ISM-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 and Mediator

Tel: 310.373.1981
Fax: 310.373.4182
Toll Free: 888-ADROffice
E-mail: ADROffice@Rumbaugh.net

PO Box 2636
Rolling Hills, California 90274

PO Box 2095
Burlingame, California 94011

7July 2001

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

1. UNDERSECRETARY OF DEFENSE ISSUES “CONTRACTOR COST SHARING” MEMORANDUM: On May 16, 2001, the Honorable EC Aldridge, Jr., Undersecretary of Defense (Acquisition, Technology & Logistics), issued an important memorandum on the financial health of the defense industry. In particular the concern was expressed on having financially sound companies being ensured by considering “carefully the degree of investment they (contractors) are making in defense programs.” The Undersecretary cited the following examples of unacceptable “contractor investment in defense programs”—

• Use of contractor independent research and development funds to subsidize defense contract research and development.
• Cost ceilings that in essence convert cost-type contracts into fixed-price contracts.
• Unreasonable capping of annual funding increments on research and development contracts.
• Award of development contracts at prices that are known to be less than the contractors' probable costs of performance.
  Any necessary changes in DoD 5000 series were also directed. The memo concluded with the admonition, “I believe this is a particularly important issue, and I expect the full support of the Military Department and Defense Agencies to ensure that contractor investment is curtailed.”
  
  COMMENT: Note that only “examples” are indicated and the direction is clear. The only stated exception is in “unusual situations where there is a reasonable probability of a potential commercial application related to the research and development effort.” Could improper investments also include a practice/policy that manifests itself by a
  
• Reduced/eliminated fee/profit?
• “Overly-broad SOW” with “low” estimated costs where subsequent increased funding—and increased estimates—operate (and arguably may have been originally intended by some) so as to eliminate any reasonable additional fee(s) for (purported) “in-scope” effort by the contractor?
  Does the DFARS/FAR need to be revised to reflect this new policy which was described by a trade association, in its letter to the Undersecretary, as a “reversal of DoD's prior cost-sharing policy?” Should the A-12 termination be converted to a T for C given this policy direction?
  
  

2. DoD Director of Defense Procurement Disapproves use of army contract clause. On June 5, 2001, Director of Defense Procurement Deidre Lee issued an important memorandum to the Army that disapproved the use of an Army “nonstandard clause” entitled, “Reporting of Contract Manpower Data Elements” which related to reporting information on contractor workforce equivalents. This clause was issued as a final rule in the Federal Register on December 26, 2000. The Director stated in that memorandum,
“It is premature to approve use of this clause, even on a temporary basis, until we better understand its projected utility, its cost and administrative impact on contractors, and other legal, contractual, and implementation issues. This clause has a significant effect beyond the internal operating procedure of the Army, and may have a significant cost or administrative impact on contractors.”
The Army subsequently issued direction “to immediately suspend use of the draft AFARS provision 'Reporting of Contract Manpower Data Elements' or similar requirement language, in new solicitations and contract actions.” Discretion was also provided in deleting this clause from existing contracts.

And, NAVAIR clause 5252.237-9503, “Ordering Procedures for Navy Marine Corps Intranet (NMCI) Services (SEP 2000)” was surfaced by a reader whereby a contract may “require the use of and/or access to” specific Navy IT resources available from/through another Navy contractor. This clause also requires contracting officer's prior approval to order same and the ordering contractor “shall be reimbursed for the placement of NMCI Orders including applicable indirect burdens (general & administrative, etc.) excluding any profit or fee.”

COMMENT: Apparently the Army did not contemplate/know DoD approval was required to use its clause—a message in itself as to “all” Departments? This “disapproval” action by the Director should not be overlooked as being a possible course of action (before/after Federal Register publication) for other perceived noncompliance with FAR Part 1, OFPP Act, and/or Paperwork Reduction Act provisions that address the promulgation/use of provisions, clauses, policies, handbooks, guides, etc. that impact contractors. Of course, having appropriate deviations in place may be a prudent action by contracting officers.

Similarly DCAA continues to use/perform “operational audits” in the absence of regulatory authority for same—see 1997 change that deleted DFARS Subpart 242-70.

This memorandum to the Army may be of assistance in other situations—perhaps the cited NAVAIR clause which impacts contractors (e.g. no profit/fee) and where there are no known deviations being issued for any such no profit/fee policy, etc.

3. OMB CIRCULAR A-76 PROPOSED CHANGES. The July 2, 2001, Federal Register noticed proposed changes to OMB Circular A-76, Performance of Commercial Activities. These changes are the “first step in OMB's effort to expand competition, improve service quality, and enhance agency accountability by integrating budgeting and performance.” Comments are due on/before August 16th.

COMMENT: It was reported that DoD will issue later this summer new “step-by-step instructions for conducting public-private job competitions under the 'best value' procurement standard.”

Miscellaneous:

• It is expected that the progress payment rate will increase to 80% for large contractors in October. The impact, e.g. “consideration,” with existing contracts is unclear.
• Air Force Materiel Command is expected to issue authority to permit interim billing of award fees in advance of final award fee determinations. It appears there may be a percentage cap based upon any prior award fee determinations as well as the authority/amount being subject to Award Fee Determining Official approval, not the PCO. It is not clear how this change in policy impacts current award fee contracts.
  
  COMMENT: On proposed contract awards, contractors may want to consider addressing/discussing this interim award fee/billing policy change/clarification prior to award in order to minimize/eliminate any “consideration” issue that may arise if/when the policy is implemented after contract award. Also, see past Updates.
  
  
• As a follow-up to earlier Updates on the topic of “Award Term” contracting, the Air Force recently announced that Boeing received a “$7,000,000,000 indefinite-delivery/indefinite-quantity contract for AWACS modernization and sustainment support effort” with a “basic performance period that concludes September 2007.” The contract also contains “award term provisions that could, based upon the quality of performance, extend the contract through September 2019.” Northrop-Grumman and Lockheed Martin will also perform subcontract work. Incentives include a “special award pool that rewards the contractor team for, among other things, developing enterprise integration initiatives and using cost-avoidance and cost-reduction practices.” It was also reported that the contract provides multi-year award terms, i.e. “four additional, three-year award terms.”
  
• Earlier Updates also noted some comments heard on the street with respect to the (proposed) Air Force linking of CPARS past performance evaluations (lower/raising) for use in source selections based upon a factor of “timely identification and resolution of (contract) issues in controversy” by the contractor. Feedback from a reader noted the AF could probably have implemented this under the guise of “management responsiveness.” But, is that the “real” substantive issue? Should there be mutuality of good faith obligations/cooperation in negotiations and is this too one-sided no matter “how” it is implemented? Further, FAR 33.214(b) merely requires contracting officers and contractors provide the other the reasons for declining to use ADR—without imposition of any “penalty!” Finally, are statutory rights to filing claims being abridged and should a deviation be obtained given ADR precepts and the clear language in FAR 33.214(b)? One major industry trade association sent a letter to the Air Force expressing its displeasure with this AF proposal.
  
  However, one “beneficiary” of this AF linkage is the fallout on, and to, lower tier subcontractors and small businesses, i.e. in order to resolve open items on a “more” timely basis, these contractors will, by necessity, have to be part of that resolution equation, notwithstanding the void in AF policy on the subject. Accordingly, earlier payments to subcontractors and small businesses should be assured by implementation of this policy. Also, contractors may also want to consider looking at “turning some (otherwise) unallowable” ADR costs into allowable costs if this becomes, in effect, policy and a “contract requirement” expected by/from contractors.
  
  
• Discussions on the “impact” on international trade are being escalated since WTO continues to rule that the US provides, in effect, improper subsidies to US companies for sales through foreign sales corporations (shields overseas profit from US income tax). Remember that any “legally authorized” WTO retaliation could/may impact wholly unrelated trade by US companies!
• On May 16, 2001, Undersecretary of Defense EC Aldridge, Jr., also issued a memorandum on “Small Business Program Reinvention” on increased DoD performance in that area with several metrics being implemented in order to ensure improved program performance.
• Previous Updates mentioned the “holding” in the case of US (ex rel. Richard Bagley) v. TRW, Inc. wherein B&P costs incurred pursuant to a teaming agreement were deemed unallowable. The National Defense Industrial Association sent the Government a letter requesting that the IR&D cost principle be clarified so as to properly reflect other statutory/CAS direction that clearly allows such costs.
• The regulatory moratorium imposed by the new Administration has resulted in a “backlog” of at least 39 pending FAR rules that are expected to be published starting later this month.
• The April 12, 2001, GAO decision in Cherokee Information Service (B-287270) should be read for applicability. Some suggest the case illustrates how submitting the best proposal up front actually harmed the offeror because they had no significant weaknesses or deficiencies and consequently did not participate in any “discussions” and, ultimately, did not win the contract.
  
  The Navy has its E-Learning website up and running where one can link to various education-related informational websites, etc. http://www.navylearning.navy.mil/

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