FASMG member Charles Rumbaugh's Regulatory Update provides general insight into timely issues facing the purchasing professional and stimulates further discussion. These updates are not intended as legal advice and you should consult your own attorney before applying any item below to a specific situation or real transaction.


CHARLES E. RUMBAUGH
Arbitrator/Mediator
Voice: 310.373.1981
FAX: 310.373.4182
E-mail: ADROffice@Rumbaugh.net
P.O. Box 2636
Rolling Hills, California 90274

P.O. Box 2095
Burlingame, California 94011


15 March 1999


Recent regulatory matters that may be of interest since the last report --

  Recent Regulatory Matters that may be of interest since the last Regulatory
  Update include---

  1.      FAR POLICY ON FINANCING PAYMENTS PROPOSED TO BE REVISED.    On February
  10th a proposed FAR rule was published in the Federal Register which would
  amend "Progress Payments and Related Financing Policies."   Significant
  changes proposed include
  · Elimination of the "paid cost" rule which requires the prime contractor to
  have paid a subcontractor before the payment could be included in its progress
  payment request.  The revised clause allows a large business to include, in
  its progress payment billings, "unpaid subcontractor requests for financing
  payments that the contractor has approved for current payment in the ordinary
  course of business."
  · Permit subcontractor performance-based payments or commercial financing
  payments under prime contracts.
  · Permits use of performance-based payments in contracts for R&D and contracts
  awarded through competitive negotiation procedures (sealed bid prohibition
  remains).
  · Raising the dollar threshold for use of contracting financing with large
  businesses from $1M to $2M.
  · Minimum dollar threshold of $2,500 for individual progress payment requests,
  "unless a lower amount is authorized in accordance with agency procedures."
        Comments are due on/before April 12, 1999.
     COMMENT:   The rule has broadened the scope of "financing payments" rather
  than merely covering "progress payments" to subcontractors-the current
  regulatory area of focus under the primes' progress payment clause.

  The Government emphasis on commercial buying practices over the past few years
  has yet to recognize by regulation progress payment requests from prime
  contractors that include payments for commercial items if there is commercial
  financing, i.e. involves anything other than payment "upon delivery."  This
  proposal will finally recognize that performance-based or commercial financing
  payments for commercial items can "properly" be included in a prime contractor
  progress payment request (without a deviation).

  No change is proposed to FAR 32.1003 "Criteria for Use (of performance-based
  payments)."  This FAR policy specifies the "conditions" that must be satisfied
  in order to permit such payments and that includes a "definitized fixed-price
  type contract" in most cases and "the contract does not provide for other
  methods of contract financing, except that advance payments in accordance with
  Subpart 32.4, or guaranteed loans in accordance with Subpart 32.3 may be
  used."  Note, no "mixing of financing methods/types" in the same contract!

  While this proposed parity with small business progress payment approach in
  eliminating the "paid cost" rule is refreshing, it must be noted that the
  current "incentive" that primes have in paying subcontractors may change.
  However, given the proposed language highlighted above, the subcontractor's
  request must have been "approved" for payment to the prime.  Accordingly,
  "conditionally approved" may not be a viable option to the prime where there
  are some unresolved contract issues?  Further, "to the extent" the prime
  contractor approves part of a subcontractor request should payment be made to
  that extent?

  Lastly, when the final rule is adopted a contractor should be able to elect to
  have the new clause included in existing contracts without additional
  consideration.  The proposal is silent on implementation to existing
  contracts.

  Clearly, some items could be clarified.

  2.      DEPARTMENT OF ENERGY IMPLEMENTS A NEW FEE POLICY.  On March 11th a final
  rule was published in the Federal Register which amends the "Department of
  Energy Acquisition Regulation (DEAR) to revise its fee policies and related
  procedures for management and operating contracts and other designated
  contracts.  The final rule implements a fee policy that ensures that fees are
  reasonable and commensurate with performance, business and cost risks; create
  and implement tailored incentives for performance-based management contracts;
  are structured to attract best business partners; and afford flexibility to
  provide incentives to contractors to perform better at less cost."  The change
  covers over 19 pages in the Federal Register. The "final rule is effective for
  new awards and extensions after April 12, 1999."

    COMMENT:  This on-going effort by DoE provides a good example of how to
  involve the public, e.g. advance rule-making notice utilized, public
  hearings/workshops conducted, website posting of prior actions, and, most
  importantly, the final rule provides a summary of the comments received and
  responses by the Department-this adds value and meaning to the process!

  3.  CONFORMING FAR RULE ON "LATE OFFERS" PROPOSED.  On January 27th a proposed
  FAR rule was published in the Federal Register which would provide uniform FAR
  policy treatment on receipt of late offers and thereby provide a single
  standard for receipt of late offers under commercial, sealed bid, and
  negotiated acquisitions.  Late offers could be considered if to do so does not
  "unduly delay the acquisition" and the "Government mishandled the offer."
  Comments are due on/before March 29, 1999.


  Miscellaneous:

  · NAVAIR INSTRUCTION 4365.3 ("Processing and Reporting of Claims and Requests
  for Equitable Adjustment") was updated November 6, 1998,  whereby all
  contracting officers final decisions, demand letters, and contract
  modifications settling a claim with a face value over $25 million (was $50
  million) must be approved by Navy Office of Assistant Secretary; Research,
  Development and Acquisition  (Acquisition and Business Management) prior to
  issuance.

  · Undersecretary of Defense for Acquisition and Technology Gansler has
  announced increased concern about the impact teaming arrangements have on
  competition with the restructuring/downsizing being undertaken within the
  defense industry.  Contractors should have all contemplated teaming agreements
  reviewed by legal counsel.

  · On the subject of "Y2K," an interesting "Tasking Memorandum" (No. 99-60) was
  issued December 11, 1998, by DCMC "Property Management, Contract Closeout, and
  Terminations."  Specifically, DCMC Contract Administration Offices were
  advised that DCMC

  "would expect contractors to check to see that Government-owned property
  potentially affected by the Y2K problem is Y2K compliant as part of their
  Government property maintenance program required by the applicable FAR
  Government property clause….  Contractors should be made aware that, while we
  (DCMC) are of the opinion that they are expected to check to see that
  Government property in their possession is Y2K compliant, any specific
  direction regarding Y2K compliance for Government property should come from
  the cognizant program office/contracting activity."

  Point of contact for further information is identified as Paul Farley at (703)
  767-2443.  Have you been "made aware" and have you made an appropriate
  response to that awareness "notice" in order to preserve your rights, if any,
  to an equitable adjustment?

  There has also been continued Congressional activities in connection with
  potential Y2K legislation (this would supplement the "Y2K Information and
  Readiness Disclosure Act" that was enacted in October 1998-see discussion in
  previous Updates).  Areas of focus include loan guarantees for small
  businesses, notice period prior to filing of a Y2K lawsuit, higher burden of
  proof, encouragement in use of ADR, duty to mitigate, limitations on attorney
  fees, etc.

  · Small Disadvantaged Business and HUBZone (Historically Underutilized
  Business Zone empowerment contracting program) must be an interesting topic to
  those working those issues on a day-to-day basis.  The recent quotes from
  government officials showing up on the electronic airwaves would strongly
  suggest change is needed in the area, i.e. improvements that recognize those
  who are "qualified" to apply and in streamlining the SBA regulations.  Also,
  with the "5% goal" required by Public Law expiring October 1, 2000, some have
  suggested little likelihood of a "new version" then. Further, it is reported
  that the number of SBAs certifying is "very few" and "no HubZones have been
  certified."

  · An earlier Update referred to the appeal in the case of Department of the
  Army v. Blue Fox.   The issue was whether or not a subcontractor could bring
  an action to enforce an equitable lien against the US, i.e. enjoin payment by
  SBA and the Army to another contractor, in order to recover the amount of
  money an original contractor owed but failed to pay the subcontractor.   In an
  unanimous decision, the Supreme Court in January ruled that a subcontractor
  cannot enforce a lien on Government property.

  · A final FAR rule streamlining the "recruitment costs" and the "public
  relations and advertising cost" cost principles was published March 4th.

  · Interesting notes from DCAA presentation at the December 3rd NCMA East Coast
  National Educational Conference on waiver of cost/pricing data under TINA for
  Boeing (St. Louis) and GE Aircraft Engines:

  Under a "thumbs-up" approach the following attributes should be present in
  order to be a "waiver candidate":  "Sufficient cost or pricing information
  from previous production buys that can be updated, adequate management and
  accounting systems, low risk defective pricing rating, and contractor
  willingness to furnish limited, readily available information (not certified
  cost or pricing data)."  "Thumbs-down" attributes were also identified:
  "Sufficient information not available to determine price reasonableness, major
  changes to the item, outstanding noncompliances with CAS, significant
  estimating system deficiencies, major cost accounting changes impacting future
  costs, and significant defective pricing history."

  My recollection seems to suggest the direction that the current prices were
  moving was also a significant factor in the equation.  Are other prime
  contractors receiving a waiver?  What about subcontractors?


  Recently Published Articles/Notes Include:

          "ADR 'Tips'" (co-author)  American Arbitration Association Dispute Resolution
  Times, on-going quarterly series of articles:

  "How to Make Arbitration Awards 'Binding' On Non-Parties"
  "Ethical Considerations for ADR Neutrals in Providing Quality Customer
  Service"
  "How to Manage Arbitrations When There are Thousands of Exhibits"
  "When are 'Corrections' to Arbitration Awards 'Permitted'"
  "Ways to Mitigate Y2K Problems/Issues and the Use of ADR"
  "Disclosure Obligations of Parties to an Arbitration"
  "Whose Award Is It?"

        "Considerations in having a Party-Appointed Arbitrator"  Society of
  Professionals in Dispute Resolution (SPIDR) News,  Spring  1999.


  Future Speaking Engagements include-

  · March 18, 1999, NCMA Phoenix Chapter, "NES-Innovative Contracting."
  · April 14, 1999, ISM Inland Empire Chapter, "How Will the Y2K 'Bug'
          Affect You and Your Supplier Management?"
  · April 22,  1999, NCMA San Diego Chapter, "NES-Innovative Contracting."
  · April 29, 1999, 1999 NCMA Educational Conference, Antelope Valley     Chapter,
  "Will the Y2K Bug 'Byte' You?"
  · April 30, 1999, Las Vegas, ABA Real Property Construction Forum,
          "Disclosure Obligations for Arbitrators and Mediators."
  · May 6 & 7, 1999, Mexico City, "International Commercial Arbitration for
          Business Executives."
  · May 25, 1999, San Diego, 84th Annual ISM International Purchasing
          Conference, "Will the Y2K 'Millennium Bug' Infect You?"
  · June 15, 1999, NCMA Los Angeles/South Bay Chapter, "ADR in Government
          Contracting."
  · August 5, 1999, NCMA Huntsville Chapter, "Y2K and ADR."
  · August 12, 1999, Washington, DC, NCMA National Conference, "ADR       Between
  Primes/Subs."
  · September 10, 1999, Columbus, Ohio NCMA Chapter, "ADR in Government
          Contracting."

© 1998 Charles E. Rumbaugh

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