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Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: March 18, 2003

SUBJECT: Federal Acquisition Circular (FAC) 2001-13, Miscellaneous Amendments

SOURCE: Federal Register, March 18, 2003, Vol. 68, No. 52, page 13199

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

ACTION: Final Rules

SYNOPSIS: The Federal Acquisition Regulatory Council is issuing FAC 2001-13 to amend the Federal Acquisition Regulation (FAR) in the following areas: (1) contract types for commercial item acquisitions; (2) preference for U.S.-flag vessels in subcontracts for commercial items; (3) federal, state, and local taxes; and (4) progress payment requests.

EFFECTIVE DATES: All items are effective April 17, 2003.

FOR FURTHER INFORMATION CONTACT: The following analysts:

      Item (1), Victoria Moss, 202-501-4764.

      Item (2), Linda Klein, 202-501-3775.

      Items (3) and (4), Ralph De Stefano, 202-501-1758.

For general information, contact the FAR Secretariat, Room 4035, GS Building, Washington, DC 20405, 202-501-4755.

SUPPLEMENTAL INFORMATION: (1) Contract Types for Commercial Item Acquisitions: This final rule amends FAR 16.202, Firm-Fixed-Price Contracts, and FAR 16.203, Fixed-Price Contracts with Economic Price Adjustment, to indicate that award fee and performance or delivery incentives based solely on factors other than cost may be used in conjunction with firm-fixed-price (FFP) contracts and fixed-price contracts with economic price adjustment (FP/EPA) without changing the FFP or FP/EPA nature of the contract.

The following sentences are added to the end of FAR 16.202-1, Description, and as paragraph (b) of FAR 16.203-1, Description (the introductory text is redesignated as paragraph (a), and paragraphs (a) through (c) are redesignated as paragraphs (a)(1) through (a)(3)):

"The contracting officer may use a firm-fixed-price [or "fixed-price contract with economic price adjustment"] contract in conjunction with an award-fee incentive (see [FAR] 16.404 [Fixed-Price Contracts with Award Fees]) and performance or delivery incentives (see [FAR] 16.402-2 [Performance Incentives] and [FAR] 16.402-3 [Delivery Incentives]) when the award fee or incentive is based solely on factors other than cost. The contract type remains firm-fixed-price when used with these incentives."

In addition, a cross reference to these sections is added to FAR 12.207, Contract Type, to specify that these revisions apply to acquisitions of commercial items.

EDITOR'S NOTE: A proposed rule was published on December 29, 2000, to amend FAR 12.207 and FAR Subpart 16.2, Fixed-Price Contracts, to clarify the contract-type requirements for commercial item acquisitions to conform to Section 8002 of the Federal Acquisition Streamlining Act (FASA) (Public Law 103-355). FASA Section 8002(d) states that the FAR "shall include for acquisitions of commercial items, a requirement that firm, fixed price contracts or fixed price with economic price adjustment contracts be used to the maximum extent practicable..." FASA also prohibits the use of cost-type contracts.

Besides proposing the changes being made by this final rule, the proposed rule would have amended FAR 12.207 to address pricing mechanisms for acquiring commercial services available on a time-and-materials or labor-hour basis within the restrictions on contract type in FAR Part 12, Acquisition of Commercial Items. (For more on the proposed rule, see the December 29, 2000, FEDERAL CONTRACTS DISPATCH "Federal Acquisition Regulation (FAR); Contract Types for Commercial Item Acquisitions.")

Ten respondents submitted comments on the proposed rule. The comments indicated significant confusion concerning the proposed FAR 12.207-2, Commercial Services Available on a Time-and-Material or Labor-Hour Basis, regarding the intended application of the proposed time-and-materials and labor-hour pricing mechanism coverage. Consequently, the FAR Council decided not to make these changes at this time.

However, the introduction to this final rule states, "Although this rule does not address the use of time-and-materials and labor-hour contracts for commercial item acquisitions, the Administrator, Office of Federal Procurement Policy [OFPP], intends to work with the other FAR Council members to develop appropriate revisions to current FAR coverage to address their use, including safeguards that are needed to effectively protect taxpayer interests when these contractual arrangements are used under [FAR] Part 12." This is the same language used in the introduction to a recent Defense FAR Supplement (DFARS) final rule on competition acquisition of services under multiple award contracts (see the October 25, 2002, FEDERAL CONTRACTS DISPATCH "Defense Federal Acquisition Regulation Supplement (DFARS); Competition Requirements for Purchase of Services Under Multiple Award Contracts"). Though the proposed rule did not address time-and-materials or labor-hour contracts, or GSA's Federal Supply Schedule contracts (which are for "commercial items" but permit time-and-materials and labor-hour pricing arrangements), OFPP attempted to force a ban on the use of such contracts by requiring that orders against GSA's FSS contracts be firm-fixed-price. However, many contractors and members of Congress did not believe this was appropriate or necessary, so OFPP decided to delete that portion of the final rule. Nevertheless, as this language attests, OFPP has not given up the fight.


(2) Preference for U.S.-Flag Vessels -- Subcontracts for Commercial Items: This final rule amends FAR 12.504, Applicability of Certain Laws to Subcontracts for the Acquisition of Commercial Items, FAR Subpart 47.5, Ocean Transportation by U.S.-Flag Vessels, and associated clauses to limit the types of subcontracts for which cargo preference statutes are waived.

10 U.S.C. 2631 (which applies to DOD) and 46 U.S.C. 1241(b) (which applies to civilian agencies) provide a preference for use of U.S.-flag vessels for ocean transportation of supplies purchased under government contracts. FAR Part 12 presently waives the requirements of 46 U.S.C. 1241(b) for subcontracts for the acquisition of commercial items. DFARS Part 212, Acquisition of Commercial Items, and DFARS Part 247, Transportation, waive the requirements of 10 U.S.C. 2631 for subcontracts for the acquisition of commercial items with certain exceptions that were added by a final rule effective March 16, 2000 (see the March 16, 2000, FEDERAL CONTRACTS DISPATCH "Defense FAR Supplement (DFARS); Cargo Preference -- Subcontracts for Commercial Items").

On November 7, 2000, a proposed rule was published to amend paragraph (a) of FAR 12.504 by adding 10 U.S.C. 2631 to the list of laws not applicable to subcontracts for the acquisition of commercial items or commercial components (paragraph (a) already includes 46 U.S.C. 1241(b)). However, to reflect the March 16, 2000, clarifying changes to the DFARS, the proposed rule would amend paragraph (d) of FAR 47.504, Exceptions, and paragraph (e) of FAR 52.247-64, Preference for Privately Owned U.S.-Flag Commercial Vessels, to add the following exceptions to the U.S.-flag vessel waiver for subcontracts of commercial items or commercial components:

Because of this proposed change, the entries in FAR 12.504(a) for 10 U.S.C. 2631 and 46 U.S.C. 1241(b) would include "(except for the types of subcontracts listed at [FAR] 47.504(d)".

Four respondents submitted comments on the proposed rule, but the FAR Council did not adopt any of the comments. Therefore, the proposed rule is adopted as final with minor editorial changes.

In addition to these changes, the existing Alternate II of FAR 52.247-64, which had been required in construction contracts in which supplies, materials, or equipment require ocean transportation, is deleted and replaced with a new Alternate II that is to be used if any of the supplies to be transported are commercial items that are shipped in direct support of U.S. military contingency operations, exercises, or forces deployed in connection with United Nations or NATO humanitarian or peacekeeping operations. The prescription for Alternate II of FAR 52.247-64 in paragraph (a)(3) of FAR 47.504, Contract Clauses, is revised accordingly.


(3) Federal, State, and Local Taxes: This final rule amends the prescriptions for FAR 52.229-3, Federal, State, and Local Taxes, and FAR 52.229-4, Federal, State, and Local Taxes (State and Local Adjustments), and revises these clauses to reflect information previously contained in FAR 52.229-5, Taxes -- Contracts Performed in U.S. Possessions or Puerto Rico, which is deleted.

On June 4, 2002, a proposed rule was published to amend FAR 29.401, Domestic Contracts, to clarify the prescriptions for use of FAR 52.229-3 and FAR 52.229-4 (then titled "Federal, State, and Local Taxes (Noncompetitive Contract)"). The rule proposed to do this by combining FAR 29.401-3, Competitive Contracts, and FAR 29.401-4, Noncompetitive Contracts, into a new FAR 29.401-3, Federal, State, and Local Taxes, deleting FAR 29.401-5, Contracts Performed in U.S. Possessions or Puerto Rico, and redesignating FAR 29.401-6, New Mexico Gross Receipts and Compensating Tax, as FAR 29.401-4. In addition, FAR 52.229-5, Taxes -- Contracts Performed in U.S. Possessions or Puerto Rico, would be removed. (EDITOR'S NOTE: For more on the proposed rule, see the June 4, 2002, FEDERAL CONTRACTS DISPATCH "Federal Acquisition Regulation (FAR); Federal, State, and Local Taxes.")

Two respondents submitted comments in response to the proposed rule. As a result, the proposed rule is adopted as final with editorial changes.

The new FAR 29.401-3 directs the contracting officer to insert FAR 52.229-3 in fixed-price contracts exceeding the simplified acquisition threshold that are to be performed wholly or in part in the U.S., its possessions, or Puerto Rico. However, while FAR 52.229-4 had been required to be included in noncompetitive fixed-price contracts exceeding the simplified acquisition threshold that are to be performed wholly or in part in the U.S., its possessions, or Puerto Rico "when [the contracting officer is] satisfied that the contract price does not include contingencies for state and local taxes, and that, unless the clause is used, the contract price will include such contingencies," the revised FAR 52.229-4 may be inserted "if the price would otherwise include an inappropriate contingency for potential postaward change(s) in state or local taxes."


(4) Progress Payment Requests Under Indefinite-Delivery Contracts: This final rule amends FAR 52.232-16, Progress Payments, to require the contractor, under indefinite-delivery contracts, to account for and submit progress payment requests under individual orders as if each order constitutes a separate contract, unless otherwise specified in the contract.

On November 14, 2001, a proposed rule was published to:

(For more on the proposed rule, see the November 14, 2001, FEDERAL CONTRACTS DISPATCH "Federal Acquisition Regulation (FAR); Progress Payment Requests Under Indefinite-Delivery Contracts.")

Eight respondents submitted comments on the proposed rule and, as a result, the proposed rule is adopted as final with minor editorial changes (such as changing the new sentence in FAR 32.503-5(c) from "the contracting officer must coordinate with the contract administration office" to "the contracting officer shall coordinate with the contract administration office."


FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

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