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FEDERAL CONTRACTS PERSPECTIVE

Federal Acquisition Developments, Guidance, and Opinions

September 2002
Vol. III, No. 9

CONTENTS

FAR Changes Proposed on Cost Principles, Overpayments, Environmental Management
DOD Exempts UK Products, Finalizes Security Rule
OMB Seeks to Streamline Grants Process
SBA Adopts, Revises NAICS Codes for Size Standards
DOD Revises Its Regulations on "Other Transactions"

FAR Changes Proposed to Cost Principles,
to Address Overpayments, Environmental Management

This month, the Federal Acquisition Regulation (FAR) Council concentrated on financial issues in its proposed series of changes to the FAR -- notification of contract financing overpayments; and cost principles on economic planning; employee morale, health, welfare, food service, and dormitory; selling; and travel. In addition, FAR changes were proposed to implement Executive Order 13148, Greening the Government Through Leadership in Environmental Management, and to remove the prohibition on evaluating Federal Prison Industries contract performance.

• Notification of Contract Financing Overpayments: In July 1999, the General Accounting Office (GAO) published GAO/NSIAD-99-131, Greater Attention Needed to Identify and Recover Overpayments, in which it pointed out that "under current law, there is no requirement for contractors who have been overpaid to notify the government of overpayments or to return overpayments prior to the government issuing a demand letter." In response, FAR 52.232-25, Prompt Payment; FAR 52.232-26, Prompt Payment for Fixed-Price Architect-Engineer Contracts; and FAR 52.232-27, Prompt Payment for Construction Contracts, were revised to require the contractor to notify the contracting officer if the contractor becomes aware of an invoice overpayment (see the January 2002 Federal Contracts Perspective article "FAC 2001-02 Addresses Energy Efficiency, Prompt Payment").
  
  One of the respondents who submitted comments on the proposed rule that led to the final rule in Federal Acquisition Circular (FAC) 2001-02 recommended that overpayments on financing payments be provided similar treatment as overpayments on invoice payments -- the contractor should be required to notify the contracting officer of overpayments on contract financing payments as well as overpayments on invoices. This proposed rule is issued to solicit and consider comments on the recommendation to extend the overpayments policy to contract financing payments. Also, the proposed rule would make the policy applicable to both contract financing and invoice payments under contracts for commercial items.
  
  The proposed rule would revise FAR 52.232-25(d), FAR 52.232-26(c), and FAR 52.232-27(l), by adding the words in brackets, and add the entire paragraph as part of paragraph (i) of FAR 52.212-4, Contract Terms and Conditions -- Commercial Items:

  Overpayments. If the contractor becomes aware of a duplicate [contract financing or invoice] payment or that the government has otherwise overpaid on a [contract financing or] invoice payment, the contractor shall immediately notify the contracting officer and request instructions for disposition of the overpayment.

  
  In addition, the following would be added as new FAR 12.215, Notification of Overpayment, and FAR 32.008, Notification of Overpayment:

  If the contractor notifies the contracting officer of a duplicate contract financing or invoice payment or that the government has otherwise overpaid on a contract financing or invoice payment, the contracting officer must provide instructions to the contractor, in coordination with the cognizant payment office, regarding disposition of the overpayment.

  
  
  
• Economic Planning Costs: To increase clarity and readability of FAR 31.205-12, Economic Planning Costs, paragraph (a) would be revised and simplified, and paragraphs (b) and (c) would be deleted. Paragraph (a) would include the statement "economic planning costs are allowable" (the primary portion of paragraph (b)), and a simplified definition of "economic planning costs" ("the costs of general long-range management planning concerned with the future overall development of the contractor's business"). It would retain the sentence, "Economic planning costs do not include organization or reorganization costs covered by [FAR] 31.205-27 [Organization Costs]." In addition, it would add the sentence, "See [FAR] 31.205-38 [Selling Costs] for determining the allowability of market planning costs other than economic planning costs."
  
  The statement in paragraph (b) that economic planning costs are allowable as "indirect costs to be properly allocated" would be deleted because it duplicates coverage already in FAR 31.202, Direct Costs, FAR 31.203, Indirect Costs, and FAR 31.201-4, Determining Allocability. Paragraph (c), which states that "research and development and engineering costs designed to lead to new products for sale to the general public are not allowable" would be deleted because FAR 31.205-18, Independent Research and Development and Bid and Proposal Costs, clearly applies to these costs, so it is not necessary to state that these costs are not economic planning costs.
  
  
• Employee Morale, Health, Welfare, Food Service, and Dormitory Costs and Credits: Paragraph (a) of FAR 31.205-13, Employee Morale, Health, Welfare, Food Service, and Dormitory Costs and Credits, would be revised to set out, in a list, the examples of allowable activities covered by the cost principle. Paragraph (d) would be revised to set out, in a list, the examples of losses from operating food and dormitory services that may be allowable. Paragraph (f) would be revised from "contributions...may be included as costs incurred under paragraph (a) of this subsection only to the extent..." to "contributions...are allowable only to the extent..."
  
  
• Selling Costs: Paragraph (a) of FAR 31.205-38, Selling Costs, would be revised to remove the list of selling activities; to add and revise current paragraph (d) as a new sentence ("The costs of any selling efforts other than those addressed in this cost principle are unallowable"); and to add and revise the last sentence of current paragraph (b) as the last sentence ("Costs of activities that are correctly classified and disallowed under cost principles referenced in paragraph (b) are not to be reconsidered for reimbursement under any other provision of this subsection").
  
  In addition, paragraph (b) would be revised by combining the list of selling activities removed from current paragraph (a) with the more detailed guidance about the allowability of these costs in current paragraphs (b) and (c)(1), and the references to reasonableness in current paragraphs (b) and (c)(1) would be removed because this general allowability standard is already addressed in FAR 31.201-2, Determining Allowability, and FAR 31.201-3, Determining Reasonableness. Also, current paragraph (c)(2), which addresses foreign selling costs, would be removed as unnecessary since there is no longer any reason to distinguish between the allowability of foreign and domestic selling costs involving direct selling and other market planning efforts. Finally, current paragraph (e), which addresses the identification and segregation of unallowable selling costs, would be removed since it is duplicative of the guidance in FAR 31.201-6, Accounting for Unallowable Costs, and paragraph (c) of FAR 31.204, Application of Principles and Procedures.
  
  
• Travel Costs: Paragraphs (b) and (c) of FAR 31.205-46, Travel Costs, would be deleted. Paragraph (b) states, "Travel costs incurred in the normal course of overall administration of the business are allowable and shall be treated as indirect costs." Paragraph (c) states, "Travel costs directly attributable to specific contract performance are allowable and may be charged to the contract under [FAR] 31.202." As is the case with the proposed revision to FAR 31.205-12(b) (see "Economic Planning Costs" above), these two paragraphs are adequately addressed in FAR 31.203 and FAR 31.202, respectively.
  
  
• Implementation of Executive Order 13148: FAR Part 23, Environment, Energy and Water Efficiency, Renewable Energy Technologies, Occupational Safety, and Drug-Free Workplace, and the related clauses in FAR 52.223, would be amended to implement Executive Order (EO) 13148 of April 21, 2000, Greening the Government through Leadership in Environmental Management (see the May 2000 Federal Contracts Perspective article "Three 'Greening' Executive Orders Issued"). The following are the primary changes being proposed:
  
  
  • Since EO 13148 revoked EO 12843 of April 21, 1993, Procurement Requirements and Policies for Federal Agencies for Ozone-Depleting Substances; EO 12856 of August 3, 1993, Federal Compliance with Right-To-Know Laws and Pollution Prevention Requirements; and EO 12969 of August 8, 1995, Federal Acquisition and Community Right-to-Know, references to those EOs would be replaced with references to EO 13148.
    
    
  • Paragraph (a) of FAR 23.906, Requirements (which would be redesignated as FAR 23.905), would add the following industries to those that must file the Toxic Chemical Release Inventory Form (Form R) (that is, those that "fall within Standard Industrial Classification Code (SIC) designations 20 through 39 or their corresponding North American Industrial Classification System (NAICS) sectors 31 through 33...":
    
    
    • Major Group 10, Metal Mining (except SIC 1011, Iron Ores; SIC 1081, Metal Mining Services; and SIC 1094, Uranium-Radium-Vanadium Ores)
      
      
    • Major Group 12, Coal Mining (except SIC 1241, Coal Mining Services)
      
      
    • SIC 4911, Electric Services; SIC 4931, Electric and Other Services Combined; or SIC 4939, Combination Utilities, Not Elsewhere Classified (limited to facilities that combust coal and/or oil for generating power)
      
      
    • SIC 4953, Refuse Systems (limited to facilities regulated under the Resource Conservation and Recovery Act (42 U.S.C. 6921, et seq.))
      
      
    • SIC 5169, Chemicals and Allied Products, Not Elsewhere Classified; SIC 5171, Petroleum Bulk Stations and Terminals; or SIC 7389, Business Services, Not Elsewhere Classified (limited to facilities primarily engaged in solvent recovery services on a contract or fee basis)
  
  (EDITOR'S NOTE: The related clauses at FAR 52.223-13, Certification of Toxic Chemical Release Reporting, and FAR 52.223-14, Toxic Chemical Release Reporting, would be revised to reflect these additional industries. NAICS codes will replace SIC codes in FAR Subpart 23.9, FAR 52.223-13, and FAR 52.223-14 once the NAICS conversion for the Toxics Release Inventory program is complete. For an article pertaining to the SBA's conversion from SIC to NAICS codes see "SBA Adopts, Revises NAICS Codes for Size Standards" in this issue.)
  
  
• Past Performance Evaluation of Federal Prison Industries (FPI) Contracts: Paragraph (b) of FAR 42.1502, Policy, states that "agencies shall not evaluate performance for contracts awarded under [FAR] Subpart 8.6 [Acquisition from Federal Prison Industries, Inc.]..." This would remove the prohibition on evaluating FPI contract performance, permitting federal customers to rate FPI performance, compare FPI to private sector providers, and give FPI feedback on previously awarded contracts. This customer input would give FPI the same opportunity to improve its customer satisfaction and its performance on delivery, prices, and quality as other contractors.

Comments on any of these proposed rules must be submitted no later than October 28, 2002, to General Services Administration, FAR Secretariat (MVP), 1800 F Street, NW, Room 4035, ATTN: Laurie Duarte, Washington, DC 20405.

DOD Exempts UK Products, Finalizes Security Rule

The Department of Defense took it easy in September, only taking two actions that affect contracting, neither of which is new:

• Waiver of Limitations on Certain Defense Items Produced in the United Kingdom: The Undersecretary of Defense (Acquisition, Technology, and Logistics) has extended for another year, until August 18, 2003, the waiver of the limitation on procurement of the following products from the United Kingdom: welded shipboard anchor and mooring chain with a diameter of four inches or less; air circuit breakers; ball and roller bearings; totally enclosed lifeboats; gyrocompasses; electronic navigation chart systems; steering controls; pumps; propulsion and machinery control systems.
  
  
• Performance of Security Functions: The interim rule that implemented Section 1010 of the USA Patriot Act (Public Law 107-56), is finalized without changes. The interim rule amended Defense FAR Supplement (DFARS) 237.102-70, Prohibition on Contracting for Firefighting or Security-Guard Functions, to permit award of contracts for security functions to proximately located local and state governments during the period of time that United States armed forces are engaged in Operation Enduring Freedom and 180 days thereafter. (EDITOR'S NOTE: For more on the interim rule, see the April 2002 Federal Contracts Perspective article "DOD Conducts Some 'Spring Cleaning,' Too.")

OMB Seeks to Streamline Grants Process

The Office of Management and Budget (OMB) has announced five actions that relate to the streamlining efforts of the OMB staff and the interagency works groups dedicated to implementing Public Law 106-107, the Federal Financial Assistance Management Improvement Act of 1999.

• Revisions to OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations: Three changes are being proposed to OMB Circular A-133. The proposed revisions, if adopted, will apply to audits of fiscal years ending after December 31, 2003, and earlier implementation will not be permitted.
  
  
  • Increase the audit threshold from $300,000 to $500,000.
    
    
  • Increase the threshold for "cognizant agency for audit" from $25,000,000 to $50,000,000 (an "oversight agency for audit" has the option to assume certain oversight functions listed in OMB Circular A-133 up to the threshold; a "cognizant agency for audit" is required to perform those oversight functions above the threshold).
    
    
  • Change the base year for cognizant agency for audit determination from one to two years before the start of the five year audit cognizance period.
  
  
• Decision Not to Revise OMB Circular A-110, Uniform Administrative Requirements for Grants and Agreements With Institutions of Higher Education, Hospitals and Other Non-Profit Organizations: On May 1, 2000, OMB published an advance notice of proposed revision in which comments were sought on several questions relating to federal requirements for requesting and issuing cash payments under federal awards. The primary issue was whether OMB Circular A-110 should be revised to require federal awarding agencies to offer recipients the option to either request cash advances on a "pooled" basis or to continue to use the current grant-by-grant payment system.
  
  Sixty-five comments were received, but there was no consensus on whether pooling should be used or not. While OMB Circular A-110 does not require federal awarding agencies to make the pooled payment method available to their recipients, it does authorize them to do so. Therefore, OMB has decided to leave OMB Circular A-110 unchanged.
  
  
• Standard Format for Federal Agency Announcements of Funding Opportunities: It is proposed that a standard format be established for federal agency announcements of funding opportunities under programs that award discretionary grants or cooperative agreements. The purpose of the standard format is to have information organized in a consistent way in program announcements for the hundreds of federal programs that make financial assistance awards to non-federal recipients, making it easier for potential applicants to find the information they need quickly.
  
  The required format would consist of an overview, followed by the full text of the announcement, consisting of the following sections:
  
  
  1. Funding Opportunity Description
  2. Award Information
  3. Eligibility Information
  4. Application and Submission Information
  5. Application Review Information
  6. Award Administration Information
  7. Agency Contact(s)
  8. Other Information
  
  
• Standard Data Elements for Electronic Synopses of Federal Agencies' Financial Assistance Program Announcements at FedBizOpps: It is proposed that a standard set of data elements be established for federal agencies to use to electronically post synopses of announcements of funding opportunities under programs that award discretionary grants or cooperative agreements. The purpose of the data elements would be to give potential applicants enough information about each funding opportunity to decide whether they are interested enough to look at the full announcement, and one or more ways (such as an Internet site, e-mail address, or phone number) to get the full announcement with the detailed information they need to decide whether they wish to apply.
  
  Federal agencies use FedBizOpps (http://www.FedBizOpps.gov) as the single site for providing public access to relevant information about procurement opportunities that exceed $25,000, including procurement notices, solicitations, drawings, and amendments. In the future, federal agencies will use FedBizOpps to post electronic synopses of funding opportunities leading to the award of grants, cooperative agreements, and other financial assistance instruments.
  
  The federal agencies selected the data elements they believe should be included in the electronic synopses to help potential applicants decide whether they wish to review the full announcement. OMB is seeking comments on these proposed data elements, which are as follows: (1) federal agency user identification; (2) federal agency password; (3) funding opportunity title; (4) funding opportunity number; (5) Catalog of Federal Domestic Assistance (CFDA) number(s); (6) federal agency mailing address; (7) federal agency contact for electronic accesss problems; (8) type of help available from the federal agency contact; (9) federal agency contact e-mail address; (10) funding opportunity description; (11) funding instrument types; (12) category of funding activity; (13) eligible applicants; (14) how to get full announcement; (15) electronic link to the full announcement; (16) cost sharing requirement; (17) due date for applications; (18) explanation of application due dates; (19) date of FedBizOpps posting; and (20) date for FedBizOpps to archive.
  
  
• Cost Principles for Educational Institutions, for State, Local, and Indian Tribal Governments and for Non-Profit Organizations: OMB proposes to revise OMB Circular A-21, Cost Principles for Educational Institutions, OMB Circular A-87, Cost Principles for State, Local and Indian Tribal Governments, and OMB Circular A-122, Cost Principles for Non-Profit Organizations, to make the cost principles more consistent among the three circulars and to clarify some aspects of the cost principles.
  
  Rather than include the revised language in the three cost principles separately, OMB created a 206 page chart that allows side-by-side comparison of proposed changes to the language contained in the current circulars. In the chart, the first column lists the current A-21 cost principle, the second column lists the similar item, if any, from A-87, the third column lists the similar item, if any, from A-122, and the fourth column lists any proposed change to the item and which of the circulars would include the revised item. If a circular does not have an item equivalent to the other circulars, the column for that circular is blank.
  
  The chart is available on the OMB web site at http://www.omb.gov, under the "Grants Management/Current Documents"section. A hard copy is available from Gilbert Tran, 202-395-3052.

Comments on the various proposals must be received by October 11, 2002, at the Office of Federal Financial Management, Office of Management and Budget, Room 6025, New Executive Office Building, Washington, DC 20503, For further information on any of these proposed actions, contact Elizabeth C. Phillips, Office of Federal Financial Management, 202-395-3053, or by e-mail to ephillip@omb.eop.gov.

SBA Adopts, Revises NAICS Codes for Size Standards

The Small Business Administration (SBA) is amending its small business size standards regulations by incorporating the Office of Management and Budget's (OMB) 2002 modifications of the North American Industry Classification System (NAICS) into its table of small business size standards.

SBA adopted NAICS industry definitions as the basis for its small business size standards effective October 1, 2000 (see the June 2000 Federal Contracts Perspective article "SBA Publishes NAICS-Based Size Standards, to Replace SIC-Based Standards on October 1, 2000"). OMB restructured and modified parts of NAICS on January 16, 2001, effective January 1, 2002. This final rule incorporates OMB's restructuring and modifications into SBA's small business size standards. The small business size standards for 12 NAICS 1997 industries and economic activities have been changed. The 12 activities with a size standard change moved to seven NAICS 2002 industries. The following is a list of the NAICS 1997 industries and corresponding size standards and the revised NAICS 2002 industries and corresponding size standards:

DOD Revises Its Regulations on "Other Transactions"

DOD has revised Title 32 of the Code of Federal Regulations (CFR), Chapter 1, Office of the Secretary of Defense, Part 3, Transactions Other Than Contracts, Grants, or Cooperative Agreements for Prototype Projects, to outline the conditions for appropriate use of "other transactions" (OTs) and to define a "nontraditional defense contractor."

Section 845 of the National Defense Authorization Act for Fiscal Year 1994 (Public Law 103-160) authorized the secretary of a military department, the director of Defense Advanced Research Projects Agency (DARPA), and any other official designated by the Secretary of Defense, to enter into OTs, which are generally exempt from all the statutes and regulations that govern federal contracts and grants. The purpose of OTs is to overcome the reluctance of many firms with significant technological advances and innovations to share their innovations with the government because of the significant statutory and regulatory requirements involved in government contracts and grants. When using OTs to contract with these "nontraditional defense contractors," DOD contracting officials are not required to include standard contract provisions that typically address such issues as financial management or intellectual property rights, but may structure the agreements as they consider appropriate.

The most significant changes are:

• To Section 3.4, Definitions, is added a definition for "nontraditional defense contractor," which states that a business is eligible to enter into an OT if, for at least one year prior to the date of the OT, it has not "entered into or performed (1) any contract that is subject to full coverage under the cost accounting standards"; or (2) "any other contract is excess of $500,000 to carry out prototype projects or to perform basic, applied, or advanced research projects for a federal agency, that is subject to the Federal Acquisition Regulation."
  
  
• New Section 3.5, Appropriate Use, states that the OT authority may be used only when "(1) at least one nontraditional defense contractor is participating to a significant extent in the prototype project; or (2) no nontraditional defense contractor is participating to a significant extent in the prototype project, but at least one of the following circumstances exists: (i) at least one third of the total cost of the prototype project is to be paid out of funds provided by non-federal parties to the transaction; [or] (ii) the Senior Procurement Executive for the agency determines in writing that exceptional circumstances justify the use of a transaction that provides for innovative business arrangements or structures that would not be feasible or appropriate under a procurement contract."

Additional guidance on OTs can be found at http://www.acq.osd.mil/dp/dsps/ot/dspsot.htm.

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