Cost or Pricing Data Threshold of $550,000 Proposed

To comply with a provision of FASA which requires that the Truth in Negotiation Act (TINA) threshold for the submission of cost or pricing data be adjusted for inflation (rounded to the nearest $50,000) effective October 1 "of each year that is divisible by 5", it is proposed that the threshold in paragraph (a)(1) of FAR 15.403-4, Requiring Cost or Pricing Data (10 U.S.C. 2306a and 41 U.S.C. 254b), be increased from $500,000 to $550,000.

FASA went into effect in 1994, so the first adjustment was due October 1, 1995. However, no adjustment was made because there was not enough inflation between 1994 and 1995 to warrant an inflation adjustment. The next adjustment is due October 1, 2000, and the inflation between 1994 and 2000 has been calculated to be 10.22% (using gross domestic product deflators from the Fiscal Year 2001 budget). Since this increase would equal $51,100 (10.22% of the current $500,000 threshold), it would be rounded to $50,000 and added to the $500,000 threshold to produce a new $550,000 for at least the next five years.

Comments on this proposed rule must be submitted by September 1, 2000, to the General Services Administration, FAR Secretariat (MVRS), 1800 F Street, NW, Room 4035, ATTN: Laurie Duarte, Washington, DC 20405, e-mail: farcase.2000-300@gsa.gov.

The following are some other changes to the FAR proposed this past month:

Contractor Responsibility and Labor Relations Costs: In 1997, Vice President Al Gore promised the AFL-CIO in Pittsburgh that the Clinton administration would require contracting officers to consider contractor compliance with labor laws when making responsibility determinations. On July 9, 1999, a proposed rule was published to amend FAR Part 9, Contractor Qualifications, to supplement the requirement that contractors must have "satisfactory record of integrity and business ethics" to receive a government contract by adding the following examples of unsatisfactory integrity and business ethics: "persuasive evidence of the prospective contractor's lack of compliance with tax laws, or substantial noncompliance with labor laws, employment laws, environmental laws, antitrust laws, and consumer protection laws." This proposed rule became known as the "blacklisting rule," and it generated more than 1,500 comments. Many of the comments observed that this proposed rule shifted the debarment function from the debarring official to the contracting officer, was vague and subjective, appeared more a punitive measure than a way to protect the government's interests, and permitted contracting officers to give undue weight to unsubstantiated allegations. As a result of the comments, the following changes have been made to the proposed rule and resubmitted to the public for additional comments:

Comments must be submitted no later than August 29, 2000, to the same address as the proposed cost or pricing data threshold rule above, or e-mail to farcase.1999-010@gsa.gov.

Javits-Wagner-O'Day (JWOD) Subcontract Preference Under Service Contracts: In 1998, the SBA changed its regulations to require contracting activities acquiring bundled JWOD services to include a requirement in the contract that the prime contractor subcontract with JWOD nonprofit agencies for performance of those services. (EDITOR'S NOTE: There are 600 JWOD agencies associated with the National Industries for the Blind (NIB) or with NISH (formerly the "National Industries for the Severely Handicapped").) To conform the FAR to the SBA regulations, paragraph (c) of FAR 8.001, Priorities for Use of Government Supply Sources, FAR 8.003, Contract Clause, and FAR 52.208-9, Contractor Use of Mandatory Sources of Supply, would be revised to apply to both JWOD supplies and services. Also, paragraph (a)(4) of FAR 44.202-2, Considerations, would state that contracting officers, when reviewing a subcontract that is subject to FAR Subpart 44.2, Consent to Subcontracts, must consider whether the contractor has complied with JWOD requirements.

Comments must be submitted no later than September 1, 2000, to the same address as the proposed cost or pricing data threshold rule above, or e-mail to farcase.1999-017@gsa.gov.

Final Contract Voucher Submission: A Department of Defense committee found that a leading reason for contracts to remain open after being completed is the contractor's failure to submit a final voucher to the government. Therefore, FAR 42.705, Final Indirect Cost Rates, and FAR 52.216-7, Allowable Cost and Payment, to allow the contracting officer to unilaterally determine the amounts due to the contractor if the contractor fails to submit any final invoice or voucher within the time provided (usually 120 days), and the determination would not be appealable under FAR 52.233-1, Disputes.

Comments must be submitted no later than September 25, 2000, to the same address as the proposed cost or pricing data rule above, or e-mail to farcase.1999-026@gsa.gov.

"Classified" Definitions: The definitions of "classified acquisition," "classified contract," and "classified information" would be moved from FAR 4.401, Definitions, to FAR 2.101, Definitions, because they apply to more than one part, and rewritten in "plain language."

Comments must be submitted no later than September 26, 2000, to the same address as the proposed cost or pricing data rule above, or e-mail to farcase.2000-404@gsa.gov.

NASA Mandates Center-Unique Clauses in Full Text

The National Aeronautics and Space Administration (NASA) has had to address one of the little unforeseen complications that continue to pop up as the Internet is used more and more to conduct business -- the ephemeral nature of electronic data.

In 1995, the NASA associate administrator for procurement authorized NASA's centers to incorporate their unique clauses by reference if they were readily available through the NASA Acquisition Internet Service (NAIS) (http://procurement.nasa.gov), with certain exceptions. Now, NASA has come to the realization that most of the clauses on the NAIS in 1995 are no longer available in 2000 because they have been overwritten with later versions or removed altogether (as frequently happened during the NASA FAR Supplement (NFS) rewrite in 1996-1997). This can be a significant problem during the administration of a long-term contract when all that exists in the contract is a reference to a vanished clause.

While NASA is confident that the text of archived NASA provisions and clauses can be obtained, it is not so confident that all the centers are consistently maintaining their unique provisions and clauses. Therefore, on July 17 NASA issued Procurement Information Circular (PIC) 00-11 rescinding the 1995 authority to reference center-unique provisions and clauses maintained through the NAIS, and requiring all center-unique provisions and clauses to be included in full text in solicitations and contracts.

In addition to this change of policy, several changes were made to the NFS during July:

SBIR/STTR Interim Performance Evaluations: Paragraph (a) of NFS 1842.1502, Policy, requires contracting officers to conduct interim performance evaluations on contracts subject to FAR Subpart 42.15, Contractor Performance Information, and which exceed one year in duration. However, NASA centers have reported that interim evaluations on Small Business Innovative Research (SBIR) and Small Business Technology Transfer (STTR) Phase II contracts are usually perfunctory and without substance because there is seldom anything to evaluate until contract completion. Therefore, this final rule revises NFS 1842.1502(a) to make interim past performance evaluations on SBIR/STTR Phase II contracts optional.

Security Requirements for Unclassified Information Technology (IT) Resources: NASA published a proposed rule on January 5, 2000, to provide contractors with definitive contractual requirements to follow NASA policy on safeguarding unclassified NASA data held in contractor-owned or contractor-operated IT systems (see the February 2000 FEDERAL CONTRACTS PERSPECTIVE article "NASA Revises Regs on Foreign Proposals, Implements HUBZone Reporting, Proposes IT Security Changes"). The proposed rule is finalized with minor clarifying changes.

The rule revises NFS 1804.470-2, Policy; NFS 1804.470-3, Security Plan for Unclassified Federal Information Technology Systems; and NFS 1852.204-76, Security Requirements for Unclassified Information Technology Resources, to require contractors and subcontractors working with NASA IT systems to comply with the security requirements in NASA Policy Directive (NPD) 2810.1, Security of Information Technology, NASA Procedures and Guidelines (NPG) 2810.1, Security of Information Technology, and other requirements (references to the obsolete NMI 2410.7 and NHB 2410.9 are removed). Also, NFS 1852.204-76 requires that a non-permanent resident alien obtain special authorization from the center's chief of security before being granted access to NASA IT systems and networks; and that the contractor give NASA access to its (and its subcontractors') facilities, installations, operations, documentation, databases, and personnel as required to conduct IT inspections and audits necessary to safeguard NASA data and to preserve evidence of computer crime.


On July 26, the SBA announced that it is enhancing its PRO-Net database system by providing direct e-mail notification of upcoming contracting opportunities to interested small businesses, by improving the PRO-Net search function, and by adding a special section dedicated to subcontracting opportunities.

PRO-Net (http://pro-net.sba.gov) consists of electronic profiles of small businesses (which are entered into the database and maintained by them), and it helps federal, state, and local governments, contractors, and the public to identify potential small business contractors, subcontractors, and partners. The following are the announced enhancements:

• Links to DOD's Central Contractor Registration (CCR) form (http://www.ccr2000.com) and the General Services Administration's FedBizOpps (http://www.eps.gov/ -- formerly called "Electronic Posting System") are provided. Contractors must be registered in the CCR to obtain defense contracts and subcontracts, and the FedBizOpps relays contracting notices from 20 federal agencies (with more to be added soon).

• A registered PRO-Net small business that uses an e-store/e-mall Internet address can add that address to its PRO-Net profile. This will permit potential customers to click on the address and go directly to the e-store/e-mall.

PRO-Net now permits full-text searches. Instead of having to enter an exact word or phrase into the PRO-Net search engine, PRO-Net will generate a list of small businesses based on the exact word or any of its close derivatives.

• Subcontracting opportunities are available at http://web.sba.gov/subnet.

DOJ Publishes Fraud Guide

The Department of Justice (DOJ) has published the "Defense Procurement Fraud Debarment Program Guide" to implement the prohibition against employment or contracting with any individuals convicted or fraud or any other felony arising out of a DOD contract (see DFARS 203.570, Employment Prohibitions on Persons Convicted of Fraud or Other DOD Contract-Related Felonies). The guide is available at http://www.ncjrs.org/txtfiles1/bja/fs000257.txt, or from Robert T. Watkins at 202-616-3507.

DOJ maintains of list of persons who have been disqualified from DOD contracting, and it responds to inquiries from federal agencies, defense-related contractors, and first-tier subcontractors (staff is available at 202-616-3507).

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