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FEDERAL CONTRACTS PERSPECTIVE

Federal Acquisition Developments, Guidance, and Opinions


September 2003
Vol. IV, No. 9

CONTENTS

OMB Decides to Drop A-76 Competitive Sourcing Goals
OMB Permits Challenges to FAIR Act Inventories
CAS Coverage Proposed for ESOPs
DOD Busy Making Assorted DFARS Changes
Agencies Directed to Establish Unique Contract Numbers
Updating Proposed for DOLAR
Per Diem Rates Increased $1 for Incidental Expenses
Changes Proposed to FEHBAR, Too



OMB Decides to Drop A-76 Competitive Sourcing Goals,
Goals Will Be Negotiated with Each Agency

The Office of Management and Budget (OMB) has decided to drop its goal of competing 15% of all federal positions performing commercial activities by the end of Fiscal Year (FY) 2003. Instead, goals will be negotiated with each agency "based on mission needs and conditions unique to the agency."

On July 24, 2003, OMB published a report titled "Competitive Sourcing: Conducting Public-Private Competition in a Reasoned and Responsible Manner," and Office of Federal Procurement Policy (OFPP) Administrator Angela Styles testified before the Senate Government Affairs Committee Subcommittee on Oversight of Government Management, the Federal Workforce and the District of Columbia, notifying Congress that OMB decided to drop its goal of competing 15% of federal "commercial" jobs by the end of FY 2003, with an eventual goal of competing 50% of such jobs. (EDITOR'S NOTE: OFPP is part of OMB.)

The Federal Activities Inventory Reform (FAIR) Act of 1998, Public Law 105-270, requires that each agency prepare an inventory of government activities it is performing which are not "inherently governmental functions," and the Bush Administration decided to use OMB Circular A-76, Performance of Commercial Activities, as the vehicle for reaching its competitive sourcing goals. The reason for the administration's emphasis on competitive sourcing is that "both the public and private sectors have conducted independent studies to document the effects of public-private competition. Each has reached the same conclusion: subjecting in-house operations to competition consistently generates cost savings -- anywhere from 10% to 40% on average, regardless of whether the competition is won by a private contractor or the government." (EDITOR'S NOTE: For more on recent changes to OMB Circular A-76, see the July 2003 Federal Contracts Perspective article "Revised OMB Circular A-76 Released, Establishes 12 Month Period for Competitions.")

Out of a total federal workforce of 1,609,000, the agencies listed 858,000 as being commercial in nature (that is, not inherently governmental), and identified 416,000 of these to be available for competition -- approximately 26% of the total workforce.

According to the report, "To begin the process of opening commercial activities identified on workforce inventories to competition, OMB instructed agencies to complete competitions on 5% of these activities by the end of FY 2001 [approximately 20,800] and an additional 10% by the end of FY 2003 [approximately 41,600]. These figures were intended to ensure a level of commitment that would help institutionalize use of the tool within each agency."

However, OMB recognized this was inadequate, so it created scorecards to measure progress using a traffic-light grading system -- red-yellow-green. An agency would move from "red" to "yellow" if it completed competitions for 15% of the total commercial positions listed in its FAIR Act inventory. An agency would move from "yellow" to "green" when it competed 50% of the total commercial positions in its FAIR Act inventory. "The 50% figure was meant to ensure that the dynamics of competition would be brought to bear on a significant portion of commercial activities over time."

OMB "learned that baselines would need to vary based on mission needs and conditions unique to the agency," so OMB has decided to drop the 15% and 50% goals in favor of individually-negotiated goals. In addition, OMB has developed a new scorecard criteria. Agencies will receive a "yellow" if they have:

Agencies will receive a "green" if they have:

Finally, the report says, "OMB and the agencies will monitor costs and results achieved. This information will be used to evaluate the effectiveness of competitive sourcing at each agency and devise additional strategies to address agency-unique implementation issues...Agencies will share lessons learned and best practices for addressing common issues. Using past experiences to inform future decision making will further ensure competitive sourcing is a fair and effective tool for improving the delivery of services to our citizens."



OMB Permits Challenges to FAIR Act Inventories

In a somewhat related development, OMB is making a technical correction to the revised OMB Circular A-76 to clarify that an interested party may challenge the inclusion or exclusion of an activity in an agency's inventory of positions that are not inherently governmental, including the classification or reclassification of an activity.

Under Section 3 of the FAIR Act, an interested party may submit to an agency a challenge of an omission of a particular activity from, or an inclusion of a particular activity on, an agency's list. The version of A-76 that was in effect prior to May 29, 2003, authorized an interested party to submit a challenge to the inclusion or exclusion of an activity from the agency's inventory (see the old A-76's Revised Supplemental Handbook, Appendix 2, Commercial Activities Inventory, Paragraph G, Inventory Review and Publication; Challenges and Appeals at http://www.whitehouse.gov/omb/circulars/a076/a076s.html).

On May 29, 2003, OMB issued the revised A-76. Attachment A to A-76, Inventory Process, provides guidance regarding agencies' responsibility to prepare annual inventories that categorize all activities performed by their government personnel as either commercial or inherently governmental. Paragraph D, Inventory Challenge Process, of Attachment A describes the processes that agencies must make available to interested parties for challenging agency inventories of commercial or inherently governmental activities. Paragraph D.2 states, "The inventory challenge shall be limited to (a) the reclassification of an activity as inherently governmental or commercial, or (b) the application of reason codes."

In its correction, OMB says, "The use of the term 'reclassification' in D.2(a) has created confusion in that it suggests that an interested party may not challenge an agency's determination that an activity is commercial or inherently governmental unless the determination has changed from prior years. Notwithstanding the wording of D.2(a), OMB did not intend to impose such a limitation. Instead, OMB intended to continue to provide that interested parties may submit challenges to an activity's classification as commercial or as inherently governmental, and such challenges would include the reasons for the interested party's belief that an activity which the agency classified as 'commercial' should be reclassified as inherently governmental or that an activity which the agency classified as 'inherently governmental' should be reclassified as commercial." To clarify this matter, OMB is changing the word "reclassification" in paragraph D.2(a) of Attachment A to "classification."



CAS Coverage Proposed for ESOPs

The Cost Accounting Standards Board (CASB) is inviting comments on proposed amendments to Cost Accounting Standard (CAS) 412, Cost Accounting Standard for Composition and Measurement of Pension Cost, and CAS 415, Accounting for the Cost of Deferred Compensation, to address issues concerning the recognition of the costs of Employee Stock Ownership Plans (ESOPs) under government cost-based contracts and subcontracts. (EDITOR'S NOTE: The CAS are 19 standards which apply to large contractors performing large contracts. They are in Chapter 99 of Title 48 of the Code of Federal Regulations, and are included as an appendix to the paper-version of the Federal Acquisition Regulation (FAR) for information purposes. The CAS are available on the Internet at http://www.arnet.gov/far/97/html/appendix.html.)

The CAS and the Federal Acquisition Regulation (FAR) have addressed issues associated with ESOPs ever since ESOPs became popular in the late 1970s as a vehicle for providing incentive compensation to employees, as well as a means for corporations to finance their capital requirements.

At first, the issues that arose were regarded as allowability matters that were to be treated in the FAR and its predecessor regulations, the Defense Acquisition Regulation (DAR) and the Armed Services Procurement Regulation (ASPR). The views of the CASB were sought primarily on an advisory basis. However, various government commenters suggested to the CASB that accounting for the cost of ESOPs under government contracts and period assignment matters warranted placement on the CASB's agenda. Therefore, on September 15, 2000, the CASB issued a Staff Discussion Paper (SDP) on ESOPs and requested comments. The CASB reviewed and discussed the comments received, and found a majority agreed that: (1) Generally Accepted Accounting Principles (GAAP) do not provide adequate guidance for measuring ESOP costs; (2) there should be no distinction between "pension" and "deferred compensation" ESOPs in the measurement of ESOP costs; (3) the fair value of the stock should be established when title to the stock is transferred to the ESOP; (4) ESOP costs should be measured by the cost incurred by the contractor rather than the value of compensation received by employees; and (5) the form of payment used to make distribution of ESOP benefits to employees is not relevant to the measurement of a contractor's ESOP costs. There was no strong consensus as to whether CAS 412 or CAS 415 or both should be amended, or whether a new CAS should be adopted regarding ESOP costs.

The CASB has decided to modify CAS 415 so contributions to ESOPs can be treated as deferred compensation for government contract costing purposes. The proposed amendments make clear that all ESOP cost determinations will become subject to CAS 415. In addition, CAS 412 is proposed to be amended to exclude from its coverage those ESOP costs that meet the definition of a pension plan (paragraph (b) of 9904.412-20, Purpose, would state, "This Standard does not cover the cost of Employee Stock Ownership Plan (ESOPs) that meet the definition of a pension plan. Such plans are considered a form of deferred compensation and covered under 9904.415.").

The proposed amendments adopt the "contribution" approach for ESOP cost measurement (paragraph (f) of 9904.415-50, Techniques for Application). Using this approach, contractors' contributions to ESOPs for a cost accounting period become the basis for ESOP cost determination. That part of the contribution that is assignable to the cost accounting period would be recognized as deferred compensation cost for the period. This recognition as an assignable cost is, in turn, based on the identification of ESOP awards that have been made to employees during the period that qualify as deferred compensation in accordance with the corresponding definition incorporated in 9904.415-30, Definitions. Essentially, the ESOP costs assignable to a cost accounting period are that part of the annual contribution that is attributable to the awards made to employees during the period.

The proposed transition method (9904.415-64, Transition Method) is designed to ensure that the adoption of this proposal will not cause changes to existing arrangements that contracting parties may have developed to deal with their existing ESOP cost determinations. In particular, the intent is that contractor/government advance agreements for existing ESOPs should not be disturbed. The emphasis is on making sure the procedures incorporated in the proposal are applied only to the measurement, assignment, and allocation of costs of new ESOPs that are established after this proposal becomes effective, if ultimately adopted by the CASB.

Comments should be submitted on or before November 18, 2003 by e-mail to casb@omb.eop.gov. Put the full body of the comments in the text of the electronic message and also as an attachment readable in either MicroSoft Word or Corel WordPerfect. Those submitting comments must include their name, title, organization, postal address, telephone number, e-mail address, and "CASB Docket No. 00-03A" in the text of the message. Comments may also be submitted by fax to 202-395-5105.



DOD Busy Making Assorted DFARS Changes

On August 21, the Department of Defense (DOD) amended the Defense FAR Supplement (DFARS) with the publication of three final rules and one interim rule. Also, DOD adopted one interim DFARS rule as final, and proposed another change.

Comments on both the interim rule and the proposed rule must be submitted on or before October 20, 2003: (1) on the web site at http://emissary.acq.osd.mil/dar/dfars.nsf/pubcomm; (2) by e-mail to: dfars@acq.osd.mil; (3) by mail to Defense Acquisition Regulations Council, Attn: Teresa Brooks (for the interim rule) or Steven Cohen (for the proposed rule), OUSD(AT&L) DP(DAR), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062; or (4) by fax to 703-602-0350.



Agencies Directed to Establish Unique Contract Numbers

On August 6, OFPP Administrator Angela Styles issued a memorandum to all agency senior procurement executives asking for "your assistance in establishing a unique prefix for the scheme your agency uses to identify procurement instruments (contracts, orders, and agreements) for FPDS-NG [Federal Procurement Data System -- Next Generation] reporting and other purposes." The FPDS-NG is to become operational on October 1, 2003.

The FPDS was established in 1978 by Congress as a system for collecting, developing, and disseminating data on the $265 billion a year the government spends on supplies and services. FPDS has become out-of-date, and its data has become unreliable, so FPDS-NG is being developed to be Internet based and available to the public at no cost. Also, agencies will be able to use its data in FPDS-NG as a management tool to monitor their contracting offices' performance.

"Among its many features, FPDS-NG will maintain an historical trail of all transactions, including interagency transactions conducted through government-wide acquisition contracts (GWACs), multi-agency contracts, and Federal Supply Schedule (FSS) contracts," wrote Ms. Styles. "In order to provide this important visibility...FPDS-NG must be able to distinguish each reported transaction. Accordingly, you are requested to establish and register with the FPDS-NG program office a unique set prefix for the beginning of the labeling scheme your agency uses to identify procurement instruments. This unique prefix will ensure that the numbers and letters assigned to identify any specific procurement action are distinct from those used by any other agency. Agencies should register the unique prefix...no later than October 1, 2003."



Updating Proposed for DOLAR

The Department of Labor (DOL) is proposing to update the DOL Acquisition Regulation (DOLAR), which was last revised in 1986. Since then, the following have taken place:

To address these and other changes, DOL is proposing to revise the DOLAR to: clarify and simplify its language; delete obsolete policies, procedures, and organizations; restructure it to correspond to the organization of the FAR; revise it to correspond to current FAR and DOL policies; incorporate electronic links to references such as the FAR, U.S. Code, the Code of Federal Regulations (CFR), and FedBizOpps; incorporate OFPP letters and Executive Orders; and establish procedures that follow current best practices.

Comments on the proposed updated DOLAR must be submitted on or before October 14, 2003, to Jeffrey Saylor, Director, Division of Acquisition Management Services, 200 Constitution Avenue, NW, Room N-5425, Washington, DC 20210-0001; or e-mailed to: OASAMRegComments@dol.gov.

EDITOR'S NOTE: The DOLAR is Chapter 29 of Title 48 of the Code of Federal Regulations (CFR). It is available on the Internet at http://www.dol.gov/oasam/regs/cfr/48cfr/toc_Part2900-2999/Part2900-2999_toc.htm.



Per Diem Rates Increased $1 for Incidental Expenses

All per diem rates for travel within the continental United States are being increased by $1.00 to the reflect the increase in the incidental expense allowance portion of the per diem rate from $2.00 to $3.00 for all localities effective October 1, 2003.

An analysis of lodging and meal cost data by the General Services Administration (GSA) revealed that the listing of maximum per diem rates for locations within the continental United States should be updated to provide for the reimbursement of federal employees' expenses covered by per diem. As a result of this analysis, the incidental expense under per diem expenses will be increased from $2 to $3 for all localities. This change is made to the table in the Federal Travel Regulations (FTR) 301-11.18, What M&IE [meals and incidental expenses] rate will I receive if a meal(s) is furnished at a nominal or no cost by the Government or is included in the registration fee?, and will be effective for all travel conducted on or after October 1, 2003.

For further information contact Umeki G. Thorne, Program Analyst, Office of Governmentwide Policy, Travel Management Policy, 202-208-7636.



Changes Proposed to FEHBAR, Too

The Office of Personnel Management (OPM) is proposing to amend the Federal Employees Health Benefits Acquisition Regulation (FEHBAR) to provide for additional OPM oversight of the Federal Employees Health Benefits (FEHB) Program carriers' contract costs that are charged to the government. To achieve this, the proposed change would establish notification and information requirements for FEHB program experience rated carriers' large provider agreements. These large provider agreements would be subject to audits, even though large providers of medical services or supplies are not defined as subcontractors.

In addition, the proposed rule would modify the threshold for review of carrier subcontracts from $100,000 to $550,000; revise the definitions of "cost or pricing data" and "experience rate" to reflect mental health parity requirements effective with the 2001 contract year; update the records retention period; update the FEHB Program clause matrix; update references to the FAR; and conform the FEHBAR structure to that of the FAR.

Comments on the proposed changes must be received on or before October 14, 2003, by Abby L. Block, Deputy Associate Director, Employee and Family Services, Strategic Human Resources Policy Division, Office of Personnel Management, Washington, DC 20415-3601; or hand-delivered to OPM, Room 3425, 1900 E Street NW, Washington, DC; or faxed to 202-606-0633.

EDITOR'S NOTE: The FEHBAR is Chapter 16 of Title 48 of the Code of Federal Regulations. It is available on the Internet at http://www.access.gpo.gov/nara/cfr/cfrhtml_00/Title_48/48cfrv6_00.html#1601.



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