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Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: July 2, 2004

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

SOURCE: Federal Register, July 2, 2004, Vol. 69, No. 127, page 40513

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

ACTION: Proposed Rule

SYNOPSIS: It is proposed that FAR Subpart 39.3, Share-in-Savings Contracting, be added to 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.

EDITOR'S NOTE: For more on the advance notice of proposed rulemaking (ANPR), see the October 1, 2003, FEDERAL CONTRACTS DISPATCH "Federal Acquisition Regulation (FAR); Share-in-Savings Contracting."

DATES: Comments should be submitted on or before August 31, 2004.

ADDRESSES: Submit comments, identified by "FAR Case 2003-008," to: (1) http://www.regulations.gov; (2) http://www.acqnet.gov/far/ProposedRules/proposed.htm; (3) e-mail: farcase.2003-008@gsa.gov; (4) fax: 202-501-4067; or (5) mail: General Services Administration, Regulatory Secretariat (MVA), 1800 F Street, NW, Room 4035, ATTN: Laurie Duarte, Washington, DC 20405.

FOR FURTHER INFORMATION CONTACT: Craig Goral, 202-501-3856, or e-mail: craig.goral@gsa.gov.

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 an SIS contract, the contractor finances the work, and 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.

Agencies are permitted to enter into SIS contracts not to exceed five years (10 years with the agency head's approval).

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

On October 1, 2003, an ANPR was published, and it solicited comments on draft revisions to the FAR, particularly in nine areas: proposal preparation; share ratios; baselines; cancellation and termination costs; ownership rights; applicability of requirements; contract structure; use of FAR Subpart 37.6, Performance-Based Contracting; and potential projects.

Based on comments received, the proposed rule differs from the draft revisions to the FAR in the ANPR in that the proposed rule:

• Emphasizes the need for an open and collaborative environment, both among government participants (such program, budget, finance, and legal offices) and between government and industry to facilitate due diligence and mitigate risk.
  
  
• Provides additional guidance to help agencies develop business cases to justify the use of SIS, including definitions of"benefit pool," "current baseline," and "projected baseline."
  
  
• Specifies options for seeking competition.
  
  
• Describes considerations that may establish best value in the context of SIS contracting.
  
  
• Assists contracting officers in determining which clauses need to be included in SIS contracts.

Proposed FAR Subpart 39.3 would include the following:

• FAR 39.300, Scope of Subpart, which 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:
  
  
  • Benefit Pool ("Savings realized based on the net difference between the current baseline costs and the projected (new) baseline costs derived from the implementation of the new project or program."
    
    
  • Cancellation ("The cancellation (within a contractually specified time) of the total requirements of all remaining program years. 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.")
    
    
  • Current Baseline ("The estimated total cost to the government to implement an information technology project through other than a share-in-savings contract. It includes all costs of ownership, including procurement, management, operation, maintenance, and administration.")
    
    
  • Projected Baseline (The estimated total cost to the government to implement an information technology project through a share-in-savings contract.")
    
    
  • 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, which 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, which states, "This subpart applies only to information technology projects that are appropriate for share-in-savings contracting techniques."
  
  
• FAR 39.304, General, which states that use of SIS contracts should be considered "(1) for projects involving significant innovation or process transformation; (2) when there is senior level management support within the agency; and (3) when there is acknowledgment that the contractor(s) will bear an unusual risk and an open and collaborative environment during the entire acquisition cycle is required to help mitigate that risk." It goes on to state that the SIS contract technique "does not exempt agencies from the requirements for acquisition planning (see [FAR] Subpart 7.1 [Acquisition Plans]), and an information technology acquisition strategy (see [FAR] 39.101(b) [Policy])." Finally, states that major IT SIS contracts are subject to the requirements of Office of Management and Budget (OMB) Circular A-11, Preparation and Submission of Budget Estimates, Part 7, Planning, Budgeting, Acquisitions and Management of Capital Assets.
  
  
• FAR 39.305, Limitations on Share-in-Savings Contract Period of Performance, 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 five years or 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 39.306, Procedures, consists of the following six subsections:
  
  
  • FAR 39.306-1, Formation of an Integrated Project Team (IPT), which states that "agencies are strongly encouraged to forman IPT comprised of program, acquisition, budget, finance, information technology, and legal representatives."
    
    
  • FAR 39.306-2, Development of the Business Case, which requires the development of a business case before use of SIS contracting techniques. "Agencies are strongly encouraged to complete the 'Share-in Savings Business Case Decision Tool' at http://www.gsa.gov/shareinsavings." It continues by stating, "The business case should minimally include a preliminary baseline analysis...The baseline must be quantifiable since it will be the basis upon which a benefit pool is established to govern the share ratio and the amount of payment a contractor is to receive under a contract. The basic elements of the current and projected baselines are: (1) the estimated value of all contracts the government would have awarded for procurement, management, maintenance, administration, and operation of the program; and (2) the costs associated with the Government personnel assigned to the project. There must be a net difference between the current and projected baselines to result in a benefit pool large enough to ensure reasonable savings to the government and to cover contractor costs and incentives commensurate with risk."
    
    
  • FAR 39.306-3, Use of Performance-Based Contracts, which requires that SIS contracts be performance-based in accordance with FAR Subpart 37.6.
    
    
  • FAR 39.306-4, Solicitation of Proposals, requires that SIS contracts "adhere to the competition requirements of [FAR] Part 6 [Competition Requirements]. Contracting officers may use any appropriate competitive procedures authorized by the FAR, including [FAR] 8.404, Using [Federal Supply] Schedules, and [FAR] 15.202, Advisory Multi-Step Process." It goes on to require the contracting officer to include in each SIS solicitation provisions and evaluation criteria that criteria ensure "(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 including reasonable savings." Finally, it recommends that agencies use the "Contractor Proposal Evaluation Model" at http://www.gsa.gov/shareinsavings when developing evaluation criteria.
    
    
  • FAR 39.306-5, Award, requires that SIS contracts be awarded "on a best value basis upon consideration of technical factors, price related factors such as highest life cycle return on investment to the Government, as well as other factors such as highest overall net present value return to both the government and the contractor."
    
    
  • FAR 39.306-6, Managing Retained Savings, provides that "agencies may retain savings in excess of the total amount of savings paid to the contractor under the contract, but 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 39.307, Cancellation or Termination, consists of the following two subsections:
  
  
  • FAR 39.307-1, Paying for Cancellation or Termination, which 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 39.307-2, Funding of Cancellation or Termination Liability, which requires that "funds obligated for share-in-savings contracts must be sufficient to cover any potential cancellation and/or termination costs." However, it provides an exception: "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...funds are available and sufficient to make payments with respect to the first fiscal year of the contract; and 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% 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." Finally, the aggregate number of SIS contracts that may be awarded without full funding of the cancellation or termination costs is limited to "five in each of fiscal years 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 39.308, FAR Clauses, requires the contracting officer, when determining the clauses to include in an SIS contract, to "assume the contract type is firm fixed price; and use the maximum cancellation amount as the contract value."
  
  
• FAR 39.309, Acquisition-Unique Clauses, states that SIS contracts:
  
  
  • Must contain 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."
    
    
  • Must have a cancellation clause "tailored to the specifics of the share-in-savings contract that describes, at a minimum, the cancellation amounts, the basis for those amounts, and the periods during which the government may cancel the contract. The clause shall contain the amount that the contractor and government have agreed will be the maximum amount of government liability under the contract in the event of cancellation."
    
    
  • May include a "termination for convenience clause other than one prescribed in [FAR] 49.502 [Termination for Convenience of the Government] if the prescribed clauses do not adequately address the specifics of the share-in-savings contract. The clause shall contain the amount that the contractor and government have agreed will be the maximum amount of government liability under the contract in the event of termination for convenience."
    
    
  • May include a "technology refreshment clause to ensure the information technology provided under the contract incorporates desired technological advancements throughout the entire period of contract performance. In developing such a clause, contracting officers should consider similar terms and conditions available on the commercial market."
    
    
  • May include other clauses not specifically prescribed in the FAR if appropriate "to ensure that the goals of the share-in-savings contract are attained, provided that such clauses are consistent with applicable statutes and regulations."

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

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