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FEDERAL CONTRACTS PERSPECTIVE

Federal Acquisition Developments, Guidance, and Opinions

October 2004
Vol. V, No. 10

CONTENTS

Government Seeks Comments on Use of T&M and
Labor-Hour Contracts for Commercial Services

The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council, along with the Office of Federal Procurement Policy (OFPP), are seeking public comments on how best to implement the requirements and authorities of Section 1432 of the Services Acquisition Reform Act (part of the National Defense Authorization Act for Fiscal Year 2004 (Public Law 108-136), which expressly authorizes the use of time-and-materials (T&M) and labor-hour (LH) contracts for the procurement of commercial services (for more on Section 1432 and other acquisition-related provisions of Public Law 108-136, see the December 2003 Federal Contracts Perspective article "Services Acquisition Reform Act Signed Into Law, Establishes Training Fund, Chief Acquisition Officer").

The Councils and OFPP want to make sure that T&M and LH contracts are used only when warranted, and that the terms and conditions incorporated into resulting T&M and LH contracts adequately protect the parties' respective interests based on the risk each party is to bear.

Federal Acquisition Regulation (FAR) 12.207, Contract Type, authorizes only firm-fixed-price and fixed-price with economic price adjustment contracts for commercial services. Section 1432 authorizes the use of T&M and LH contracts for the acquisition of commercial services that are commonly sold to the general public through such contracts and are procured on a competitive basis. This provision was included in the authorization act to recognize that many types of commercial information technology services are acquired through T&M and LH pricing arrangements, and that the requirement to use fixed-price contracts makes it difficult for the government to acquire such services.

The Councils and OFPP are soliciting comments on how best to implement the requirements and authorities of Section 1432. They have grouped their concerns and questions as follows:

• Suitability of T&M and LH Contracts: To better understand how T&M and LH contracts are used commercially and when their use is in the best interest of the government, the following questions are posed:
  
  
  • What, if any, types of commercial services are sold to the general public predominantly on a T&M or LH basis?
    
    
  • What types of commercial services are rarely, if ever, sold to the general public on a T&M or LH basis?
    
    
  • What types of commercial services are commonly sold to the general public through both a T&M or LH and fixed-price basis?
    
    
  • What conditions typically exist when services are commonly sold to the general public through the use of T&M or LH contracts?
    
    
  • Should the same policy be adopted that is in the FAR for non-commercial items and in GSA's special ordering procedures for acquiring commercial services under the Multiple Award Schedules that restricts T&M and LH contracts to situations where it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence? Why or why not?
    
    
  • What steps should a contracting officer be required to take to establish that a fixed-price contract is not suitable?
    
    
• Terms and Conditions: The current FAR clauses prescribed for the acquisition of commercial items were designed to support firm-fixed price contracts and fixed-price contracts with economic price adjustments. In shaping these clauses, the FAR drafters gave little thought to the risk involved when using flexibly priced contracts. For this reason, the Councils are reviewing these clauses to determine where refinements might be needed to more appropriately reflect the relationship that is created between the government and a contractor under a T&M or LH contract.
  
  As part of their review, the Councils are considering the provisions that have been traditionally incorporated into T&M and LH contracts as required by FAR Subpart 16.6, Time-and-Materials, Labor-Hour, and Letter Contracts. The Councils are inviting the public, especially small businesses, to provide comment on industry practices, including terms and conditions, relating to commercial use of T&M and LH contracts, particularly on the following questions:
  
  
  • What type of surveillance is conducted under T&M and LH commercial contracts (for example, quality control and inspections)?
    
    
  • What responsibility should the contractor bear for correction of non-conforming services under T&M and LH commercial contracts (for example, who should bear the cost of correction or re-performance)? Does the burden of responsibility depend on whether the government has accepted the service?
    
    
  • What oversight is used to ensure work is being properly charged under T&M and LH contracts (for example, what type of information is required to substantiate payment requests)?
    
    
  • Is consent to subcontract required for subcontracts not identified in the original proposal?
    
    
  • How are material handling or subcontract administration rates charged under T&M commercial contracts? If material handling or subcontract administration rates are reimbursed based on actual rates, how can this be done without application of FAR Subpart 31.2, Contracts with Commercial Organizations?
    
    
  • What is the impact if Cost Accounting Standards apply to these contracts?
    
    
  • How often and under what circumstances does the customer provide property on a T&M or LH contract? How is the property managed and controlled?

Comments should be submitted on or before November 19, 2004, to (1) http://www.regulations.gov; (2) http://www.acqnet.gov/far/ProposedRules/proposed.htm; (3) e-mail: ANPR.2003-027@gsa.gov; (4) fax: 202-501-4067; or (5) mail: General Services Administration, Regulatory Secretariat (MVA), 1800 F Street, NW, Room 4035, ATTN: Laurie Duarte, Washington, DC 20405.

A public meeting will be held on October 19, 2004, from 10:00 am to 4:30 pm EST, in the GSA Building Auditorium, 1800 F Street, NW, Washington, DC, 20405. Parties are encouraged to provide written comments on issues they would like addressed at the public meeting no later than October 1, 2004. Parties may offer additional questions for discussion at the public meeting.

Parties may register and submit their input electronically at http://www.acq.osd.mil/dpap/dars/coming.htm. Attendees are encouraged but not required to register for the public meeting to ensure adequate room accommodations.

FAR Rules on Evaluation, Unallowable Costs Proposed

Two FAR rule changes were proposed in September:

• Small Disadvantaged Business and HUBZone Price Evaluation Factors: This proposed rule would amend FAR Part 19, Small Business Programs, to remove some of the exceptions to the applicability of the Small Disadvantaged Business (SDB) and Historically Underutilized Business Zone (HUBZone) price evaluation factors.
  
  Paragraph (a) of FAR 19.1103, Procedures, and paragraph (b) of FAR 19.1307, Price Evaluation Preference for HUBZone Small Business Concerns, direct the contracting officer not to apply the SDB and HUBZone price evaluation adjustments to offers of eligible products in acquisitions subject to the Trade Agreements Act (see FAR Subpart 25.4, Trade Agreements), or where application of the factor would be inconsistent with a Memorandum of Understanding (MOU) or other international agreement.
  
  This proposed rule would remove these exceptions because they give more favorable treatment to offers of eligible products or qualifying country products than to offers from U.S. large businesses or, in the case of the SDB preference, even offers from U.S. small businesses. The basic goal of the trade agreements and other international agreements is to provide nondiscriminatory treatment for certain foreign products, not preferential treatment. Therefore, this proposed rule would remove FAR 19.1103(a)(2), (a)(3), and (a)(5), and FAR 19.1307(b)(3) and (b)(4). In addition, conforming amendments would be made to the associated clauses at FAR 52.219-4, Notice of Price Evaluation Preference for HUBZone Small Business Concerns, and FAR 52.219-23, Notice of Price Evaluation Adjustment for Small Disadvantaged Business Concerns.
  
  Comments on the proposed rule should be submitted on or before November 1, 2004, to either: (1) http://www.regulations.gov; (2) http://www.acqnet.gov/far/ProposedRules/proposed.htm; (3) e-mail: farcase.2003-015@gsa.gov; (4) fax: 202-501-4067; or (5) mail: General Services Administration, Regulatory Secretariat (MVA), 1800 F Street, NW, Room 4035, ATTN: Laurie Duarte, Washington, DC 20405.
  
  
• Accounting for Unallowable Costs: This rule would amend FAR 31.201-6, Accounting for Unallowable Costs, to revise the language regarding accounting for unallowable costs.
  
  On May 22, 2003, a proposed rule was published to amend FAR 31.204, Application of Principles and Procedures, and FAR 31.201-6 (see the June 2003, Federal Contracts Perspective article "Two FAR Cost Principle Policies Proposed for Revision"). No comments were received on the proposed changes to FAR 31.204, so it was adopted as final without changes (see the July 2004 Federal Contracts Perspective article "FAC 2001-24 Amends Federal Supply Schedule Rules to Add Procedures for Acquiring Services"). However, because of the significance of the comments received pertaining to the proposed changes to FAR 31.201-6, it was decided that a second proposed rule would be published. This is that second proposed rule.
  
  The May 22, 2003, proposed rule would have added a paragraph (c)(2) to FAR 31.201-6, which would have stated, "Statistical sampling is an acceptable practice for accounting and presenting unallowable costs provided: (i) the statistical sampling results in an unbiased sample that accurately represents the sampling universe; and (ii) the statistical sampling permits audit verification." This second proposed rule would make the following additions to FAR 31.201-6:
  
  
  • An additional condition for statistical sampling to be an acceptable practice would be added to paragraph (c)(2): "All large dollar value and high risk transactions are separately reviewed for unallowable costs and excluded from the sampling process."
    
    
  • To avoid potential disputes regarding the assessment of penalties against a contractor if it includes expressly unallowable costs in its claims to the government (see FAR 42.709, Scope, and its subsections), a new paragraph (c)(3) would be added to FAR 31.201-6 to explicitly address this issue. It would require the exclusion from "any final indirect rate proposal or final statement of costs incurred or estimated to be incurred under a fixed-price incentive contract submitted to the government: (A) the amounts projected to the sampling universe for any expressly unallowable costs in the sample; [and] (B) the amounts projected to the sampling universe for any costs in the sample determined to be unallowable for the contractor before proposal submission...Any amounts that are not excluded...are subject to the penalties provisions at FAR 42.709." It goes on to exclude from the penalties provisions contracts that are $500,000 or less, fixed-price contracts without cost incentives, and firm-fixed-price contracts for the purchase of commercial items.
    
    
  • Because coordination and agreement between the contractor and the auditor regarding the sampling plan (for example, the sampling method, expense accounts, stratification, precision, confidence, and projection) is necessary to avoid disputes over the adequacy of the sampling plan used by the contractor, the following would be added as paragraph (c)(4): "Use of statistical sampling methods for identifying and segregating unallowable costs should be the subject of an advance agreement under the provisions of FAR 31.109 [Advance Agreements]. The advance agreement should specify the basic characteristics of the sampling process."
  
  Comments should be submitted on or before November 29, 2004, by any of the methods mentioned above, except the e-mail address is farcase.2004-006@gsa.gov.

NASA Removes MidRange Procedures from NFS

NASA is removing NFS Part 1871, MidRange Procurement Procedures, because the FAR provides contracting officers with broad discretion and flexibility in the source selection process, so a separate MidRange process is no longer necessary.

The purpose of the MidRange procedures was to reduce the leadtime and effort associated with the conduct of acquisitions between $25,000 (the small purchase threshold at that time) and $500,000. Subsequent changes increased the threshold to $10,000,000 for non-commercial items and $25,000,000 for commercial items. The MidRange procedures are no longer unique and all the source selection methodologies under NFS Part 1871 have been incorporated in FAR Part 12, Acquisition of Commercial Items, FAR Part 14, Sealed Bidding, and FAR Part 15, Contracting by Negotiation. Retaining a separate NASA MidRange process is no longer necessary, so NFS Part 1871 is removed.

DOD Removes Iraq from List of Terrorist Countries

The Department of Defense (DOD) was busy during September, amending the Defense Federal Acquisition Regulation Supplement (DFARS) to remove Iraq from the list of terrorist countries, to prevent and mitigate corrosion, to establish a quality control policy for aviation critical safety items, and to address several other issues.

• Removal of Iraq from Definition of Terrorist Country: DFARS 252.209-7001, Disclosure of Ownership or Control by the Government of a Terrorist Country, is amended to remove Iraq from the list of terrorist countries subject to a prohibition on DOD contract awards. Cuba, Iran, Libya, North Korea, Sudan, and Syria remain on the list. This is response to the suspension of sanctions against Iraq by President Bush on May 7, 2003.
  
  
• Corrosion Prevention and Mitigation: DFARS 207.105, Contents of Written Acquisition Plans, is revised to implement Section 1067 of the National Defense Authorization Act for Fiscal Year 2003 (Public Law 107-314), which requires DOD to prevent and mitigate corrosion during the design, acquisition, and maintenance of military equipment. DFARS 207.105(b)(13)(ii), which requires acquisition plans to discuss reliability and maintainability (R&M) program plans, is amended to add the following sentence: "Also discuss corrosion prevention and mitigation plans."
  
  
• Consolidation of Contract Requirements: This interim rule adds DFARS 207.170, Consolidation of Contract Requirements, to implement Section 801 of the National Defense Authorization Act for Fiscal Year 2004 (Public Law 108-136), which prohibits the consolidation of two or more requirements of a DOD department, agency, or activity with a total value exceeding $5,000,000 into a single solicitation and contract "unless the acquisition strategy includes (1) the results of market research; (2) identification of any alternative contracting approaches that would involve a lesser degree of consolidation; and (3) a determination by the senior procurement executive that the consolidation is necessary and justified" (DFARS 207.170-3, Policy and Procedures).
  
  Comments on the interim rule must be submitted on or before November 16, 2004, to either (1) http://emissary.acq.osd.mil/dar/dfars.nsf/pubcomm; (2) e-mail: dfars@acq.osd.mil; (3) by mail to Defense Acquisition Regulations Council, OUSD(AT&L)DP(DAR), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062; or (4) by fax: 703-602-0350.
  
  For more on other acquisition-related provisions of the National Defense Authorization Act for Fiscal Year 2004, see the December 2003 Federal Contracts Perspective article "Services Acquisition Reform Act Signed Into Law, Establishes Training Fund, Chief Acquisition Officer."
  
  
• Quality Control of Aviation Critical Safety Items and Related Services: This interim rule adds DFARS 209.270, Aviation Critical Safety Items, to implement Section 802 of the National Defense Authorization Act for Fiscal Year 2004, which requires DOD to establish a quality control policy for the procurement of aviation critical safety items and the modification, repair, and overhaul of those items.
  
  The two most important subsections added by this interim rule are:
  
  
  • DFARS 209.270-3, Policy, which states that "the head of the contracting activity for an aviation critical safety item may enter into a contract for the procurement, modification, repair, or overhaul of such an item only with a source approved by the head of the design control activity" (defined by DFARS 209.270-2, Definitions, as "the systems command of a military department that is specifically responsible for ensuring the air worthiness of an aviation system or equipment in which an aviation critical safety item is to be used"), and that this approval authority supersedes those in FAR 9.202, Policy, and FAR 9.206, Acquisitions Subject to Qualification Requirements, with regard to the procurement, modification, repair, and overhaul of aviation critical safety items.
    
    
  • DFARS 209.270-4, Procedures, which provides, for aviation critical safety items, that the head of the design control activity approve qualification requirements, and qualify and identify aviation critical safety item suppliers and products. It goes on to require the contracting officer to refer any requests for qualification to the design control activity, and to refer any offer from an unapproved source to the head of the design control activity, who will determine whether the offeror or its product meets or can meet the established qualification standards before the date specified for award of the contract.
  
  Comments on the interim rule must be submitted on or before November 16, 2004, by any of the methods mentioned above.
  
  
• Personal Services Contracts: This interim rule amends DFARS 237.104, Personal Services Contracts, to implement Sections 721 and 841 of Public Law 108-136. Section 721 provides permanent authority for DOD to enter into personal services contracts for health care at locations outside of DOD medical treatment facilities (such as military entrance processing stations). This authority had been in effect but was temporary, and it expired December 31, 2003.
  
  Section 721 is implemented by this interim rule with the addition of paragraph (b)(ii)(A)(2) to DFARS 237.104, which states that "health care services at locations outside of medical treatment facilities (such as the provision of medical screening examinations at military entrance processing stations)" may be acquired through a personal services contract. In addition, paragraph (b)(ii)(C) is amended to require the "chief of the medical facility who is responsible for the area in which the services will be performed" to approve the use of such contracts.
  
  Section 841 adds authority for DOD to enter into contracts for personal services that either: (1) are to be provided by individuals outside the United States to support DOD activities and programs outside the United States; (2) directly support the mission of a DOD intelligence or counter-intelligence organization; or (3) directly support the mission of the DOD special operations command. This authority applies if the services to be procured are urgent or unique and would not be practical to obtain by other means. Section 841 is implemented with the addition of new paragraph (b)(iii), which states that an agency may enter into a personal services contract if head of the contracting activity provides written approval and the services: "are to be provided by individuals outside the United States, regardless of their nationality [a later subparagraph states that such services must be 'necessary and appropriate for supporting DOD activities and programs outside the United States']; directly support the mission of a defense intelligence component or counter-intelligence organization of DOD; or directly support the mission of the special operations command of DOD."
  
  Comments on the interim rule must be submitted on or before November 16, 2004, by any of the methods mentioned above.
  
  
• Berry Amendment Changes: DOD is adopting as final, without change, the interim rule that amended DFARS 225.7002, Restrictions on Food, Clothing, Fabrics, Specialty Metals, and Hand or Measuring Tools, to implement Sections 826 and 827 of the National Defense Authorization Act for Fiscal Year 2004, to provide exceptions to the domestic source requirements of the Berry Amendment for: (1) covered items when they are needed to support contingency operations or when the use of other than competitive procedures has been approved on the basis of unusual and compelling urgency; and (2) the acquisition of waste and byproducts of cotton or wool fiber for use in the production of propellants and explosives.
  
  For more on the interim rule being finalized, see the June 2004 Federal Contracts Perspective article "Exceptions to the Berry Amendment Added to DFARS."
  
  
• Indian Incentive Program: DOD is adopting as final, with minor changes, the interim rule that amended DFARS Subpart 226.1, Indian Incentive Program, and DFARS 252.226-7001, Utilization of Indian Organizations, Indian-Owned Economic Enterprises, and Native Hawaiian Small Business Concerns, to implement Section 8021 of the Fiscal Year 2003 DOD Appropriations Act (Public Law 107-248), which revised the criteria for application of the Indian Incentive Program to DOD contracts.
  
  The Indian Incentive Program provides for incentive payments to contractors, and subcontractors at any tier, that use Indian organizations and Indian-owned economic enterprises as subcontractors. Section 8021 of Public Law 107-248 revised the criteria for application of the Indian Incentive Program by (1) establishing a $500,000 threshold for contracts and subcontracts under which incentives may be paid; (2) by authorizing incentive payments for subcontracts awarded to Native Hawaiian small business concerns; and (3) by adding contracts and subcontracts for commercial items to the program.
  
  On October 1, 2003, DOD published an interim rule which amended DFARS 226.103, Procedures, and DFARS 252.226-7001. Fourteen respondents submitted comments on the interim rule, and the interim rule is adopted as final with the following minor changes:
  
  
  1. The prescription in DFARS 226.104, Contract Clause, had required that DFARS 252.226-7001 be included in all contracts and subcontracts exceeding $500,000 "for which subcontracting opportunities may exist." It was recommended that "for which subcontracting opportunities may exist" be removed to eliminate the possibility that a subcontracting opportunity might be overlooked. DOD agreed, and has removed the language. Now, DFARS 252.226-7001 must be included in all contracts and subcontracts exceeding $500,000.
     
     
  2. To further clarify that Alaskan Native Corporations are eligible to participate in the Indian Incentive Program, the definition of "Indian" in DFARS 252.226-7001 is modified to separate the two separate authorities into subparagraphs: "(1) any person who is a member of any Indian tribe, band, group, pueblo, or community that is recognized by the federal government as eligible for services from the Bureau of Indian Affairs (BIA) in accordance with 25 U.S.C. 1452(c); and (2) any 'Native' as defined in the Alaska Native Claims Settlement Act (43 U.S.C. 1601 et seq.)." Previously, the two were included in the same sentence, so some questioned whether a person had to be eligible under both authorities to participate in the program.
  
  For more on the interim rule being finalized, see the November 2003 Federal Contracts Perspective article "DFARS Changes on Task Orders, Unique Item IDs."
  
  
• Performance-Based Payments: DOD is conducting an assessment regarding the use of performance-based payments as a method of financing for DOD contracts. The Office of Defense Procurement and Acquisition Policy (DPAP) is soliciting comments on potential areas for improving DOD's use of performance-based payments. (EDITOR'S NOTE: Performance-based payments are addressed in FAR Subpart 32.10, Performance-Based Payments, and DFARS Subpart 232.10, Performance-Based Payments.)
  
  Government policy is that performance-based payments are the preferred form of contract financing when the contracting officer finds them practical and the contractor agrees to their use. To further this policy, the DPAP is soliciting comments regarding actions (such as policy changes, training, etc.) that DOD should undertake to:
  
  
  1. Increase the use of performance-based payments as the method of contract financing on DOD contracts -- for example, what should be done to increase the number of contracts that utilize performance-based payments?
     
     
  2. Improve the efficiency of performance-based payments when used on DOD contracts -- for example, what should be done to improve the use of performance-based payments on those contracts that provide for such contract financing?
  
  Comments must be submitted on or before October 25, 2004, to the Office of the Director, Defense Procurement and Acquisition Policy, Policy Directorate, ATTN: David Capitano, Room 3C838, 3000 Defense Pentagon, Washington, DC 20301-3000; by fax to 703-614-0719; or by e-mail to david.capitano@osd.mil.

GSA Applies DPAS to FSS

The General Services Administration (GSA) is amending the GSA Acquisition Regulation (GSAR) to implement the Defense Priorities and Allocations System (DPAS) within the Federal Supply Service (FSS).

FAR Subpart 11.6, Priorities and Allocations, implements DPAS, a Department of Commerce (DOC) program that supports the national defense. DOC delegates authority to "delegate agencies" to place priority ratings on contracts and orders that support authorized programs "to require that contracts in support of the national defense be accepted and performed on a preferential or priority basis over all other contracts, and to allocate materials and facilities in such a manner as to promote the national defense." GSA is a delegate agency.

The FSS issues Federal Supply Schedule contracts. These contracts are not rated orders as defined by DPAS but occasionally an order placed against one of these Federal Supply Schedule contracts is a rated order. Therefore, GSAR Subpart 511.6, Priorities and Allocations, is added to provide GSA contracting officers with specific guidance, and to require the use of a new clause, GSAR 552.211-15, Defense Priorities and Allocations System Requirements, which explains to schedule contractors their obligations under DPAS.

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