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Barry McVay's FEDERAL CONTRACTS DISPATCH

DATE: March 27, 2000

FROM: Barry McVay, CPCM

SUBJECT: Federal Acquisition Circular (FAC) 97-16, Small Business Competitiveness Demonstration Program and Progress Payments

SOURCE: Federal Register, March 27, 2000, Vol. 65, No. 59, page 16273

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 97-16 to amend the Federal Acquisition Regulation (FAR) in the following three subject areas: (1) the Small Business Competitiveness Demonstration Program; (2) progress payments and related financing policies; and (3) 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), (2), and the technical amendments are effective March 27, 2000. Item (1) is applicable to all solicitations issued on or after March 27, 2000. Item (2) is applicable to all solicitations issued on or after May 26, 2000, but contracting officers may, at their discretion, include the revised or new clauses and provisions in solicitations issued before that date. Comments on the interim rule at item (1) should be submitted to the FAR Secretariat by May 26, 2000, to be considered in the formulation of a final rule.

ADDRESSES: Interested parties should submit written comments on the interim rule at item (1) to the General Services Administration, FAR Secretariat (MVR), 1800 F Street, NW, Room 4035, Attn: Ms. Laurie Duarte, Washington, DC 20405. Cite FAC 97-16, FAR case 1999-012 in all correspondence related to the interim rule. Address e-mail comments to farcase.1999-012@gsa.gov.

FOR FURTHER INFORMATION CONTACT: The following analysts:

     Item (1): Victoria Moss at 202-501-4764.

     Item (2): Jeremy Olson at 202-501-0692.

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) Small Business Competitiveness Demonstration Program: The Small Business Competitiveness Demonstration Program was established in 1988 as a test program by the Small Business Competitiveness Demonstration Program Act (Public Law 100-656), and it was implemented by FAR Subpart 19.10, Small Business Competitive Demonstration Program. The purpose of the program is to (1) assess the ability of small businesses to compete successfully in certain industry groups without the use of small business set-asides (the "designated industry groups" are construction, refuse systems and related services, nonnuclear ship repair, and architectural and engineering services); (2) expand small business participation in 10 targeted industry categories, selected by each agency participating in the program, through use of set-aside procedures, increased management attention, and tailored acquisition procedures; and (3) measure the extent to which awards are made to "emerging small businesses" (ESB) (defined as "no greater than 50% of the numerical size standard applicable to the standard industrial classification code assigned to a contracting opportunity"), and to provide for emerging small business set-asides for acquisitions equal to or less than $25,000 for construction, refuse systems and related services, and nonnuclear ship repair, and $50,000 for architectural and engineering services. The 10 agencies participating in the program are: the departments of Agriculture, Defense (except the National Imagery and Mapping Agency), Energy, Health and Human Services, Interior, Transportation, and Veterans Affairs; Environmental Protection Agency; General Services Administration; and National Aeronautics and Space Administration.

The Small Business Reauthorization Act of 1997 (Public Law 105-135) made the program permanent and made other changes. On May 25, 1999, the Office of Federal Procurement Policy (OFPP) and Small Business Administration (SBA) issued a joint final policy directive on the program which reflected the provisions of the Small Business Reauthorization Act. This interim rule amends FAR Subpart 19.10 to make it consistent with the joint final policy directive.

The most significant changes made to FAR Subpart 19.10 by the interim rule are:

• To FAR 19.1002, Definitions, is added a definition of "emerging small business reserve amount" ("a threshold established by the Office of Federal Procurement Policy of (1) $25,000 for construction, refuse systems and related services, and nonnuclear ship repair; and (2) $50,000 for architectural and engineering services").



• FAR 19.1006, Exclusions, is added (FAR 19.1006, Procedures, and FAR 19.1007, Solicitation Provisions, are redesignated as FAR 19.1007 and FAR 19.1008, respectively). It states that FAR Subpart 19.10 does not apply to "(a) Orders placed against Federal Supply Schedules; (b) Contract awards to educational and nonprofit organizations; or (c) Contract awards to governmental entities."



• Redesignated FAR 19.1007 (formerly FAR 19.1006) is reorganized for clarity. There is one significant change: paragraph (c)(i), which addresses acquisitions of $25,000 or less in one of the designated industry groups that are not set aside for emerging small business because the contracting officer does not have a reasonable expectation of obtaining competitive offers from two or more responsible ESBs, had directed contracting officers to set-aside the acquisition for small businesses in accordance with FAR Subpart 19.5, Set-Asides for Small Business. The revised paragraph (c)(i) now directs the contracting officer to make the award through the 8(a) Program (FAR Subpart 19.8, Contracting with the Small Business Administration (The 8(a) Program)), the HUBZone Program (FAR Subpart 19.13, Historically Underutilized Business Zone (HUBZone) Program), or small business set-asides (FAR Subpart 19.5).

(2) Progress Payments and Related Financing Policies: This final rule revises certain financing policies at FAR Part 32, Contract Financing, to reduce the burdens imposed on contractors and contracting officers by the progress payment type of financing; to permit the use of performance-based payments in contracts for research and development, and contracts awarded through competitive negotiation procedures; to expand the use of subcontractor performance-based and commercial financing payments; and to simplify and clarify related provisions and clauses in FAR Part 52, Solicitation Provisions and Contract Clauses. (EDITOR'S NOTE: Performance-based payments are contract financing payments made after achievement of predetermined goals, such as performance objectives or defined events. See FAR Subpart 32.10, Performance-Based Payments.)

This final rule is the product of a process that began in 1997, when the Director of Defense Procurement established a special interagency "progress payment rewrite" team to review existing policies and procedures related to progress payments. The team solicited comments from industry and government on how to revise FAR Part 32. It reviewed the comments and, in 1998, identified potential changes to FAR Part 32, solicited comments, held a public meeting, and submitted a report that included a draft proposed rule.

A proposed rule was published on February 10, 1999, and 15 respondents submitted public comments. Based on those comments, several clarifying changes have been made to this final rule.

The most significant changes to FAR Part 32 and the related provisions and clauses in FAR Part 52 are:

• In FAR 32.104, Providing Contract Financing, a requirement is added for the contracting officer to "include the form of contract financing deemed to be in the Government's best interest in the solicitation" (paragraph (a)(4)). Also, it states that the contracting officer may provide contract financing in the form of performance-based payments or customary progress payments if "the contractor will not be able to bill for the first delivery of products for a substantial time after work must begin (normally 4 months or more for small business concerns, and 6 months or more for others)...or demonstrates actual financial need or the unavailability of private financing" (paragraph (d)(1)). Paragraph (d)(2) states that financing for a small business must be restricted to contracts that exceed the $100,000 simplified acquisition threshold, and financing for large businesses must be restricted to contracts that exceed $2 million (the previous threshold was $1 million). For indefinite-delivery contracts, basic ordering agreements, and similar ordering instruments, only orders that exceed the $100,000 simplified acquisition threshold will be considered in determining whether the $2 million threshold will be reached, and the contracting officer must restrict the financing to the orders that exceed the simplified acquisition threshold.



• FAR 32.110, Payment of Subcontractors Under Cost-Reimbursement Prime Contracts, is added. It permits prime contractors that receive cost-reimbursement type payments to use performance-based payments or commercial financing payments with their subcontractors if the subcontracts meet the same criteria and use essentially the same terms as those in the prime contract.



• FAR 32.113, Customary Contract Financing, is revised to state that "the solicitation must specify the customary contract financing offerors may propose" (see revised FAR 32.104 above). In addition, "performance-based payments" are added as customary financing of contracts for supplies or services awarded under the procedures in FAR Part 15, Contracting by Negotiation. Contracting officers may now use either progress payments based on costs (see FAR Subpart 32.5) or performance-based payments (see FAR Subpart 32.10) for these contracts, but not both. (EDITOR'S NOTE: The prohibition against the use of performance-based payments for competitively negotiated contracts is also removed from FAR 32.1000, Scope of Subpart. The prohibition against the use of performance-based payments for contracts awarded through sealed bids remains because performance-based payments require discussions, and discussions are not permitted in sealed bidding (see FAR 52.232-28 below). Also removed from FAR 32.1000 is the prohibition against the use of performance-based payments for research and development contracts.)



• The first sentence of paragraph (c)(4) of FAR 32.205, Procedures for Offeror-Proposed Commercial Contract Financing, is revised to clarify that the contracting officer is to calculate the time value of proposal-specified contract financing arrangements.



• Removed from paragraph (a) of FAR 32.501-1, Customary Progress Payment Rates, is the authorization for DOD to establish customary progress payment rates for foreign military sales (FMS) and flexible progress payments that differ from the customary rates (80%, except the rate for small businesses is 85%). (EDITOR'S NOTE: The introductory material to this final rule states, "DOD no longer uses flexible progress payments and does not intend to establish alternate rates for FMS.")



• FAR 32.502-1, Use of Customary Progress Payments, is completely revised. Most of the language has been moved to FAR 32.104 (see above) -- minimum length of contract to be eligible for customary progress payments, minimum size of contracts eligible for customary progress payments, how to determine minimum size of contracts which consist of a series of orders (such as task- or delivery-order contracts). The remaining language states that the contracting officer may use a Progress Payments clause in solicitations and contracts in accordance with FAR Subpart 32.5 (instead of "shall be based upon considerations of the criteria in this subsection"). Also, the statement "reasonable doubts should be resolved in favor of including the Progress Payments clause in the solicitation" is removed.



• FAR 32.503-1, Contractor Requests, is revised to establish a $2,500 minimum for progress payment requests "unless agency procedures authorize a lower amount."



• Paragraph (f) of FAR 32.503-6, Suspension or Reduction of Payments, which addresses the fair value of undelivered work, is stripped of all the excess verbiage until it basically says "the contracting officer must adjust progress payments when necessary to ensure that the fair value of undelivered work equals or exceeds the amount of unliquidated progress payments." It goes on to state that the application of the loss ratio described in FAR 32.503-6(g) on loss contracts constitutes this adjustment. The application of the FAR 32.503-6(g) loss ratio insures that the progress payments do not exceed the value of the work performed.



• FAR 32.503-7, Limitation on General and Administrative Expenses (G&A) for Progress Payments, is removed. This applies only to contractors that have established an inventory suspense account under Cost Accounting Standard 410, Allocation of Business Unit General and Administration Expenses to Final Cost Objectives, Appendix A, Transition from a Cost of Sales or Sales Base to a Cost Input Base (see Title 48 of the Code of Federal Regulations, Chapter 99, Section 9904.410). FAR 32.503-7 (and its predecessor in the Armed Services Procurement Regulation (ASPR)) dates back to 1979, and it applies to very few contractors.



• FAR 32.503-8, Liquidation Rates -- Ordinary Method, is revised to remove all the language pertaining to liquidation rates for contracts subject to the limitations in FAR 32.803-7, which is removed (see above).



• Paragraph (b)(1) of FAR 32.503-10, Establishing Alternate Liquidation Rates, is revised to remove the language pertaining to contracts subject to the limitations in FAR 32.803-7 (see above). Also, the dollar figures in the examples in paragraph (b)(3) are doubled to reflect the increase in the $1 million threshold to $2 million (see FAR 32.104 above).



• FAR 32.503-13, Quarterly Statements for Price Revision Contracts, is removed. It required contractors to submit quarterly statements under price revision or redeterminable contracts. However, the government's interests are adequately protected by the contracting officer responsible for administering progress payments.



• FAR 32.504 is retitled "Subcontracts Under Prime Contracts Providing Progress Payments" (it had been titled "Subcontracts"), and substantially revised. It now states that "subcontracts may include either performance-based payments...or progress payments...but not both. Subcontracts for commercial purchases may include commercial item purchase financing terms..." It also does away with the "paid cost" rule, which required large contractors to pay their subcontractors before including the payment in its progress payment billings (this restriction did not apply to small businesses). Now, all contractors' requests for progress payments "may include the full amount of commercial item purchase financing payments, performance-based payments, or progress payments to a subcontractor, whether paid or unpaid," if the subcontract or invoice provides for such payments and the contractor will pay the subcontractor before the contractor's next progress payment request to the government.



• FAR 32.1001, Policy, is revised by redesignating paragraph (e) as paragraph (a). This paragraph states that "performance-based payments are the preferred government financing method when the contracting officer finds them practical, and the contractor agrees to their use." Moving the paragraph from the end of FAR 32.1001 to the beginning adds emphasis to this statement of policy.



• FAR 32.1004, Procedures, is revised to add as new paragraph (a)(2)(iv) the following statement: "Because performance-based payments are contract financing, events or criteria must not serve as a vehicle to reward the contractor for completion of performance levels over and above what is required for successful completion of the contract" (paragraph (a)(2)(iv) is redesignated as paragraph (a)(2)(v)). Also, paragraph (b), which addresses performance-based finance payment amounts, is revised to add the following statement: "Performance-based payment amounts are commensurate with the value of the performance event or performance criterion, and are not expected to result in an unreasonably low or negative level of contractor investment in the contract. To confirm sufficient investment, the contracting officer may request expenditure profile information from offerors, but only if other information in the proposal, or information otherwise available to the contracting officer, is expected to be insufficient" (new paragraph (b)(3)(ii)). In addition, a new paragraph (e) is added to address procedures for competitive negotiated solicitations since FAR 32.113 and FAR 32.1003 now permit the use performance-based payments in competitively negotiated contracts (see above).



• FAR 32.1006, Agency Approvals, which stated "the contracting officer shall obtain such approvals as are required by agency regulations", is removed.



• The following clauses are revised to reflect the elimination of the "paid cost" rule (see FAR 32.504 above): FAR 52.216-7, Allowable Cost and Payment; FAR 52.216-26, Payments of Allowable Costs Before Definitization; and FAR 52.232-7, Payments under Time-and-Materials and Labor-Hour Contracts.



• FAR 52.232-16, Progress Payments, is extensively revised. It incorporates the $2,500 minimum for progress payment requests (see FAR 32.503-1 above); reflects the elimination of the "paid cost" rule (see FAR 32.504 above); and reflects that prime contractors that receive progress payments may use performance-based payments with their subcontractors if the subcontracts meet the same criteria and use essentially the same terms as FAR 52.232-32, Performance-Based Payments, or may use commercial item financing payments.



• FAR 52.232-28, Invitation to Propose Performance-Based Payments, is added for use in negotiated solicitations that invite offerors "to propose terms under which the government will make performance-based contract financing payments during contract performance. The government will consider performance-based payment financing terms proposed by the offeror in the evaluation of the offeror's proposal." Also, there is an Alternate I for use in competitive negotiated solicitations if "the government will adjust each proposed price to reflect the cost of providing the proposed performance-based payments to determine the total cost to the government of that particular combination of price and performance-based financing." The contracting officer will make the adjustment using the procedure described in FAR 32.205(c) (see above).

(3) Technical Amendments: The technical amendments update references and make editorial changes in several FAR sections. The most significant changes are to FAR 9.404, List of Parties Excluded from Federal Procurement and Nonprocurement Programs, in which its Internet address is included (http://epls.arnet.gov); FAR 15.404-1, Proposal Analysis Techniques, in which the Internet address for the five-volume set of Contract Pricing Reference Guides is changed to "http://www.acq.osd.mil/dp/cpf"; and FAR 52.212-1, Instructions to Offerors -- Commercial Items, in which the address for the DOD Index of Specifications and Standards (DODISS) Internet site is changed to "http://assist.daps.mil".

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

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