DATE: July 26, 2000

FROM: Barry McVay, CPCM

SUBJECT: Federal Acquisition Circular (FAC) 97-19, Miscellaneous Amendments

SOURCE: Federal Register, July 26, 2000, Vol. 65, No. 144, page 46051

AGENCIES: Department of Defense (DOD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA)

ACTION: Final and Interim Rules

SYNOPSIS: The Federal Acquisition Regulatory Council is issuing FAC 97-19 to amend the Federal Acquisition Regulation (FAR) in the following ten subject areas: (1) contract bundling; (2) North American Industry Classification System (NAICS); (3) liquidated damages; (4) Service Contract Act, commercial items subcontracts; (5) Small Business Competitiveness Demonstration Program; (6) Construction Industry Payment Protection Act of 1999; (7) deferred research and development (R&D) costs; (8) time-and-materials or labor-hours contracts; (9) repeal of reporting requirements under Public Law 85-804 ; and (10) technical amendments. These FAR changes are in plain language as required by the June 1, 1998, Presidential memorandum "Plain Language in Government Writing."

DATES: Items (1), (5), (6), and the technical amendments are effective July 26, 2000. Item (4) is effective August 25, 2000. Items (3), (7), (8), and (9) are effective September 25, 2000. Item (2) is effective October 1, 2000. Comments on the interim rule at item (2) should be submitted to the FAR Secretariat by September 25, 2000, to be considered in the formulation of a final rule.

ADDRESSES: Interested parties should submit written comments on the interim rule at item (2) to the General Services Administration, FAR Secretariat (MVR), 1800 F Street, NW, Room 4035, Attn: Ms. Laurie Duarte, Washington, DC 20405. Cite FAC 97-19, FAR case 2000-604 in all correspondence related to the interim rule. Address e-mail comments to farcase.2000-604@gsa.gov.


     Items (1) and (6): Ralph De Stefano at 202-501-1758.

     Items (2), (3), and (5): Victoria Moss at 202-501-4764.

     Items (4), (8), and (9): Linda Klein at 202-501-3775.

     Item (7): Linda Nelson at 202-501-1900.

For more information on the technical amendments or for general information, contact the FAR Secretariat, Room 4035, GS Building, Washington, DC 20405, 202-501-4755.

SUPPLEMENTAL INFORMATION: (1) Contract Bundling: This rule converts the interim rule published in FAC 97-15 as Item 3 to a final rule with minor changes. The interim rule amended the FAR to implement Sections 411 through 417 of the Small Business Reauthorization Act of 1997 (Public Law 105-135), which require agencies to avoid unnecessary "contract bundling" (the practice of combining several small contracts into a single large "bundled" contract that is less expensive to administer) because the bundled contract is often too large for small businesses to perform as prime contractors. (EDITOR'S NOTE: For more on the interim rule, see the January 2000 Federal Contracts Perspective article "FAC 97-15 Addresses Foreign Acquisition, Contract Bundling, Award Fee Determinations.")

Six respondents provided comments. As a result of the comments, the final rule includes the following changes:

(2) North American Industry Classification System (NAICS): This interim rule amends the FAR (particularly FAR Part 19, Small Business Programs, and the related provisions and clauses in FAR Part 52) to convert small business size standards and other programs in the FAR that are based on the Standard Industrial Classification (SIC) system to the North American Industry Classification System (NAICS). The SBA amended its regulations on May 15, 2000, to convert small business size standards from the SIC system to the NAICS, and the conversion will be effective October 1, 2000. (EDITOR'S NOTE: The NAICS is a system devised by the United States, Canada, and Mexico for classifying establishments by type of economic activity. The SIC system was originally developed in the 1930s and last updated by OMB in 1987. The NAICS reflects the enormous changes in technology and the growth and diversification of services that have marked recent years much better than does the SIC. For more on the SBA conversion from SIC to NAICS, see the May 15, 2000, FEDERAL CONTRACTS DISPATCH "Small Business Administration; North American Industry Classification System (NAICS) Small Business Size Standards.")

To conform the FAR to the final SBA size standards and to convert other programs currently based on SIC codes to NAICS codes, "North American Industry Classification system (NAICS)" replaces "Standard Industrial Classification (SIC)" wherever it appears. Also, "NAICS Industry Subsector" replaces "Major Industry Group" wherever it appears. There are two exceptions: paragraph (a)(2)(iv) of FAR 23.906, Requirements, and paragraph (b)(2) of FAR 52.223-13, Certification of Toxic Chemical Release Reporting, are revised to read, "The facility does not fall within Standard Industrial Classification Code (SIC) major groups 20 through 39 or their corresponding North American Industry Classification System (NAICS) sectors 31 through 33."

Other changes are:

(3) Liquidated Damages: This final rule rewrites the FAR guidance on liquidated damages in plain language because many found it difficult to understand the policy for administering liquidated damages (particularly difficult was FAR 11.102, Policy). This revises FAR Subpart 11.5, Liquidated Damages, FAR 22.302, Liquidated Damages and Overtime Pay, FAR 22.406-8, Investigations, FAR 22.406-9, Withholding From or Suspension of Contract Payments, and the associated clauses in FAR Part 52. The only substantive change made by the proposed rule was in paragraph (e) of proposed FAR 11.501, in which the authority to approve reductions in or waivers to liquidated damages was changed from the Comptroller General to the Commissioner, Financial Management Service, as stated in Treasury Order 145-10.

On January 13, 2000, a proposed rule was published. Four respondents submitted comments. Editorial changes were made as a result of the comments, the most significant being the removal of proposed FAR 11.501(d), which stated, "The amount of liquidated damages assessed under a contract is a unilateral decision made solely at the discretion of the Government" (the proposed paragraph (e) mentioned above now is paragraph (d)). (EDITOR'S NOTE: For more on the proposed rule, see the January 13, 2000, FEDERAL CONTRACTS DISPATCH "Federal Acquisition Regulation (FAR); Liquidated Damages.")

(4) Service Contract Act, Commercial Item Subcontracts: This final rule removes the Service Contract Act of 1965 (SCA) from the list of laws in FAR 12.504, Applicability of Certain Laws to Subcontracts for the Acquisition of Commercial Items, that are inapplicable to subcontracts for commercial items, and adds the SCA to FAR 52.212-5, Contract Terms and Conditions Required to Implement Statutes or Executive Orders -- Commercial Items, as a law that must be included in subcontracts for commercial items or commercial components.

Section 8003 of the Public Law 103-355, Federal Acquisition Streamlining Act of 1994 (FASA) required the FAR Council to include in the FAR a list of existing provisions of law that are inapplicable to subcontracts for commercial items. FASA defined those laws to be any provision of law, as determined by the FAR Council, that "sets forth policies, procedures, requirements, or restrictions for the procurement of property or services", except those that provide for criminal or civil penalties, or those that specifically state it applies to contracts for the procurement of commercial items. In implementing FASA Section 8003, the FAR Council included the SCA on the list of laws inapplicable to commercial subcontracts (see FAC 90-32, September 18, 1995).

Since then, the FAR Council and the Department of Labor (which administers the SCA), have concluded that it is not in the best interest of the government to retain the SCA on the list of laws that are inapplicable to all subcontracts for commercial items, and that any exemption from SCA coverage for commercial subcontracts should be authorized by the Secretary of Labor under his or her SCA authority.

The FAR Council has forwarded recommendations to the Secretary of Labor for consideration regarding exemptions from coverage under the SCA for commercial items, and DOL has published a proposed rule today that would exempt from SCA coverage for certain subcontracts for commercial services: the maintenance and repair of information technology equipment, and subcontracts for a specified subset of commercial services that meet certain criteria. Also, to prevent some subcontractors from being SCA-exempt, to being SCA-covered, to being SCA-exempt over the period of less than one year, DOL has also published today a temporary exemption, not to exceed one year, that mirrors the proposed exemption. (EDITOR'S NOTE: For more on the DOL temporary and proposed SCA exemptions for certain commercial services subcontracts, see the July 26, 2000, FEDERAL CONTRACTS DISPATCH "Service Contract Act; Labor Standards for Federal Service Contracts.")

EDITOR'S NOTE: The rule also explains why the Walsh-Healey Act and the certification and contract clause requirements of the Contract Work Hours and Safety Standards Act remain inapplicable to commercial items contracts, though they are similar to the SCA: "The Walsh-Healey Act and the Contract Work Hours and Safety Standards Act provide statutory exemptions for purchases in the open market. The listing of these statutes in the FAR with respect to their inapplicability to commercial item contracts was designed to reflect the existing statutory open market exemptions."

(5) Small Business Competitiveness Demonstration Program: On March 27, 2000, FAC 97-16 included an interim rule which revised FAR Subpart 19.10, Small Business Competitive Demonstration Program, to implement the Small Business Reauthorization Act of 1997 (Public Law 105-135), which made the program permanent and made other revisions to the program. Comments were submitted on the interim rule, but it has been decided to finalize the interim rule without change. (EDITOR'S NOTE: For more on the interim rule, see the March 27, 2000, FEDERAL CONTRACTS DISPATCH "Federal Acquisition Circular (FAC) 97-16, Small Business Competitiveness Demonstration Program and Progress Payments and Related Financing Policies.")

(6) Construction Industry Payment Protection Act of 1999 (Public Law 106-49): This final rule implements the Construction Industry Payment Protection Act (CIPP Act) which amended the Miller Act of 1935 to require that the amount of a payment bond equal the total amount of the contract unless the contracting officer determines that a payment bond in that amount is impractical.

The Miller Act requires contractors performing government construction contracts that exceed $100,000 to furnish performance and payment bonds. Previously, the required payment bond did not exceed 50% of the contract price, and was capped at $2.5 million. However, the CIPP Act revised the requirement so that the payment bond must equal the contract price. In addition, the CIPP Act prohibited any subcontractor from waiving its right to sue on the payment bond until the subcontractor has performed work.

On December 28, 1999, a proposed rule was published to revise FAR 28.102-2, Amount Required, and the related clauses at FAR 52.228-13, Alternative Payment Protections, FAR 52.228-15, Performance and Payment Bonds -- Construction, and FAR 52.228-16, Performance and Payment -- Bonds Other Than Construction, to reflect the CIPP Act changes. However, the proposed rule also extended the payment protection to construction contracts between $25,000 and $100,000, even though these contracts are not subject to the Miller Act and are not addressed by the CIPP Act, to add consistency to the rule and provide added protection to subcontractors and suppliers on contracts less than $100,000. (EDITOR'S NOTE: For more on the proposed rule, see the January 2000 Federal Contracts Perspective "FAR Changes Proposed: Construction, Competition Under Multiple-Award Contracts, Veterans' Employment.")

Ten respondents submitted comments, and minor editorial changes have been made to the final rule. The clause prescriptions in FAR 28.102-3, Contract Clauses, are revised ("the contracting officer may establish a lower percentage" instead of "the contracting officer may decrease the penal amount of the performance or payment bonds"), and additional information is included in the paragraph (e) of FAR 52.228-15, Performance and Payment Bonds--Construction, regarding notice of subcontractor waiver of protection (instead of "any subcontractor waiver of the right to sue on a payment bond is subject to 40 U.S.C. 270b(c)", paragraph (e) now states "any waiver of the right to sue on the payment bond is void unless it is in writing, signed by the person whose right is waived, and executed after such person has first furnished labor or material for use in the performance of the contract").

(7) Deferred Research and Development (R&D) Costs: On January 26, 2000, a proposed rule was published to clarify and simplify FAR 31.205-48, Deferred Research and Development Costs, by deleting the second sentence ("Research and development costs (including amounts capitalized) that were incurred before the award of a particular contract are unallowable except when allowable as precontract costs") because the subject is already covered in FAR 31.205-32, Precontract Costs, and to revise the final sentence, which addresses incurred costs that exceed the contract or grant amount, from "such excess may not be allocated as a cost to any other government contract" to "such excess is unallowable under any other government contract." Three respondents submitted comments, but the proposed rule is converted to final without change. (EDITOR'S NOTE: For more on the proposed rule, see the January 26, 2000, FEDERAL CONTRACTS DISPATCH "Federal Acquisition Regulation (FAR); Deferred Research and Development Costs.")

(8) Time-and-Materials or Labor-Hours Contracts: On January 24, 2000, a proposed rule was published to bring FAR 52.243-3, Changes -- Time-and-Materials or Labor-Hours, into conformance with the guidance in Alternate II of FAR 52.243-1, Changes -- Fixed Price, because Alternate II is required to be included in all service contracts when supplies are to be furnished (other than architect-engineer or other professional services), and most of the work performed under time-and-materials or labor-hour contracts involves services. One respondent submitted comments, and the proposed rule is finalized without change. Therefore, FAR 52.243-3(a) now authorizes the contracting officer to make changes in the "(1) description of services to be performed; (2) time of performance (i.e., hours of the day, days of the week, etc.); (3) place of performance of the services; (4) drawings, designs, or specifications when the supplies to be furnished are to be specially manufactured for the government in accordance with the drawings, designs, or specifications; (5) method of shipment or packing of supplies; (6) place of delivery; [or] (7) amount of government-furnished property."

Also, FAR 52.243-3(c) states that "the contractor must assert its right to an adjustment under this clause within 30 days from the date of receipt of the written order." To the FAR 52.243-3 prescription in paragraph (c) of FAR 43.205, Contract Clauses, is added the following sentence: "The contracting officer may vary the 30-day period in paragraph (c) of the clause according to agency procedures." (EDITOR'S NOTE: For more on the proposed rule, see the January 24, 2000, FEDERAL CONTRACTS DISPATCH "Federal Acquisition Regulation (FAR); Time-and-Materials or Labor-Hours Contracts.")

(9) Repeal of Reporting Requirements under Public Law 85-804: This final rule removes FAR 50.104, Reports, which required each department and agency to report annually to Congress any contract action in excess of $50,000 issued under the authority of Public Law 85-804. FAR 50.104 implemented Section 4 of Public Law 85-804, but Section 4 was repealed by paragraph 901(r)(1) of the Federal Reports Elimination Act of 1998 (Public Law 105-362), so the reporting requirement no longer exists.

Also, FAR 50.000, Scope of Part, is amended to revise the authority "Pub. L. 85-804 as amended by Pub. L. 93-155 (50 U.S.C. 1431-1435), as amended" to "Public Law 85-804 (50 U.S.C. 1431-1434)".

(10) Technical Amendments: Two minor editorial changes are made:

FOR FURTHER INFORMATION CONTACT: Barry McVay at 703-451-5953 or by e-mail to BarryMcVay@FedGovContracts.com.

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