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FEDERAL CONTRACTS PERSPECTIVE

Federal Acquisition Developments, Guidance, and Opinions

OCTOBER 2001
Vol. II, No. 10

CONTENTS

Deluge of DFARS Changes: Foreign Acquisitions, Small Business, Profit
SBA Makes Microloan Program Permanent
FAIR Act Inventories Available to Public
Reminder: Reservist Loans Available from SBA

Deluge of DFARS Changes Made and Proposed,
Involve Foreign Acquisitions, Small Business, Profit

The Department of Defense (DOD) has not amended the Defense Federal Acquisition Regulation (DFARS) since President Bush took office. DOD finally broke the ice during September with three final rules and three interim rules. Also, DOD published six proposed DFARS changes and extended for one year a Federal Acquisition Regulation (FAR) deviation on maximum per diem rates.

FINAL RULES

• Reporting Requirements Update: DFARS 253.204-70, DD Form 350, Individual Contracting Action Report, and DFARS 253.204-71, DD Form 1057, Monthly Summary of Contracting Actions, to provide contract action reporting requirements for Fiscal Year 2002 (October 1, 2001 -- September 30, 2002). Changes to the instructions contained in these DFARS sections (and the forms themselves) involve requirements for reporting on bundled contracts, indefinite-delivery contracts, information technology products, commercial items, and recovered materials.
  
  
• Acquisition Plans for Conventional Ammunition: DFARS 207.103, Agency-Head Responsibilities, is amended to require military departments and defense agencies to submit acquisitions plans to the DOD single manager for conventional ammunition (SCMA) for review (at Deputy for Ammunition, Office of the Assistant Secretary of the Army (Acquisition, Logistics and Technology), ATTN: SAAL-ZCA, 5001 Eisenhower Avenue, Alexandria, VA 22333-0001; 703-617-8001; DSN 767-8001). This requirement also applies to all new procurements covered by previously approved acquisition plans if the SCMA did not review the previously approved acquisition plan. If the SCMA does not concur with the acquisition plan, the SCMA will attempt to resolve the matter with the department or agency. If no agreement is reached, the Assistant Secretary of the Army (Acquisition, Logistics and Technology) will make the final decision.
  
  
• Iceland as Newly Designated Country Under the Trade Agreements Act: Since Iceland joined the World Trade Organization Government Procurement Agreement in April 2001, the United States Trade Representative has ordered that Iceland be added as a designated country under the Trade Agreements Act (see FAR Subpart 25.4, Trade Agreements, and DFARS Subpart 225.4, Trade Agreements). Therefore, DFARS 252.225-7007, Buy American Act -- Trade Agreements Act -- Balance of Payments Program, and DFARS 252.225-7021, Trade Agreements, is revised to add Iceland as a designated country.

INTERIM RULES

• Pilot Mentor-Protege Program: DFARS Subpart 219.71, Pilot Mentor-Protege Program, and DFARS Appendix I, Policy and Procedures for the DOD Pilot Mentor-Protege Program, are amended to add women-owned small businesses as eligible for participation as protege firms in DOD's mentor-protege program as required by Section 807 of the National Defense Authorization Act for Fiscal Year 2001 (Public Law 106-398). Most of the changes involve changing "small disadvantaged firms" to "protege firms," as in the statement "the purpose of the program is to provide incentives for DOD contractors to assist protege firms." In addition, DOD wanted to clarify that business concerns owned and controlled by an Indian tribe or a Native Hawaiian organization are eligible to participate as protege firms. Therefore, paragraph (b) of DFARS 219.7102, General, and paragraph (a) of DFARS I-104, Eligibility Requirements for a Protege Firm, are revised to state that the following are eligible to participate in the program as proteges: small disadvantaged business concerns, business entities owned and controlled by an Indian tribe, business entities owned and controlled by a Native Hawaiian Organization, qualified organizations employing the severely disabled, and women-owned small business concerns.
  
  The interim rule is effective September 11, 2001. Comments must be submitted by November 13, 2001, on http://emissary.acq.osd.mil/dar/dfars.nsf/pubcomm; by e-mail to dfars@acq.osd.mil; to Defense Acquisition Regulations Council, Attn: Angelena Moy, OUSD (AT&L) DP (DAR), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062; or by fax to 703-602-0350. Cite DFARS Case 2001-D006 when submitting comments.
  
  
• Utilization of Indian Organizations and Indian-Owned Economic Enterprises: Section 8022 of the DOD Appropriations Act for Fiscal Year 2001 (Public Law 106-259) provides funding for incentive payments to DOD contractors, and subcontractors at any tier, that use Indian organizations and Indian-owned economic enterprises as subcontractors. To implement this, a new clause at DFARS 252.226-7001, Utilization of Indian Organizations and Indian-Owned Economic Enterprises -- DOD Contracts, now provides for incentive payments to contractors and subcontractors of 5% of the estimated cost, target cost, or firm-fixed-price of any subcontracts to Indian organizations and Indian-owned economic enterprises. However, a subcontractor will not be able to receive the 5% adjustment unless the contractor requests it on behalf of the subcontractor. (EDITOR'S NOTE: DFARS 226.104, Contract Clause, used to direct contracting officers to use FAR 52.226-1, Utilization of Indian Organizations and Indian-Owned Economic Enterprises, which provided 5% incentive payments to contractors only. DFARS 226.104 is revised to direct contracting officers to use DFARS 252.226-7001 instead.)
  
  The interim rule is effective September 11, 2001. Comments must be submitted by November 13, 2001, as indicated above. Cite DFARS Case 2001-D024 when submitting comments.
  
  
• Caribbean Basin Country End Products: To implement Section 211 of the United States-Caribbean Basin Trade Partnership Act (Title II of Public Law 106-200), and several determinations made by the United States Trade Representative in late 2000, the following changes are made:
  
  
  • Paragraph (a)(1) of DFARS 252.225-7007, Buy America Act -- Trade Agreements -- Balance of Payments Program, and DFARS 252.225-7021, Trade Agreements, are amended by removing Panama from the definition of "Caribbean Basin country."
    
    
  • To clarify which Caribbean Basin country products are subject to duty-free treatment, a new paragraph (e) is added to both clauses which states that certain provisions of the Harmonized Tariff Schedule of the United States (HTSUS) apply, and provides an Internet address for the HTSUS: http://www.customs.ustreas.gov/impoexpo/impoexpo.htm.
  
  The interim rule is effective September 11, 2001. Comments must be submitted by November 13, 2001, as indicated above, except that they should be sent to the attention of Amy Williams. Cite DFARS Case 2001-D302 when submitting comments.

PROPOSED RULES

• Ocean Transportation by U.S.-Flag Vessels: It is proposed that DFARS 247.573, Solicitation Provision and Contract Clauses, and DFARS 252.247-7023, Transportation of Supplies by Sea, be amended to specify that requirements for use of U.S.-flag vessels in the transportation of supplies by sea apply to contracts at or below the $100,000 simplified acquisition threshold. Currently, contracts of $100,000 or less are exempt from the provisions of DFARS 252.247-7023. Making DFARS 252.247-7023 applicable to contracts of $100,000 or less would be in accordance with 10 U.S.C. 2631, Supplies: Preference for United States Vessels, and regulations of the Maritime Administration at Title 46 of the Code of Federal Regulations (CFR), Part 381.
  
  Comments on the proposed rule must be submitted by November 13, 2001, as indicated above, except that they should be sent to the attention of Rick Layser. Cite DFARS Case 2000-D014 when submitting comments.
  
  EDITOR'S NOTE: DFARS Subpart 247.5, Ocean Transportation by U.S.-Flag Vessels, implements the Cargo Preference Act of 1904, which applies to DOD. That law's provisions exceed the requirements of the Cargo Preference Act of 1954, which is implemented in FAR Subpart 47.5, Ocean Transportation by U.S.-Flag Vessels. Federal Acquisition Circular (FAC) 97-17 revised FAR Subpart 47.5 to make its provisions applicable to contracts awarded using the simplified acquisition procedures in FAR Part 13, Simplified Acquisition Procedures. For more on 97-17, see the May 2000 Federal Contracts Perspective article "FAC 97-17 Tightens Task Order Rules, Encourages Indian Subcontracting, Addresses U.S.-Flag Vessels."
  
  
• Balance of Payments Program: It is proposed that policy pertaining to the application of the Balance of Payments Program to construction contracts performed outside the United States be added to the DFARS because FAR Subpart 25.3, Balance of Payments Program, which DOD currently uses, has been proposed for elimination. (EDITOR'S NOTE: On September 11, 2000, a proposal was published to remove FAR Subpart 25.3 because civilian agencies enter into very few contracts for construction outside the United States. For more on this proposal, see the October 2000 Federal Contracts Perspective article "Proposed FAR Changes on Child Labor, Financing.")
  
  In anticipation of the removal of FAR Subpart 25.3, this proposed revision would remove DFARS Subpart 225.3 (since there would no longer be a FAR Subpart 25.3 to supplement) and move a significant portion of it to a new DFARS Subpart 225.75, Balance of Payments Program. In addition, the current FAR Subpart 25.3 policy on the application of the Balance of Payments program to construction contracts would be incorporated into DFARS Subpart 225.75.
  
  The DFARS Subpart 225.75 application of the Balance of Payments Program to DOD construction contracts would be streamlined over that in FAR Subpart 25.3 by:
  
  
  • Exempting any particular construction material that is at or below the $100,000 simplified acquisition threshold (proposed paragraph (a)(1) of DFARS 225.7501, Policy).
    
    
  • Specifically authorizing an assessment, prior to issuance of a solicitation, as to whether an exemption to the Balance of Payments Program applies on the basis of the entire project (proposed DFARS 225.7501(a)(5)).
    
    
  • Authorizing the contracting officer to make pre-solicitation determinations as to whether a requirement can best be filled by a foreign end product or construction material (proposed DFARS 225.7501(b)).
  
  In addition, DFARS 252.225-70XX, Balance of Payments Program -- Construction Material, would be required to be included in solicitations and contracts for construction to be performed outside the United States with a value greater than the $100,000 simplified acquisition threshold but less than $6,806,000 (that is, the threshold for the application of the Trade Agreements Act to construction -- the provisions of the Trade Agreements Act take precedence over those of the Balance of Payments Act -- see FAR Subpart 25.4, Trade Agreements, and the April 2000 Federal Contracts Perspective article "Trade Agreements Thresholds Revised"). DFARS 252.225-70XX would be a simplified version of FAR 52.225-9, Buy American Act -- Balance of Payments Program -- Construction Material.
  
  Finally, DFARS 252.225-70YY, Balance of Payments Program -- Construction Material Under Trade Agreements, would be required to be included in solicitations and contracts for construction to be performed outside the United States with a value of $6,806,000 or more. For acquisitions with a value of $6,806,000 or more, but less than $7,068,419 (the threshold for application of the North American Free Trade Agreement (NAFTA) to Mexican construction -- see FAR Subpart 25.4 and the April 2000 Federal Contracts Perspective article "Trade Agreements Thresholds Revised"), Alternate I to DFARS 252.225-70YY would be used. DFARS 252.225-70YY would be a simplified version of FAR 52.225-11, Buy American Act -- Balance of Payments Program -- Construction Material Under Trade Agreements, and Alternate I to DFARS 252.225-70YY would be essentially the same as Alternate I to FAR 52.225-11.
  
  Comments on the proposed rule must be submitted by November 13, 2001, as indicated above, except that they should be sent to the attention of Amy Williams. Cite DFARS Case 2000-D020 when submitting comments.
  
  
• Preference for Local 8(a) Contractors -- Base Closure or Realignment: DFARS 226.7103, Procedure, would be amended to clarify that both competitive and noncompetitive acquisitions under the Section 8(a) program are permitted if an 8(a) contractor is located in the vicinity of the base to be closed or realigned (see FAR Subpart 19.8, Contracting with the Small Business Administration (the 8(a) Program), for more on the program). Currently, paragraph (c) of DFARS 226.7103 permits award under the Section 8(a) program if "the 8(a) contractor" is located in the vicinity of the base to be closed or realigned. To clarify that both competitive and noncompetitive 8(a) acquisitions are permitted, this proposed rule would revise paragraph (c) to permit use of 8(a) procedures if "at least one eligible 8(a) contractor" is located in the vicinity. Also, a similar clarifying amendment would be made to paragraph (c) pertaining to set-asides for small business concerns.
  
  Comments on the proposed rule must be submitted by November 13, 2001, as indicated above. Cite DFARS Case 2001-D007 when submitting comments.
  
  
• Subcontract Commerciality Determinations: To clarify the responsibilities regarding determinations as to whether a subcontract item meets the definition of "commercial item" in FAR 2.101, Definitions, this proposed rule would add the following:
  
  
  • DFARS 244.303, Extent of Review, to require the administrative contracting officer, when conducting a contractor purchasing system review, "review the adequacy of rationale documenting commercial item determinations to ensure compliance with the definition of 'commercial item' in FAR 2.101."
    
    DFARS 244.402, Policy Requirements, to require contractors to "determine whether a particular subcontract item meets the definition of a commercial item...Contractors are expected to exercise reasonable business judgment in making such determinations, consistent with the guidelines for conducting market research in FAR Part 10 [Market Research]."
  
  Comments on the proposed rule must be submitted by November 13, 2001, as indicated above, except that they should be sent to the attention of Rick Layser. Cite DFARS Case 2000-D028 when submitting comments.
  
  
• Tax Exemptions for Contract Performance in Italy: DFARS 252.229-7003, Tax Exemptions (Italy), is included in contracts that will be performed in Italy. DFARS 252.229-7003 would be revised to update the information pertaining to tax exemptions that contractors must include on their invoices. Invoices would be required to include the contract number, the Imposta Valore Aggiunto (IVA) tax exemption claimed, and the appropriate fiscal code(s). In addition, the clause would be revised to state that "the Contractor may address questions regarding the IVA tax to the Ministry of Finance, IVA office, Rome (06) 520741."
  
  Comments on the proposed rule must be submitted by November 20, 2001, as indicated above, except that they should be sent to the attention of Susan Schneider. Cite DFARS Case 2000-D027 when submitting comments.
  
  
• Profit Policy: In July 2000, DOD proposed to revise the profit policy in DFARS 215.404-71, Weighted Guidelines Method, to: (1) reduce the values assigned to facilities capital employed by 50% and eventually eliminating facilities capital employed altogether; (2) add general and administrative expense to the cost base used in determining profit objectives; (3) increase emphasis on performance risk by increasing its values by 1% and decreasing the values for contract type risk by 0.5%; and (4) add a special factor for cost efficiency to encourage contractor cost reduction efforts (see the August 2000 Federal Contracts Perspective article "DOD Proposes More Changes to Profit Policy").
  
  Twelve sources submitted comments on the proposal. Because of the complexity of the issues raised by the comments, DOD held a public meeting on December 12, 2000. After considering all the written and verbal comments, DOD decided to publish a revised proposed rule. The major differences between the initial proposed rule and this revised proposed rule are --
  
  
  • Facilities capital employed. The initial proposed rule would have eliminated facilities capital employed as a factor over a 4-year period. The revised paragraph (c) of proposed DFARS 215.404-71-4, Facilities Capital Employed, would retain 50% of the current values for equipment as an incentive for modernization of equipment (that is, the normal range would be 17.5% versus the current 35%, and the designated range would be 10% to 25% versus the current 20% to 50%).
    
    
  • Contract type and performance risks. The intention of the proposed profit policy changes is to revise the incentive structure of the policy and not to increase or decrease average profit objectives. Changes to contract type and performance risks in the initial proposed rule were made to offset the addition of general and administrative expense to the cost base and the elimination of facilities capital employed. Since the revised proposed rule restores a portion of facilities capital employed, offsets to performance risk contained in the initial rule have been reduced (see proposed DFARS 215.404-71-2, Performance Risk). Likewise, the revised proposed rule restores the current values for contract type risk that had been reduced by 0.5% in the initial proposed rule (see proposed DFARS 215.404-71-3, Contract Type Risk and Working Capital Adjustment).
    
    Comments on the proposed rule must be submitted by November 20, 2001, as indicated above, except that they should be sent to the attention of Sandra Haberlin. Cite DFARS Case 2000-D018 when submitting comments.

FAR DEVIATION

• Maximum Per Diem Rates: Paragraph (a)(2)(1) of FAR 31.205-46, Travel Costs, limits allowable costs for contractor employee lodging, meals, and incidental expenses to the maximum per diem rates that are in the Federal Travel Regulations (FTR) and in effect at the time of travel.
  
  On December 2, 1998, the General Services Administration issued a final rule amending the FTR effective January 1, 1999. Besides revising the per diem rates for particular localities, the final rule made significant changes to how the FTR maximum per diem rate limitations are computed, particularly the extraction of lodging taxes from the per diem rates and allowing the payment of those lodging taxes as miscellaneous expenses instead.
  
  On December 23, 1998, the Director of Defense Procurement issued a DOD FAR class deviation permitting the use of either the FTR rates and definitions effective on December 31, 1998, or the revised FTR rates and definitions that went into effect on January 1, 1999. This class deviation was to remain in effect until September 30, 1999, or until FAR 31.205-46 was revised, whichever occurred first.
  
  FAR 31.205-46 has not been revised to reflect the DOD FAR class deviation, so the deviation has been extended annually. On September 10, 2001, the DOD FAR class deviation was extended for another year, through September 30, 2002, or until the FAR is revised.

SBA Makes Microloan Program Permanent

To comply with the provisions of the Small Business Reauthorization Act of 1997 (Public Law 105-135), which terminated the designation of the Microloan Program as a "demonstration" (that is, made the program permanent) and made other changes to the program, the Small Business Administration (SBA) has issued a final rule revising its microloan program regulations in Title 13 of the Code of Federal Regulations (CFR), Part 120, Business Loans, Subpart G, Microloan Program, as follows:

• The word "demonstration" is removed wherever it appears.
  
  
• In paragraph (a) of Section 120.706, What are the terms and conditions of an SBA loan to an Intermediary?, the aggregate amount that a microloan intermediary may borrow from SBA is increased from $2,500,000 to $3,500,000.
  
  
• Paragraph (a) of Section 120.707, What conditions apply to loans by Intermediaries to Microloan borrowers?, is amended to authorize microloan assistance to a borrower to establish a nonprofit child care business (generally, microloan borrowers must engage in for profit activities).
  
  
• Paragraph (b)(1) of Section 120.712, How does an Intermediary get a grant to assist Microloan borrowers?, is amended to increase from 15% to 25% the amount of grant funds a microloan intermediary may use for technical assistance to prospective microloan borrowers. Also, paragraph (c) is amended to allow an intermediary to use up to 25% of the grant funds it receives from SBA to contract with third parties to provide technical assistance to microloan borrowers.
  
  
• Section 120.716, Suspension or revocation of an Intermediary or NTAP, is added to describe the procedures that SBA will use to suspend or revoke a microloan intermediary or non-lending technical assistance provider (NTAP) (Section 120.701, Definitions, defines an NTAP as "an entity which receives grant funds from SBA to provide technical assistance to microloan borrowers."). It also permits an intermediary or NTAP to appeal a suspension or revocation under the procedures in Part 134, Rules of Procedure Governing Cases Before the Office of Hearings and Appeals.

In addition, the Consolidated Appropriations Act of 2001 (Public Law 106-554), directed the increase of several dollar amounts used to define aspects of the program. The most significant changes are:

• In Section 120.701, Definitions, a "microloan" is defined as a loan of not more than $35,000 (formerly $25,000) by an intermediary to a small business. Also, the definition of "specialized intermediary" is changed to mean an intermediary that maintains a portfolio of microloans averaging $10,000 (up from $7,500) or less.
  
  
• Section 120.702, Are there limitations on who can be an Intermediary or on where an Intermediary may operate?, is revised to state that an organization, to become an intermediary, must have made and serviced short-term fixed rate loans of not more than $35,000 (up from $25,000) to newly established or growing small businesses for at least one year.
  
  
• Section 120.704, How are applications evaluated?, is revised so, when selecting intermediaries for the microloan program, SBA will give priority to applicants that maintain a portfolio of loans averaging $10,000 (up from $7,500) or less.

FAIR Act Inventories Available to Public

On September 26, the Office of Management and Budget (OMB) published a notice in the Federal Register that the first release of the 2001 "Agency Inventories of Activities that are not Inherently Governmental" required by Section 2 of Public Law 105-270, the Federal Activities Inventory Reform Act of 1998 ("FAIR Act"), is available to the public from the Departments of Energy, State, and Veterans Affairs; National Aeronautics and Space Administration (NASA); Office of Management and Budget; SBA; several small agencies and activities; and eight offices of inspector general. These inventories consist of "activities performed by federal government sources for the executive agency that, in the judgment of the head of the executive agency, are not inherently governmental functions." Interested parties have 30 days from the publication of the Federal Register notice (that is, until October 26, 2001) to challenge the omission or inclusion of an activity on and inventory.

Approximately 300,000 jobs are included in this release, and about 75% of those jobs are categorized as eligible to be performed by the private sector.

In addition, the Office of Federal Procurement Policy (OFPP) has prepared a summary "FAIR Act User's Guide" and has made it available at http://www.whitehouse.gov/OMB/procurement/index.html. This User's Guide will help interested parties review 2001 FAIR Act inventories, and include the website addresses for individual agency inventories.

On March 9, 2001, OMB Deputy Director Sean O'Keefe directed agencies to either outsource or put up for public/private competition at least 5% of the positions on their FY 2000 inventories -- approximately 42,000 positions (see the April 2001 Federal Contracts Perspective article "OMB Memo Establishes 20% Performance-Based Contracting Goal, A-76 Use on FAIR Act Inventories"). In guidance for the preparation of the FY 2003 budget, OMB has directed agencies to outsource or compete an additional 10% of the positions, for a total of 15%.

Reminder: Reservist Loans Available from SBA

In response to the tragic events of September 11, President Bush has called up several thousand reservists for duty. This sheds a new light on the recently implemented Military Reservist Economic Injury Disaster Loans program. The loans are available to small businesses employing military reservists who are called up to active duty and are essential employees critical to their businesses. The loans have interest rates of 4%, have a term up to 30 years, and are limited to $1,500,000.

For more information on this program, see the August 2001 Federal Contracts Perspective article "SBA to Provide Loans When Reservists Are Called Up," and the September 2001 article "SBA Taking Applications for Reservist Loans."

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