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FEDERAL CONTRACTS PERSPECTIVE

Federal Acquisition Developments, Guidance, and Opinions

August 2002
Vol. III, No. 8

CONTENTS

DOD Proposes Exempting "Substantially Transformed" U.S.-Made End Products from BAA
Lots of DFARS Rules Finalized
OGE to Review Conflict of Interest Statutes
SBA Proposes Small Business Size Standards Changes
NFS Addresses Performance Evaluations, IT Security
VAAR Construction/A-E Clause Prescriptions Revised
Prompt Payment Interest Rate Set at 5 1/4%

DOD Proposes Exempting "Substantially Transformed"
U.S.-Made End Products from the Buy American Act

In a move that would greatly simplify the evaluation of offers involving U.S. products containing foreign components, the Department of Defense (DOD) is proposing to amend Defense Federal Acquisition Regulation Supplement (DFARS) Part 225, Foreign Acquisition, and the corresponding provisions and clauses in DFARS Part 252, to exempt U.S.-made end products that are "substantially transformed in the United States" from the application of the Buy American Act (BAA) in acquisitions subject to the Trade Agreements Act (TAA). This would eliminate a conflict between the definition of "domestic end product" under the BAA and the definition of "U.S.-made end product" under the TAA.

The BAA, which applies to supplies that exceed the $2,500 micro-purchase threshold, is very simple: the government must purchase "domestic end products," which are defined as "articles manufactured in the U.S in which the cost of domestic components exceeds 50% of the cost of all components."

Under the TAA, which applies to supplies that exceed $169,000, the government must, for the most part, purchase either a "U.S.-made end product" or a "designated country end product" -- a product of a country that has signed the Agreement on Government Procurement, which resulted in enactment of the TAA (there are lots and lots of exceptions and exceptions to the exceptions). A "U.S.-made end product" is one that either wholly produced in the U.S. or "consists in whole or in part of materials from another country...[that] has been substantially transformed in the U.S. into a new and different article of commerce..." The criteria for a "designated country end product" is the same as for a "U.S.-made end product" except that "designated country" is substituted for "U.S."

The problem is in paragraph (d) of DFARS 252.225-7007, Buy American Act -- Trade Agreements -- Balance of Payments Program, which states, "Generally, each offer of a U.S. made end product that does not meet the definition of 'domestic end product' is adjusted for the purpose of evaluation by adding 50% of the offered price, inclusive of duty." (EDITOR'S NOTE: For more on "domestic end products," "U.S.-made end products," and other key terms applicable to the BAA and TAA, see Federal Acquisition Regulation (FAR) 25.003, Definitions, and DFARS 225.003.)

An example: Japan is a "designated country" -- it has signed the Agreement on Government Procurement. Therefore, a Japanese firm can manufacture a computer with 60% of its components coming from Taiwan (a "non-designated country" under the TAA -- it has not signed the Agreement on Government Procurement) and still offer it under the TAA because those Taiwanese components have been "substantially transformed" in Japan into a "designated country end product." However, an American firm manufacturing the same computer with 60% of its components coming from Taiwan would be disqualified under the TAA: though the computer would be considered a "U.S.-made end product" since the Taiwanese components have been "substantially transformed" in the U.S., the computer would not be considered a "domestic end product" because it would flunk the 50% domestic component test under the BAA. The government would not be permitted to purchase the U.S.-made computer, but would be able to buy the exact same computer made by the Japanese.

On May 16, 1997, the Under Secretary of Defense for Acquisition, Technology, and Logistics (USD(AT&L)) determined that it would not be in the public interest to apply the BAA to U.S.-made information technology products in Federal Supply Group (FSG) 70 and FSG 74. On March 14, 2002, the USD(AT&L) expanded this by determining that it would not be in the public interest to apply the BAA to U.S.-made end products that are substantially transformed in the U.S. in any procurements subject to the TAA. The March 14, 2002, determination is consistent with paragraph (b)(2) of FAR 25.502, Application, which permits agencies to "give the same consideration given eligible offers to offers of U.S.-made end products that are not domestic end products...Otherwise, evaluate in accordance with agency procedures..."

Because the March 14, 2002, determination makes it unnecessary for DOD contracting officers to determine if a U.S.-made end product is also a domestic end product, this proposed rule would simplify the evaluation of offers in acquisitions subject to the TAA. In addition, DFARS 252.225-7006, Buy American Act -- Trade Agreements -- Balance of Payments Program Certificate, and DFARS 252.225-7007, Buy American Act -- Trade Agreements -- Balance of Payments Program, would no longer be necessary because DFARS 252.225-7020, Trade Agreements Certificate, and DFARS 252.225-7021, Trade Agreements, would be appropriate for all acquisitions subject to the TAA.

The proposed rule would make the following changes to DFARS Part 225 and DFARS Part 252:

• DFARS 252.225-7006 and DFARS 252.225-7007 would be removed, as would all references to them in DFARS Part 225.
  
  
• References to the May 16, 1997, USD(AT&L) determination to exempt FSG 70 and 74 products that are substantially transformed in the U.S. from the application of the BAA are changed to the USD(AT&L) determination to exempt end products that are substantially transformed in the U.S. from the application of the BAA.
  
  
• In DFARS 225.502, Application, the current text would be redesignated as paragraph (c) and would apply only to acquisitions subject to the BAA and the Balance of Payments Act (which extends the BAA restrictions to acquisitions of supplies for overseas use), and new paragraph (b) would provide the following evaluation procedures for acquisitions subject to the TAA: "(i) Consider only offers of U.S.-made, qualifying country, or eligible end products, except as permitted by [DFARS] 225.403 [Trade Agreements Act]; [and] (ii) If price is the determining factor, award on the low offer." In addition, paragraph (iii) (which would be redesignated as paragragraph (c)(iii)), which directs contracting officers to Example 4 of DFARS 225.504, Evaluation Examples, when U.S.-made end products that are not domestic end products, would be deleted.
  
  
• Paragraph (4) of DFARS 225.504, which consists of Example 4 (when a U.S.-made end product that is not a domestic offer, a domestic offer, and an eligible product are being evaluated), would be deleted.

Comments on the proposed rule must be submitted no later than September 30, 2002, on the web site at http://emissary.acq.osd.mil/dar/dfars.nsf/pubcomm. As an alternative, respondents may e-mail comments to dfars@acq.osd.mil. Also, respondents who cannot submit comments through the web site or by e-mail may submit comments to Defense Acquisition Regulations Council, Attn: Amy Williams, OUSD(AT&L)DP(DAR), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062; or by fax to 703-602-0350.

Lots of DFARS Rules Finalized

In addition to proposing the new rule described above, the folks at DOD finalized several interim and proposed 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, are revised to provide contract action reporting requirements for Fiscal Year 2003. The reporting changes are related to indefinite-delivery contracts, performance-based service contracts, the Small Business Administration (SBA)/Office of Federal Procurement Policy (OFPP) pilot program for acquisition of services from small business concerns, purchases made using the governmentwide purchase card, and purchases made by a DOD agency on behalf of another DOD or non-DOD agency. DD Forms 350 and 1057 have been revised accordingly to reflect these reporting requirements.
  
  
• Reserve Officer Training Corps (ROTC) and Military Recruiting on Campus: This rule finalizes, with minor editorial changes, the interim rule that amended DFARS 209.470, Reserve Officer Training Corps and Military Recruiting on Campus, and the corresponding clause at DFARS 252.209-7005, to prohibit DOD from providing funds to an institution of higher education (including any subelement of that institution) if the secretary of defense determines that the institution (or any subelement of the institution) has a policy or practice that prohibits, or prevents, senior ROTC units or military recruiting on campus. For more on te interim rule, see the February 2000 Federal Contracts Dispatch article "New DFARS Rules on ROTC Recruiting, Utility Privatization, Manufacturing Technology, and FPI Exceptions."
  
  
• Weighted Guidelines Form: This final rule revises the information on the DD Form 1547, Record of Weighted Guidelines Application, so the form corresponds to the changes made to DOD profit policy in April 2002 (see the May 2002 Federal Contracts Dispatch article "New DFARS Rules Address Profit, Berry Amendment, Federal Prisons, NAFTA, Balance of Payments"). The April rule amended DFARS 215.404-71, Weighted Guidelines Method, to reduce the emphasis on facilities investment, add general and administrative expense to the cost base used in determining profit objectives, increase emphasis on performance risk, and encourage contractor cost efficiency.
  
  
• Partnership Agreement Between DOD and the SBA: This finalizes, with a minor editorial change, the interim rule that amended DFARS Subpart 219.8, Contracting with the Small Business Administration (The 8(a) Program), to implement a partnership agreement (PA) between DOD and the SBA to streamline procedures for contract awards under SBA's 8(a) Program (see the April 2002 Federal Contracts Dispatch article "DOD Conducts Some 'Spring Cleaning,' Too").
  
  
• Trade Agreements Act -- Construction: This final rule amends DFARS 225.7503, Contract Clauses, to implement the determination of the U.S. Trade Representative (USTR) to revise the dollar thresholds for application of the TAA and the North American Free Trade Agreement (NAFTA) to construction contracts (see the March 2002 Federal Contracts Dispatch article "Trade Agreements Act and NAFTA Thresholds Revised"). The prescriptions for the use of DFARS 252.225-7044, Balance of Payments Program -- Construction Material, and DFARS 252.225-7045, Balance of Payments Program -- Construction Material Under Trade Agreements, is revised to reflect the new dollar thresholds: $6,481,000 for the TAA (reduced from $6,806,000), and $7,304,733 for NAFTA (increased from $$7,068,419).
  
  
• Technical Amendments: This revises the DFARS to change obsolete cross-references to definitions in the FAR to reflect the consolidation of definitions in FAR 2.101, Definitions; revise references to FAR clauses that have been retitled; to update titles of positions; update the identification numbers of publications; and revise addresses of military activities in DFARS Appendix G, Activity Address Numbers.

OGE to Review Conflict of Interest Statutes

The Office of Government Ethics (OGE) has announced it is conducting a review of the criminal conflict of interest (COI) statutes in Title 18 of the U.S. Code, Crimes and Criminal Procedure, Sections 202 through 209 (18 U.S.C. 202-209). The COI statutes at 18 U.S.C. 202-209 have existed, for the most part, in their current form for nearly 40 years, and the last comprehensive examination of the conflict of interest statutes occurred in 1989. Since then, a number of developments have occurred which bring into question whether the statutes are adequately tailored to their legislative purposes, in light of the realities of modern government, among them: the sustained government efforts toward privatization of certain functions (such as the Federal Activities Inventory Report (FAIR) Act and Office of Management and Budget (OMB) Circular A-76, Performance of Commercial Activities); a growing emphasis on commercialization of government-developed products; and the ever-increasing reliance on personnel with scientific and technological expertise.

OGE will examine whether 18 U.S.C. 202-209 could be simplified or improved without sacrificing the necessary protection they provide for a fair and impartial government process. As part of its review, OGE is inviting the public and the federal government to express their views concerning the need for change to the COI statutes. Send comments to the Office of Government Ethics, Suite 500, 1201 New York Avenue, NW, Washington, DC 20005-3917, Attention: Stuart D. Rick, or by e-mail to: usoge@oge.gov.

SBA Proposes Small Business Size Standards Changes

The Small Business Administration (SBA) continues to propose adjustments to its small business size standards, and proposes a waiver of the nonmanufacturer rule for hand and edge tools:

• Information Technology (IT) Value Added Resellers: SBA is proposing to establish a new industry category and size standard of 500 employees for IT value added resellers under North American Industry Classification System (NAICS) 541519, Other Computer Related Services.
  
  Many federal agencies use contractors to provide solutions to their IT needs, such as to advise what types of computer equipment, systems, and technologies will fit the agency's needs; designing and integrating systems; purchasing and installing IT equipment; customizing hardware and software configurations; and providing technical services, maintenance, warranty service, and user support. SBA's size standards and program eligibility requirements do not address the classification of federal contracts that combine services with the acquisition of supplies, which makes it difficult for agencies to use small business preference programs for these types of contracts. To address these types of IT contracts, SBA proposes establishing a category of IT value added resellers under NAICS 541519, Other Computer Related Services. An IT value added resellers industry category will allow federal agencies to better utilize small business preference programs for their IT acquisitions.
  
  SBA proposes to establish a small business size standard of 500 employees "Information Technology Value Added Resellers" under NAICS 541519, Other Computer Related Services (the rest of NAICS 541519 would retain its $21 million small business size standard). The new industry category would be explained by a footnote to the NAICS 541519 size standard, which would state, in part, "For purposes of government procurement, an information technology procurement classified under this industry category must consist of at least 15% and not more than 50% of value added services as measured by the total price less the cost of information technology hardware, computer software, and profit."
  
  SBA considered three other size standards:
  
  
  The same $21 million size standard that applies to the computer services industries (NAICS 541510 through 541519). However, SBA believes an employee size standard is a better measure of the operations of an IT value added reseller.
  
  
  • SBA considered a 150-employee size standard that represents the employee-equivalent of the $21 million computer services size standard (on average, computer services businesses generate $142,500 sales per employee, so sales in the amount of $21 million translate to approximately 150-employees). However, SBA did not propose this size standard since it is lower than the size standard that now applies to nonmanufacturers (500 employees).
    
    
  • SBA considered applying the 100-employee size standard for wholesale trade industries to IT value added resellers but did not propose this size standard since it is lower than the 500 employee nonmanufacturer size standard.
  
  SBA is inviting comments on these three alternative size standards, or other alternatives that may more appropriately define a small IT value added reseller. The comments should explain why the alternative is a more appropriate size standard than 500 employees. Send comments by August 23, 2002, to Linda G. Williams, Associate Administrator for Policy, Planning, and Liaison, Office of Government Contracting and Business Development, U.S. Small Business Administration, 409 Third St., SW, Mail Code 6510, Washington, DC 20416, or e-mail to SIZESTANDARDS@sba.gov.
  
  
• Forest Fire Suppression and Fuels Management Services: SBA is proposing to establish a $15,000,000 small business size standard for the Forest Fire Suppression and Fuels Management activities classified within NAICS 115310, Support Activities for Forestry, which has a size standard of $6,000,000.
  
  To meet the various fire suppression and fuels management requirements issued by the United States Forest Service (USFS) and Bureau of Land Management (BLM), firms need to invest in new capital equipment, such as fire engines, helicopters, brush cutters, and yarders. These agencies require contractors to provide specialized long-term (five to seven years) certifiable training to fire-crew chiefs and to crews, and to obtain USFS certification for fire-fighting equipment. In addition, recent fires in the West and Southeast, as well as increased use of contractors to conduct "prescribed burn," have generated additional revenues for the 200 to 300 businesses in the industry, causing many to exceed the current $6,000,000 size standard, thus reducing the pool of eligible small businesses. Therefore, SBA is proposing a $15,000,000 small business size standard for forest fire suppression and fuels management separate from other forestry activities. SBA believes the proposed $15,000,000 size standard will allow firms to grow to an appropriate level without losing their small business status, but not to a level where a few firms would be able to control a significant portion of federal contracts at the expense of other small businesses.
  
  SBA is inviting public comments on the proposed $15,000,000 size standard. SBA is concerned with how the proposed size standard may negatively affect those qualified under the current size standards. Comments supporting an alternative to the proposal, including the option of retaining the size standards at $6 million, or changing the size standard to $28.5 million (the current size standard for construction) or 500 employees should explain why the alternative would be preferable to the proposed size standard, and how the alternative affects current small businesses. Send comments by August 19, 2002, to Gary M. Jackson, Assistant Administrator for Size Standards, 409 3rd Street, SW, Mail Code 6530, Washington, DC 20416; or e-mail to SIZESTANDARDS@sba.gov.
  
  
• Waiver of the Nonmanufacturer Rule for Hand and Edge Tool Manufacturing: SBA is considering granting a waiver of the nonmanufacturer rule for hand and edge tool manufacturing under NAICS 332212 because no small business manufacturers are currently supplying these classes of products to the federal government. This waiver would allow otherwise 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.
  
  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. SBA considers a small business manufacturer or processor to be in the federal market if it submitted a proposal or received a contract from the federal government within the last 24 months.
  
  Comments and sources must be submitted by August 2002, to Edith Butler, Program Analyst, U.S. Small Business Administration, 409 3rd Street, SW, Washington, DC 20416; 202-619-0422.

NFS Addresses Performance Evaluations, IT Security

The National Aeronautics and Space Administration (NASA) has been busy revising the NASA FAR Supplement (NFS) to address contractor performance evaluations and to clarify the information technology (IT) security requirements for sensitive information contained in unclassified automated information resources.

• Contractor Performance Information: Paragraph (a) of NFS 1842.1502, Policy, is amended to delete the requirement for interim performance evaluations on contracts whose anniversary of award coincides with or occurs within three months of the end of the contract period of performance. Paragraph (a) required contracting officers to conduct interim evaluations of contractor performance on contracts with a performance period of more than one year within 60 days of the anniversary date. However, when the award anniversary is within three months of the end of the contract, the requirement to conduct both an interim and final evaluation created an added burden on the contracting officer, the evaluators, and the contractor. Therefore, paragraph (a) is revised to state, "Interim evaluations are not required on contracts whose award anniversary is within 3 months of the end of the contract period of performance. The final evaluation will include an evaluation of the period between the last interim evaluation and the end of the contract period of performance."
  
  
• Security Requirements for Unclassified IT Resources: NFS 1804.470, Security Requirements for Unclassified Automated Information Resources, and NFS 1852.204-76, Security Requirements for Unclassified Information Technology Resources, are revised to clarify the information technology (IT) security requirements for sensitive information contained in unclassified automated information resources. NFS 1804.470 contains the requirement for all NASA contractors and subcontractors to comply with federal and NASA policies in safeguarding unclassified NASA IT data, and NFS 1852.204-76 is the implementing contract clause. This final rule makes these two changes:
  
  
  • NFS 1804.470-1, Scope, had merely stated, "This section implements NASA's acquisition-related aspects of federal policies for assuring the security of unclassified automated information resources." The final rule adds references to federal policies that are implemented through NASA's Procedures and Guidelines (NPG) 2810.1, Security of Information Technology: "Federal policies include, but are not limited to, the Computer Security Act of 1987 (40 U.S.C. 1441 et seq.), the Clinger-Cohen Act of 1996 (40 U.S.C. 1401 et seq.), Public Law 106-398, Section 1061, Government Information Security Reform, OMB Circular A-130, Management of Federal Information Resources, and the National Institute of Standards and Technology security guidance and standards."
    
    
  • NFS 1852.204-76 lists three different levels of personnel screening: IT-1 -- individuals having privileged access or limited privileged access to systems whose misuse can cause very serious adverse impact; IT-2 -- individuals having privileged access or limited privileged access to systems whose misuse can cause serious adverse impact to NASA missions; and IT-3 -- individuals having privileged access or limited privileged access to systems whose misuse can cause significant adverse impact to NASA missions. Paragraph (d)(3)(i), which addresses forms that must be filled out by individuals subject to IT-1 screening, exempted from disclosure certain information contained in Standard Form 85P, Questionnaire for Public Trust Positions (information regarding financial record, question 22, and the Authorization for Release of Medical Information). This final rule removes this exemption.

VAAR Construction/A-E Clause Prescriptions Revised

The Department of Veterans Affairs (VA) is revising VA Acquisition Regulation (VAAR) 852.236-70, Clauses and Provisions for Fixed-Price Construction Contracts, to replace the general prescription directing the use of all VAAR clauses relating to construction contracts with specific prescriptions for each clause. It required that all clauses prescribed by VAAR Part 836, Construction and Architect-Engineering Contracts, be included in all construction contracts regardless of dollar value. This final rule adds prescriptions in VAAR Part 836 that require the use of the following VAAR clauses only if the solicitation or contract is expected to exceed the micro-purchase threshold (currently $2,000 for construction) because the FAR does not require the use of any clauses in contracts below the micro-purchase threshold:

Also, the following VAAR clauses are required only if the solicitation or contract includes the FAR clauses that these clauses supplement:

Prompt Payment Interest Rate Set at 5 1/4%

The Department of Treasury has established 5 1/4% (5.25%) as the interest rate for the computation of payments made between July 1 and December 31, 2002, under the Prompt Payment Act and the Contracts Disputes Act. This rate is also used in facilities capital cost of money calculations. The interest rate for the prior six-month period (January 1, 2002 -- June 30, 2002) was 5 1/2% (5.5%). The interest rate for July 1, 2001, through December 31, 2001, was 5 7/8% (5.875%).

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