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Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: October 1, 2003

SUBJECT: Federal Acquisition Regulation (FAR); Share-in-Savings Contracting

SOURCE: Federal Register, October 1, 2003, Vol. 68, No. 190, page 56613

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

ACTION: Advance Notice of Proposed Rulemaking (ANPR)

SYNOPSIS: Comments are being solicited on a proposed FAR Subpart 39.3, Share-in-Savings Contracting, which would implement Section 210 of the E-Government Act of 2002 (Public Law 107-347). Section 210 authorizes the use of share-in-savings (SIS) contracts for information technology (IT). In SIS contracts, the contractor finances the work and then shares the savings generated from contract performance with the agency.

DATES: Comments should be submitted on or before October 31, 2003.

ADDRESSES: Submit written comments in response to the ANPR to General Services Administration, FAR Secretariat (MVA), 1800 F Street, NW, Room 4035, Attn: Laurie Duarte, Washington, DC 20405. Submit e-mail comments to: ANPR.2003-008@gsa.gov. Cite "ANPR FAR case 2003-008" when referring to this ANPR.

FOR FURTHER INFORMATION CONTACT: Craig R. Goral, 202-501-3856.

SUPPLEMENTAL INFORMATION: Section 210 of Public Law 107-347 authorizes the use of SIS contracts for IT. SIS is a performance-based concept intended to help an agency leverage its limited resources to improve or accelerate mission-related or administrative processes and lower costs for the taxpayer. Under Section 210, agencies are permitted to enter into SIS contracts not to exceed five years (10 years with the agency head's approval). Agencies are obligated to pay the contractor for services performed only if savings are realized and, in such cases, a portion of the savings. The agency may retain its share of the savings (that is, not return the savings to the Department of the Treasury), with certain exceptions.

The Section 210 authority to award SIS contracts expires September 30, 2005.

The following are the proposed contents of FAR Subpart 39.3, which would implement Section 210:

• FAR 39.300, Scope of Subpart. It cites Section 210 of Public Law 107-347 as the authority for the SIS policies and procedures.
  
  
• FAR 39.301, Definitions. It includes definitions of:
  
  
  • "Cancellation" ("Cancellation results when the contracting officer (i) notifies the contractor of nonavailability of funds for contract performance for any subsequent program year; or (ii) fails to notify the contractor that funds are available for performance of the succeeding program year requirement.")
    
    
  • "Savings" ("(1) monetary savings to an agency; or (2) savings in time or other quantifiable benefits realized by the agency, including enhanced revenues (other than enhanced revenues from the collection of fees, taxes, debts, claims, or other amounts owed the federal government).")
    
    
  • "Share-in-Savings contract" ("a contract under which (1) a contractor provides solutions for improving the agency's mission-related or administrative processes or for accelerating the achievement of agency missions; and (2) the government pays the contractor an amount equal to a portion of the quantifiable savings derived by the agency from (i) any improvements in mission-related or administrative processes that result from implementation of the solution; or (ii) acceleration of achievement of agency missions.")
  
  
• FAR 39.302, Authority. It states that the agency head is authorized to enter into SIS contracts for IT, and that authority expires September 30, 2005.
  
  
• FAR 39.303, Applicability. It states that use of SIS contracts "should be considered only for projects involving significant innovation or process transformation." It encourages agencies to complete the "Share-in-Savings Project Screening Template" at http://www.gsa.gov/shareinsavings, and the information "will help the General Services Administration to assist agencies in determining the potential effectiveness of using the authority of this subpart." It also identifies the SIS contracts to which the capital programming requirements of Office of Management and Budget (OMB) Circular A-11, Preparation and Submission of Budget Estimates, apply.
  
  
• FAR 39.304, Limitations on Share-in-Savings Contract Period of Performance. It limits the duration of SIS contracts to five years, except that an SIS contract may be for up to 10 years if "the head of the agency determines in writing prior to award of the contract that (1) the level of risk to be assumed and the investment to be undertaken by the contractor is likely to inhibit the government from obtaining the needed information technology competitively at a fair and reasonable price if the contract is limited in duration to a period of 5 years of less; and (2) use of the information technology to be acquired is likely to continue for a period of time sufficient to generate reasonable benefit for the government."
  
  
• FAR 39.305, Use of Performance-Based Contracts. This requires that SIS contracts be performance-based. "Objective outcomes and performance standards shall be used to measure achievements and milestones that must be met before payment is made (see [FAR] Subpart 37.6 [Performance-Based Contracting])."
  
  
• FAR 39.306, Share-in-Savings Baseline. This requires that each SIS contract "shall include a clause containing a quantifiable baseline that is to be the basis upon which a saving share ratio is established to govern the amount of payment a contractor is to receive under a contract," and that the agency's senior procurement executive "shall determine in writing that the terms of the baseline clause are quantifiable and will likely yield value to the government."
  
  
• FAR 39.307, Managing Retained Savings. This permits an agency to "retain savings in excess of the total amount of savings paid to the contractor under the contract, but [the agency] may not retain any portion of such savings that is attributable to a decrease in the number of civilian employees of the federal government performing the function." It goes on to provide that such funds "remain available until expended; and [shall] be applied first to fund any cancellation or termination liabilities associated with Share-in-Savings procurements that are not fully funded."
  
  
• FAR 39.308, Cancellation or Termination. This consists of two subsections:
  
  
  • FAR 39.308-1, Paying for Cancellation or Termination. It provides that "the amount payable in the event of cancellation or termination of a Share-in-Savings contract shall be negotiated with the contractor at the time of contract award." It goes on to specify which appropriations are to be used to pay the costs of cancellation or termination of the SIS contract.
    
    
  • FAR 39.308-2, Funding of Cancellation or Termination Liability. It requires that "the funds obligated for Share-in-Savings contracts must be sufficient to cover any potential cancellation and/or termination costs." However, it provides an exception: "(b)(1) The head of an agency may enter into Share-in-Savings contracts even if funds are not made specifically available for the full costs of cancellation or termination of the contract provided that (i) the action is approved as provided in paragraph (b)(1)(iii) of this subsection; (ii) funds are available and sufficient to make payments with respect to the first fiscal year of the contract; and (iii) the following conditions are met regarding the funding of cancellation and termination liability: (A) the amount of unfunded liability does not exceed the lesser of 25 percent of the estimated costs of a cancellation or termination, or $5 million; (B) an unfunded cancellation or termination liability in excess of $1 million has been approved by the Director of the Office of Management and Budget; [and] (C) notification has been provided to OMB" at least 30 days prior to solicitation issuance."
    
    Paragraph (b)(2) limits the aggregate number of SIS contracts that may be awarded without full funding of the cancellation or termination costs to "five in each of fiscal years 2003, 2004, and 2005 for each of the following groups of agencies: (i) the Department of Defense, NASA, and the Coast Guard; (ii) all other agencies."
  
  
• FAR 39.309, Solicitation Requirements. This requires that solicitations for SIS contracts "use competitive procedures to the maximum extent practicable. Each solicitation shall include provisions and evaluation criteria ensuring that (1) the contractor's share of savings reflects the risks involved and market conditions; and (2) the government will realize best value from the contract." It continues by recommending that contracting officers "consider the use of a technology refreshment clause to ensure the information technology provided under the contract incorporates desired technological advancements throughout the entire period of contract performance."

The introduction to the ANPR states that the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council, "seek the public's comment on the challenges associated with SIS contracts, such as the establishment of quantifiable baselines and a reasonable return on investment (ROI) over the life-cycle of the investment, so that this tool can be applied effectively to improve mission performance...The Councils, along with the OMB, wish to ensure the necessary guidance is in place for agencies to effectively motivate contractors and successfully capture the benefits of an SIS contract. Given the Government's limited experience with this tool...the Councils are soliciting public comment for consideration in drafting implementing FAR regulations...Respondents are welcome to share any insights that may assist in managing the use of SIS contracts, but are especially encouraged to comment on the following issues:

• "Proposal preparation. What type of information or guidance will vendors need in the solicitation to adequately prepare a proposal for an SIS contract?
  
  
• "Share ratios. What criteria should be taken into account in developing an appropriate share ratio and schedule for payment? Should ROIs be market-based? In light of the generally short life cycle of IT, can the Government's interests be adequately protected if it does not share in savings each year?
  
  
• "Baselines. What general factors or criteria should be considered in determining a quantifiable baseline?
  
  
• "Cancellation and termination costs. How, if at all, should the determination of cancellation and termination costs differ from that used in connection with multi-year contracts (see FAR 17.106-1(c) [Cancellation Procedures])?
  
  
• "Ownership rights. Should ownership rights of hardware or property acquired under the SIS contract be addressed in the FAR (e.g., in the coverage on cancellation costs or in a standard contract clause)?
  
  
• "Applicability of requirements. What contract valuation method should be used to determine the applicability of various FAR requirements that are triggered by the dollar amount of the acquisitions?
  
  
• "Contract structure. Should there be a preference for structuring SIS contracts as firm-fixed price or fixed-price with economic price adjustment? Under what, if any, circumstances would other contract types be appropriate?
  
  
• "Use of FAR 37.6. Which, if any, of the policies pertaining to performance-based contracting in FAR Subpart 37.6 should not be applicable to an SIS contract, and why?
  
  
• "Potential projects. What types of activities in the IT arena might be especially conducive to SIS contracting?"

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

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