FedGovContracts.com

Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: September 20, 2004

SUBJECT: Federal Acquisition Regulation (FAR); Additional Commercial Contract Types

SOURCE: Federal Register, September 20, 2004, Vol. 69, No. 181, page 56315

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

ACTION: Advance Notice of Proposed Rulemaking (ANPR)

SYNOPSIS: This ANPR solicits comments on the implementation of Section 1432 of the National Defense Authorization Act for Fiscal Year 2004 (Public Law 108-136), which expressly authorizes the use of time-and-materials (T&M) and labor-hour (LH) contracts for the procurement of commercial services.

EDITOR'S NOTE: For more on other acquisition-related provisions of Public Law 108-136, see the November 25, 2003, FEDERAL CONTRACTS DISPATCH "Enactment of the National Defense Authorization Act for Fiscal Year 2004."

DATES: Comments on the ANPR should be submitted on or before November 19, 2004.

A public meeting will be held on October 19, 2004, from 10:00 am to 4:30 pm EST, in the GSA Building Auditorium, 1800 F Street, NW, Washington, DC, 20405. Parties are encouraged to provide written comments on issues they would like addressed at the public meeting no later than October 1, 2004. Parties may offer additional questions for discussion at the public meeting.

Parties may register and submit their input electronically at http://www.acq.osd.mil/dpap/dars/coming.htm. Attendees are encouraged but not required to register for the public meeting to ensure adequate room accommodations.

ADDRESSES: Submit comments, identified by "ANPR, FAR Case 2003-027," to: (1) http://www.regulations.gov; (2) http://www.acqnet.gov/far/ProposedRules/proposed.htm; (3) e-mail: ANPR.2003-027@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: Gerald Zaffos, 202-208-6091.

SUPPLEMENTAL INFORMATION: Section 1432 of Public Law 108-136 (which is part of what is referred to as the "Services Acquisition Reform Act" (SARA)), amends Section 8002(d) of the Federal Acquisition Streamlining Act (FASA) to expressly authorize the use of T&M and LH contracts for the procurement of commercial services. Section 1432 places certain conditions on the use of T&M and LH contracts for purchases of commercial services under Federal Acquisition Regulation (FAR) Part 12, Acquisition of Commercial Items: (1) the purchase must be made on a competitive basis; (2) the service must fall within certain categories as prescribed by FASA Section 8002(d); (3) the contracting officer must execute a determination and findings (D&F) that no other contract type is suitable; and (4) the contracting officer must include a ceiling price that the contractor exceeds at its own risk and that may be changed only upon a determination documented in the contract file that the change is in the best interest of the procuring agency. This ANPR is being issued to seek comments on how best to implement the requirements and authorities of FASA Section 8002(d) and SARA Section 1432. (EDITOR'S NOTE: The ANPR states that it "is not intended to affect the special ordering procedures issued by the GSA pursuant to FAR 8.402 [General] for the procurement of services under the Multiple Award Schedules (MAS) Program [that is, Federal Supply Schedules]. MAS policies regarding the placement of orders on a T&M and LH basis will be conformed to the FAR when FAR coverage is finalized.")

The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council, along with the Office of Federal Procurement Policy (OFPP), want to make sure that T&M and LH contracts are used only when warranted, and that the terms and conditions incorporated into resulting T&M and LH contracts adequately protect the parties' respective interests based on the risk each party is to bear. Some of the issues and considerations involved are the following:

1. Suitability of T&M and LH Contracts: Section 8002(d) limits T&M and LH contracts to the following categories of commercial services:
   1. Commercial services procured for support of a commercial item; and
   2. Any other category of commercial services that is designated by the Administrator of OFPP on the basis that --
      1. The commercial services are of a type of commercial services that are commonly sold to the general public through use of T&M or LH contracts; and
      2. (ii) It would be in the best interests of the government to authorize use of T&M or LH contracts for purchases of the commercial services in such category.
   
   To better understand how T&M and LH contracts are used commercially and when their use is in the best interest of the government, OFPP has developed the following questions:
   
   
   • What, if any, types of commercial services are sold to the general public predominantly on a T&M or LH basis?
   • What types of commercial services are rarely, if ever, sold to the general public on a T&M or LH basis?
   • What types of commercial services are commonly sold to the general public through both a T&M or LH and fixed-price basis?
   • What conditions typically exist when services are commonly sold to the general public through the use of T&M or LH contracts?
   • Should this rule adopt the same policy set forth in the FAR for non-commercial items and in GSA's special ordering procedures for acquiring commercial services under the Multiple Award Schedules (MAS) (see http://www.gsa.gov, then click on "GSA Schedules") that restricts T&M and LH contracts to situations where it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence? Why or why not?
   • What steps should a contracting officer be required to take to establish that a fixed-price contract is not suitable?
   
   
2. Terms and Conditions: The current FAR clauses prescribed for the acquisition of commercial items were designed to support firm-fixed price contracts and fixed-price contracts with economic price adjustments. In shaping these clauses, the FAR drafters gave little thought to the risk involved when using flexibly priced contracts. For this reason, the Councils are reviewing these clauses to determine where refinements might be needed to more appropriately reflect the relationship that is created between the Government and a contractor under a T&M or LH contract.
   
   As part of their review, the Councils are considering the provisions that have been traditionally incorporated into T&M and LH contracts in accordance with FAR Subpart 16.6, Time-and-Materials, Labor-Hour, and Letter Contracts.
   
   The Councils are inviting the public, especially small businesses, to provide comment on industry practices, including terms and conditions, relating to commercial use of T&M and LH contracts, particularly on the following questions:
   
   
   • What type of surveillance is conducted under T&M and LH commercial contracts (for example, quality control and inspections)?
   • What responsibility should the contractor bear for correction of non-conforming services under T&M and LH commercial contracts (for example, who should bear the cost of correction or re-performance)? Does the burden of responsibility depend on whether the Government has accepted the service?
   • What oversight is used to ensure work is being properly charged under T&M and LH contracts (for example, what type of information is required to substantiate payment requests)?
   • Is consent to subcontract required for subcontracts not identified in the original proposal?
   • How are material handling or subcontract administration rates charged under T&M commercial contracts? If material handling or subcontract administration rates are reimbursed based on actual rates, how can this be done without application of FAR Subpart 31.2, Contracts with Commercial Organizations?
   • What is the impact if Cost Accounting Standards apply to these contracts?
   • How often and under what circumstances does the customer provide property on a T&M or LH contract? How is the property managed and controlled?
   
   
3. FAR Amendments Under Consideration: The Councils are considering amendments to commercial items policies in FAR Part 12 and associated clauses in FAR Part 52. Also, changes are also being considered to FAR Part 2, Definitions; FAR Part 10, Market Research; and FAR Part 16, Types of Contracts. While the specific FAR changes will not be decided until after comments have been submitted and considered, the following are the main changes being considered. Comments are sought on these preliminary changes, which are published as part of the ANPR.
   
   
   • Determination and Findings (D&F): SARA Section 1432 requires the contracting officer to execute a D&F (see FAR Subpart 1.7, Determinations and Findings) that no other contract type is suitable before proceeding with a purchase on a T&M or LH basis. The D&F helps to ensure that contracting officers give sufficient consideration to fixed-price arrangements that will frequently represent a more appropriate allocation of risk. In the conference report on SARA, Congress made clear that the option to use T&M and LH contracts was not intended to supplant the statutory preference for performance-based fixed-price task orders established by Section 821 of the Defense Authorization Act for FY 2001 (Public Law 106-398) (for more on the acquisition-related provisions of Public Law 106-398, see the November 2, 2000, FEDERAL CONTRACTS DISPATCH "Enactment of the National Defense Authorization Act of Fiscal Year 2001").
     
     The Councils and OFPP generally would expect to find that services are likely to be sold on both a T&M or LH and fixed-price basis in many instances. In these cases, determining whether fixed-price contracts are unsuitable may be more a function of the specific circumstances surrounding the acquisition than the specific nature of the service being acquired. For these reasons, the preliminary draft would require contracting officers to describe the market research they have undertaken to evaluate contract options and the rationale for concluding that fixed-prices for the delivery of completed tasks is unsuitable under the circumstances. The preliminary draft would require the contracting officer to prepare a D&F that establishes either (1) that it is not possible at the time of placing the contract to accurately estimate the extent or duration of the work or to anticipate costs with any reasonable degree of certainty or, (2) if work is sufficiently understood to allow for pricing on a fixed-price basis, that fixed pricing would unnecessarily inflate the government's costs or impose unreasonable risk on the contractor.
     
     
   • Terms and Conditions: The Councils are considering an alternate to the standard clause used in commercial contracts, FAR 52.212-4, Contract Terms and Conditions -- Commercial Items, for incorporation into T&M and LH contracts for commercial services. This alternative clause would make the following modifications to FAR 52.212-4:
     
     
     1. Inspection/Acceptance: FAR 52.212-4(a) states that the government may require repair or replacement of nonconforming supplies or reperformance of nonconforming services at no increase in price. The Councils anticipate, based on their initial review of commercial contracts, that the requirement at paragraph (a) for reperformance of nonconforming services is consistent with commercial practice. However, the Councils also determined that, regardless of whether a fixed-price contract or a T&M or LH contract is used, reperformance may not correct defects or may not be possible. In these cases, the Councils believe the government should be able to invoke other remedies, such as requiring action by the contractor to ensure that future performance conforms to contract requirements or acceptance of nonconforming supplies or services with appropriate consideration. Accordingly, this clarification is included in a draft revision to paragraph (a) and a proposed alternate that would be used for T&M and LH contracts.
        
        
     2. Payment: The payment provision at FAR 52.212-4(i) provides that payment shall be made for items accepted. In general, paragraph (b)(3) of FAR 15.403-1, Prohibition on Obtaining Cost or Pricing Data (10 U.S.C. 2306a and 41 U.S.C. 254b), exempts contracts for commercial items from the submission of cost or pricing data, and paragraph (b)(1)(iii) of FAR 15.209, Solicitation Provisions and Contract Clauses, exempts contracts for commercial items from applicability of FAR 52.215-2, Audits and Records -- Negotiations. As a result of SARA Section 1432, these same exceptions would generally apply to T&M and LH contracts used for the acquisition of certain commercial services. However, there are some unique aspects of T&M and LH contracts that may require government review. These reviews would be limited to review of the labor hours, the actual material costs, and actual subcontract costs. Therefore, the Councils are considering an alternate clause that would provide a special payment provision for T&M and LH contracts. The language of the alternate clause is generally derived from FAR 52.232-7, Payments Under Time-and-Materials and Labor-Hour Contracts, which is used for non-commercial acquisitions on T&M and LH contracts, but the language has been modified to incorporate commercial buying practices.
        
        The proposed alternate payment provision requires the contractor to provide access to employees and their timecards, labor distributions, and material and subcontract invoices. The alternate payment provision does not provide for the withholding and retention of payments subject to final audit. Since the proposal does not provide for reimbursement of actual indirect rates (for example, a material handling or subcontract administration rate), the proposal does not require application of FAR Part 31, Contract Cost Principles and Procedures.
        
        Also, paragraphs (b)(1) and (b)(4)(iii) of FAR 52.232-7 allow for the reimbursement of reasonable and allocable material handling costs and/or subcontract administration costs arising from the handling of materials and/or the administration of subcontracts (provided these indirect costs are not included in the loaded hourly rate). As a result, T&M and LH contracts for non-commercial items are generally subject to the provisions of FAR Part 31 and the negotiation of final indirect rates. Since commercial item contracts are not subject to FAR Part 31 and final indirect rates, the Councils have discussed the possibility of using a predetermined rate not subject to any audit and adjustment. However, concerns were raised that this would violate the prohibition on cost-plus-a-percentage-of-cost (CPPC) contracts (see paragraph (c) of FAR 16.102, Policies) if the factor is any amount greater than the actual overhead rate the contractor incurs. Therefore, the alternate payment provision provides for payment of the direct costs of material or subcontracts only and does not allow for the application and payment of separate indirect rates for materials and subcontracts.
        
        Finally, the alternate clause applies the Prompt Payment Act to T&M and LH contracts, thus maintaining the application of the Prompt Payment Act to commercial items acquisitions (see FAR Subpart 32.9, Prompt Payment).
        
        
     3. Termination for Convenience: The current termination language in FAR 52.212-4(l) and the corresponding guidance in paragraph (d) of FAR 12.403, Termination, do not reflect how a contractor would be paid under a terminated commercial T&M and LH contract. Rather than paying the contractor based on a "percentage of contract price reflecting the percentage of the work performed prior to notice of termination," the alternate clause would pay the contractor for the number of direct labor hours expended before the effective date of termination multiplied by the hourly rate(s) in the contract schedule, plus reasonable charges directly related to the termination.
        
        
     4. d. Subcontracts: FAR Part 12 does not address subcontracts -- there is no guidance addressing issues such as consent to subcontracts and advanced notification requirements. However, the Councils believe that the additional risks associated with T&M and LH contracting require surveillance, including insight into subcontracts. A new FAR 12.216, Subcontracts, and paragraph (u) for the alternate clause are being considered that would require the contractor to obtain the contracting officer's consent prior to awarding certain subcontracts. Similar to FAR 52.244-2, Subcontracts, which is used for non-commercial acquisitions involving either T&M or LH contracts, paragraph (u) of the alternate clause would establish standard conditions under which consent is required, and would permit the contracting officer to designate or exempt additional specific subcontracts or categories of subcontracts for consent. The contracting officer would be required to consider the risk, complexity and dollar value of anticipated subcontracts when determining the consent requirements.
        
        
     5. Application of Cost Accounting Standards (CAS): FAR 12.214, Cost Accounting Standards, states that the CAS do not apply to contracts and subcontracts for the acquisition of commercial items when these contracts and subcontracts are firm-fixed price or fixed-price with economic price adjustment, provided that the price adjustment is not based on actual costs incurred. FAR 12.214 is based on a CAS exemption that was promulgated by the CAS Board after enactment of the Clinger-Cohen Act (Public Law 104-106). The scope of the CAS exemption parallels the scope of contract types currently authorized by FAR 12.207, Contract Type.
        
        The need for potential amendments to the current CAS exemption for commercial items is being considered. Temporary waivers are subject to approval by the CAS Board. Permanent exemptions are subject to the regulatory promulgation process. While no changes to FAR 12.214 are reflected in the draft amendment that is being published with this ANPR, FAR 12.214 will be revised to reflect any actions that are taken by the CAS Board. Any public comments addressing CAS will be provided to the CAS Board for consideration.

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

Return to the Dispatches Library.

Return to the Main Page.