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FEDERAL CONTRACTS PERSPECTIVE

Federal Acquisition Developments, Guidance, and Opinions

July 2002
Vol. III, No. 7

CONTENTS

FAC 2001-08 Restricts "Incidental Items" on FSS Orders
FY 2001 Spending Increases 8.1% to $248.7 Billion
FAR Changes on Taxes Proposed, 508 Comments Sought
DFARS Changes on U.S.-Flag Vessels, Indian Organizations
Travel Agencies' Size Standard Increased

FAC 2001-08 Restricts "Incidental Items" on FSS Orders,
Moves Definitions, Adds Relocation Costs

Continuing its languid summer pace, the Federal Acquisition Regulation (FAR) Council issued another little Federal Acquisition Circular (FAC) -- FAC 2001-08, which adds policies on incidental items and disputes under Federal Supply Schedule (FSS) contracts, moves the definitions of "claim" and various other terms related to contract terminations to FAR 2.101, Definitions, and amends FAR 31.205-35, Relocation Costs, to make some additional costs allowable.

1. Definition of "Claim" and Terms Relating to Termination: This final rule makes the following changes:
   
   
   • It moves the definition of "claim" from FAR 33.201, Definitions, to FAR 2.101, and revises it by deleting the confusing sentence, "A claim arising under a contract, unlike a claim relating to that contract, is a claim that can be resolved under a contract clause that provides for the relief sought by the claimant."
     
     Then, to clarify the distinction between claims that "arise under a contract" and those that "relate to a contract," the following parenthetical phrase is added to paragraph (a) of FAR 33.213, Obligation to Continue Performance: "(A claim arising under a contract is a claim that can be resolved under a contract clause, other than the clause at 52.233-1, Disputes, that provides for the relief sought by the claimant; however, relief for such claim can also be sought under the clause at 52.233-1. A claim relating to a contract is a claim that cannot be resolved under a contract clause other than the clause at 52.233-1.)" Finally, the definition of "claim" in FAR 52.233-1 is revised to correspond to the FAR 2.101 definition.
     
     
   • The definition of "termination for convenience" is moved from FAR 17.103, Definitions, to FAR 2.101. To clarify the difference between "termination for convenience" and "cancellation" in FAR Subpart 17.1, Multi-Year Contracts, the following is added as new paragraph (d) of FAR 17.104, General: "The termination for convenience procedure may apply to any government contract, including multiyear contracts. As contrasted with cancellation, termination can be effected at any time during the life of the contract (cancellation is effected between fiscal years) and can be for the total quantity or partial quantity (whereas a cancellation must be for all subsequent fiscal years' quantities)."
     
     
   • The definitions of "continued portion of the contract," "partial termination," and "terminated portion of the contract" are moved from FAR 49.001, Definitions, to FAR 2.101.
     
     
   • A definition of "termination of default" is added to FAR 2.101. It takes the "general" statement in paragraph (a) of FAR 49.401 ("termination for default is generally the exercise of the government's right to completely or partially terminate a contract because of the contractor's actual or anticipated failure to perform its contractual obligations") and turns it into a definition ("termination for default means the exercise...").
   
   On August 15, 2001, a proposed rule was published to make these changes (see the September 2001 Federal Contracts Perspective article "Flurry of FAR Changes Proposed: Trademarks, Claims, Terminations, Commercial Items, Task Orders"). One respondent submitted two comments suggesting editorial changes, and both were accepted, so the proposed rule was finalized with a correction to a cross-reference and the inclusion of "the movement of the various definitions to FAR 2.101 is not intended to change the operation of the cost principles" in the introduction to the final rule.
   
   
2. Federal Supply Schedule Order Incidental Items and Disputes: This final rule amends the FAR to add policies on incidental items and disputes under FSS contracts and to remove the requirement that contracting officers notify GSA when a schedule contractor refuses to honor an order placed by a government contractor, as follows:
   
   
   • It had been common practice to add "incidental" non-FSS items to FSS orders for administrative convenience. However, on July 15, 1999, the General Accounting Office (GAO) ruled in a protest that agencies "may no longer rely on the 'incidentals' test to justify the purchase of non-FSS items in connection with an FSS buy; where an agency buys non-FSS items, it must follow applicable acquisition regulations" (Pyxis Corporation, B-282469; B-282469.2). Therefore, paragraph (d) is added to FAR 8.401, General, to permit the addition of "items not on the Federal Supply Schedule (also referred to as open market items) to a Federal Supply Schedule blanket purchase agreement (BPA) or an individual task or delivery order" only if "(1) all applicable acquisition regulations have been followed (e.g., publicizing (Part 5), competition requirements (Part 6), acquisition of commercial items (Part 12), contracting methods (Parts 13, 14, and 15)); and small business programs (Part 19)); (2) the ordering office contracting officer has determined the price for the items not on the Federal Supply Schedule is reasonable; and (3) the items are clearly labeled on the order as items not on the Federal Supply Schedule..."
     
     
   • FAR 8.405-7, Disputes, had stated that ordering offices "shall refer all unresolved disputes under orders to the schedule contracting office for action under the Disputes clause of the contract." FAR 8.405-7 is revised to permit the ordering office contracting officer to "issue final decisions on disputes arising from performance of the order..." However, disputes pertaining to the terms and conditions of schedule contracts still have to be referred to the schedule contracting officer for resolution.
     
     
   • FAR 51.103, Ordering from Government Supply Sources, provides procedures for contractors that are authorized to place orders under FSS contracts. Paragraph (b), which requires the contracting officer to report to GSA any refusal by an FSS contractor to fulfill an order from an authorized contractor, is removed because agencies are no longer required to notify GSA under those circumstances.
   
   A proposed rule was published on December 19, 2000, to make these changes (see the January 2001 Federal Contracts Perspective article "Proposed FAR Changes on High Tech Employees"). Nine respondents submitted comments, and the following changes were made to the finalized rule:
   
   
   • Proposed FAR 8.401(d) referred to "open market (noncontract) items" in several places. Since there are no definitions in the FAR for "open market" or "noncontract," the expression "items not on the Federal Supply Schedule" was substituted as the best characterization of these items.
     
     
   • Also in proposed FAR 8.401(d), one respondent suggested that FAR Part 19, Small Business Programs, be listed as an applicable acquisition regulation because its omission would allow ordering offices to circumvent the requirement that all procurements valued between $2,500 and $100,000 be set aside for small business concerns. Accordingly, FAR Part 19 has been added to the list to further emphasize that ordering offices must consider small business programs when acquiring items not on the FSS.
     
     
   • Proposed FAR 8.405-7(d) stated, "The contracting officer should use the alternative dispute resolution (ADR) procedures, when appropriate (see 33.214)." One respondent suggested that the language should be revised to cite the policy statement in FAR 33.204, Policy, that ADR should be used "to the maximum extent practicable." The FAR Council agrees, so paragraph (d) now states, "The contracting officer should use the alternative dispute resolution (ADR) procedures, to the maximum extent practicable (see 33.204 and 33.214)."
   
   
3. Relocation Costs: FAR 31.205-35, Relocation Costs, is amended to make the following changes:
   
   
   • Paragraph (a)(10) is added to make allowable payments for increased employee income and Federal Insurance Contributions Act (FICA) taxes incident to allowable reimbursed relocations costs (the statement that these payments are unallowable is removed from paragraph (c)).
     
     
   • Paragraph (a)(11) is added to make allowable payments for spouse employee assistance (the statement that these payments are unallowable is removed from paragraph (c)).
     
     
   • Paragraph (b)(4) is amended to increase from $1,000 to $5,000 the ceiling for miscellaneous expenses of relocation (such as disconnecting and connecting appliances, automobile registration, forfeited utility fees and deposits) when the contractor uses the lump-sum payment method.

FY 2001 Spending Increases 8.1% to $248.7 Billion

Fiscal Year (FY) 2001 spending by the federal government surpassed the FY 2000 record of $230.1 billion by $18.6 billion, setting a new record of $248.7 billion -- a 8.1% increase. Since the end of the fiscal year was September 30, 2001, most of this spending took place before the September 11 attack. With almost all the spending on the war in Afghanistan and homeland security taking place in FY 2002 (which began on October 1), FY 2002 is certain to set another record.

The following are the largest agencies' FY 2001 spending totals (in billions) and the percentage change from FY 2000:

The following states received the most federal contract money in FY 2001 (in billions), with their FY 2000 rank and dollar amount change in parentheses:

FAR Changes on Taxes Proposed, 508 Comments Sought

The FAR Council continues to think about topics for future FACs:

• Federal, State, and Local Taxes: It is proposed to clarify the prescriptions for FAR 52.229-3, Federal, State, and Local Taxes, and FAR 52.229-4, Federal, State, and Local Taxes (Noncompetitive Contract), by combining FAR 29.401-3, Competitive Contracts, and FAR 29.401-4, Noncompetitive Contracts, into a new FAR 29.401-3, Federal, State, and Local Taxes; by deleting FAR 29.401-5, Contracts Performed in U.S. Possessions or Puerto Rico; and by redesignating FAR 29.401-6, New Mexico Gross Receipts and Compensating Tax, as FAR 29.401-4.
  
  The new FAR 29.401-3 would direct the contracting officer to insert FAR 52.229-3 into fixed-price contracts exceeding the $100,000 simplified acquisition threshold that are to be performed wholly or in part in the U.S., its possessions, or Puerto Rico. However, where FAR 52.229-4, Federal, State, and Local Taxes (Noncompetitive Contract), is currently required to be included in noncompetitive fixed-price contracts exceeding the simplified acquisition threshold that are to be performed wholly or in part in the U.S., its possessions, or Puerto Rico "when [the contracting officer is] satisfied that the contract price does not include contingencies for state and local taxes, and that, unless the clause is used, the contract price will include such contingencies," FAR 52.229-4 (which would be retitled "Federal, State, and Local Taxes (State and Local Adjustments)") may be inserted by the contracting officer "if the price would otherwise include an inappropriate amount in anticipation of potential postaward change(s) in state or local taxes."
  
  In addition, the definition for "local taxes" would be relocated from FAR 52.229-5 (which is proposed for deletion) to FAR 52.229-3 and FAR 52.229-4, and the definition would be revised by adding U.S. territories and the Commonwealth of the Northern Mariana Islands, because they are no longer considered possessions of the United States.
  
  Comments on the proposed rule must be submitted no later than August 5, 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.
  
  
• Section 508 Contract Clause: On August 7, 1998, the Workforce Investment Act of 1998 (Public Law 105-220) was signed into law. It included the Rehabilitation Act Amendments of 1998, and Subsection 408(b) of the Rehabilitation Act Amendments amended Section 508 of the Rehabilitation Act of 1973 to require that when federal agencies develop, procure, maintain, or use electronic information technology (EIT), that they make sure the EIT allows federal employees with disabilities to have comparable access to and use of information as other federal employees. Section 508 also requires that individuals with disabilities who are members of the public seeking information or services from a federal agency have comparable access to and use of information and data as those without disabilities. However, comparable access is not required if it would impose an undue burden.
  
  On December 21, 2000, the Architectural and Transportation Barriers Compliance Board published the final EIT accessibility standards and the technical and functional performance criteria necessary for accessibility for such technology (see the January 2001 Federal Contracts Perspective article "IT Accessibility Standards Published"). The amended Section 508 required that the FAR implement the Compliance Board's standards within six months of their publication. Therefore, FAR Subpart 39.2, Electronic and Information Technology, was added by FAC 97-27 to implement the Section 508 standards, effective June 25, 2001 (see the May 2001 Federal Contracts Perspective article "FAC 97-27 Implements Section 508 Accessibility Standards").
  
  FAR Subpart 39.2 does not require vendors to certify that offered products or services comply with the requirements of Section 508. However, some have suggested there is a need for additional guidance, such as a FAR clause which would promote greater consistency and reduce confusion in the implementation of Section 508 by avoiding the proliferation of agency specific clauses. Others insist that EIT standards are best addressed through the statement of work or other specifications instead of a FAR clause.
  
  The FAR Council is seeking comments on the following to help them determine the best approach to promote more consistent and effective implementation of Section 508:
  
  
  1. The Council asks that respondents discuss whether additional acquisition guidance to implement Section 508 is needed. Respondents are encouraged to discuss potential advantages and disadvantages.
     
     
  2. To the extent additional guidance is desired, the Council asks respondents to identify if such guidance should be in the form of a FAR clause, a solicitation provision, other FAR coverage, or non-regulatory guidance. If a clause is desirable, respondents are encouraged to identify the types of EIT purchases on which a clause should focus (for example, all EIT purchases, EIT services only). Non-regulatory guidance may be in the form of reference material or frequently asked questions on the web site at http://www.section508.gov. Respondents are encouraged to discuss potential advantages and disadvantages of the form of guidance they suggest and why they believe other forms of guidance would be less beneficial or not appropriate.
     
     
  3. The Council invites respondents' ideas regarding what should be included in the guidance.
  
  Comments should be submitted on or before August 26, 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: farnotice.2001-033@gsa.gov.
  
  
• Withdrawal of Proposed Rule on "Applied Research" and "Development" Definitions: The FAR Council is withdrawing the proposed rule published September 11, 2000, that would have moved the definitions of "applied research" and "development" from FAR 31.205-18, Independent Research and Development and Bid and Proposal Costs, and FAR 35.001, Definitions, to FAR 2.101, Definitions. No public comments were received. After further review, it was concluded that the current coverage is clear and the proposed reorganization is unnecessary. Therefore, the FAR Council is withdrawing the proposed rule. (EDITOR'S NOTE: For more on the proposed rule being withdrawn, see the October 2000 Federal Contracts Perspective article "Proposed FAR Changes on Child Labor, Financing.")
  
  
• Electronic Posting of Proposed Rulemaking Withdrawals: On a related note, the FAR Council is giving notice that proposed rule withdrawals will be electronically posted at http://www.acq.osd.mil/dp/dars, "Defense Acquisition Regulations Directorate, Management Status Reports." The notice states, "The electronic posting of withdrawal notices of proposed rules promotes the use of cost-effective procedures and processes that employ electronic commerce in the conduct and administration of federal procurement systems. Proposed rule withdrawal notices are, and will continue to be, included in the semi-annual 'Unified Agenda of Federal Regulatory and Deregulatory Actions' published in the Federal Register."

DFARS Changes on U.S.-Flag Vessels, Indian Organizations

The Department of Defense (DOD) was busy in June, as usual:

• Ocean Transportation by U.S.-Flag Vessels: This final rule amends Defense FAR Supplement (DFARS) 247.573, Solicitation Provision and Contract Clauses, and DFARS 252.247-7023, Transportation of Supplies by Sea, 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. DOD had exempted contracts and subcontracts at or below the $100,000 simplified acquisition threshold from the requirements of DFARS 252.247-7023. But on September 11, 2001, DOD published a proposed rule to eliminate this exemption (see the October 2001 Federal Contracts Perspective article "Deluge of DFARS Changes Made and Proposed, Involve Foreign Acquisitions, Small Business, Profit"). However, the proposed rule prescribed an alternate version of the clause (Alternate III) for contracts and subcontracts at or below the simplified acquisition threshold which excluded the requirement for a contractor or subcontractor to provide a representation regarding ocean transportation with its final invoice.
  
  Five respondents submitted comments on the proposed rule, but DOD decided not to adopt any of the comments, so DOD is adopting the proposed rule as final without changes.
  
  
• Utilization of Indian Organizations and Indian-Owned Economic Enterprises: DOD is finalizing, without change, the September 11, 2001, interim rule that amended DFARS 226.104, Contract Clause, and added DFARS 252.226-7001, Utilization of Indian Organizations and Indian-Owned Economic Enterprises -- DOD Contracts, to provide incentive payments of 5% of the estimated cost, target cost, or firm-fixed price of any subcontracts awarded by DOD contractors and subcontractors at any tier to Indian organizations or Indian-owned economic enterprises that use Indian organizations (for more on the interim rule, see the October 2001 Federal Contracts Perspective article "Deluge of DFARS Changes Made and Proposed, Involve Foreign Acquisitions, Small Business, Profit").
  
  Nineteen respondents submitted comments on the interim rule, but DOD decided not to adopt any of the comments, so the interim rule is adopted without change.
  
  
• Subcontract Commerciality Determinations: To clarify the responsibilities of contractors and contracting officers regarding determinations as to whether a subcontract item meets the definition of "commercial item" in FAR 2.101, Definitions, the following are amended:
  
  
  • DFARS 244.303, Extent of Review, requires the administrative contracting officer, when conducting a contractor purchasing system review (CPSR), to "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, requires 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]."
  
  A proposed rule was published September 11, 2001 (see the October 2001 Federal Contracts Perspective article "Deluge of DFARS Changes Made and Proposed, Involve Foreign Acquisitions, Small Business, Profit"). Comments were received from three respondents, and a minor clarification was made to the final rule as a result.
  
  
• Electronic Submission and Processing of Payment Requests: DOD is proposing to add DFARS Subpart 232.70, Electronic Submission and Processing of Payment Requests, and related provision DFARS 252.232-7XXX, Electronic Submission of Payment Requests, to implement Section 1008 of the National Defense Authorization Act for Fiscal Year 2001 (Public Law 106-398). Section 1008 provides that: (1) contractors must submit electronically, and DOD must process electronically, requests for payment under DOD contracts; (2) DOD must transmit any supporting documentation electronically within DOD; and (3) the Secretary of Defense may exempt cases in any category if the Secretary determines that the requirement for using electronic means for submitting or transmitting payment requests is unduly burdensome.
  
  Proposed DFARS 232.7002, Policy, would require contractors to submit requests for contract financing and invoice payments in electronic form except for six exceptions, such as when the governmentwide commercial purchase card is used to make a purchase, or the purchase is made from a foreign vendor for work performed outside the U.S.
  
  Proposed DFARS 232.7003, Procedures, would identify the following three electronic forms of payment request transmission as acceptable:
  
  
  • Web Invoicing System (WinS) (see https://ecweb.dfas.mil)
    
    
  • Wide Area WorkFlow Receipts and Acceptance (WAWF-RA) (see https://rmb.ogden.disa.mil)
    
    
  • American National Standards Institute (ANSI) X.12 electronic data interchange (EDI) formats (see http://www.x12.org for information on EDI formats, and http://www.dfas.mil/ecedi for EDI implementation guides)
  
  However, contracting officers would be permitted to authorize the contractor to use another electronic form with the concurrence of the payment and contract administration offices.
  
  Comments are to be submitted by July 30, 2002. They may be submitted directly on the website at http://emissary.acq.osd.mil/dar/dfars.nsf/pubcomm. As an alternative, respondents may e-mail comments to dfars@acq.osd.mil, or mail their comments to Defense Acquisition Regulations Council, Attn: Sandra Haberlin, OUSD(AT&L)DP (DAR), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062, or by fax to 703-602-0350.

Travel Agencies' Size Standard Increased

The Small Business Administration (SBA) is finalizing the proposed small business size standard for travel agencies from $1,000,000 to $3,000,000. It also is finalizing the interim final rule that applied the increased size standard retroactively to victims of the September 11, 2001, terrorist attacks. For more on the changes, see the April 2002 Federal Contracts Perspective article "SBA Proposes Increasing Travel Agencies' Size Standard."

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