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FEDERAL CONTRACTS PERSPECTIVE
Federal Acquisition Developments, Guidance, and Opinions
April 2003
Vol. IV, No. 4
CONTENTS
FAC 2001-13 Addresses Fixed-Price Contract Incentives, Progress Payments Under IDIQ Contracts
5% Witholding on T&M Contracts Proposed for Removal
NFS Changes on TAA, IAAs, and Tech Reports
OMB Unveils Website to Safeguard Sensitive Information
Refineries, Job Corps Centers Size Standards Revised
GSA Proposes Reducing Industrial Funding Fee to 0.75%
OMB Releases Final Set of FAIR Act Inventories
FAC 2001-13 Addresses Fixed-Price Contract Incentives,
Progress Payments Under IDIQ Contracts
Federal Acquisition Circular (FAC) 2001-13 takes on a couple of controversial issues: how incentives based on factors other than cost may be used in firm-fixed-price (FFP) contracts and fixed-price contracts with economic price adjustment (FP/EPA) without changing the FFP or FP/EPA nature of the contract; and requiring contractors, under indefinite-delivery indefinite-quantity (IDIQ) contracts, to account for and submit progress payment requests under individual orders as if each order constitutes a separate contract. In addition, FAC 2001-13 contains final rules on the preference for U.S.-flag vessels under subcontracts for commercial items; and federal, state, and local taxes.
- Contract Types for Commercial Item Acquisitions: This final rule amends Federal Acquisition Regulation (FAR) 16.202, Firm-Fixed-Price Contracts, and FAR 16.203, Fixed-Price Contracts with Economic Price Adjustment, to clarify the contract-type requirements for commercial item acquisitions in Section 8002 of the Federal Acquisition Streamlining Act (FASA) (Public Law 103-355). FASA 8002(d) states that the FAR "shall include, for acquisitions of commercial items, (1) a requirement that firm-fixed-price contracts or fixed-price with economic price adjustment contracts be used to the maximum extent practicable; and (2) a prohibition on use of cost type contracts." However, FAR 12.207, Contract Type, states that "agencies shall use firm-fixed-price contracts or fixed-price contracts with economic price adjustment for the acquisition of commercial items." This language does not reflect FASA's "to the maximum extent practicable" flexibility with respect to FFP and FP/EPA contracts.
On December 29, 2000, the FAR Council published a proposed rule that attempted to clarify the situation. The proposed rule would have added the following sentences to the end of FAR 16.202-1, Description, and as paragraph (b) of FAR 16.203-1, Description (the current introductory text is redesignated as paragraph (a), and current paragraphs (a) through (c) are redesignated as paragraphs (a)(1) through (a)(3)): "The contracting officer may use a firm-fixed-price [or "fixed-price contract with economic price adjustment"] contract in conjunction with an award-fee incentive (see [FAR] 16.404 [Fixed-Price Contracts with Award Fees]) and performance or delivery incentives (see [FAR] 16.402-2 [Performance Incentives] and [FAR] 16.402-3 [Delivery Incentives]) when the award fee or incentive is based solely on factors other than cost." Also, the proposed rule would have completely revised FAR 12.207 to cross-reference FAR 16.202-1 and FAR 16.203-1, and to address pricing mechanisms for acquiring commercial services available on a time-and-materials or labor-hour basis within the FASA contract-type restrictions. (EDITOR'S NOTE: For more on the proposed rule, see the January 2001 Federal Contracts Perspective article "Proposed FAR Changes on High Tech Employees.")
The final rule adopts the changes to FAR 16.202-1 and FAR 16.203-1 without change. However, the changes proposed to FAR 12.207 are not included in the final rule because the comments on this portion of the proposed rule indicated significant confusion concerning the intended application of the proposed time-and-materials and labor-hour pricing mechanism coverage.
EDITOR'S NOTE: The introduction to this final rule states, "Although this rule does not address the use of time-and-materials and labor-hour contracts for commercial item acquisitions, the Administrator, Office of Federal Procurement Policy [OFPP], intends to work with the other FAR Council members to develop appropriate revisions to current FAR coverage to address their use, including safeguards that are needed to effectively protect taxpayer interests when these contractual arrangements are used under [FAR] Part 12 [Acquisition of Commercial Items]." This is the same language used in the introduction to a recent Defense FAR Supplement (DFARS) final rule on competitive acquisition of services under multiple award contracts (see the November 2002 Federal Contracts Perspective article "DFARS Revised on Multiple Award Competitions, Enterprise Software Agreements, Honduras"). Though the DFARS rule did not address time-and-materials or labor-hour contracts, or the the General Service Administration's (GSA) Federal Supply Schedule (FSS) contracts (which are for "commercial" items and services but permit time-and-materials and labor-hour pricing arrangements), OFPP attempted to force a ban on the use of such contracts by requiring that orders against GSA's FSS contracts be FFP. However, many contractors and members of Congress did not believe this was appropriate or necessary, so OFPP decided to delete that portion of the final rule. Nevertheless, as the language in the introduction to the final rule attests, OFPP has not given up the fight.
- Preference for U.S.-Flag Vessels -- Subcontracts for Commercial Items: This final rule amends FAR 12.504, Applicability of Certain Laws to Subcontracts for the Acquisition of Commercial Items, FAR Subpart 47.5, Ocean Transportation by U.S.-Flag Vessels, and associated clauses to limit the types of subcontracts for which cargo preference statutes are waived.
10 U.S.C. 2631 (which applies to the Department of Defense (DOD)) and 46 U.S.C. 1241(b) (which applies to civilian agencies) provide a preference for use of U.S.-flag vessels for ocean transportation of supplies purchased under government contracts. FAR Part 12, Acquisition of Commercial Items, presently waives the requirements of 46 U.S.C. 1241(b) for subcontracts for the acquisition of commercial items. DFARS Part 212, Acquisition of Commercial Items, and DFARS Part 247, Transportation, waive the requirements of 10 U.S.C. 2631 for subcontracts for the acquisition of commercial items with certain exceptions that were added by a final rule effective March 16, 2000 (see the April 2000 Federal Contracts Perspective article "DOD Cargo Preference for Commercial Items Clarified").
On November 7, 2000, a proposed rule was published that would have amended paragraph (a) of FAR 12.504 by adding 10 U.S.C. 2631 to the list of laws not applicable to subcontracts for the acquisition of commercial items or commercial components (paragraph (a) already included 46 U.S.C. 1241(b)). However, to reflect the March 16, 2000, rule clarifying changes to the DFARS, the proposed rule would have amended paragraph (d) of FAR 47.504, Exceptions, and paragraph (e) of FAR 52.247-64, Preference for Privately Owned U.S.-Flag Commercial Vessels, to add the following exceptions to the U.S.-flag vessel waiver for subcontracts of commercial items or commercial components: subcontracts under construction contracts; and shipments of commercial items that are "(i) items the contractor is reselling or distributing to the government without adding value (see FAR 12.501(b)). Generally, the contractor does not add value to the items when it subcontracts items for f.o.b. destination shipment; or (ii) shipped in direct support of U.S. military (A) contingency operations; (B) exercises; or (C) forces deployed in connection with United Nations or North Atlantic Treaty Organization humanitarian or peacekeeping operations." Because of this proposed change, the entries in FAR 12.504(a) for 10 U.S.C. 2631 and 46 U.S.C. 1241(b) would have included "(except for the types of subcontracts listed at [FAR] 47.504(d)". (EDITOR'S NOTE: For more on the proposed rule, see the December 2000 Federal Contracts Perspective article "Experience Requirements for IT Workers Restricted.")
The FAR Council did not adopt any of the comments on the proposed rule, so the proposed rule is adopted as final with minor editorial changes.
In addition to these changes, Alternate II of FAR 52.247-64, which had been required in construction contracts in which supplies, materials, or equipment require ocean transportation, is deleted and replaced with a new Alternate II that is to be used if any of the supplies to be transported are commercial items that are shipped in direct support of U.S. military contingency operations, exercises, or forces deployed in connection with United Nations or North Atlantic Treaty Organization humanitarian or peacekeeping operations. The prescription for Alternate II of FAR 52.247-64 in paragraph (a)(3) of FAR 47.504, Contract Clauses, is revised accordingly.
- Federal, State, and Local Taxes: This final rule amends the prescriptions for FAR 52.229-3, Federal, State, and Local Taxes, and FAR 52.229-4, Federal, State, and Local Taxes (State and Local Adjustments), and revises these clauses to reflect information previously contained in FAR 52.229-5, Taxes -- Contracts Performed in U.S. Possessions or Puerto Rico, which is deleted.
On June 4, 2002, a proposed rule was published that would amend FAR 29.401, Domestic Contracts, to clarify the prescriptions for use of FAR 52.229-3 and FAR 52.229-4 (then titled "Federal, State, and Local Taxes (Noncompetitive Contract)"). The rule proposed to do this 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, deleting FAR 29.401-5, Contracts Performed in U.S. Possessions or Puerto Rico, and redesignating FAR 29.401-6, New Mexico Gross Receipts and Compensating Tax, as FAR 29.401-4. In addition, FAR 52.229-5, Taxes -- Contracts Performed in U.S. Possessions or Puerto Rico, would be removed. (EDITOR'S NOTE: For more on the proposed rule, see the July 2002 Federal Contracts Perspective article "FAR Changes on Taxes Proposed, 508 Comments Sought.")
Two respondents submitted comments in response to the proposed rule. As a result, the proposed rule is adopted as final with editorial changes.
The new FAR 29.401-3 directs the contracting officer to insert FAR 52.229-3 in 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. However, while FAR 52.229-4 had been 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," the revised FAR 52.229-4 may be inserted "if the price would otherwise include an inappropriate contingency for potential postaward change(s) in state or local taxes."
- Progress Payment Requests Under Indefinite-Delivery Contracts: This final rule amends FAR 52.232-16, Progress Payments, to require the contractor, under IDIQ contracts, to account for and submit progress payment requests under individual orders as if each order constitutes a separate contract, unless otherwise specified in the contract.
On November 14, 2001, a proposed rule was published that would:
- Add to paragraph (c) of FAR 32.503-5, Administration of Progress Payments, the following sentence: "When the contract will be administered by an agency other than the awarding agency, the contracting officer must coordinate with the contract administration office if the awarding agency wants the administration of progress payments to be on a basis other than order-by-order."
- Add a new paragraph to FAR 52.232-16 to address progress payments under indefinite delivery contracts as follows: "The contractor shall account for and submit progress payment requests under individual orders as if the order constituted a separate contract, unless otherwise specified in this contract."
Eight respondents submitted comments and, as a result, the proposed rule is adopted as final with minor editorial changes. (EDITOR'S NOTE: For more on the proposed rule, see the December 2001 Federal Contracts Perspective article "Proposed FAR Change Addresses IDIQ Progress Payments.")
5% Witholding on T&M Contracts Proposed for Removal
DOD is proposing to amend the DFARS to remove the requirement that a contracting officer withhold 5% of the payments due under a time-and-materials or labor-hour contract unless otherwise prescribed in the contract. FAR 52.232-7, Payments under Time-and-Materials and Labor-Hour Contracts, requires the contracting officer to withhold 5% of the amounts due, up to a maximum of $50,000, unless otherwise specified in the contract. The government retains the withheld amount until the contractor executes and delivers, at the time of final payment, a release discharging the government from all liabilities, obligations, and claims arising under the contract.
This rule proposes to add DFARS 252.232-7XXX, Alternate A, which would provide a substitute paragraph (a)(2) for FAR 52.232-7(a)(2). Alternate A would permit the administrative contracting officer (ACO) to withhold 5% of the amount due until a reserve is set aside in an amount the ACO considers to be necessary, but not to exceed $50,000, to protect the government's interests. The reserve would be retained until the contractor executes and delivers the release discharging the government from all liabilities, obligations, and claims under the contract.
Also, the prescription for DFARS 252.232-7XXX would be added as DFARS 232.111, Contract Clauses for Non-Commercial Purchases. In addition to describing when to use DFARS 252.232-7XXX, DFARS 232.111 would state, "Normally, there should be no need to withhold payment for a contractor with a record of timely submittal of the release discharging the government from all liabilities, obligations, and claims."
Comments must be submitted by April 29, 2003, directly on the web site at http://emissary.acq.osd.mil/dar/dfars.nsf/pubcomm, or, as an alternative, by e-mail to: dfars@acq.osd.mil.
NFS Changes on TAA, IAAs, and Tech Reports
The National Aeronautics and Space Administration (NASA) has been relatively busy fine-tuning its NASA FAR Supplement (NFS):
- Trade Agreements Act -- Exception for U.S.-Made End Products:
NASA is revising NFS 1825.103, Exceptions, and NFS 1825.1101, Acquisition of Supplies, to implement the Assistant Administrator for Procurement's determination that, for procurements subject to the Trade Agreements Act (TAA), it would be inconsistent with the public interest to apply the Buy American Act (BAA) to U.S.-made end products that are substantially transformed in the United Sates. The Assistant Administrator's determination is consistent with paragraph (b)(2) of FAR 25.502, Application, which permits agencies to give the same consideration to offers of U.S.-made end products that are not domestic end products as given to eligible offers. The determination is also consistent with the revision of the Defense FAR Supplement (DFARS) regarding the treatment of U.S.-made end products (for more on the Defense determination and DFARS implementing changes, see the January 2003 Federal Contract Perspectives article "DFARS Changes on Mentor-Protege, U.S.-Made Products).
EDITOR'S NOTE: The TAA applies to acquisitions for supplies or services if the estimated value of the acquisition is $169,000, and to construction if the estimated value of the acquisition is $6,481,000. For more on the TAA, see FAR Subpart 25.4, Trade Agreements, and the corresponding NFS Subpart 1825.4.
For more on the BAA, see FAR Subpart 25.1, Buy American Act -- Supplies, FAR Subpart 25.2, Buy American Act -- Construction Materials, and the corresponding NFS Subparts 1825.1 and NFS 1825.2.
For definitions of "domestic end products," "eligible offers," "U.S.-made end products," and other key terms applicable to the BAA and TAA, see FAR 25.003, Definitions.
- Scientific and Technical Reports: This final rule amends the NFS to clarify the review requirements for data produced under research and development contracts, including data contained in final reports, and the review requirements for final reports prior to inclusion in NASA's Center for AeroSpace Information (CASI) scientific and technical information (STI) database.
Paragraph (e) to NFS 1852.235-70, Center for Aerospace Information, stated that "the contractor shall not release the final report, outside of NASA, until the DAA [Document Availability Authorization] review has been completed by NASA and availability of the report has been determined." The DAA review is intended to insure that NASA disseminates its STI consistent with U.S. laws and regulations, federal information policy, intellectual property rights, technology transfer protection requirements, and budgetary and technological limitations. However, this final report review requirement had been incorrectly interpreted by some university contractors as restricting their right to publish any of the data produced under the contract which may be included in the final report until NASA has completed its DAA review.
On November 14, 2001, NASA published a proposed rule to clarify its intent by: (1) revising NFS 1852.235-70 to delete references to the submission of the final report; (2) adding a new clause, NFS 1852.235-73, Final Scientific and Technical Reports, that would (a) require submission of a final report; (b) state that the contractor may publish data produced during the performance of the contract, including data contained in the final report, without prior review by NASA; and (c) retain the restriction on release of the final report as delivered under the contract until NASA has completed its DAA review; and (3) add a new clause, NFS 1852.235-75, Review of Final Scientific and Technical Reports and Other Data, to be used "when prior review of all data produced during the performance of the contract is required before the contractor may publish, release, or otherwise disseminate the data." (EDITOR'S NOTE: For more on the proposed rule, see the December 2001 Federal Contract Perspectives article "NASA Proposes Amending NFS on Scientific Reports.)
One association submitted comments on the proposed rule, and it objected to the inclusion of "information disclosing an invention in which the government may have rights" as an example of when it would be appropriate to use the proposed NFS 1852.235-75. Therefore, NASA is finalizing the proposed rule without NFS 1852.235-75. In addition, NFS 1852.235-73 is revised to encourage contractors to submit their reports electronically.
- Interagency Acquisitions -- Authority for Use: This final rule amends NFS Subpart 1817.72, Interagency Transactions, to state, "The Space Act (42 U.S.C. 2473) applies to NASA interagency acquisitions except those for the NASA Office of Inspector General acquired under the authority of the Inspector General Act of 1978 (5 U.S.C. Appendix III). NASA has elected to conform its implementation of the Space Act and the Inspector General Act to the requirements of the Economy Act (see FAR 17.5)" (new NFS 1817.7201, Policy).
NASA decided to do this because FAR Subpart 17.5, Interagency Acquisitions Under the Economy Act, and NFS Subpart 1817.5 address interagency acquisitions (IAAs) under the Economy Act, and NFS Subpart 1817.72, Interagency Transactions, addresses IAAs under the Space Act, but the NFS is not clear on when the Economy Act or Space Act should be used as the authority for an IAA. Furthermore, the NFS did not address IAA under the Inspector General Act of 1978. So this final rule clarifies the status of IAAs under these two acts, and specifies that the requirements of the Economy Act will be applied to these acquisitions as a matter of policy.
OMB Unveils Website to Safeguard Sensitive Information
On March 3, 2003, the Office of Management and Budget announced that it is implementing the Federal Technical Data Solution (http://www.fedteds.gov), a web application designed to safeguard acquisition-related information. FedTeDS.gov will enable an agency to integrate the secure distribution and dissemination of Sensitive But Unclassified (SBU) acquisition material into its business process.
The need for a secure online dissemination tool arose from the requirement that all federal agencies must provide online material to commercial vendors as outlined in the Freedom of Information Act. This material includes information related to operations, systems, structures, individuals, and services essential to the security and management of a facility, including telecommunications, electrical power, building facility structural layout, water supply, emergency services, continuity of operations, schedules, work hours, and security clearance requirements. Much of this information could pose a possible threat to national security if made public.
FedTeDS.gov improves the efficiency, credibility, and effectiveness of the acquisition and logistics support process by streamlining the procurement process. It allows vendor access to SBU acquisition material, establishes a physical firewall between the federal government and its public customers, and uses existing DOD databases to validate a user's access to export controlled data. FedTeDS.gov is fully integrated with FedBizOpps (http://www.fedbizopps.gov) and the Central Contractor Registration (CCR) (http://www.ccr.gov).
All wishing access to FedTeDS.gov must be registered. Federal engineers and buyers must be granted approval by their local administrator, and vendors must have their CCR Marketing Partner Identification Number (MPIN) and Contractor and Government Entity (CAGE) code or DUNS number.
Refineries, Job Corps Centers Size Standards Revised
During March, the Small Business Administration (SBA) adjusted the small business size standards for two industries:
- Petroleum Refineries: The small business size standard for North American Industry Classification System (NAICS) 324110, Petroleum Refineries, is 1,500 employees. However, there was an additional size standard component that a firm had to meet to qualify as a small business. Footnote 4 to the Table of Small Business Size Standards (13 CFR 121.201) stated:
"For purposes of government procurement, the firm may not have more than 1,500 employees nor more than 75,000 barrels per day capacity of petroleum-based inputs, including crude oil or bona fide feedstocks. Capacity includes owned or leased facilities as well as facilities under a processing agreement or an arrangement such as an exchange agreement or a throughput. The total product to be delivered under the contract must be at least 90 percent refined by the successful bidder from either crude oil or bona fide feedstocks."
On February 12, 2002, SBA proposed changing "75,000 barrels per day" to "155,000 barrels per calendar day," and to further clarify the capacity measure by adding to footnote 4 the phrase "total Operable Atmospheric Crude Oil Distillation Capacity" as the U. S. Department of Energy, Energy Information Administration (EIA) uses the term in Petroleum Supply Annual 2000, Volume 1, to distinguish it from refiners' "Downstream Charge Capacity." (EDITOR'S NOTE: For more on the proposed rule, see the March 2002 Federal Contracts Perspective article "SBA Proposes Revising Size Standard for Oil Refineries.")
SBA received comments from 16 respondents, and there was no consensus on how to change the size standard. Therefore, SBA has decided to adopt footnote 4 as proposed except that "125,000" is substituted for "155,000." The first sentence of revised footnote 4 (the only sentence changed), now reads as follows: "For purposes of federal government procurement, the petroleum refiner must be a concern that has no more than 1,500 employees nor more than 125,000 barrels per calendar day total Operable Atmospheric Crude Oil Distillation capacity."
- Job Corps Centers: SBA is establishing a $30,000,000 small business size standard in average annual receipts for Job Corps Centers activities classified within the "Other Technical and Trade Schools" industry (NAICS code 611519). The size standard for all activities within NAICS 611519 was $6,000,000 in average annual receipts.
The Department of Labor (DOL) operates most Job Corps Centers though private companies. DOL had classified its Job Corps Centers contracts under the Facilities Support Services industry, NAICS 561210, and applied the Base Maintenance size standard of $23,000,000 in average annual receipts. However, an offeror on a Job Corps Center solicitation appealed this NAICS designation to SBA's Office of Hearings and Appeals (OHA). OHA decided that the proper classification for an activity that trains individuals in life skills and readies them for the job market through academic studies and/or technical training is Other Technical and Trade Schools, NAICS 611519, which has a size standard of $6,000,000. DOL requested that SBA review the size standard used for Job Corps Center contracts, and based on the review, SBA proposed to establish $30,000,000 as the small business size standard specifically for DOL Job Corp Center contracts as an exception within NAICS 611519 (as footnote 16).
Eight respondents submitted comments on the proposed size standard -- six of the respondents supported the proposed size standard of $30,000,000. Based on the comments, SBA has decided to adopt the proposed size standard.
GSA Proposes Reducing Industrial Funding Fee to 0.75%
GSA is proposing to give itself the right to change the percentage rate of the Industrial Funding Fee (IFF) in Federal Supply Schedule (FSS) contracts, and is providing notice that it intends to reduce the IFF rate from 1.0% to 0.75%, effective January 1, 2004.
Contractors include the IFF in the FSS prices charged to ordering activities, and remit the collected fees to GSA based on quarterly contract sales. This is how GSA recoups its costs for operating and maintaining the FSS program. The GSAR does not specify the percentage rate of the IFF -- the original 1% rate was established in 1995 by an acquisition letter.
In July 2002, the General Accounting Office (GAO) issued report GAO-02-934, "Interagency Contract Program Fees Need More Oversight." In the report, GAO wrote that its review of the FSS program found "from fiscal year 1999 to 2001, the revenue generated by (IFF) fees exceeded (FSS) program costs by 53.8%, or $151.3 million. Program customers are, in effect, being overcharged for the contract services they are buying. Nevertheless, program officials have not adjusted the fee." Members of Congress expressed their intention to conduct hearings on the FSS and the 1% IFF, and GSA suddenly announced its intention to reduce the IFF from 1% to 0.75%. This proposed rule is a direct result of GAO's report and GSA's reaction/announcement.
The proposed rule could combine current GSAR 552.238-74, Industrial Funding Fee, and GSAR 552.238-76, Contractor's Report of Sales, both of which are included in each FSS contract, into a new GSAR 552.238-74, Industrial Funding Fee and Sales Reporting. The new clause would permit GSA to make changes at any time but not more than once per year.
Also, the introduction to the proposed rule states that GSA will compensate the FSS contractors for the cost of making this change by allowing them to continue to include the 1% IFF in their contract prices until December 31, 2003, but to forward to FSS an IFF of 0.75% for reported sales for the period of October 1, 2003, through December 31, 2003.
OMB Releases Final Set of FAIR Act Inventories
On March 19, the Office of Management and Budget (OMB) released the fourth, and final, set of Fiscal Year 2002 Commercial Activities Inventories of non-governmental functions being performed by government agencies. This last set of inventories covers approximately 224,000 positions -- the first set covered approximately 250,000, the second set covered almost 54,000 positions, and the third set covered approximately 540,000. Inventories in this fourth set are from the Departments of Transportation and Veterans Affairs, and a few others. The agencies' lists are available at http://www.whitehouse.gov/omb/procurement/index.html.
Interested parties have until May 1, 2003, to challenge the omission or inclusion of an activity on an agency's list.
Copyright 2003 by Panoptic Enterprises. All Rights Reserved.
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