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FEDERAL CONTRACTS PERSPECTIVE

Federal Acquisition Developments, Guidance, and Opinions

March 2003
Vol. IV, No. 3

CONTENTS

FAR Changes Proposed for Contract Bundling, Cost Principles, Debriefings, Commercial Items
PTO Acquisition Guidelines Issued
DFARS "Transformation," Many Changes Proposed
OMB Releases Third Set of FAIR Act Inventories

FAR Changes Proposed for Contract Bundling,
Cost Principles, Debriefings, Commercial Items

The Federal Acquisition Regulation (FAR) Council was busy at the end of January and during February, publishing proposed rules to address President Bush's small business agenda item on discouraging contracting bundling, to revise or clarify various cost principles, to add information that must be disclosed to unsuccessful offerors under competitive proposals, and to solicit comments on laws that should not apply to commercial-off-the-shelf (COTS) items.

• Contract Bundling: FAR 2.101, Definitions, defines "bundling" as "consolidating two or more requirements for supplies or services, previously provided or performed under separate smaller contracts, into a solicitation for a single contract that is likely to be unsuitable for award to a small business concern due to (1) the diversity, size, or specialized nature of the elements of the performance specified; (2) the aggregate dollar value of the anticipated award; (3) the geographical dispersion of the contract performance sites; or (4) any combination of the factors..."
  
  On March 19, 2002, President Bush issued his "Small Business Agenda," and one of the items on the agenda was: "Avoid unnecessary contract bundling. Small businesses bring innovation and lower costs to the government. When contracts are bundled together, small businesses are at a disadvantage if they are not capable of supplying all the contracts. Accordingly, the president has instructed the Director of the OMB [Office of Management and Budget] to prepare a federal government strategy for unbundling contracts whenever practicable."
  
  On October 29, 2002, the Office of Federal Procurement Policy (OFPP -- part of OMB) submitted to the president its report "Contract Bundling: A Strategy for Increasing Federal Contracting Opportunities for Small Business" (see the December 2002 Federal Contracts Perspective article "OFPP Issues Proposals for 'Unbundling' Contracts"). The report listed nine separate actions for unbundling contracts. On January 31, 2003, the FAR Council published a proposed rule addressing the actions that require FAR changes:
  
  
  • The definition of "bundling" in FAR 2.101 would be amended to state that the term "single contract" includes: "(i) an indefinite quantity contract awarded to two or more sources under a single solicitation for the same or similar supplies and services (see FAR 16.504(c) [Indefinite-Quantity Contracts]); and (ii) an order placed against an indefinite quantity contract under a (A) Federal Supply Schedule contract; or (B) task-order contract or delivery-order contract awarded by another agency (i.e., governmentwide acquisition contract or multi-agency contract)."
    
    
  • A new paragraph (d)(1) would be added to FAR 7.104, General Procedures, to require the acquisition planner to coordinate the acquisition strategy with the small business specialist (SBS) when the strategy contemplates award of a contract or order meeting the agency dollar amounts in proposed new paragraph (d)(2) (see next) unless the contract or order is set-aside for small business under FAR Part 19, Small Business Programs. Paragraph (d)(1) would require the SBS to notify the agency OSDBU if the proposed acquisition strategy involves contract bundling that the agency has not identified as bundled or includes unnecessary or unjustified bundling of requirements.
    
    
  • New FAR 7.104(d)(2) would require that the acquisition strategy be coordinated with the SBS in accordance with FAR 7.104(d)(1) if the estimated contract or order value is $7 million or more for the Department of Defense (DOD); $5 million or more for the National Aeronautics and Space Administration (NASA), the General Services Administration (GSA), and the Department of Energy and GSA; and $2 million or more for all other agencies.
    
    
  • Paragraph (e) of FAR 7.107, Additional Requirements for Acquisitions Involving Bundling, would be amended to revise the "substantial bundling" definition from "any bundling that results in a contract or order with an average annual value of $10 million or more" to "any bundling that results in a contract or order that meets the dollar amounts specified in [FAR] 7.104(d)(2)." This change is intended to simplify the application of the substantial bundling procedures by using the same dollar thresholds to trigger notification of the agency OSDBU of unnecessary bundling under the proposed FAR 7.104(d)(1).
    
    
  • New FAR 7.107(e)(6) would require the acquisition strategy to "identify alternative strategies that would reduce or minimize the scope of the bundling, and the rationale for not choosing those alternatives."
    
    
  • Paragraph (a)(1) of FAR 8.404, Using Schedules, would be revised to state that the requirement in proposed paragraph (e)(1)(iii) of FAR 19.202-1, Encouraging Small Business Participation in Acquisitions, applies to orders placed against Federal Supply Schedules. FAR 19.202-1(e)(1)(iii) would require the contracting officer to provide to the SBA procurement center representative (when the acquisition involves bundling) and the OSDBU (when the acquisition involves substantial bundling) "all information relative to the justification of contract bundling, including the acquisition plan or strategy and, if the acquisition involves substantial bundling, the information identified in [FAR] 7.107(e)." Also, FAR 8.404(a)(2) would be revised to add that orders placed under a Federal Supply Schedule contract must comply with all FAR requirements for a bundled contract when the order meets the proposed FAR definition of "bundled contract" in FAR 2.101.
    
    
  • Paragraph (a)(7) of FAR 16.505, Ordering, would be revised to state that orders placed under a task-order or delivery-order contract awarded by another agency must comply with all FAR requirements for a bundled contract when the order meets the proposed FAR definition of "bundled contract" in FAR 2.101.
  
  In addition, the proposed rule would make the following changes to strengthen the implementation of all small business programs:
  
  
  • New paragraph (d)(11) would be added to FAR 19.201, General Policy, to require the OSDBU to "conduct periodic reviews to assess the (i) extent to which small businesses are receiving a fair share of federal procurements, including contract opportunities under the programs administered under the Small Business Act; (ii) adequacy of contract bundling documentation and justifications; and (iii) actions taken to mitigate the effects of necessary and justified contract bundling on small businesses." The OSDBU would be required to submit a copy of its assessment to the agency head and the SBA administrator.
    
    
  • To FAR 19.202, Specific Policies, would be added a requirement that agencies establish procedures, including dollar thresholds, for review of acquisitions by the OSDBU as to whether a particular acquisition should be awarded under FAR Subpart 19.5, Small Business Programs (that is, small business set-asides), FAR Subpart 19.8, Contracting with the Small BusinessAdministration (The 8(a) Program), or FAR Subpart 19.13, Historically Underutilized Business Zone (HUBZone) Program.
    
    
  • To paragraph (a) of FAR 42.1502, Policy, which addresses evaluations of contractor performance, the following would be added as the last sentence: "These procedures shall require an assessment of contractor compliance with the goals identified in the small business subcontracting plan when the contract includes the clause at [FAR] 52.219-9, Small Business Subcontracting Plan."
  
  Comments on the proposed FAR rule must be submitted by April 1, 2003, to the General Services Administration (GSA), FAR Secretariat (MVA), 1800 F Street, NW, Room 4035, Attn: Laurie Duarte, Washington, DC 20405. Submit e-mail comments to: farcase.2002-029@gsa.gov.
  
  Concurrently with the proposed FAR changes, SBA proposed changes to it regulations in Title 13 of the Code of Federal Regulations (CFR), Part 125, Government Contracting Programs, Subpart 125.2, Prime Contracting Assistance. While most of the changes parallel those in the proposed FAR rule, there are some additional changes:
  
  
  • Proposed paragraph (b)(2) would require the agency to coordinate the acquisition strategy or plan with the SBS as early in the planning process as practicable, but no later than 30 days before the issuance of the solicitation. The SBS would be required to notify the OSDBU if the proposed acquisition strategy or plan includes bundled requirements that the agency has not identified as bundled or includes unnecessary or unjustified bundling of requirements.
    
    
  • A new pagaraph (d)(7)(ii) would require the procuring agency to provide both the PCR and the OSDBU a copy of the proposed acquisition at least 30 days prior to the release of a solicitation if substantial bundling is involved.
  
  
• General Provisions of the Cost Principles: The general provisions of the cost principles in the FAR Part 31, Contract Cost Principles and Procedures, would be amended to clarify and expand on the concepts involved. While most of the changes would be editorial in nature, the most significant change would be to FAR 31.106-2, Exceptions to General Rule on Allowability and Allocability. When the contractor's usual method of allocating indirect costs to a facilities contract will yield inequitable results, paragraph (b) currently requires the contractor to vary its usual method and make appropriate adjustments to the indirect cost pool and base. This requirement is intended to provide the special treatment needed to produce an equitable allocation of cost to applicable facilities contracts. However, paragraph (b) does not provide sufficient detail as to how the contractor must make the adjustment.
  
  It is proposed that FAR 31.106-2 be renamed "Special Allocations," and that paragraphs (b) through (e) be amended to explicitly recognize the concept of special allocations for application to facilities contracts that are not subject to full Cost Accounting Standards (CAS) coverage (the CAS are Title 48 of the Code of Federal Regulations, Chapter 99, and are available on the Internet at http://www.acqnet.gov/far/97/html/appendix.html). The CAS provide for special allocations in CAS 403, Allocation of Home Office Expenses in Segments (48 CFR 9904.403), CAS 410, Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives, CAS 418, Allocation of Direct and Indirect Costs (48 CFR 9904.418), and CAS 420, Accounting for Independent Research and Development Costs and Bid and Proposal Costs (48 CFR 9904.420). The proposed special allocation provisions would specify the treatment that the contractor must use to produce an equitable allocation to applicable facilities contracts.
  
  In addition, proposed language would be added to paragraph (b) to provide the specific methodology to be used when employing the concept of a special allocation.
  
  Comments on the proposed rule must be submitted on or before April 7, 2003, to GSA, FAR Secretariat (MVA), 1800 F Street, NW, Room 4035, Attn: Laurie Duarte, Washington, DC 20405, or submit e-mail comments to: farcase.2001-034@gsa.gov.
  
  
• Depreciation Cost Principle: FAR 31.205-11, Depreciation, would be revised to retain, delete, or clarify specific requirements of the cost principle. A comprehensive review of the FAR 31.205-11 cost principle was conducted to evaluate the need for each specific requirement. As a result of the review, and it is proposed that the cost principle be revised to: (1) add language to make the policy on residual values consistent with Cost Accounting Standard (CAS) 409, Depreciation of Tangible Capital Assets, which allows contractors to ignore residual values under 10% for tangible personal property; (2) eliminate references to federal income tax accounting since it is unnecessary to tie allowable depreciation to depreciation claimed for tax purposes; (3) clarify the rules on the write-down due to business combinations/impaired assets; and (4) delete the requirements for emergency facilities because there are no known existing contracts supporting the operation of emergency facilities covered by certificates of necessity.
  
  Comments on the proposed rule must be submitted on or before March 31, 2003, to GSA, FAR Secretariat (MVA), 1800 F Street, NW, Room 4035, Attn: Laurie Duarte, Washington, DC 20405, or submit e-mail comments to: farcase.2001-026@gsa.gov.
  
  
• Insurance and Pension Costs: Paragraph (j) of FAR 31.205-6, Compensation for Personal Services (the portion that addresses pension costs), and FAR 31.205-19, Insurance and Indemnification, would be amended to clarify the cost principles involved and reflect current policy, particularly with employee stock ownership plans (ESOPs). It would: (1) clarify that an ESOP does not have to invest 100% in the stock of the employer corporation; (2) that ESOP costs are to be measured, assigned, and allocated in accordance with CAS 412, Cost Accounting Standard for Composition and Measurement of Pension Cost, for ESOPs that meet the definition of a pension plan, and in accordance with CAS 415, Accounting for the Cost of Deferred Compensation, for all other ESOPs; and (3) increase the limitation on ESOP contributions in any one year 15% to 25% percent, which is consistent with the Internal Revenue Code limitation on ESOP contributions for corporations.
  
  Comments on the proposed rule must be submitted on or before March 31, 2003, to GSA, FAR Secretariat (MVA), 1800 F Street, NW, Room 4035, Attn: Laurie Duarte, Washington, DC 20405, or submit e-mail comments to: farcase.2001-037@gsa.gov.
  
  
• Debriefings: FAR 52.212-1, Instruction to Offerors -- Commercial Items, and FAR 52.215-1, Instructions to Offerors -- Competitive Acquisition, would be amended to add requirements for debriefing unsuccessful offerors under competitive proposals specified in paragraph (d) of FAR 15.506, Postaward Debriefing of Offerors, that were inadvertently left out. The requirement to disclose past performance information on the debriefed offeror would be added to FAR 52.215-1, and all the required information would be added to FAR 52.212-1 as new paragraph (k).
  
  Comments on the proposed rule must be submitted on or before April 7, 2003, to GSA, FAR Secretariat (MVA), 1800 F Street, NW, Room 4035, Attn: Laurie Duarte, Washington, DC 20405, or submit e-mail comments to: farcase.2002-014@gsa.gov.
  
  
• Laws Inapplicable to Acquisitions of COTS Items: The FAR Council is soliciting comments regarding the implementation of Section 4203 of the Clinger-Cohen Act, which requires that the FAR list the provisions of law that are inapplicable to contracts for acquisition of COTS -- items (however, the list of statutes cannot include a provision of law that provides for criminal or civil penalties). FAR 12.503, Applicability of Certain Laws to Executive Agency Contracts for the Acquisition of Commercial Items, already lists laws that have been determined to be inapplicable to all COTS items. The FAR Council has provided a list of additional laws that could be determined inapplicable to COTS items, and is asking for comments on this list and for suggestions of other laws that should be inapplicable to COTS items.
  
  Comments must be submitted on or before March 31, 2003, to GSA, FAR Secretariat (MVA), 1800 F Street, NW, Room 4035, Attn: Laurie Duarte, Washington, DC 20405, or submit e-mail comments to: farcase.2000-305@gsa.gov.

PTO Acquisition Guidelines Issued

On February 6, the Patent and Trademark Office (PTO) published nonbinding guidelines for the acquisition of its products and services. However, the PTO is exempt from the FAR, and the acquisitions guidelines are not binding on PTO contracting officers and other PTO employees involved in the procurement process. So "PTO employees may use procedures other than those set forth in the FAR and this notice so long as these procedures comply with all applicable statutes, executive orders and regulations, will further the legitimate interests of the PTO and are calculated to result in fair decisions." Nevertheless, "PTO employees may assume that following either the FAR procedures or...the alternate procedures set forth in this notice will ensure compliance with applicable legal requirements and result in fair and appropriate decisions."

Some of the more significant provisions of PTO's acquisition guidelines are:

• The competitive threshold is increased from $2,500 to $5,000.
  
  
• Contracting officers are to use "maximum reasonable competition" instead of "full and open competition.
  
  
• The threshold for the use of simplified acquisition procedures for commercial items is increased from $5,000,000 to $10,000,000.
  
  
• Contract types not authorized by the FAR may be used, such as labor-hour award fee.

DFARS "Transformation," Many Changes Proposed

The Department of Defense (DOD) has announced that it is planning on a "major transformation" of the Defense FAR Supplement (DFARS) by taking "a new look at the purpose and content of the DFARS and the process of creating and maintaining it." As that "new look" is being undertaken, DOD published several relatively-minor DFARS changes and proposed changes.

• DFARS Transformation: Because the DFARS is nearly 20 years old, DOD's review is intended to determine "what value-based improvements and reductions to procurement policies, procedures, and processes we can make to the DFARS. The initiative will consider bold changes and will involve a coordinated effort by the services and other DOD components. We will also develop legislative proposals for consideration by the Congress for future changes to the DFARS. We've already determined that about 60% of the DFARS is driven by internal policies and procedures and not driven by statute or federal policies. While many policies and procedures in the DFARS are sound, they may not always be the most effective approach for every situation and certainly do not required restrictive regulations in every case...We will eliminate or dramatically change parts of the regulation if, by doing so, it presents an opportunity to improve and strengthen the efficiency and effectiveness of acquisition processes, reduces unnecessary costs and administrative burdens for government and industry and creates an environment that fosters creative solutions to the unique challenges that face our acquisition workforce."
  
  DOD, the public, and industry are invited to participate in this effort by submitting proposals for changes to http://emissary.acq.osd.mil/dar/dfars_pubcom.nsf/pubcomm by March 28, 2003. Commentors will be asked to identify the proposal, the recommended change, the rationale (consisting of a "value analysis that addresses the benefits of the proposal in terms of reduced cost, cycle time, administrative burden and/or enhanced clarity"). The proposed changes to the DFARS produced by this effort will be published in the Federal Register for comment.
  
  
• Emergency Acquisitions in Regions Subject to Economic Sanctions: FAR 25.701, Restrictions, prohibits the acquisition of supplies or services from sources in countries or regions subject to economic sanctions (currently Cuba, Iran, Iraq, Libya, North Korea, Sudan, Territory of Afghanistan Controlled by the Taliban, and parts of Serbia). On October 1, 2002, the Department of the Treasury, Office of Foreign Assets Control, issued DOD a license authorizing emergency acquisitions in direct support of U.S. or allied forces deployed in military contingency, humanitarian, or peacekeeping operations in a country or region subject to economic sanctions. This final rule implements that license by adding DFARS 225.701-70, Exception, to authorize DOD personnel to make emergency acquisitions in direct support of U.S. or allied forces deployed in military contingency, humanitarian, or peacekeeping operations in a country or region subject to economic sanctions.
  
  
• Fish, Shellfish, and Seafood Products: This interim rule addresses changes recently made by Section 8136 of the Defense Appropriations Act for Fiscal Year 2003 (Public Law 107-248) to the application of the Berry Amendment (10 U.S.C. 2533a). The Berry Amendment requires the acquisition of certain items from domestic sources, including food. However, paragraph (j) of DFARS 225.7002-2, Exceptions, provides an exception for the acquisition of foods manufactured or processed in the United States, regardless of where the foods (and any component) were grown or produced (10 U.S.C. 2533a(f)).
  
  Section 8136 of Public Law 107-248 makes the exception at 10 U.S.C. 2533a(f) inapplicable to fish, shellfish, and seafood products. Therefore, DFARS 225.7002-2 and DFARS 252.225-7012, Preference for Certain Domestic Commodities, are amended to require the acquisition of domestic fish, shellfish, and seafood, including fish, shellfish, and seafood manufactured or processed, or contained in foods manufactured or processed, in the United States.
  
  The effective date for this interim rule is February 14, 2003. Comments on the interim rule must be submitted on or before April 15, 2003, directly on the web site at http://emissary.acq.osd.mil/dar/dfars.nsf/pubcommdfars@acq.osd.mil.
  
  
• Contractor Performance of Security-Guard Functions: 10 U.S.C. 2465 prohibits DOD from entering into contracts for the perfomance of firefighting or security-guard functions at any military installation or facility except when the contract is performed outside the U.S., or the contract will be performed at a government-owned but privately-operated installation, or the contract is for performance of a function under contract on September 24, 1983.
  
  Section 332 of Public Law 107-314, the National Defense Authorization Act for Fiscal Year 2003, authorizes DOD to waive the prohibition at 10 U.S.C. 2465(a) related to security-guard functions at military installations or facilities. It permits contractor performance of security-guard functions to meet the increased requirements for such services since September 11, 2001. This authority extends only to the increased requirements, so existing security-guard services not performed by contractors are unaffected. The authority expires on December 2, 2005. Therefore, a new paragraph (d) is added to DFARS 237.102-70, Prohibition on Contracting for Firefighting or Security-Guard Functions, to implement Section 332.
  
  The effective date for this interim rule is February 14, 2003, through December 2, 2005 (three years after enactment of the law). Comments on the interim rule must be submitted on or before April 15, 2003, directly on the web site at http://emissary.acq.osd.mil/dar/dfars.nsf/pubcomm, or by e-mail to: dfars@acq.osd.mil.
  
  
• Electronic Submission and Processing of Payment Requests: This interim rule adds DFARS Subpart 232.70, Electronic Submission and Processing of Payment Requests, to implement Section 1008 of the National Defense Authorization Act for Fiscal Year 2001, which requires contractors to submit, and DOD to process, payment requests in electronic form.
  
  On May 31, 2002, DOD published a proposed rule that stated the requirement, specified six exceptions to the requirement, identified three electronic forms of payment request transmission as acceptable, and prepared an implementing contract clause (see the the July 2002 Federal Contracts Dispatch article "DFARS Changes on U.S.-Flag Vessels, Indian Organizations"). Seventeen comments on the proposed rule were received, and based on those comments, DOD has made substantive changes to the rule, so it is adopting the proposed rule as an interim rule with another request for comments.
  
  The main differences between the proposed and interim rules are: (1) the sixth exception to the electronic submittal requirement in DFARS 232.7002 (the Secretary of Defense determines that using electronic means is unduly burdensome) is changed to "cases where (i) the contractor is unable to submit, or DOD is unable to receive, a payment request in electronic form; and (ii) the contracting officer, the payment office, and the contractor mutually agree to an alternative method"; and (2) the definition of "electronic form" in paragraph (a)(2) of DFARS 252.232-7003, Electronic Submission of Payment Requests, is amended by adding the following new sentence: "Facsimile, e-mail, and scanned documents are not acceptable electronic forms."
  
  The effective date for this interim rule is March 1, 2003. Comments on the interim rule must be submitted on or before April 22, 2003, directly on the web site at http://emissary.acq.osd.mil/dar/dfars.nsf/pubcomm, or by e-mail to: dfars@acq.osd.mil.
  
  
• Liability for Loss Under Vessel Repair and Alteration Contracts: This proposed rule would amend DFARS 252.217-7012, Liability and Insurance, to increase a contractor's liability for loss or damage under vessel repair and alteration contracts from $5,000 to $50,000 per incident because (1) the $5,000 ceiling dates back to 1982, and has not been adjusted for inflation; and (2) an analysis of contractor-incurred damages for a period of three years indicates that 70% of the incidents were below $50,000.
  
  Comments on the proposed rule must be submitted on or before April 15, 2003, directly on the web site http://emissary.acq.osd.mil/dar/dfars.nsf/pubcomm, or by e-mail to: dfars@acq.osd.mil.
  
  
• Payment Bonds on Cost-Reimbursement Contracts: This proposed rule would amend DFARS 228.102, Performance and Payment Bonds for Construction Contracts, to permit the use of alternative payment protections for fixed-price construction subcontracts between $25,000 and $100,000 issued under cost-reimbursement contracts. Currently, paragraph (a) of DFARS 228.102-1, General, waives the requirement for performance and payment bonds for cost- reimbursement contracts, but requires the prime contractor to obtain bonds for its fixed-price subcontracts exceeding $25,000.
  
  Comments on the proposed rule must be submitted on or before April 15, 2003, directly on the web site http://emissary.acq.osd.mil/dar/dfars.nsf/pubcomm, or by e-mail to: dfars@acq.osd.mil.

OMB Releases Third Set of FAIR Act Inventories

On February 6, the Office of Management and Budget (OMB) released the third set of Fiscal Year 2002 Commercial Activities Inventories of non-governmental functions being performed by government agencies. These inventories are required to be compiled and made available to the public by the Federal Activities Inventory Reform (FAIR) Act of 1998. This third set of inventories covers approximately 540,000 positions -- the first set covered approximately 250,000, and the second set covered almost 54,000 positions. Inventories in this third set are from the Departments of Agriculture, Commerce, Defense, Energy, Justice, Labor, State, Transportation; General Services Administration; Social Security Administration; U.S. Agency for International Development; and others. The agencies' lists are available at http://www.whitehouse.gov/omb/procurement/index.html.

Interested parties have 30 working days (that is, until March 21, 2003) to challenge the omission or inclusion of an activity on an agency's list.

The Office of Federal Procurement Policy (OFPP) has prepared a summary "FAIR Act User's Guide" and it is available at http://www.whitehouse.gov/omb/procurement/fair-index.html. This User's Guide will help interested parties review 2002 FAIR Act inventories, and include the website addresses for individual agency inventories.

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