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FEDERAL CONTRACTS PERSPECTIVE

Federal Acquisition Developments, Guidance, and Opinions

August 2005
Vol. VI, No. 8

CONTENTS

FAC 2005-05 Clarifies Justifications for Limiting
Schedule Orders, 5% Withholding on T&M Contracts

Federal Acquisition Circular (FAC) 2005-05 amends the Federal Acquisition Regulation (FAR) to clarify and correct some unintended and inapplicable requirements that were adopted by FAC 2001-24 for restricting consideration of Federal Supply Schedule contractors to less than the required number. In addition, FAC 2005-05 removes the requirement that a contracting officer withhold 5% of the payments due under a time-and-materials contract, revises the definition of "information technology," requires prime contractors to confirm that a subcontractor representing itself as a Historically Underutilized Business Zone (HUBZone) small business concern is certified, and clarifies the basis for determining rental charges for the use of government property.

• Documentation Requirement for Limited Sources Under Federal Supply Schedules: This final rule amends FAR 8.405, Ordering Procedures for Federal Supply Schedules, to correct several anomalies that were inadvertently introduced by the final rule in FAC 2001-24 that instituted documentation requirements for justifying sole source orders under Federal Supply Schedule (FSS) contracts (see the July 2004 Federal Contracts Perspective article "FAC 2001-24 Amends Federal Supply Schedule Rules to Add Procedures for Acquiring Services"). The rule was intended to apply the documentation requirements whenever a contracting activity restricts consideration of FSS contractors to less than the number required (three under most instances). In addition, the final rule based the content of the documentation requirements on those in FAR 6.303-2, Content [of Justifications]. However, some of the FAR 6.303-2 requirements do not apply to FSS orders, so this interim rule corrects those requirements.
  
  
  • Paragraph (c) of FAR 8.405-1, Ordering Procedures for Supplies, and Services Not Requiring a Statement of Work, is amended to require that contracting activities "consider reasonably available information...by surveying at least three schedule contractors through the GSAAdvantage! on-line shopping service" ("at least three schedule contractors through" is added"). A new paragraph (e) requires the ordering activity to document the FSS contracts that were considered and the amount paid for the supply or service.
    
    
  • FAR 8.405-7, Documentation, is redesignated as paragraph (e) to FAR 8.405-2, Ordering Procedures for Services Requiring a Statement of Work, except the language in FAR 8.405-7(a)(4) regarding circumstances in which restricting the number of FSS contractors to be considered may be justified is incorporated into FAR 8.405-6, Limited Sources Justification and Approval (formerly "Sole Source Justification and Approval") as paragraph (b).
    
    
  • FAR 8.405-6 is amended to address all justifications to limit sources, not merely sole source justifications. Circumstances that may justify restricting the number of FSS sources are sole source, new work is a logical follow-on, the item is peculiar to one manufacturer, or an urgent and compelling need exists.
    
    
  • For orders in excess of the micro-purchase threshold (i.e., $2,500), but not exceeding the simplified acquisition threshold (i.e., usually $100,000, but see FAR 2.101, Definitions), the contracting officer must document the circumstances for restricting the number of FSS contractors. For orders in excess of the simplified acquisition threshold, paragraph (e) specifies the information that must be included in the justification. Paragraph (f) provides justification approval authorities for various dollar thresholds.
  
  
• Payment Withholding: This final rule amends FAR 32.111, Contract Clauses for Non-Commercial Purchases, and FAR 52.232-7, Payments under Time-and-Materials and Labor-Hour Contracts, to remove the requirement that the contracting officer withhold 5% of the payments under time-and-materials and labor-hour contracts. Instead, the contracting officer is to use his or her judgment regarding whether to withhold payments to protect the government's interests.
  
  If the contracting officer decides it is necessary to withhold payment, FAR 52.232-7 is amended to permit the contracting officer to unilaterally issue a modification requiring the contractor to withhold 5% of amounts due, up to a maximum of $50,000 under the contract.
  
  
• Definition of Information Technology: This interim rule amends the definition of "information technology" in FAR 2.101, Definitions, to include "analysis" and "evaluation" as functions performed by such equipment or systems, and adds to the definition "ancillary equipment (including imaging peripherals, input, output, and storage devices necessary for security and surveillance)," and "peripheral equipment designed to be controlled by the central processing unit of a computer." This implements Section 535(b) of the Consolidated Appropriations Act for Fiscal Year 2004 (Public Law 108-199), which modified the definition of "information technology".
  
  Comments on the interim rule must be submitted by September 26, 2005, to (a) http://www.regulations.gov; (b) http://www.acqnet.gov/far/ProposedRules/proposed.htm; (c) e-mail: farcase.2004-030@gsa.gov; (d) fax: 202-501-4067; or (e) mail: General Services Administration, Regulatory Secretariat (MVA), 1800 F Street, NW, Room 4035, ATTN: Laurieann Duarte, Washington, DC 20405.
  
  
• Confirmation of HUBZone Certification: This interim rule amends FAR 19.703, Eligibility Requirements for Participating in the Program, and FAR 52.219-9, Small Business Subcontracting Plan, to clarify that contractors are required to confirm that a subcontractor representing itself as a HUBZone small business concern is certified by the Small Business Administration (SBA) as a HUBZone small business concern. Contractors may do this by accessing the Central Contractor Registration (http://www.ccr.gov) or by contacting the SBA (either at http://dsbs.sba.gov/dsbs/dsp_searchhubzone.cfm, or by e-mail at hubzone@sba.gov, or by writing the Associate Administrator for the HUBZone program).
  
  Comments on the interim rule must be submitted on or before September 26, 2005, by any of the methods specified above, except that e-mail comments should be sent to farcase.2005-009@gsa.gov.
  
  
• Government Property Rental: This final rule amends FAR Part 45, Government Property, and FAR 52.245-9, Use and Charges, to clarify the basis for determining the rental charges for the use of government property. This rule incorporates a Department of Defense (DOD) class deviation that was originally authorized in 1998 and was extended in 1999 "until the FAR is revised."
  
  The most significant changes are in FAR 52.245-9, which is revised to:
  
  
  • Make the time that property is actually used for commercial purposes the basis for calculating rental rather than the time available for use (definition of "rental time" in paragraph (a)).
    
    
  • Permit contractors to obtain property appraisals from independent appraisers (paragraph (e)).
    
    
  • Permit appraisal-based rentals for all property (paragraph (e)(2)).
    
    
  • Allow contracting officers to consider alternate bases for determining rentals (paragraph (e)(3)).
  
  A proposed rule was published July 15, 2004, which also addressed special tooling. The proposed rule would have reinstated the April 1984 version of FAR 52.245-17, Special Tooling (see the August 2004 Federal Contracts Perspective article "FAR Rules on Commercial-Type Contracts Proposed.") Four respondents submitted comments. As a result of those comments, the final rule does not change the requirements for special tooling. Instead, consideration is being given to deleting the clause, and a proposed rule soliciting comments on the proposed deletion of FAR 52.245-17 is expected to be issued.

FAR Rule Would Address Fast Payment Procedures

It is proposed that FAR 52.213-1, Fast Payment Procedure, be amended to permit, but not require, fast payment when invoices and/or outer shipping containers are not marked "Fast Pay." Current practice is to reject such invoices. Instead, they will be paid using either fast payment or normal payment procedures. In addition, the proposed revision would delete the requirement for marking invoices "No Receiving Report Prepared."

Comments on the proposed rule must be submitted by September 12, 2005, to (a) http://www.regulations.gov; (b) http://www.acqnet.gov/far/ProposedRules/proposed.htm; (c) e-mail: farcase.2004-031@gsa.gov; (d) fax: 202-501-4067; or (e) mail: General Services Administration, Regulatory Secretariat (MVA), 1800 F Street, NW, Room 4035, ATTN: Laurieann Duarte, Washington, DC 20405.

EDITOR'S NOTE: Fast payment procedures are authorized for fixed-price contracts, purchase orders, or delivery orders for supplies that are less than $25,000. Title to the supplies passes to the government upon delivery to a post office or common carrier, but the supplier has to agree to replace, repair, or correct supplies that are not received, are damaged, or do not conform to purchase requirements. See FAR Subpart 13.4, Fast Pay Procedure, for more details.

DOD Addresses Berry Amendment, Hawaiian Organizations

The Department of Defense (DOD) stayed busy in July, publishing one final rule amending the Defense FAR Supplement (DFARS), two interim rules, five proposed rule, and executing a DFARS class deviation regarding foreign information technology.

• Berry Amendment Determinations: This final rule amends DFARS 225.7002, Restrictions on Food, Clothing, Fabrics, Specialty Metals, and Hand or Measuring Tools, to identify who may make domestic nonavailability determinations under the Berry Amendment.
  
  The "Berry Amendment" (10 U.S.C. Chapter 148, Section 2533a, Requirement to Buy Certain Articles from American Sources; Exceptions) requires that procurements of covered items in excess of the simplified acquisition threshold ($100,000 under most circumstances) for "food, clothing, tents, tarpaulins, covers, cotton and other natural fiber products, woven silk or woven silk blends, spun silk yarn for cartridge cloth, synthetic fabric or coated synthetic fabric, canvas products, or wool...or specialty metals including stainless steel flatware, or hand measuring tools..." be grown, reprocessed, reused, or produced in the United States or its possessions, unless the "Secretary of the Department concerned" determines that satisfactory quality and sufficient quantity "cannot be procured as and when needed at United States market prices..." This authority has been delegated down to the secretaries of the various services, and DFARS 225.7002-2, Exceptions, is amended to specify that the secretaries (and the undersecretary of defense for acquisition, technology, and logistics) are authorized, without power of redelegation, to make this determination. In addition, DFARS 225.7002-2 is amended to require that such determinations be supported by certain documentation, such as an analysis of alternatives, and requires agencies to follow the procedures in Procedures, Guidance, and Information (PGI) 225.7002-2, Exceptions. (EDITOR'S NOTE: The PGI, which is available at http://www.acq.osd.mil/dpap/dars/pgi, consists of all mandatory and non-mandatory internal DOD procedures, non-mandatory guidance, and supplemental information. For more on the PGI, see the December 2004 Federal Contracts Perspective article "DFARS Transformation in Full Gear, 'Procedures, Guidance, and Information' Added.")
  
  
• Sole Source 8(a) Awards to Small Business Concerns Owned by Native Hawaiian Organizations: This interim rule amends DFARS 219.805, Competitive 8(a), to implement Section 8021 of the DOD Appropriations Act for Fiscal Year 2005 (Public Law 108-287), which permits the award of sole source contracts to small business concerns owned by Native Hawaiian Organizations. This applies to manufacturing contacts exceeding $5,000,000 and non-manufacturing contracts exceeding $3,000,000 that are awarded under the SBA's 8(a) program (see FAR Subpart 19.8, Contracting with the Small Business Administration (the 8(a) Program)). Under the 8(a) Program, competition is required for manufacturing contracts exceeding $5,000,000 and non-manufacturing contracts exceeding $3,000,000, unless (1) there is no reasonable expectation that at least two eligible and responsible 8(a) firms will submit offers at a fair market price, or (2) SBA accepts the requirement on behalf of a concern owned by an Indian tribe or an Alaska Native Corporation. This interim rule implements Public Law 108-287 by expanding the competition exceptions to include requirements accepted on behalf of a small business concern owned by a Native Hawaiian Organization.
  
  Comments on this interim rule must be submitted by September 26, 2005, to: (a) http://www.regulations.gov; (b) http://emissary.acq.osd.mil/dar/dfars.nsf/pubcomm; (c) e-mail: dfars@acq.osd.mil; (d) fax: 703-602-0350; (e) mail: Defense Acquisition Regulations Council, OUSD(AT&L)DP(DAR), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062; or by courier/hand to Defense Acquisition Regulations Council, Crystal Square 4, Suite 200A, 241 18th Street, Arlington, VA 22202-3402.
  
  
• Business Restructuring Costs: This interim rule amends DFARS 231.205-70, External Restructuring Costs, to implement Section 819 of the National Defense Authorization Act for Fiscal Year 2005 (Public Law 108-375), which contains changes concerning the delegation of authority to make determinations relating to payment of defense contractors for business restructuring costs.
  
  DOD is prohibited from reimbursing a defense contractor for restructuring costs arising from a business combination that occurs after November 18, 1997, unless the Secretary of Defense determines either that: (i) the amount of projected savings associated with the restructuring will be at least twice the amount of the costs allowed; or (ii) the amount of projected savings associated with the restructuring will exceed the amount of the costs allowed and that the business combination will result in the preservation of a critical capability that otherwise might be lost to DOD. The Secretary of Defense was prohibited from delegating this authority below the level of an Assistant Secretary of Defense, and the Secretary of Defense had delegated this authority to the Under Secretary of Defense (Acquisition, Technology, and Logistics) (USD(AT&L)), or his principal deputy.
  
  Section 819 of Public Law 108-375 permits the Director of the Defense Contract Management Agency (DCMA) to make these determinations when restructuring costs are expected to be less than $25 million over a 5-year period. To implement this, DFARS 231.205-70 is amended to provide the DCMA director with this authority; to remove unnecessary references to USD(AT&L) certifications for pre-November 19, 1997, business combinations; and to clarify the requirement that projected restructuring costs and savings be computed on a present value basis.
  
  Comments on the interim rule must be submitted on or before September 26, 2005, by any of the methods specified above.
  
  
• Material Inspection and Receiving Report: This proposed rule would amend DFARS Appendix F, Material Inspection and Receiving Report, to: (1) clarify the requirements for marking of shipments when a contractor's certificate of conformance is used as the basis for acceptance ("enter in capital letters 'CERTIFICATE OF CONFORMANCE' in Block 21a [Contract Quality Assurance]" -- paragraph (b)(21)(iii) and (b)(21)(iv)(D) of F-301, Preparation Instructions); (2) clarify that use of Wide Area WorkFlow-Receipt and Acceptance electronic form satisfies DD Form 250 distribution requirements (F-401, Distribution); and (3) remove the procedures for documenting government contract quality assurance performed at a subcontractor's facility (F-201, Instructions, which would be renamed "Procedures"), and the procedures for distribution and correction of DD Form 250-1 documents (F-701, Distribution, and F-702, Corrected DD Form 250-1), and transfer them to the PGI as PGI F-401, PGI, F-701, and F-702, respectively. All that would remain of the DFARS sections would be cross-references to the respective PGI sections.
  
  Comments on the proposed rule must be submitted on or before September 12, 2005, by any of the methods specified above.
  
  
• Contract Termination: This proposed rule would amend DFARS Part 249, Termination of Contracts, to: (1) revise DFARS 249.7000, Terminated Contracts with Canadian Commercial Corporation, to add text relocated from DFARS 225.870-6, Termination Procedures; and (2) transfer to the PGI the text of DFARS 249.105, Duties of Termination Contracting Officer After Issuance of Notice of Termination, and its subsections, DFARS 249.109-7, Settlement by Determination, DFARS 249.110, Negotiation Memorandum, and paragraph (b) of DFARS 249.7001, Congressional Notification on Significant Contract Terminations. All that would remain of the DFARS sections would be cross-references to the respective PGI sections.
  
  Comments on the proposed rule must be submitted on or before September 12, 2005, by any of the methods specified above.
  
  
• Export-Controlled Information and Technology: This proposed rule would add DFARS Subpart 204.73, Export-Controlled Information and Technology at Contractor, University, and Federally Funded Research and Development Center Facilities, and the clause at DFARS 252.204-70XX, Requirements Regarding Access to Export-Controlled Information and Technology, to implement requirements for preventing unauthorized disclosure of export-controlled information and technology under DOD contracts.
  
  DFARS Subpart 204.73 would provide general information on export control laws and regulations and require contracting officers to ensure that contracts identify any export-controlled information and technology.
  
  DFARS 252.204-70XX would be used in solicitations and contracts for research and development or for services or supplies that may involve the use or generation of export-controlled information or technology. It would require the contractor to: (1) comply with all applicable laws and regulations regarding export-controlled information and technology (paragraph (c)); (2) maintain an effective export compliance program (paragraph (d)); (3) conduct initial and periodic training on export compliance controls (paragraph (e)(1)); and (4) perform periodic assessments (paragraph (e)(2)).
  
  Comments on the proposed rule must be submitted on or before September 12, 2005, by any of the methods specified above.
  
  
• Transportation: This proposed rule would amend DFARS Part 247, Transportation, to: (1) delete DFARS 247.104-5, Citation of Government Rate Tenders, DFARS 247.105, Transportation Assistance, most of DFARS 247.270, Stevedoring Contract, and DFARS 247.370, Use of Standard Form 30 for Consignment Instructions, because they are sufficiently addressed in the FAR or DOD transportation regulations; (2) clarify requirements for inclusion of shipping instructions in solicitations and contracts in DFARS 247.371, DD Form 1384, Transportation Control and Movement Document, DFARS 247.372, DD Form 1653, Transportation Data for Solicitations, and DFARS 247.572-1, Ocean Transportation Incidental to a Contract for Supplies, Services, or Construction; and (3) transfer to the PGI most of DFARS 247.271, Contracts for the Preparation of Personal Property for Shipment or Storage (except DFARS 247.271-1, Scope of Section, and DFARS 247.271-2, Policy, which would be deleted), and all of DFARS 247.305-10, Packing, Marking, and Consignment Instructions. All that would remain of the transferred DFARS sections would be cross-references to the respective PGI sections.
  
  Comments on the proposed rule must be submitted on or before September 26, 2005, by any of the methods specified above.
  
  
• Labor Laws: This proposed rule would amend DFARS Part 222, Application of Labor Laws to Government Acquisitions, to:
  
  
  • Relocate to the PGI internal procedures in DFARS 222.101-1, General; DFARS 222.101-3-70, Impact of Labor Disputes on Defense Programs; paragraph (a)(ii) of DFARS 222.101-4, Removal of Items from Contractors' Facilities Affected by Work Stoppages; paragraphs (a), (b), and (d) of DFARS 222.406-8, Investigations; DFARS 222.807, Exemptions; DFARS 222.1008-2, Preparation of SF 98a; and DFARS 222.1014, Delay of Acquisition Dates Over 60 Days. All that would remain of the transferred DFARS sections would be cross-references to the respective PGI sections.
    
    
  • Delete DFARS 222.404-2, General Requirements [for Davis-Bacon Wage Determinations]; DFARS 222.404-3, Procedures for Requesting Wage Determinations; DFARS 222.404-11, Wage Determination Appeals; DFARS 222.407, Contract Clauses; DFARS 222.804-2, Construction [Affirmative Action Programs]; DFARS 222.805, Procedures; DFARS 222.1003-7, Questions Concerning Applicability of the [Service Contract] Act; paragraph (1) of DFARS 222.1406, Complaint Procedures [Handicapped]; DFARS 222.7100, Scope of Subpart [Right of First Refusal of Employment]; and DFARS 222.7200, Scope of Subpart [Compliance with Labor Laws of Foreign Governments], because they are either no longer applicable, the coverage is already provided by the FAR or internal agency procedure, or unnecessary.
  
  
• Class Deviation -- Exemption from Limitations on Procurement of Foreign Information Technology that is a Commercial Item for Fiscal Year 2005: To implement Section 517 of the Consolidated Appropriations Act for Fiscal Year 2005 (Public Law 108-447), Director of Defense Procurement and Acquisition Policy Deidre Lee issued a class deviation exempting acquisitions of foreign information technology using FY 2005 funds from the provisions of the Buy American Act (see FAR Subpart 25.1). The deviation is effective from July 6, 2005, until its provisions are incorporated into the DFARS, or the deviation is rescinded.

Agriculture Proposes Six Biobased Items

The Department of Agriculture (USDA) is proposing to designate the following six items as biobased products that would be afforded federal procurement preference: mobile equipment hydraulic fluids; urethane roof coatings; water tank coatings; diesel fuel additives; penetrating lubricants; and bedding, bed linens, and towels.

Once USDA designates an item, federal agencies are generally required to purchase biobased products within these designated items when the purchase price exceeds $10,000 or where the quantity of such items (or functionally equivalent items) purchased over the preceding fiscal year equaled $10,000 or more. The regulations for the program are at Title 7 of the Code of Federal Regulations (CFR) Part 2902, Guidelines for Designating Biobased Products for Federal Procurement, and information on the program is at http://www.biobased.oce.usda.gov. Also, see the February 2005 Federal Contracts Perspective article "USDA Publishes Biobased Products Guidelines."

In addition, USDA is proposing a minimum biobased content for each of these items; would revise Section 2902.2, Definitions, to add definitions for "biodegradability" and "functional unit"; and would amend Section 2902.8 to adopt applicable ASTM International performance tests to verify biodegradability.

Comments on the proposal should be submitted by September 6, 2005, at either http://www.regulations.gov or http://www.biobased.oce.usda.gov; by e-mail to fb4p@oce.usda.gov; or by mail Marvin Duncan, USDA, Office of the Chief Economist, Office of Energy Policy and New Uses, Room 4059, South Building, 1400 Independence Avenue SW, MS-3815, Washington, DC 20250-3815. All submissions must include the agency name and "Regulatory Information Number (RIN) 0503-AA26." Identify submittals as pertaining to the "Proposed Designation of Items."

Comments Sought on Contractors' ESOPs

The Cost Accounting Standards Board (CASB) (part of the Office of Federal Procurement Policy (OFPP)), is inviting public 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, regarding employee stock ownership plans (ESOPs). These proposed amendments would address criteria for measuring the costs of ESOPs and their assignment to cost accounting periods under government cost-based contracts and subcontracts. Also, the amendments would specify that accounting for the costs of ESOPs will be covered by the provisions of CAS 415.

This notice of proposed rulemaking (NPRM) is in response to ten sets of comments submitted on the August 20, 2003, advance notice of proposed rulemaking (see the September 2003 Federal Contracts Perspective article "CAS Coverage Proposed for ESOPs"). Differences between the NPRM and the advance NPRM involve assignment of costs based on award of shares (paragraph (f)(2) of CAS 9904.415-50, Techniques for Application); transition method (proposed CAS 9904.415-64, Transition Method, is deleted, and a new paragraph (d) is added to CAS 9904.415-63, Effective Date); and the definition of an ESOP (paragraph (a)(3) of CAS 9904.415-30, Definitions).

Comments should be sent no later than September 20, 2005, by e-mail to casb2@omb.eop.gov.

Prompt Payment Interest Rate Set at 4 1/2%

The Treasury Department has established 4 1/2% (4.5%) as the interest rate for the computation of payments made between July 1 and December 31, 2005, under the Prompt Payment Act and the Contracts Disputes Act. This rate is also used in facilities capital cost of money calculations. The interest rate for the prior six-month period (January 1, 2005, through June 30, 2005), was 4 1/4% (4.25%). The interest rate for July 1 through December 31, 2004, was 4 1/2% (4.5%).

FAR Subpart 32.9, Prompt Payment; FAR Subpart 33.2, Disputes and Appeals; FAR 31.205-10, Cost of Money; and Cost Accounting Standard (CAS) 9904.414, Cost of Money as an Element of the Cost of Facilities Capital, are affected by this interest rate.

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