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FEDERAL CONTRACTS PERSPECTIVE

Federal Acquisition Developments, Guidance, and Opinions


June 2006
Vol. VII, No. 6

CONTENTS


Defense Requires RFID Tags for Additional Commodities and Locations
Homeland Security Acquisition Regulation Finalized
DOE Will Not Reimburse Defined Benefit Pension Plans
Denett Nominated to be OFPP Administrator
SBA Denies Nonmanufacturer Waiver for Ophthalmic Lenses
Executive Compensation Benchmark Raised to $546,689
Increased Size Standard for Airport Operations Proposed



Defense Requires RFID Tags for Additional
Commodities and Locations

The Department of Defense (DOD) has amended the Defense Federal Acquisition Regulation Supplement (DFARS) to require contractors to affix passive radio frequency identification (RFID) tags at the case and palletized unit load levels when shipping packaged petroleum products, construction and barrier materials, and medical materials to specified DOD locations.

DOD has developed a three-year roll-out plan for supplier implementation of RFID. The first year of the plan was implemented with the amendment of DFARS Subpart 211.2, Using and Maintaining Requirements Documents, to add DFARS 211.275, Radio Frequency Identification, and the corresponding clause DFARS 252.211-7006, Radio Frequency Identification, which required contractors to affix passive RFID tags at the case and palletized unit load levels for packaged operational rations, clothing, individual equipment, tools, personal demand items, or weapon system repair parts shipped to the Defense Distribution Depot in Susquehanna, PA, or the Defense Distribution Depot in San Joaquin, CA (see the October 2005 Federal Contracts Perspective article "RFID Requirements Included in DFARS").

This rule addresses the second year of the plan by amending DFARS 211.275 and DFARS 252.211-7006 to require contractors to affix passive RFID tags at the case and palletized unit load levels for packaged petroleum, lubricants, oils, preservatives, chemicals, and additives; construction and barrier materials; and medical materials to (1) the Defense Distribution Depots in Albany, GA; Anniston, AL; Barstow, CA; Cherry Point, NC; Columbus, OH; Corpus Christi, TX; Hill, UT; Jacksonville, FL; Oklahoma City, OK; Norfolk, VA; Puget Sound, WA; Red River, TX; Richmond, VA; San Diego, CA; Tobyhanna, PA; and Warner Robins, GA; and (2) the Air Mobility Command Terminals at Charleston Air Force Base, Charleston, SC; Naval Air Station, Norfolk, VA; and Travis Air Force Base, Fairfield, CA. The RFID tags must be in accordance with the applicable implementation plan at http://www.acq.osd.mil/log/rfid/implementation_plan.htm, and the data encoding schemes that contractors may write to the tags are located at http://www.acq.osd.mil/log/rfid/tag_data.htm.

In addition, DFARS 252.211-7006(e) is amended to require contractors to send an advance shipment notice in accordance with the procedures at http://www.acq.osd.mil/log/rfid/advance_shipment_ntc.htm (instead of http://www.dodrfid.org/asn.htm as previously required).

The introduction to the rule states, "Options to comply with the requirements of the rule can be as simple as replacing existing military shipping label printers with RFID-enabled printers, which will allow DOD contractors to print military shipping labels with embedded RFID tags." Other options, and the approximate costs to comply, are available at http://www.acq.osd.mil/log/rfid/EA_08_02_05_UnHighlighted_Changes.pdf.

Comments on the interim rule must be submitted no later than July 18, 2006, identified as "DFARS Case 2006-D002," by any of the following methods: (1) eRulemaking Portal: http://www.regulations.gov; (2) e-mail: dfars@osd.mil; (3) fax: 703-602-0350; (4) mail to: Defense Acquisition Regulations System, OUSD(AT&L)DPAP(DARS), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062; or (5) hand-delivery or courier to: Defense Acquisition Regulations System, Crystal Square 4, Suite 200A, 241 18th Street, Arlington, VA 22202-3402.

Besides the RFID rule, DOD has amended the DFARS to address the following:

Finally, DOD published a proposed rule that would amend DFARS 201.602-2, Responsibilities [of contracting officers], to update text pertaining to the designation of a contracting officer's representative (COR). The proposed rule would: (1) amend paragraph (4), which states that a COR "may not be delegated authority to make any commitments or changes that affect price, quality, quantity, delivery, or other terms and conditions of the contract..." to "has no authority to make any commitments..."; and (2) relocate text requiring the COR to maintain files on each assigned contract (paragraph (6)) to the PGI.

Comments on the proposed rule must be submitted no later than July 11, 2006, identified as "DFARS Case 2005-D022," by any of the following methods: (1) eRulemaking Portal: http://www.regulations.gov; (2) e-mail: dfars@osd.mil; (3) fax: 703-602-0350; (4) mail to: Defense Acquisition Regulations System, OUSD(AT&L)DPAP(DARS), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062; or (5) hand-delivery or courier to: Defense Acquisition Regulations System, Crystal Square 4, Suite 200A, 241 18th Street, Arlington, VA 22202-3402.



Homeland Security Acquisition Regulation Finalized

The Department of Homeland Security (DHS) is adopting as final, with changes, the interim rule that initially established the Homeland Security Acquisition Regulation (HSAR) in 2003 (see the January 2004 Federal Contracts Perspective article "Homeland Security Acquisition Regulation Issued"). The HSAR applies to all DHS entities except the Transportation Security Administration (TSA), which is required by law to comply with the Federal Aviation Administration (FAA) Acquisition Management System (AMS). (EDITOR'S NOTE: The HSAR is available at http://www.dhs.gov/dhspublic/interapp/editorial/editorial_0378.xml.)

This final rule amends the HSAR to incorporate changes resulting from the comments submitted by 66 respondents, changes resulting from statutory requirements, and various clarifying and editorial changes. The following are significant changes being made to the HSAR by this rule:



DOE Will Not Reimburse Defined Benefit Pension Plans

The Department of Energy (DOE) has announced that it will no longer compensate its management and operating (M&O) contractors and site management contractors for the costs of defined benefit pension plans for their new employees. Instead, DOE will compensate these contractors only for the costs of defined contribution pension plans such as 401(k) plans. The same principle will apply to medical benefit plan costs -- DOE will reimburse contractors for the costs of medical savings accounts and health savings accounts (which are low-cost, high-deductible health plans), but not for standard medical insurance plans such as Blue Cross/Blue Shield.

DOE will continue to reimburse contractors for the costs of the 200,000 current and retired employees' defined benefit pension plans and medical benefit plans under existing contracts.

This change is in DOE Notice 351.1, Contractor Employee Pension and Medical Benefits Policy.

No longer will employees be able to forecast with certainty what their pensions will be when they retire. Instead, DOE will compensate contractors for a specific amount per employee and the employee will be responsible for the rest of the contributions to their pension funds.

Prior to this policy announcement, DOE contractors were permitted to provide their employees with any kind of pension and medical plans, then charge DOE for those costs since M&O and site management contracts are typically cost-reimbursement types of contracts.

The reason for this change in pension policy is because there has been significant volatility in the assets to liabilities rations in defined benefit pension plans as a result of market conditions, investment choices, and other factors. This has caused significant fluctuations in DOE's outlays for reimbursement of contractor contributions to these plans. Similarly, the costs associated with employee medical benefits have grown dramatically because of rapidly rising costs of medical services. Therefore, to mitigate the cost volatility and liability growth of defined-benefit pension and medical benefit plans, DOE will compensate the contractors only for defined contribution pension and medical benefit plan costs.

"The new policy recognizes the contributions of current and retired contractor employees and, at the same time, ensure that future costs for pension and medical benefits are more consistent with market trends," said Secretary of Energy Samuel Bodman.

Congress has taken note of this change, and several pieces of legislation have been introduced to block the policy. The House Appropriations Committee passed H.R. 5247, the Fiscal Year 2007 Energy and Water Development Appropriations Act, which contains a provision prohibiting the implementation of DOE Notice 351.1 (Section 311, Contractor Pension Benefits). Also, H.R. 5362, the Department of Energy Contractor Employee Equitable Treatment Act of 2006, sponsored by 18 Democratic representatives, has been referred to the House Committee on Education and the Workforce.

The Senate Democrats have taken note, too.

"This policy to undermine secure pensions and healthcare for Department of Energy contract workers is an outrage," Senator Edward Kennedy stated. "The federal government should be a champion for a secure retirement and quality healthcare for all workers, instead of leading the race to the bottom."

In a letter to President Bush, Senators Harry Reid, Max Baucus, Jeff Bingaman, Tom Harkin, Barbara Mikulski, Maria Cantwell, Patty Murray, and Kennedy questioned the legality of DOE's change. "We have serious questions about this policy's impact on the Davis-Bacon Act and Service Contract Act. These laws require that federal government contracts provide for prevailing wages and benefits, critical protections which were designed to prevent the federal government from undermining local labor markets. By driving down workers' benefits, the DOE notice directly contradicts this underlying policy."



Denett Nominated to be OFPP Administrator

President Bush has nominated Paul Denett to become the administrator for the Office of Federal Procurement Policy (OFPP). He would take the place of Robert Burton, who has been acting administrator since the resignation of David Safavian in September just prior to his being arrested and indicted for lying to investigators and obstructing investigations into his relationship with Jack Abramoff, the lobbyist who has pleaded guilty to conspiracy, mail fraud, and tax evasion. Safavian is currently being tried in U.S. District Court. (EDITOR'S NOTE: For more on the Safavian/Abramoff scandal, see the October 2005 Federal Contracts Perspective article "OFPP Chief Arrested for Making False Statements," the November 2005 Federal Contracts Perspective article "Former OFPP Chief Indicted for Obstruction," and the February 2006 Federal Contracts Perspective article "Abramoff Pleads Guilty to Fraud, Tax Evasion.")

Currently, Denett is Vice President of Contracting Programs at ESI International. During his more than 30-year career in federal contracts, he was the senior procurement executive at the Department of the Interior and the Department of the Treasury. He received his bachelor's degree from Nasson College, and his master's degree from George Washington University.



SBA Denies Nonmanufacturer Waiver for Ophthalmic Lenses

SBA is terminating the proposed nonmanufacturer rule waiver for ophthalmic lenses manufacturing under North American Industry Classification System (NAICS) code 339115. SBA was unaware of any small businesses supplying that class of products to the federal government, so it proposed issuing a nonmanufacturer rule waiver (see the April 2006 Federal Contracts Perspective article "Nonmanufacturer Waiver Proposed for Water Chemicals"). However, SBA received a comment from a small business manufacturer indicating that it has furnished this product to the federal government. Therefore, SBA has determined that there is a small business manufacturer of this class of product, so it is terminating the proposed waiver.

EDITOR'S NOTE: Public Law 100-656, enacted November 15, 1988, requires those with federal contracts that are set-aside for small businesses or awarded through the 8(a) program to provide the product of a small business manufacturer or processor if the recipient is not the actual manufacturer or processor (see paragraph (f) of FAR 19.102, Size Standards). This is called the "nonmanufacturer rule." However, SBA may waive this requirement if there are no small business manufacturers or processors.

The SBA regulation on the nonmanufacturer rule is in Title 13 of the CFR, Business and Credit Administration, Part 121, Small Business Size Standards, under paragraph (b) of 121.406, How Does a Small Business Concern Qualify to Provide Manufactured Products Under Small Business Set-Aside or MED [Minority Enterprise Development] Procurements? The SBA regulation on the waiver of the nonmanufacturer rule is 13 CFR 121.1202, When Will a Waiver of the Nonmanufacturer Rule Be Granted for a Class of Products? A complete list of products for which the nonmanufacturer rule has been waived is available at http://www.sba.gov/GC/approved.html.



Executive Compensation Benchmark Raised to $546,689

Clay Johnson III, the acting director of the Office of Management and Budget (OMB), has decided to increase the "benchmark compensation amount" for senior executives by $73,371, from $473,318 to $546,689 -- a 15.5% increase. This figure is "the median amount of the compensation provided for all senior executives of all benchmark corporations [those with annual sales in excess of $50 million] for the most recent year..." It was determined based on commercially available surveys and after consultation with the director of the Defense Contract Audit Agency.

The $546,689 is the maximum amount of compensation (that is, wages, salary, bonuses, deferred compensation, and employer contributions to defined contribution pension plans) that is allowable under federal contracts for "the five most highly compensated employees in management positions at each home office and each segment of the contractor." However, the benchmark compensation amount is not a limit on the compensation an executive may receive -- $546,689 is the maximum allowable amount the government will reimburse contractors for their senior executives' compensation. See paragraph (p) of FAR 31.205-6, Personal Compensation.

The benchmark compensation amount applies to contract costs incurred after January 1, 2006, for contractor fiscal year 2006 and subsequent contractor fiscal years unless and until revised by OMB, which is required to set the benchmark compensation amount annually.



Increased Size Standard for Airport Operations Proposed

SBA is proposing to increase the size standard for the Air Traffic Control (NAICS code 488111), Other Airport Operations (NAICS code 488119), and Other Support Activities for Air Transportation (NAICS code 488190) industries from $6.5 million in average annual receipts to $21 million. The proposed revisions are being made to better define the size of a small business in these industries based on a review of industry characteristics.

SBA is seeking comments on its proposed size standard for these industries. Comments on alternatives, including the option of retaining the size standards at $6.5 million or establishing employee-based size standards should explain why the alternative would be preferable to the proposed size standards.

Comments must be submitted to SBA on or before June 16, 2006, identified by "RIN 3245-AF29," by one of the following methods: (1) Federal eRulemaking Portal: http://www.regulations.gov; (2) fax: 202-205-6390; or (3) mail/hand-delivery/courier to Gary M. Jackson, Assistant Administrator for Size Standards, 409 Third Street, SW, Mail Code 6530, Washington, DC 20416.



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