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FEDERAL CONTRACTS PERSPECTIVE

Federal Acquisition Developments, Guidance, and Opinions

July 2003
Vol. IV, No.7

CONTENTS

Revised OMB Circular A-76 Released
Lots of Different Kinds of DFARS Changes
OMB Addresses Emergency Procurements, Software
FY 2002 Spending Increases 6.7% to $265.3 Billion
Proposed FAR Changes on Compensation, Unsolicited Proposals

Revised OMB Circular A-76 Released,
Establishes 12 Month Period for Competitions

On May 29, the Office of Management and Budget (OMB) released its long-awaited revision of its Circular No. A-76, Performance of Commercial Activities. The circular establishes 12 months as the amount of time allotted for conducting a standard competition, and institutes a new streamlined competition procedure for activities involving 65 or fewer "full-time equivalents" (FTEs) that is to be conducted within 90 days. It is expected that the revised A-76 will help the Bush administration attain its goal of competing 50% of the 850,000 positions designated by agencies as "commercial in nature."

On November 19, 2002, OMB published a proposal for major revisions to A-76 (see the December 2002 Federal Contracts Perspective article "Proposed A-76 Revision to Rely on FAR Part 15 Procedures").

The following are the significant changes between the old A-76 and the new A-76 (as well as with the proposed A-76):

• The new A-76 does not contain the statement that the government should not compete with its citizens. This deletion is meant to avoid the presumption that the government should not compete for work to meet its own needs. Such a presumption would conflict with A-76's main purpose of providing policies and procedures for determining the best service provider, irrespective of whether the provider is the government or private industry.
  
  
• Streamlined competitions may be used for activities of 65 or fewer "full-time equivalents" (FTEs). Agencies are free to use streamlined acquisition tools, such as the General Services Administration's Federal Supply Schedules (see Federal Acquisition Regulation (FAR) Subpart 8.4, Federal Supply Schedules) to obtain proposals from the private sector.
  
  
• The old A-76 did not have any standard timeframes for conducting competitions. This allowed agencies to extend competitions indefinitely. The new A-76 establishes 12 months as the time for conducting a standard competition -- that is, from the date the competition is publicly announced to the date a decision is made. (A standard competition is the general competition process in which an agency selects a provided based on formal offers submitted in response to an agency solicitation.) However, the agency's competitive sourcing official (CSO) may extend the period by six months with notification of OMB. (EDITOR'S NOTE: The proposed A-76 would have permitted the CSO to waive the 12 months completion period and set an alternative completion date, with notification of OMB, if the competition was particularly complex.)
  
  The proposed A-76 called for the new streamlined competition procedure for activities involving 65 or fewer FTEs to be conducted within 15 days. This was considered unrealistic by many respondents, so the new A-76 establishes 90 days as the time for conducting a streamlined competition, though the CSO may grant a 45-day extension. If an agency cannot complete a streamlined competition within the time limit, the agency must either convert the streamlined competition to a standard competition or request an extension from OMB.
  
  
• The new A-76 calls for agencies to make public announcements in FedBizOpps (http://www.FedBizOpps.gov) of the beginning of competitions, performance decisions made at the end of competitions, and cancellations of announced competitions.
  
  
• The old A-76 permitted agencies to perform "direct conversions" (that is, the conversion from government performance to private sector performance without competition) for activities performed by 10 or fewer FTEs. The proposed A-76 would have permitted direct conversions, but the new A-76 eliminates direct conversions.
  
  
• The new A-76 requires agencies to track the results of competitions, regardless of whether the service provider is a government agency or the private sector. Agencies will be expected to implement a quality assurance surveillance plan, record the actual cost of performance, and collect performance information that may be considered in future competitions.
  
  
• The proposed A-76 presumed that an activity is commercial in nature unless it is justified as inherently governmental. The new A-76 does not include this presumption.
  
  
• The new A-76 guidance on source selections is designed to be more manageable, more reliant on well-established principles in FAR Part 15, Contracting by Negotiation, and more accommodating than the old A-76's cost-centric process for conducting public-private competitions. The new A-76 provides several alternative procedures for conducting source selections, two of which give agencies leeway to take non-cost factors into account:
  
  
  • An agency may use sealed bidding where the award will be made strictly on the basis of price and price-related factors, and the agency will not need to negotiate with sources.
    
    
  • An agency may conduct a lowest price technically acceptable source selection where the performance decision is based on the lowest cost offer of all the offers that have been determined to be technically acceptable. This process permits exchanges between the parties.
    
    
  • An agency may conduct a phased evaluation source selection process to have the flexibility of considering alternative performance levels that sources may wish to propose. During the first phase, only technical factors are considered, and all prospective providers (the agency, other agencies interested in performing the work, and private sector offerors) may propose performance standards different from those specified in the solicitation. If the agency determines that a proposed alternative performance standard is appropriate and within the agency's current budget, the agency must issue a formal amendment to the solicitation and request revised submissions. In the second phase, the source selection authority (SSA) makes a performance decision after performing price and cost realism analyses to compare offers and tenders (that is, agency offers) that were determined to be technically acceptable at the conclusion of the first phase.
    
    
  • An agency may conduct a tradeoff source selection process with cost-technical tradeoffs similar to those authorized by FAR Part 15 if non-cost factors are likely to play an important role in the selection decision. Like the FAR Part 15 process, all prospective providers may propose different performance standards than stated in the solicitation. The contracting officer is required to determine if any desired tradeoffs are affordable and document the rationale for these tradeoffs. The new A-76 limits the use of tradeoffs to: (1) information technology (IT) activities, (2) contracted commercial activities, (3) new requirements, (4) segregable expansions, or (5) activities approved by the CSO before public announcement, with notification to OMB.
  
  
• The old A-76 required the addition to the cost of performance by a non-incumbent source the lesser of 10% of the agency's "most efficient organization's" (MEO) personnel-related costs or $10 million. This factor compensates for the temporary decrease in efficiency, temporary operation of the facilities at reduced capacity, and other unpredictable problems that might occur should the performance of the activity be transferred. The new A-76 does not apply this factor to streamlined competitions.
  
  
• An agency tender may be excluded from a standard competition without cancellation of the competition if the SSA identifies a material deficiency, and the CSO determines that the material deficiency cannot be corrected with a reasonable commitment of resources.
  
  
• The coverage in the proposed A-76 on interservice support agreements (ISSA) is deleted from the new A-76. OMB believes a more directed management focus should enable agencies to more quickly acclimate themselves to A-76's improved processes.

In addition, the General Accounting Office (GAO) is soliciting comments on two key legal questions regarding protests under the recent major revisions to A-76: (1) do the revisions to A-76 affect the standing of an in-house entity to file a protest with GAO; and (2) who would have the representational capacity to file such a protest. Under the old A-76, GAO consistently had found that federal employees and their unions could not protest any aspect of the A-76 competition because they were not "interested parties" -- neither individual federal employees, nor the MEO, nor the employees' union representatives are offerors. However, since the new A-76 incorporates many features of FAR Part 15, GAO believes it may be justified in reaching a different conclusion.

GAO is soliciting comments from contracting agencies, other federal agencies, individual federal employees, federal employee unions, contractors, and other private-sector firms, attorneys (from all sectors), and others wishing to express a view. Comments should be submitted by July 16, 2003, by e-mail to: A76Comments@gao.gov, or by facsimile to 202-512-9749. Comments may be sent by Federal Express or United Parcel Service to: Michael R. Golden, Assistant General Counsel, General Accounting Office, 441 G Street, NW, Washington, DC 20548.

Lots of Different Kinds of DFARS Changes

The Department of Defense (DOD) was very busy during June, issuing three final Defense FAR Supplement (DFARS) rules, two proposed DFARS rules, one FAR deviation, and notice of a public meeting.

• Transportation of Supplies by Sea -- Commercial Items: DFARS 252.212-7001, Contract Terms and Conditions Required to Implement Statutes or Executive Orders Applicable to Defense Acquisitions of Commercial Items, is amended to add Alternate III of DFARS 252.247-7023, Transportation of Supplies by Sea, to the list of clauses required to be included in contracts for commercial items. Alternate III of DFARS 252.247-7023 is required in contracts at or below the simplified acquisition threshold, but it was inadvertently omitted from DFARS 252.212-7001(b) in the May 31, 2002, final rule that added Alternate III to the DFARS. (EDITOR'S NOTE: For more on the May 31, 2002, final rule, see the July 2002 Federal Contracts Perspective article "DFARS Changes on U.S.-Flag Vessels, Indian Organizations.” For more on the proposed rule, see the November 2002 Federal Contracts Perspective article "DFARS Revised on Multiple Award Competitions, Enterprise Software Agreements, Honduras.")
  
  
• Payment Bonds on Cost-Reimbursement Contracts: DFARS 228.102, Performance and Payment Bonds for Construction Contracts, is revised to permit the use of alternative payment protections for fixed-price construction subcontracts between $25,000 and $100,000 issued under cost-reimbursement contracts. Paragraph (a) of DFARS 228.102-1, General, waived the requirement for performance and payment bonds for cost-reimbursement contracts, but required the prime contractor to obtain bonds for its fixed-price subcontracts exceeding $25,000. However, FAR 28.102-1(b) permits five alternative payment protections for construction contracts between $25,000 and $100,000. This revision makes DFARS 228.102-1 consistent with FAR 28.102-1. (EDITOR'S NOTE: For more on the proposed rule, see the March 2003 Federal Contracts Perspective article "DFARS 'Transformation,' Many Changes Proposed.")
  
  
• Deletion of Federal Prison Industries Clearance Exception: FAR 8.606, Exceptions, had excepted purchases of $25 or less from the requirement that products on Federal Prison Industries, Inc.'s (FPI) schedule had to be acquired from FPI. However, FPI had granted DOD a blanket waiver for all purchases of $250 or less, and this waiver was reflected in DFARS 208.606 (see the February 2000 Federal Contracts Perspective article "New DFARS Rules on ROTC Recruiting, Utility Privatization, Manufacturing Technology, and FPI Exceptions").
  
  The FPI Board of Directors recently adopted a resolution increasing the small dollar exception threshold from $25 to $2,500, and Federal Acquisition Circular (FAC) 2001-14 amended FAR 8.606 to reflect this change (see the June 2003 Federal Contracts Perspective article "FAC 2001-14 Addresses Electronic Signatures, Federal Prison Industries, Cost Principles"). Since the $2,500 threshold now in FAR 8.606 is greater than the $250 threshold previously authorized DOD, the text in DFARS 208.606(1) is no longer necessary and is deleted.
  
  
• Follow-On Production Contracts to Awardees of "Other Transactions" (OTs): 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. For that reason, OTs are generally exempt from all the statutes and regulations that govern federal contracts.
  
  On May 20, 2003, DOD published a proposed rule to revise its regulations in Title 32 of the Code of Federal Regulations to implement Section 822 of the National Defense Authorization Act for Fiscal Year 2002 (Public Law 107-107), which provides for award of a follow-on production contract to traditional defense contractors, without further competition, when the OT agreement for the prototype project provides for at least one-third non-federal cost-share. To provide the corresponding exemption from DFARS Part 206, Competition Requirements, for follow-on production contracts awarded under the authority of Section 822, DOD is proposing to amend DFARS 206.001, Applicability, by exempting OT agreements that include provisions for a follow-on production contract; if the contracting officer establishes quantities and prices for the follow-on production contract that do not exceed the quantities and target prices established in the OT agreement; and if the contracting officer receives sufficient information from the agreements officer and the project manager for the prototype OT agreement documenting that all the other conditions have been met.
  
  Comments on this proposed DFARS change must be submitted by August 4, 2003, to http://emissary.acq.osd.mil/dar/dfars.nsf/pubcomm; by e-mail to: dfars@acq.osd.mil; by fax to 703-602-0350; or to Defense Acquisition Regulations Council, Attn: Susan Schneider, OUSD(AT&L)DP(DAR), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062.
  
  
• DOD Activity Address Codes (DODAAC) in Contract Numbers: DOD proposes to amend DFARS Subpart 204.70, Uniform Procurement Instrument Identification Numbers, to prescribe the use of a contracting office's DOD activity address code (DODAAC) in the first six positions of a solicitation or contract number, instead of the DOD activity address number found in DFARS Appendix G, Activity Address Numbers. DOD is planning to use DODAACs in numbering solicitations and contracts, beginning October 1, 2003. (EDITOR'S NOTE: DODAACs are maintained by Defense Logistics Agency at https://day2k1.daas.dla.mil/dodaac/dodaac.asp.)
  
  Comments on this proposed DFARS change must be submitted by August 11, 2003, using any of the methods or to the addresses listed above.
  
  
• FAR Class Deviation Regarding Prohibited Sources: On June 25, 2003, Director of Defense Procurement Deidre A. Lee issued a memorandum to DOD acquisition officials directing them to remove Serbia, the Taliban-controlled regions, and Iraq from the list of prohibited sources in FAR 25.701, Restrictions, and FAR 52.225-13, Restrictions on Certain Foreign Purchases. Until the FAR is revised to reflect the lifting of sanctions against these countries, the FAR deviation will remain in effect.
  
  
• Public Meeting on Utilities Privatization: Director of Defense Procurement and Acquisition Policy Deidre Lee and Deputy Under Secretary of Defense for Installations and Environment are co-sponsoring a public meeting to discuss potential deviations to FAR Part 31, Contract Cost Principles and Procedures, for contracts awarded under 10 U.S.C. 2688, Utility Systems; Conveyance Authority.
  
  Under the Defense Utilities Privatization Program, DOD will complete, by September 2005, a privatization evaluation of each utility system at every Active Duty, Reserve, and Guard installation, within the United States and overseas, that is not designated for closure under a base closure law. The co-sponsors of the meeting would like to hear the views of interested parties regarding which provisions of FAR Part 31, if any, are significantly problematic for utility contractors and the reasons why.
  
  The meeting will be held July 21, 2003, from 9:00 a.m. to 5:00 p.m., in Room C-43, Crystal Mall 3, 1931 Jefferson Davis Highway, Arlington, VA 22202. For further information or directions, contact David Capitano, Office of the Director, Defense Procurement and Acquisition Policy, 703-847-7486, or e-mail to david.capitano@osd.mil.

OMB Addresses Emergency Procurements, Software

During June, the Office of Management and Budget (OMB) issued guidance on "Emergency Procurement Flexibilities," and instituted the SmartBuy program to reduce cost and improve quality in purchases of commercial software.

• "Emergency Procurement Flexibilities: A Framework for Responsive Contracting" was published June 6 by the Office of Federal Procurement Policy (OFPP), part of OMB, because "the ongoing war on terrorism has intensified the need for responsive, results-based contracting...The first part of the guidance addresses general considerations for agile contracting support. It describes both current flexibilities and new flexibilities authorized by the Homeland Security Act of 2002 (HSA), Public Law 107-296, to meet the demands associated with protecting our homeland. The second part of the guidance lays out considerations for using simplified acquisition procedures, one of the tools available to agencies when doing business in the marketplace. The HSA significantly expands application of simplified acquisition procedures..."
  
  The guidance discusses simplified open market competitions for commercial items up to $5 million; competition among pre-qualified sources (as with Federal Supply Schedules and multiple award task and delivery order contracts); HUBZone (Historically Underutilized Business Zone) small business contracts (which can be issued on a sole source basis); oral solicitations; letter contracts; limited source selections; innovative contracting ("agencies are fully authorized to innovate and use sound business judgement"); and the temporary set of emergency procurement authorities provided by the HSA (see the January 2003 Federal Contracts Perspective article "Department of Homeland Security Approved to Open").
  
  "Emergency Procurement Flexibilities" is available at http://www.acqnet.gov/Library/OFPP/PolicyDocs/empro11.doc.
  
  
• On June 2, 2003, OMB Director Daniels issued a memorandum to all department and agency heads notifying them that he had appointed the General Services Administration (GSA) to develop and manage the SmartBUY program to negotiate, by the end of fiscal year 2003, governmentwide enterprise licenses for various commerical off-the-shelf software, including office automation, network management, antivirus, database, business modeling tools, and open source software support. Daniels is directing all departments and agencies to participate in SmartBuy, and to assist and support the SmartBUY initiative by:
  
  
  • Providing information and input on existing agreements, current prices, unique terms and conditions, and future needs for relevant software. "The SmartBUY team is collecting this information, using a web-based survey, for consideration in an overall acquisition strategy."
    
    
  • Developing a migration stategy and taking contractual actions as needed to move to the governmentwide license agreements as quickly as practicable.
    
    
  • Integrating agency common desktop and server software licenses under the leadership of the SmartBUY team. "This includes refraining, to the maximum extent feasible, from renewing or entering into new license agreements without prior consultation with, and consideration of the views of, the SmartBUY team."

FY 2002 Spending Increases 6.7% to $265.3 Billion

Fiscal Year (FY) 2002 spending by the federal government set another record, surpassing the FY 2001 record of $248.7 billion by $16.6 billion, setting a new record of $265.3 billion -- a 6.7% increase. Much of the increased spending is attributable to the war in Afghanistan and homeland security, but practically every agency's spending went up. (NOTE: Because the Department of Homeland Security was not established until about a third of the way through FY 2003 (January 24, 2003), it does not appear in the FY 2002 statistics.)

The following are the largest agencies' FY 2002 spending totals (in billions) and the percentage change from FY 2001:

The following states received the most federal contract money in FY 2002 (in billions), with their FY 2001 rank and dollar amount change in parentheses:

Proposed FAR Changes on Compensation, Unsolicited Proposals

Two proposed FAR changes were published on June 3:

• Deferred Compensation and Postretirement Benefits Other Than Pensions: Several paragraphs of FAR 31.205-6, Compensation for Personal Services, relating to deferred compensation and postretirement benefits other than pensions would be revised for clarity and simplicity.
  
  The proposed rule would revise paragraph (k), Deferred Compensation Other Than Pensions, to: delete the first two sentences of paragraph (k)(l) because they duplicate the definition of deferred compensation at FAR 31.001, Definitions; delete the third sentence of paragraph (k)(l) because it merely duplicates requirements at FAR 31.205-6(a); delete paragraph (k)(3) because it is refers to awards made before Cost Accounting Standard 415, Accounting for the Cost of Deferred Compensation, went into effect -- Cost Accounting Standard 415 went into effect April 17, 1992; and change the phrase "measured, allocated, and accounted for" to "measured, assigned, and allocated" to be consistent with the language used in the cost accounting standards.
  
  Paragraph (o), Postretirement Benefits Other Than Pensions, would be revised by moving and revising the language in paragraphs (o)(3) through (o)(5) to paragraph (o)(2)(iii), Accrual Basis, because these requirements only apply to accrual costing other than terminal funding; and adding language to current paragraph (o)(6) (new paragraph (o)(3)) specifying how the contractor must handle refunds and credits.
  
  
• Unsolicited Proposals: FAR Subpart 15.6, Unsolicited Proposals, would be amended to implement Section 834 of the Homeland Security Act of 2002 (Public Law 107-296), which adds new considerations concerning the submission, receipt, evaluation, and acceptance or rejection of unsolicited proposals.
  
  A new paragraph would be added to FAR 15.603, General, that would require that a valid unsolicited proposal "not address a previously published agency requirement".
  
  FAR 15.606-1, Receipt and Initial Review, would be revised to require that, before initiating a comprehensive evaluation, the agency determine the proposal "contains sufficient technical information and cost-related or price-related information for evaluation" (currently, the proposal must "contain sufficient technical and cost information for evaluation"); and to require that the agency determine the proposal "has overall scientific, technical, or socioeconomic merit."
  
  Comments on either of these two proposed rules must be submitted by August 4, 2003, to General Services Administration, FAR Secretariat (MVA), 1800 F Street, NW, Room 4035, Attn: Laurie Duarte, Washington, DC 20405.

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