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FEDERAL CONTRACTS PERSPECTIVE

Federal Acquisition Developments, Guidance, and Opinions

June 2002
Vol. III, No. 6

CONTENTS

FAC 2001-07 Addresses Performance-Based Preference, Balance of Payments, European Sanctions
Training and Education Cost Principle Changes Proposed
DOD to Hold Meeting on Federal Prison Industries
Waiver of GSA Screening of DOD Property Extended
GAO Commercial Activities Panel Issues Report
OMB to Hold Meeting on Competition, Contract Bundling
Executive Compensation Benchmark Raised to $387,783
Nonmaufacturer Rule Waived for Bearings



FAC 2001-07 Finalizes Performance-Based Preference,
Removes Balance of Payments, Clarifies Sanctions

Taking a breather, the Federal Acquisition Regulation (FAR) Council issued little Federal Acquisition Circular (FAC) 2001-07, which finalizes an interim rule from last year on performance-based contracting, removes the Balance of Payments programs from the FAR, and clarifies the application of the European Union trade sanctions.

  1. Preference for Performance-Based Contracting: This finalizes an interim rule that was published in FAC 97-25 which established a preference for performance-based contracts or task orders when acquiring services (see the June 2001 FEDERAL CONTRACTS PERSPECTIVE article "FedBizOpps.Gov to Replace CBD, Performance-Based Contracts Preferred for Services"). The interim rule amended FAR 2.101, Definitions, and FAR 37.102, Policy, to implement Section 821 of the Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001 (Public Law 106-398), which established the following order of precedence when acquiring services: (1) a firm-fixed-price performance-based contract or task order; (2) a performance-based contract or task order that is not firm-fixed-price; and (3) a contract or task order that is not performance-based (for more on the acquisition-related provisions of Public Law 106-398, see the December 2000 PERSPECTIVE article "Experience Requirements for IT Workers Restricted").

    Two respondents submitted comments on the interim rule, and the interim rule is finalized without change except that paragraph (b)(4) of FAR 7.105, Contents of Written Acquisition Plans, is amended to clarify that contracting officers must "provide rationale if a performancebased contract will not be used or if a performance-based contract for services is contemplated on other than a firm-fixed price basis (see [FAR] 37.102(a) and [FAR] 16.505(a)(3) [Ordering])."

    EDITOR'S NOTE: One respondent suggested that the regulations do not need to be changed, but acquisition personnel need to be trained in developing performance-based requirements. The final rule states, "the regulatory changes in this rule are not meant as a substitute for training that will enhance the knowledge and skills of acquisition personnel in performance-based contracting." However, it lists the following websites as possible sources of guidance:
          Best Practices for Performance-Based Service Contracting
                (http://www.arnet.gov/Library/OFPP/BestPractices/)
          Seven Steps to Performance-Based Services Acquisition
                (http://oamweb.osec.doc.gov/pbsc/index.html)
          General Services Administration's Performance-Based Contracting Website
                http://www.gsa.gov, click on "Policies, Guidelines, Regulations, and Best Practices"; then "Acquisition"; then "Best Practices"; then "Performance-Based Contracting")

  2. Balance of Payments Program (BOPP): This rule amends the FAR to remove language pertaining to the BOPP, particularly FAR Subpart 25.3, Balance of Payments Program, and the related clauses in FAR Section 52.225.

    The BOPP is like a foreign version of the Buy American Act, and it applies to purchases of supplies for use outside the U.S. and to construction materials for construction contracts performed outside the U.S. On September 11, 2000, a proposed rule was published to eliminate FAR Subpart 25.3 because few civilian agencies make purchases for use outside the U.S. and the BOPP does not apply to purchases below the $100,000 simplified acquisition threshold, nor to contracts subject to the Trade Agreements Act applies (generally, contracts over $169,000 for supplies and $6,481,000 for construction -- see the March 2002 PERSPECTIVE article "Trade Agreements Act and NAFTA Thresholds Revised"; for more on the proposal to remove FAR Subpart 25.3, see the October 2000 PERSPECTIVE article "Proposed FAR Changes on Child Labor, Financing").

    One respondent submitted comments, claiming that "industry would be adversely impacted by the elimination of the Balance of Payments Program by the deletion of FAR 25.3." In response, the FAR Council states that "it appears the commenter is unaware that the Balance of Payments Program will be continued within the Department of Defense..." In fact, on April 26, 2002, the Department of Defense (DOD) published a final rule incorporating the BOPP policy in FAR Subpart 25.3 related to construction contracts performed outside the U.S., along with the BOPP coverage already in Defense FAR Supplement (DFARS) Subpart 225.3, into a new DFARS Subpart 225.75, Balance of Payments Program. For more on this, see the May 2002 PERSPECTIVE article "New DFARS Rules Address Profit, Berry Amendment, Federal Prisons, NAFTA, Balance of Payments."

    This final rule removes FAR Subpart 25.3; revises all the clauses in FAR 52.225 to remove references to the BOPP (for example, changing the title of FAR 52.225-1 from "Buy American Act -- Balance of Payments Program -- Supplies" to "Buy American Act -- Supplies" and removing the reference to "Balance of Payments Program" in paragraph (d)); makes related changes to other clauses (such as revising the titles of FAR 52.225 clauses referenced in FAR 52.212-3, Offeror Representations and Certifications -- Commercial Items); and makes conforming changes in FAR Part 13, Simplified Acquisition Procedures, and elsewhere in FAR Part 25, Foreign Acquisition.

  3. European Union Trade Sanctions: This rule revises paragraph (c)(2)(i) of FAR 25.1103, Other Provisions and Clauses, to specifically exclude solicitations issued and contracts awarded by DOD from the use of FAR 52.225-15, Sanctioned European Union Country End Products, and FAR 52.225-16, Sanctioned European Union Country Services. While FAR 25.600, Scope of Subpart, which addresses the coverage of FAR Subpart 25.6, Trade Sanctions, clearly states that "this subpart does not apply to...the Department of Defense", the prescription for FAR 52.225-15 and FAR 52.225-16 in FAR 25.1103(c)(2)(i) does not include the DOD exception. Therefore, to FAR 25.1103(c)(2)(i) is added an exception for solicitations issued and contracts awarded by "the Department of Defense."


Training and Education Cost Principle Changes Proposed

The FAR Council is proposing that FAR 31.205-44, Training and Education Costs, be amended to make it less restrictive by generally allowing the costs associated with training and education. Currently, FAR 31.205-44 is restrictive in that it differentiates between vocational training, part-time college level education, full-time education, and specialized programs with numerous specific limitations on the allowability of costs associated with each of these categories. The proposed rule would make the costs associated with training and education allowable, subject to five public policy exceptions that are retained from the current cost principle:

  1. Overtime compensation for training and education.

  2. Costs of tuition, fees, training materials and textbooks, subsistence, salary, and any other emoluments in connection with full-time college level education, including training provided at the contractor's own facilities, at an (a) undergraduate level; or (b) postgraduate level except "where the course or degree pursued is related to the field in which the employee is working or may reasonably be expected to work and is limited to a total period not to exceed two school years or the length of the degree program, whichever is less, for each employee so trained." In addition, the cost of salaries for attending undergraduate or graduate level classes on a part-time basis is unallowable, "except for attending such classes during working hours where circumstances do not permit attendance at these classes before or after regular working hours."

  3. Grants to educational or training institutions, including the donation of facilities or other properties, scholarships, and fellowships (because they are considered "contributions").

  4. Training or education costs for other than bona fide employees, "except that the costs incurred for educating employee dependents (primary and secondary level studies) when the employee is working in a foreign country where suitable public education is not available may be included in overseas differential pay."

  5. Costs of college plans for employee dependents.

Except for these five expressly unallowable cost exceptions, the reasonableness of specific contractor training and education costs would be determined by FAR 31.201-3, Determining Reasonableness.

Comments on the proposed rule must be submitted by July 15, 2002, to General Services Administration, FAR Secretariat (MVP), 1800 F Street, NW, Room 4035, ATTN: Laurie Duarte, Washington, DC 20405, or by e-mail to farcase.2001-021@gsa.gov.



DOD to Hold Meeting on Federal Prison Industries

Director of Defense Procurement Deidre Lee is sponsoring a public meeting on June 3 to discuss the April 26, 2002, interim rule that added DFARS 208.602, Policy, to implement Section 811 of the Fiscal Year 2002 National Defense Authorization Act (Public Law 107-107). Section 811 requires DOD to conduct market research before purchasing a product listed in the Federal Prison Industries (FPI) catalog to determine whether the FPI product is comparable in price, quality, and time of delivery to products available from the private sector (for more on the interim rule, see the May 2002 Federal Contracts Perspective article "New DFARS Rules Address Profit, Berry Amendment, Federal Prisons, NAFTA, Balance of Payments").

A list of possible issues for discussion at the meeting includes, but is not limited to --

  1. The overall purpose and intent of the interim rule.

  2. If you are in the government --


  3. If your are in the private sector --


  4. What changes would you like to see in the final rule, if any?

  5. Are there specific contracting procedural issues that may need to be clarified in the final rule?

The meeting will be held between 1:00 p.m. and 4:00 p.m. in Room C-43, Crystal Mall 4, 1931 Jefferson Davis Highway, Arlington, VA 22202. For further information, call Susan L. Schneider, Defense Acquisition Regulations Directorate, at 703-602-0326, or e-mail her at susan.schneider@osd.mil.



Waiver of GSA Screening of DOD Property Extended

On May 29, Director of Defense Procurement Deidre A. Lee issued a memorandum extending through March 5, 2004, the DOD FAR waiver that exempts special test equipment without standard components from the General Services Administration (GSA) screening requirements prescribed in paragraph (b) of FAR 45.608-1, General; FAR 45.608-4, Limited Screening; and paragraph (b) of FAR 45.608-5, Special Items Screening (FAR 45.608 addresses screening of contractor inventory). In addition, the GSA screening requirement at FAR 45.608-4 is waived for DOD property in poor and salvage condition (that is, items reported in the inventory schedule with condition codes A3, A6, A9, B3, B6, F3, F6, F9, or HX).

The previous waiver extension was issued March 22, 2000, and was effective from March 6, 2000, through March 6, 2002.



GAO Commercial Activities Panel Issues Report

On April 30, the Commercial Activities Panel convened by the General Accounting Office (GAO) to study the transfer of commercial activities currently performed by government employees to federal contractors issued its final report, "Improving the Sourcing Decisions of the Government," in which the panel recommended that the government adopt a procedure based on the procedures in FAR Part 15, Contracting by Negotiation. (EDITOR'S NOTE: An executive summary of the report is available at http://www.gao.gov/a76panel/dcap0202.pdf, and the full report is available at http://www.gao.gov/a76panel/dcap0201.pdf.)

Section 832 of the Fiscal Year 2001 National Defense Authorization Act (Public Law 106-398) required the Comptroller General of the United States (the head of the GAO) to convene a panel of experts to study the policies and procedures governing the transfer of commercial activities for the federal government from government personnel to a federal contractor. This procedure is commonly known as "contracting out" or "outsourcing," and it is governed by Office of Management and Budget (OMB) Circular A-76, Performance of Commercial Activities. Section 832 required the Comptroller General to submit to Congress, by May 1, 2002, a report of the panel on the results of the study, including recommended changes with regard to implementing policies and enactment of legislation (see the April 2001 Federal Contracts Perspective article "GAO to Convene Panel on Contracting Out"). This is the required report.

On April 17, 2001, the GAO announced the names of the 12 panelists from the government, private industry, federal labor organizations, and academia (see the May 2001 Perspective article "GAO Names Members of Contracting Out Panel"). The panel held three public hearings and heard the views of interested parties on the current process issues (see the June 2001 Perspective article "GAO Contracting Out Panel to Hold Meeting June 11"), and it reviewed existing literature on outsourcing issues. The panel decided that all of its findings and recommendations would require the agreement of at least two-thirds of the 12 panelists.

The panel unanimously adopted ten guiding principles as the basis for all sourcing decisions (such as "recognize that inherently governmental and certain other functions should be performed by federal workers"), but it split 8-4 on the three main recommendations, with government and private industry representatives in the majority and federal employee organizations and academia representatives in the minority.

The three recommendations are:

While many of the panel's recommendations can be accomplished administratively under existing law, the panel recognizes that some of its recommendations would require changes to statutes and regulations, and this could take some time. Therefore, the panel is recommending that the following phased implementation strategy be implemented:



OMB to Hold Meeting on Competition, Contract Bundling

OMB is inviting interested parties from both the public and private sector, especially from small businesses, to attend a meeting on June 14, 2002, and provide comments on the positive and negative effects of agency competition practices from the 1990s to the present, and on the impact of contract bundling. The meeting is being held because several studies by the General Accounting Office (GAO) and various agency inspectors general question whether agencies are taking advantage of the full range of marketplace capabilities in their competitions. In addition, concerns have been voiced that the unnecessary bundling of contracts is limiting opportunities for contractors, especially small businesses.

OMB is seeking comments from interested parties on the following topics:

The June 14 public meeting will be held at the General Services Administration (GSA) auditorium, 18th and F Streets NW, Washington, DC 20405, from 1:00 p.m. to 3:00 p.m. Eastern time. Parties wishing to make formal oral presentations at the public meeting must contact Barbara Diering, Office of Federal Procurement Policy (OFPP) by June 3, 2002. Time allocations for oral presentations will depend on the number of individuals who desire to make presentations. Parties wishing to provide written statements at the public meeting must submit such statements to OFPP by June 7, 2002. Instead of participating in the public meeting, interested parties may submit comments no later than July 1, 2002, by e-mail to: bdiering@omb.eop.gov or by fax to 202-395-5105 (hard copy mail is not being accepted due to security reasons).



Executive Compensation Benchmark Raised to $387,783

OFPP Administrator Angela Styles has decided to increase the "benchmark compensation amount" for senior executives by more than $13,500, from $374,228 to $387,783. 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. Styles settled on that figure based on commercially available surveys and after consultation with the director of the Defense Contract Audit Agency.

The $387,783 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 -- $387,783 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 applies to contract costs incurred after January 1, 2002, for contractor fiscal year 2002 and subsequent contractor fiscal years unless and until revised by OMB, which is required to set the benchmark compensation amount annually.



Nonmanufacturer Rule Waived for Bearings

On May 30, the Small Business Administration (SBA) waived the "nonmanufacturer rule" for bearings, plain, unmounted and bearings, mounted. This will permit qualified nonmanufacturers to supply the products of any domestic manufacturer on a federal contract set aside for small business or awarded through the SBA's 8(a) program.

On April 4, 2002, SBA published a notice that no small business manufacturers were supplying these bearings to the government, and a search of PRO-Net (http://pro-net.sba.gov)) failed to identify any small business manufacturers of these bearings. SBA invited the public to comment or provide information on potential small business sources for these bearings (see the May 2002 Perspective article "Nonmanufacturer Rule Waiver Proposed for Bearings"). Since no small business sources were identified, SBA is granting the waiver.

The nonmanufacturer rule requires recipients of contracts set-aside for small businesses or 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 (see paragraph (f) of FAR 19.102, Size Standards). However, SBA may waive this requirement if there are no small business manufacturers or processors.



Copyright 2002 by Panoptic Enterprises. All Rights Reserved.

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