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FEDERAL CONTRACTS PERSPECTIVE

Federal Acquisition Developments, Guidance, and Opinions

May 2002
Vol. III, No. 5

CONTENTS

New DFARS Rules Address Profit, Berry Amendment, NAFTA
DOD FAIR Inventory Available
Proposed FAR Changes on Personal Costs, Trademarks
OFPP Issues Two Memos on Source Selections
Safety and Health Clauses Amended in NFS
SBA Proposes Increasing Testing Labs' Size Standards
Nonmanufacturer Rule Waiver Proposed for Bearings

New DFARS Rules Address Profit, Berry Amendment,
Federal Prisons, NAFTA, Balance of Payments

Spring cleaning continues apace at the Department of Defense (DOD). During the month of April, DOD amended the Defense Federal Acquisition Regulation Supplement (DFARS) by issuing four final rules and two interim rules. In addition, DOD published two proposed rules, withdrew two other proposed rules, requested comments on a proposal, and issued a Federal Acquisition Regulation (FAR) class deviation.

Final Rules:

• Profit Policy: This amends the profit policy in DFARS 215.404-71, Weighted Guidelines Method, by:
  
  
  1. Increasing emphasis on performance risk by adding 1% to the "normal values" and "designated ranges" in paragraph (c) of DFARS 215.404-71-2, Performance Risk;
     
     
  2. Adding general and administrative expense to the cost base used in determining profit objectives (in DFARS 215.404-71-2(b)(4), the statement that "total contract costs" exclude general and administrative expenses, contractor independent research and development and bid and proposal expenses, and facilities capital cost of money, is revised to state that total contract costs excludes only facilities capital cost of money);
     
     
  3. Diminishing the emphasis on facilities investment by reducing the value assigned to facilities capital employed by half, and eliminating facilities capital employed for buildings (see paragraph (c) of DFARS 215.404-71-4, Facilities Capital Employed); and
     
     
  4. Adding a special cost efficiency factor to encourage cost reduction efforts (new DFARS 215.404-71-5, Cost Efficiency Factor, states, "to the extent that the contractor can demonstrate cost reduction efforts that benefit the pending contract, the contracting officer may increase the prenegotiation profit objective by an amount not to exceed 4% of total objective cost...to recognize these efforts").
  
  This profit policy change has been in the works for quite some time. See the August 2000 Federal Contracts Perspective article "DOD Proposes More Changes to Profit Policy" and the October 2001 article "Deluge of DFARS Changes Made and Proposed, Involve Foreign Acquisitions, Small Business, Profit."
  
  
• North American Free Trade Agreement (NAFTA) Threshold for Goods from Mexico: DFARS 225.1101, Acquisition of Supplies, is amended to revise the prescription for use of DFARS 252.225-7036, Buy American Act -- North American Free Trade Agreement Implementation Act -- Balance of Payments Program, to reflect the U.S. Trade Representative's (USTR) increase in the threshold for application of NAFTA to the procurement of Mexican goods from $54,372 to $56,190 (for more on the USTR's action, see the March 2002 Federal Contracts Perspective article "Trade Agreements Act and NAFTA Thresholds Revised").
  
  
• Research and Development Streamlined Solicitation (RDSS) Procedures: This revises DFARS 235.7003-2, RDSS Process, to eliminate the requirement for posting solicitations at the RDSS website (http://www.rdss.osd.mil). Posting solicitations at this website is no longer necessary because contracting activities now make synopses and solicitations available through FedBizOpps (http://www.fedbizopps.gov). For more on the proposed rule, see the January 2002 Federal Contracts Perspective article "New DFARS Rules on Various Contracting Methods."
  
  
• Balance of Payments Program (BOPP): This adds, as DFARS Subpart 225.75, Balance of Payments Program, the policy in FAR Subpart 25.3, Balance of Payments Program, which addresses construction contracts performed outside the United States. FAR Subpart 25.3 has been proposed for removal because civilian agencies enter into very few contracts for construction outside the U.S., but DOD contracts for construction outside the U.S., so it decided to incorporate the FAR BOPP coverage to the DFARS. For more on the proposal to remove FAR Subpart 25.3, see the October 2000 Federal Contracts Perspective article "Proposed FAR Changes on Child Labor, Financing." For more on the proposed rule to incorporate FAR Subpart 25.3 into the DFARS, see the October 2001 article "Deluge of DFARS Changes Made and Proposed, Involve Foreign Acquisitions, Small Business, Profit." Also, see below for a proposal to eliminate the application of the BOPP to DOD procurements of supplies for use overseas.

Interim Rules:

• Competition Requirements for Purchases from Federal Prison Industries (FPI): In the National Defense Authorization Act for Fiscal Year 2002 (Public Law 107-107), Section 811, Applicability of Competition Requirements to Purchases from a Required Source, requires DOD contracting officers, before buying an FPI product, to conduct market research to determine whether the FPI product is comparable in price, quality, and time of delivery to products available from the private sector, and, if the FPI is not comparable, to use competitive procedures to procure the product. To implement this, DFARS 208.602, Policy, is added to DFARS Subpart 208.6, Acquisitions from Federal Prison Industries, Inc. DFARS 208.602 states, "If the FPI product is comparable, follow the policy at FAR 8.602(a) [Policy]. If the FPI product is not comparable -- (A) use competitive procedures to acquire the product; and (B) consider a timely offer from FPI for award in accordance with the specifications and evaluation factors in the solicitation."
  
  
• Codification and Modification of the Berry Amendment: In the National Defense Authorization Act for Fiscal Year 2002 (Public Law 107-107), Section 832, Codification and Modification of Provision of Law Known as the "Berry Amendment", codifies and makes minor modifications to the provision of law known as the Berry Amendment (formerly 10 U.S.C. 2241 note, now codified at 10 U.S.C. 2533a). The Berry Amendment is implemented by DFARS 225.7002, Restrictions on Food, Clothing, Fabrics, Specialty Metals, and Hand or Measuring Tools, and it requires that procurements of covered items in excess of the $100,000 simplified acquisition threshold must be of products grown, reprocessed, reuse, or produced in the U.S. or its possessions unless the service secretary determines that satisfactory quality and sufficient quantity cannot be procured when needed at U.S. market prices.
  
  This interim rule specifies that (1) the domestic source requirements apply to listed items acquired either as end products or as components of end products (paragraph (a) of DFARS 225.7002-1, Restrictions); (2) an exception to the domestic source requirement applies for foods manufactured or processed in the U.S. regardless of where the foods (and any component) were grown or produced (paragraph (j) of DFARS 225.7002-2, Exceptions); and (3) the domestic source requirement does not apply to end products incidentally incorporating minor amounts of cotton, other natural fibers, or wool (DFARS 225.7002-2(i)). In addition, DFARS 252.225-7012, Preference for Certain Domestic Commodities, is revised to reflect these changes.

Both these interim rules are effective April 26, 2001. Comments on either (or both) must be submitted by June 25, 2002, on the website at http://emissary.acq.osd.mil/dar/dfars.nsf/pubcomm; by e-mail to dfars@acq.osd.mil; by fax to 703-602-0350; or to Defense Acquisition Regulations Council, Attn: Susan Schneider (for FPI rule) or Amy Williams (for Berry Amendment rule), OUSD(AT&L)DP(DAR), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062.

For more on the acquisition-related provisions of Public Law 107-107, see the February 2002 Federal Contracts Perspective article "2002 Defense Authorization Act Signed Into Law, Extends FAR Subpart 13.5 Until January 1, 2003."

Proposed Rules:

• Competition for Purchase of Services Under Multiple Award Contracts: This would amend DFARS Subpart 208.4, Federal Supply Schedules, and DFARS Subpart 216.5, Indefinite-Delivery Contracts, to implement Section 803 of the National Defense Authorization Act for Fiscal Year 2002 (Public Law 107-107), which requires that each DOD purchase of services over $100,000 made under a multiple award contract be made on a competitive basis unless a contracting officer waives the requirement under certain specific circumstances.
  
  New DFARS 208.404-70, Additional Ordering Procedures for Services, would state that each order for services over $100,000 "must be made on a competitive basis...unless the contracting officer waives this requirement on the basis of a written determination that (1) one of the circumstances described at FAR 16.505(b)(2)(i) through (iii) [Ordering] applies to the order [that is, (i) urgent need; (ii) sole source; or (iii) logical follow-on]; or (2) a statute expressly authorizes or requires that the purchase be made from a specified source." Also, it would state that such an order would be considered made on a competitive basis only if the contracting officer "provides a fair notice of the intent to make the purchase, including a description of the work the contractor must perform and the basis upon which the contracting officer will make the selection, to all contractors offering such services under the multiple award schedule; and affords all contractors responding to the notice a fair opportunity to submit an offer and have that offer fairly considered..." or "provides the [above] notice...to as many contractors as practicable and receives offers from at least three qualified contractors; or determines in writing that no additional qualified contractors could be identified despite reasonable efforts to do so."
  
  In addition, new DFARS 216.505-70, Orders for Services Under Multiple Award Contracts, would be similar to DFARS 208.404-70 except that contracting officers would have an additional authority to waive the competition requirement: FAR 16.505(b)(2)(iv), which authorizes a waiver if the order is to satisfy a minimum guarantee.
  
  DOD is sponsoring a public meeting on April 29, 2002, from 12:00 p.m. to 3:00 p.m., to discuss the proposed rule and hear the views of interested parties on what they believe to be the key issues pertaining to the acquisition of services through Federal Supply Schedules, governmentwide acquisition contracts, multiple agency contracts, and multi-agency indefinite-delivery, indefinite-quantity (IDIQ) contracts. The meeting will be held in Room C-43, Crystal Mall 4, 1941 Jefferson Davis Highway, Arlington, VA 22202.
  
  
• Foreign Military Sales (FMS) Customer Involvement: At the request of FMS customers that they be afforded more visibility into the preparation and pricing of contracts that DOD awards on their behalf, DFARS 225.7304, FMS Customer Involvement, would be revised to provide greater involvement of FMS customers in the contract award process while protecting against unauthorized disclosure of contractor proprietary data.
  
  The proposed rule would "encourage" FMS customers to "participate with U.S. government acquisition personnel in discussions with industry to develop technical specifications; establish delivery schedules; identify any special warranty provisions or other requirements unique to the FMS customer; and review prices on varying alternatives, quantities, and options needed to make price-performance tradeoffs." In addition, "the degree of FMS customer participation in contract negotiations (would be) left to the discretion of the contracting officer." Furthermore, "if an FMS customer requests additional information concerning FMS contract prices, the contracting officer shall, after consultation with the contractor, provide sufficient information to demonstrate the reasonableness of the price and reasonable responses to relevant questions concerning contract price."

Comments on the proposed multiple award contracts rule must be submitted by May 6, 2002, and comments on the proposed FMS rule must be submitted by June 25, 2002, on the website at http://emissary.acq.osd.mil/dar/dfars.nsf/pubcomm; by e-mail to dfars@acq.osd.mil; by fax to 703-602-0350; or to Defense Acquisition Regulations Council, Attn: Susan Schneider (for multiple award contracts rule) or Amy Williams (for FMS rule), OUSD (AT&L)DP(DAR), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062.

Request for Comments:

• Elimination of Balance of Payments Program in Defense Supply Contracts: The BOPP was established in July 1962 when Secretary of Defense Robert S. McNamara directed the military departments to hold to a minimum their expenditures of appropriated funds outside the U.S., its possessions, and Puerto Rico. The BOPP was established as an interim measure to be used until the U.S. balance of payments deficit was corrected. However, the deficit continues even with the BOPP in place. There have been so many waivers and exceptions to the BOPP's provisions that few DOD supply procurements are subject to its procedures: defense equipment procured from approximately 85 countries receive equal consideration with domestic offers. Therefore, DOD is seeking comments on a proposal to eliminate the application of the BOPP to DOD procurements of supplies to be used overseas. Those submitting comments should provide specific examples of the benefits to be achieved by the elimination of the BOPP or identify specific harm that would be caused by the elimination of the BOPP preference in DOD supply contracts.
  
  Comments must be submitted by June 14, 2002, to Charles A. Zuckerman, Deputy Director, Defense Procurement, Foreign Contracting, OUSD(AT&L), 3060 Defense Pentagon, Washington, DC 20301-3060.

Withdrawals:

• Anticompetitive Teaming: The November 1, 2001, proposed rule to amend DFARS Subpart 203.3, Reports of Suspected Antitrust Violations, to specify that certain exclusive teaming arrangements may evidence violations of the antitrust laws is withdrawn because public comments indicated there is no demonstrated need for DFARS guidance on this subject (for more on the proposed rule, see the December 2001 Federal Contracts Perspective article "DOD Authorizes Overseas Purchase Card Use Up to $200K").
  
  
• Demilitarization: The June 5, 1997, proposed rule to amend DFARS Part 245, Government Property, to address control of Munitions List items and Strategic List items and demilitarization of excess property under government contracts is withdrawn because DOD 4160.21-M-1, Defense Demilitarization Manual, is being revised to define DOD policy on this subject. After the revised manual is issued, DOD will reevaluate the need for DFARS changes pertaining to demilitarization.

FAR Deviation:

• Class Deviation from FAR 31.205-20, Interest and Other Financial Costs, for Utilities Privatization Contracts: Director of Defense Procurement Deidre Lee issued a class deviation from FAR 31.205-20 for utilities privatization contracts under which previously government-owned utility systems are conveyed by a military department or defense agency to a contractor. FAR 31.205-20 states that interest on borrowings, bond discounts, costs of financing and refinancing capital, and related fees are unallowable. With this FAR class deviation, the utilities privatization contractor will be permitted to recover its interest costs associated with capital expenditures to acquire, renovate, replace, upgrade, and/or expand utility systems. However, the contractor will not be permitted to receive facilities capital cost of money as a contract cost under FAR 31.205-10, Cost of Money.

DOD FAIR Inventory Available

On April 15, the Office of Management and Budget (OMB) announced that the fourth, and final, release of Commercial Activities Inventories required to be compiled by Public Law 105-270, Federal Activities Inventory Reform Act of 1998 (FAIR Act), is now available to the public from the Department of Defense (DOD). The inventory is available by contacting DOD's FAIR Act Hotline at 703-824-2692, or through the website at http://web.lmi.org/fairnet/. The inventory consists 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 notice (that is, until May 15) to challenge the omission or inclusion of an activity on and inventory.

For more on the other three releases of inventories, see the following Federal Contracts Perspective articles: October 2001, "FAIR Act Inventories Available to Public"; December 2001, "Second FAIR Act Inventories Released"; and February 2002, "OMB Releases Third Set of FAIR Act Inventories."

Proposed FAR Changes on Personal Costs, Trademarks

Though it was a relatively quiet month for the FAR, that doesn't mean there was no action -- a proposed rule on personal costs was published, and a meeting was announced to discuss the August 9, 2001, proposed rule to provide guidance on the use of trademarks for government products.

• Compensation for Personal Services: FAR 31.205-6, Compensation for Personal Services, would be amended to improve its clarity without changing its meaning based on an analysis of most of its content (the analysis excluded paragraph (j), which addresses pension costs; paragraph (k), which addresses deferred compensation other than pensions; and paragraph (o), which addresses postretirement benefits other than pensions -- these will be reviewed later and could be the subject of a future proposed rule).
  
  The proposed rule would revise FAR 31.205-6 as follows:
  
  
  • In paragraph (a), the list of specific types of compensation would be removed because it is unnecessary.
    
    
  • Paragraph (b)(2)(i) would become new paragraph (a)(6) and expanded to cover members of "limited liabilities companies" since their compensation requires special consideration.
    
    
  • Paragraph (b) would consolidate all the reasonableness provisions, including those dealing with labor-management agreements currently addressed in paragraph (c).
    
    
  • Delete the language in paragraph (b)(1) that places the burden of demonstrating reasonableness on the contractor because it is redundant of language currently in paragraph (a) of FAR 31.201-3, Determining Reasonableness. However, the removal of this language is not intended to imply this burden has shifted to the government.
    
    
  • Paragraph (h) would become new paragraph (g), and it would emphasize that backpay for underpaid work is allowable if required by a settlement, order, or court decree.
  
  In addition, FAR 31.001, Definitions, would be revised to define "compensation for personal services" as "all remuneration paid currently or accrued, in whatever form and whether paid immediately or deferred, for services rendered by employees to the contractor."
  
  Comments on the proposed rule must be submitted by June 24, 2002, to General Services Administration (GSA), FAR Secretariat (MVP), 1800 F Street, NW, Room 4035, ATTN: Laurie Duarte, Washington, DC 20405, or by e-mail to farcase.2001-008@gsa.gov.
  
  
• Trademarks for Government Products: DOD and GSA are cosponsoring a public meeting on May 9 to discuss the August 9, 2001, proposed rule that would add FAR Subpart 27.X, Government-Unique Trademarks and Service Marks, to provide guidance on the use of names, symbols, and logos that describe government products, services, systems, and programs. Some of the issues raised in the comments which be discussed are the definition of "government-unique mark", the relationship between the proposed rule and federal trademark law, and the applicability of the rule to subcontractors.
  
  The public meeting will be held in room C-43, Crystal Mall Building 4, 1941 Jefferson Davis Highway, Arlington, VA 22202. The dates and times of any subsequent meetings will be published after the initial meeting on the Defense Procurement Internet home page at http://www.acq.osd.mil/dp/ (click on "Interest Items"). For more information, call William H. Anderson, 703-588-5090.
  
  For more on the proposed rule that will be discussed, see the September 2001 Federal Contracts Perspective article "Flurry of FAR Changes Proposed: Trademarks, Claims, Terminations."

OFPP Issues Two Memos on Source Selections

Angela B. Styles, Administrator of the Office of Federal Procurement Policy (OFPP), issued two memoranda to federal departments and agencies involving the source selection process.

• Protests, Claims, and Alternative Dispute Resolution (ADR) as Factors in Past Performance and Source Selection Decisions: Ms. Styles states that "concerns have arisen regarding the consideration federal agencies give contractor protests, claims and ADR practices in past performance evaluations and source selection decisions....contractors should feel free to avail themselves of the rights provided to them by law. Accordingly, please emphasize to your agency's acquisition personnel, especially source selection officials, that: (1) contractors may not be given 'downgraded' past performance evaluations for availing themselves of their rights by filing protests and claims or for deciding not to use ADR; and (2) contractors may not be given more 'positive' past performance evaluations for refraining from filing protests and claims or for agreeing to use ADR."
  
  
• Contractor Responsibility Determinations and Indefinite-Delivery Contracts: In a memorandum clearly inspired by the suspensions of Enron and Arthur Andersen from future federal contracts (see the April 2002 Federal Contracts Perspective article "Enron, Arthur Andersen Suspended from Federal Work"), Ms. Styles wrote a memorandum in which she notes that paragraph (b) of FAR 9.405-1, Continuation of Current Contracts, permits agencies to place orders against existing contracts of contractors that are debarred, suspended, or proposed for debarment, including indefinite-delivery contracts. "This provision creates a significant risk that the government will not be adequately protected," writes Styles. "Accordingly, I am asking the FAR Council to consider revising FAR 9.405-1(b) to address this risk."
  
  She points out that "a current DFARS provision may serve as a model for the FAR revision. Under DFARS 209.405-1, DOD contracting officers shall not i) place orders exceeding the guaranteed minimum under indefinite-quantity contracts; or ii) place orders against Federal Supply Schedule contracts when the agency is an optional user, unless the agency head makes a written determination that a compelling reason to do so."
  
  Ms. Styles concludes by stating, "Contracting officers should be mindful that FAR 9.405-1(b) is discretionary, stating that agencies 'may continue to place orders against existing contracts' (emphasis in original). The FAR provision does not require the placement of orders with nonresponsible contractors. If a contracting officer places an order under an existing contract with a contractor that is debarred, suspended, or proposed for debarment, the contract action should be justified in writing by the cognizant contracting officer."

Safety and Health Clauses Amended in NFS

On December 13, 2001, the National Aeronautics and Space Administration (NASA) published a proposed rule to remove the requirement that NASA FAR Supplement (NFS) 1852.223-70, NASA Safety and Health, and NFS 1852.223-73, Safety and Health Plan, be included in contracts that are greater than $1 million, involve construction, or have hazardous deliverable end items or operations (see the January 2002 Federal Contracts Perspective article "Changes Proposed for NFS Safety and Health Clauses"). This proposed change was intended to make sure contractors are held to the same standards for mishap prevention as the government. Since only one comment was received, and it did not recommended any changes, NASA is finalizing the proposed rule without changes.

SBA Proposes Increasing Testing Labs' Size Standard

SBA is proposing to modify the small business size standard for testing laboratories (North American Industry Classification System (NAICS) code 541380) from $6,000,000 to $10,000,000 in average annual receipts to better define the size of businesses that should be eligible as small for federal procurement programs. SBA is proposing this change because of the high level capacities and skills that federal agencies have recently required among their vendors that specialize in environmental and radiochemical testing, and the costs of doing business in this industry may have increased to the point that the pool of eligible small businesses has seriously declined.

SBA believes $10,000,000 is a reasonable size standard for the testing laboratories industry and will help small testing laboratories compete for federal contracts without including laboratories that are so large that they could harm the ability of small laboratories to compete successfully for federal contracts.

SBA estimates that the number of small businesses would increase by 120, from 3,762 firms to 3,882, out of 4,126 businesses in the industry if this increase is adopted.

EDITOR'S NOTE: Effective February 22, 2002, the testing laboratories size standard was increased from $5,000,000 to $6,000,000 as part of a 15.8% inflation adjustment to SBA's monetary size standards. For more on the adjustment, see the February 2002 Federal Contracts Perspective article "SBA Increases Small Business Size Standards for Services."

Nonmanufacturer Rule Waiver Proposed for Bearings

The SBA is considering a waiver of the "nonmanufacturer rule" for bearings, plain, unmounted and bearings, mounted. The basis for the proposed waiver is that no small business manufacturers are currently supplying these products to the government, and a search of the Procurement Marketing and Access Network (PRO-Net (http://pro-net.sba.gov)) failed to identify any small business manufacturers of these items.

The nonmanufacturer rule requires recipients of federal contracts that are set-aside for small businesses or are awarded through the 8(a) program to provide the product of a small business manufacturer or processor if the recipient is not the actual manufacturer or processor (see paragraph (f) of FAR 19.102, Size Standards). However, SBA may waive this requirement if there are no small business manufacturers or processors.

Comments and sources must be submitted to Edith Butler, Program Analyst, U.S. Small Business Administration, 409 3rd Street, SW, Washington, DC 20416; 202-619-0422.

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