– The Small Business Administration (SBA) is hosting a meet-and-greet event during National Small Business Week in late May in Washington, DC. [Market Watch].
– The Department of Defense sent Congress a legislative proposal that would abridge the definition of a “commercial item” to goods and services actually sold to the public, improving the government’s ability to oversee spending in government contracts. [Huffington Post].
Every time the Government effectuates a regulatory change there is yet another opportunity to learn about the pre-existing regulation. On June 16, 2010, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council implemented an interim rule modifying the market research requirements of the Federal Acquisition Regulation (“FAR”). Their doing so presents government contractors, irrespective of their size, with an important opportunity to learn about market research and its importance in the federal acquisition process.
What IS “Market Research”? Like any buyer in a contracting relationship, the Government wants to ensure that its decisions are informed. The obvious difference for the Government is that its wallet is filled with taxpayers’ money, so every dollar counts. The requirements for market research, under certain circumstances, is the means by which the Government ensures that it is spending no more than it has to on procurement efforts, and that it is not ignoring alternative contracting opportunities that, while less obvious, are equally beneficial.
WHEN Must Agencies Conduct Market Research? FAR Subpart 10.001(2) establishes a series of circumstances when performing market research is required. First, agencies must do so “[b]efore developing new requirements documents for an acquisition by that agency[.]” This succinct clause is perhaps the most important of those that follow. The federal procurement process can easily deteriorate into a cumbersome, illogical circus if the requirements on which it is premised are not based on up-to-date information. Second, agencies must perform market research ”[b]efore soliciting acquisitions with an estimated value in excess of the simplified acquisition threshold[.]“ Per FAR Subpart 2.101(b), the simplified acquisition threshold is, generally, $150,000. However, whether or not agencies must conduct market research is not entirely dependent on the cost of the acquisition. On the contrary, per Subpart 10.001(2)(iii), agencies must conduct market research “[b]efore soliciting offers for acquisitions with an estimated value less than the simplified acquisition threshold when adequate information is not available and the circumstances justify its cost.” Thus, the availability of adequate information is the determining factor, rather than the cost of the acquisition. There are a variety of other circumstances under which agencies must conduct market research. The most interesting circumstance for small business owners is the requirement that, “[o]n an ongoing basis,” agencies must “take advantage (to the maximum extent practicable) of commercially available research methods in order to effectively identify the capabilities of small businesses and new entrants into Federal contracting that are available in the marketplace for meeting the requirements of the agency in furtherance of- (A) A contingency operation or defense against recovery from nuclear, biological, chemical, or radiological attack; and (B) Disaster relief to include debris removal, distribution of supplies, reconstruction, and other disaster or emergency relief activities…” FAR Subpart 10.001(a)(vi).
What FOR? FAR Subpart 10.001(a)(3) identifies how the results of market research should be utilized by federal agencies. Beyond “[d]etermin[ing] if sources capable of satisfying the agency’s requirements exist[,]” most of the remaining uses of market research focus on how agencies’ needs can be equally satisfied through cheaper means. More specifically FAR subpart 10.001(3) requires that agencies consider the use of commercial/nondevelopmental items or whether commercial items can be modified to suit agencies’ objectives and, among other things, that agencies “[e]nsure maximum practicable use of recovered materials…and promote energy conservation and efficiency[.]”
HOW is Market Research Conducted? A number of factors determine the intensity of the requisite market research: “urgency, estimated dollar value, complexity, and past experience.” FAR Subpart 10.002(b)(1). Essential here is that, under FAR Subpart 10.002(b)(1) the market research does not have to be brand new- rather, the “contracting officer may use market research conducted within 18 months before the award of any task or delivery order if the information is still current, accurate, and relevant.” The precise information for which contracting officers should search closely tracks the manner in which the market research should be used (see above). For example, under FAR Subpart 10.002(b)(i), market research should include information addressing “[w]hether the Government’s needs can be met by- (A) Items of a type customarily available in the commercial marketplace[.]” As for the techniques that contracting officers should use to conduct their market research, the FAR gives them a broad array of options, including “[c]ontacting knowledgeable individuals in Government and industry regarding market capabilities to meet requirements[,]” and “[r]eviewing the results of recent market research undertaken to meet similar or identical requirements.” FAR Subpart 10.002(b)(2)
The IMPACT of Market Research. The most important provisions of FAR Part 10 are arguably Subparts 10.002(c), (d)(1), and (d)(2). Each addresses a different possible outcome of the market research, and identifies the associated path forward. Under Subpart 10.002(c), “[i]f market research indicates commercial or nondevelopmental items might not be available to satisfy agency needs, agencies shall reevaluate the need in accordance with 10.001(a)(3)(ii) and determine whether the need can be restated to permit commercial or nondevelopmental items to satisfy the agency’s needs.” (Emphasis added). Under Subpart 10.002(d)(1), “[i]f market research establishes that the Government’s need may be met by a type of item or service customarily available in the commercial marketplace that would meet the definition of a commercial item at Subpart 2.1, the contracting officer shall solicit and award any resultant contract using the policies and procedures in Part 12.” (Emphasis added). FAR Part 12 focuses on the acquisition of commercial items. Lastly, under FAR Subpart 10.002(d)(2), “[i]f market research establishes that the Government’s need cannot be met by a type of item or service customarily available in the marketplace, Part 12 shall not be used. When publication of the notice at 5.201 is required, the contracting officer shall include a notice to prospective offerors that the Government does not intend to use Part 12 for the acquisition.” (Emphasis added). By prescribing specific actions based on the substance of the market research, the FAR ensures that such research be used for more than mere situational awareness, and that the contracting officer adjust his/her conduct based on such research.
Prime Contractor? Sorry, no luck (necessarily). At first glance, the requirement for market research seems only to apply to Government agencies. However, under FAR Subpart 10.003, “[t]he contracting officer shall insert the clause at 52.210-1, market research, in solicitations and contracts over $5 million for the procurement of items other than commercial items.” Accordingly, prime contractors must conduct market research where their contract values are over the $5 million threshold and are for non-commercial items.
The June, 2010 Change. As mentioned above, a June 16, 2010 interim rule modified the FAR’s market research requirement. Among other things, it added the requirement that agencies perform market research “[b]efore awarding a task or delivery order under an indefinite-delivery/indefinite-quantity (ID/IQ) contract…for a noncommercial item in excess of the simplified acquisition threshold…” 10.001(a)(2)(v).
Nervous? Don’t Be! It is unlikely that the market research requirement described herein would negatively impact your small business. First of all, FAR Subpart 10.001 contains a built-in reasonableness mechanism at Subsection (b), which stipulates that, “[w]hen conducting market research, agencies should not request potential sources to submit more than the minimum information necessary.” Furthermore, it is unlikely that, as a small business, you will be required to perform market research as a prime contractor under FAR Subpart 10.003. In fact, as suggested by the interim rule, “[t]he number of small businesses receiving such contract awards is estimated to be statistically insignificant.”
So What? As a small business owner, this provision is unlikely to directly impact you, as discussed above. It would directly benefit you if you manufactured the type of commercial items that may be selected for federal procurement after rigorous market research, but the chances that you do so are relatively slim. Indirectly, however, the FAR’s market research requirements should be encouraging, as they indicate a federally imposed willingness to make informed decisions. Ultimately, it is such a prejudice towards rational decisions that may protect you from a seemingly irrational market.
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Adam Munitz is a lawyer at Fluet Huber + Hoang, a full service law firm focused on the needs of growing government contractors. Adam specializes in Government Contracts Law and Export Compliance. You can reach him by email here.
In December, 2010, the Department of Defense (“DoD”), General Services Administration (“GSA”), and National Aeronautics and Space Administration (“NASA”) modified the Federal Acquisition Regulation (“FAR”) to further discourage “excessive pass-through charges.” Over a year later, this amendment is of critical importance to contractors and subcontractors alike.
History and Context. Sometimes, the DoD, GSA, and NASA modify the FAR without any statutory impetus. Often, however, these agencies are amending the FAR in reaction to, and in furtherance of, new statutes. In short, statutes may be found toothless without the implementing regulations, which add a necessary regulatory bite. Such was the case for the subject amendment, which was in response to the John Warner National Defense Authorization Act for Fiscal Year 2007 (“FY 2007 NDAA”). Section 852(b)(1) of the FY 2007 NDAA stipulates that, “Not later than May 1, 2007, the Secretary of Defense shall prescribe regulations that ensure that pass-through charges on contracts or subcontracts (or task or delivery orders) that are entered into for, or on behalf of, the Department of Defense are not excessive in relation to the cost of work performed by the relevant contractor or subcontractor.” The amendments to the FAR, proposed as an interim rule in October, 2009, and established as a final rule on December 13, 2010, do just this.
What IS An “Excessive Pass-Through Charge”? FAR Subpart 52.215-23, which was added through the interim rule, defined an “excessive pass-through charge” as, “with respect to a Contractor or subcontractor that adds no or negligible value to a contract or subcontract,…a charge to the Government by the Contractor or subcontractor that is for indirect costs or profit/fee on work performed by a subcontractor (other than charges for the costs of managing subcontracts and any applicable indirect costs and associated profit/fee based on such costs.)” This Subpart further defines “no or negligible value” as meaning that, “the Contractor or subcontractor cannot demonstrate to the Contracting Officer that its effort added value to the contract or subcontract in accomplishing the work performed under the contract (including task or delivery orders).” Lastly, “added value” means “that the Contractor performs subcontract management functions that the Contracting Officer determines are a benefit to the Government (e.g., processing orders of parts or services, maintaining inventory, reducing delivery lead times, managing multiple sources for contract requirements, coordinating deliveries, performing quality assurance functions).” Overall, excessive pass-through charges are costs submitted by contractors/subcontractors that are not providing substantive goods/services to the Government but are, rather, merely facilitating the substantive work performed by other subcontractors/lower-tier subcontractors.
Cracking Down. The aforementioned rule was implemented to give the Government greater visibility into situations in which excessive pass-through costs may be incurred, and to give the Government the ability to either reject such charges or recoup such costs in the form of a price reduction. The interim rule added Subparts 52.215-22 and 52.215-23. In addition to prohibiting proposals from containing excessive pass-through charges, generally, 52.215-22 requires contractors/subcontractors to identify in their proposals the work to be performed by such offeror, and the total work to be performed by subcontractors, as measured by total cost.
Furthermore, where the contractor/subcontractor ”intends to subcontract more than 70 percent of the total cost of work to be performed under the contract, task order, or delivery order” to its subcontractor/lower-tier subcontractor, the contractor/subcontractor must identify in its proposal:
“(i) The amount of the offeror’s indirect costs and profit/fee applicable to the work to be performed by the subcontractor(s) [or lower-tier subcontractor(s)]; and
(ii) A description of the added value provided by the offeror as related to the work to be performed by the subcontractor(s) [or lower-tier subcontractor(s)].”
Additionally, FAR Subpart 52.215-23 establishes a reporting requirement which is triggered when the contractor “changes the amount of subcontract effort after award such that it exceeds 70 percent of the total cost of work to be performed under the contract, task order, or delivery order”, or when the subcontractor “changes the amount of lower-tier subcontractor effort after award such that it exceeds 70 percent of the total cost of the work to be performed under its subcontract.” Specifically, the contractor must “identify the revised cost of the subcontract effort and shall include verification that the Contractor will provide added value” and the subcontractor must “identify the revised cost of the subcontract effort and shall include verification that the subcontractor will provide added value as related to the work to be performed by the lower-tier subcontractor.”
FAR Subpart 52.215-23 also empowers the Government to reject excessive pass-through charges as unallowable where they are incurred on other than fixed-price contracts and to secure a price reduction for such charges on “applicable DoD fixed-price contracts, as identified in [FAR Subpart] 15.408(n)(2)(i)(B)“. Under the interim rule, price reductions were not authorized on firm-fixed price contracts awarded on the basis of adequate price competition; fixed-price contracts with economic price adjustment awarded on the basis of adequate price competition; firm-fixed price contracts for the acquisition of commercial items; or fixed-price contracts with contracts with economic price adjustment for the acquisition of a commercial item. However, the final version of the rule made such price reductions also inapplicable to fixed-price incentive contracts awarded on the basis of adequate price competition and fixed-price incentive contracts for the acquisition of commercial items. The rationale for this modification is traceable to Section 852 of the FY 2007 NDAA which, according to the FAR Councils, ”is clear that DoD contracts awarded on the basis of adequate price competition, and DoD contracts for the acquisition of a commercial item are not subject to the limitation on pass-through charges.”
Lastly, FAR Subpart 52.215-23 gives the contracting officer auditing authorization and identifies the contracts into which this new clause must be inserted as a flowdown.
It All Comes Down to Contract Types. As a sophisticated business entity, by now you should know that a rule will be applicable or inapplicable depending on the contract type at issue. FAR Subpart 52.215-22 is simply included in all contracts containing Subpart 52.215-23. The applicability of Subpart 52.215-23, however, is more complicated, and is thus captured using the following diagram:
Why Seventy Percent? In response to the final rule, one respondent challenged the 70% threshold, suggesting that 90% was more appropriate. The FAR Councils disagreed, however, as they “identified 70 percent as the threshold whereby a greater risk is assumed by the Government in paying excessive pass-through charges.” Furthermore, “[t]he Councils consider this 70 percent threshold reasonable, because it affords the parties an opportunity to address subcontracting management requirements above this level in more detail and to ensure the contracting officer is able to determine the disclosed subcontract management functions are of benefit to the Government.”
Commercial Contracts Exemption? Not So Fast. Two respondents to the interim rule specifically recommended that all commercial item contracts be exempted from this new rule. However, the FAR Councils did not believe such an exemption to be within either the letter or the “spirit” of Section 852 of the FY 2007 NDAA. Sometimes, commercial item contracts receive a break. That they did not in this case is arguably the result of at least two factors: First, this rule is driven by a specific statute, giving the FAR Councils less discretion to grant exemptions than they may normally have. Second, and perhaps more fundamentally, is the fact that excessive pass-through costs are sufficiently abhorrent to the Government that the commercial or non-commercial nature of a contract will be irrelevant to the calculus.
Scared? Don’t Be! At first glance, this is precisely the type of rule that would appear to severely impact small businesses. However, a more focused review of the rule’s intention will allay such concerns. Small businesses such as yours are far more likely to be the contract participant that is performing the disproportionate share of the contract performance than they are the participant that is simply facilitating such work. Furthermore, where your prime contractor is identified as a potential pass-through violator, the information that you will have to provide under this rule is negligible. As the interim and final rule asserted in assessing the modification’s impact under the Regulatory Flexibility Act, “we do not expect a significant number of entities to propose excessive pass-through charges under contracts or subcontracts, and the information required from offerors and contractors regarding pass-through charges is minimal.”
So What? As discussed above, this FAR modification is unlikely to have a substantial impact on small business entities. Regardless, there is a valuable lesson to be learned from the information contained herein. In the private sector, contracts are written on a daily basis that disproportionately benefit the buyer or the seller. Specifically, unsophisticated private buyers are often disadvantaged by intricate contracts and sellers with superior experience. The Government, however, is not an unsophisticated buyer. On the contrary, it is highly educated and has anticipated your strategies before you have developed them. More importantly, the Government is the most cost-conscious buyer you will ever deal with- its pennies are the taxpayer’s pennies, so it WILL count them. Overall, the Government will not tolerate arrangements in which it is paying contractors for meaningless non-value-added services. Keep this principle in mind and you will save yourself from a myriad of conflicts with your Government customer.
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Adam Munitz is a lawyer at Fluet Huber + Hoang, a full service law firm focused on the needs of growing government contractors. Adam specializes in Government Contracts Law and Export Compliance. You can reach him by email here.
On July 5, 2011, the Department of Defense (“DoD”), General Services Administration (“GSA”), and National Aeronautics and Space Administration (“NASA”) issued a final rule on suspension and debarment. Six months later, this rule remains of vital importance to all government contractors.
A Little History. Section 2455(a) of the Federal Acquisition Streamlining Act of 1994 stipulates that, “[r]egulations shall be issued providing that provisions for the debarment, suspension, or other exclusion of a participant in a procurement activity under the Federal Acquisition Regulation…shall have government-wide effect. No agency shall allow a party to participate in any procurement or nonprocurement activity if any agency has debarred suspended, or otherwise excluded (to the extent specified in the exclusion agreement) that party from participation in a procurement…activity.” Importantly, Subsection (c)(1) defines “procurement activities” as “all acquisition programs and activities of the Federal Government, as defined in the Federal Acquisition Regulation.” Section 815 of The National Defense Authorization Act (“NDAA”) for FY 2010 amended the definition of “procurement activities” to include the following sentence: “Such term includes subcontracts at any tier, other than subcontracts for commercially available off-the-shelf items…except that in the case for commercial items, such term includes only first-tier subcontracts.”
Let’s Back Up- What is Suspension/Debarment? Under Federal Acquisition Regulation (“FAR”) Section 9.4, federal agencies are authorized to temporarily restrict contractors and/or their representatives from contracting with the U.S. government (suspension), or restrict such activity for a finite period of time, which is generally at least three years (debarment). There are a number of malfeasances that merit such harsh administrative action; those justifying suspension can be found at FAR Subpart 9.407-2 and those justifying debarment can be found at FAR Subpart 9.406-2. The key takeaway, however, is that BOTH suspension and debarment can be imposed for any “cause of so serious or compelling a nature that it affects the present responsibility of the contractor or subcontractor.” FAR Subparts 9.406-2(c) (debarment) and 9.407-2(c) (suspension). This ground for administrative action is extremely broad, and grants federal suspension and debarment officials a remarkable degree of discretion. This should come as no surprise, as FAR Part 9.4 is ultimately intended to compel government contractors to engage in ethical business practices, rather than just punish unethical contractors in retrospect.
Expanding the Scope. Prior to the issuance of the FY 2010 NDAA, Section 2455(a) only mandated that contractors and higher-tier subcontractors check the suspension/debarment status of their first-tier subcontractors and that they report the suspension or debarment of first tier subcontractors contractors to the contracting officer before entering into subcontracts with such contractors. Section 815 of the FY 2010 NDAA expanded the scope of this reporting requirement, so that ANY suspended/debarred subcontractor must be reported in advance, regardless of their position in the supply/services chain. The subject rule modifies this slightly, by only applying the requirement to subcontracts in excess of $30,000. The effect, however, is the same: as of July 5, 2011, suspended/debarred contractors, regardless of the tier in which they perform, must be reported to the contracting officer by prime contractors and higher-tier subcontractors (for efforts in excess of $30,000).
The Commercial/COTS Exception. As usual, there are exceptions to the foregoing rule for commercial items. Specifically, for the procurement of commercial items, the monitoring and checking requirements are only applicable to first-tier subcontractors. Furthermore, the expanded scope is inapplicable to subcontracts for commercially available off-the-shelf items (“COTS”).
So What? If you are a government contractor and are involved in the provision of non-commercial goods or services, regardless of your size, this modification has dramatically expanded the scope of your monitoring and reporting requirements. While this may seem unduly burdensome, you should welcome this enhanced regulation. First, procurement fraud and other malfeasances will undeniably be detrimental to the goods or services you are providing, regardless of the scope or the level on which such miscondcut occurs. Second, this modification forces your business to be proactive in avoiding sanctioned individuals/entities that will eventually be uncovered as performing on government contracts irrespective of their suspended/debarred status. Government investigation of such misconduct is robust, and it is not a question of if investigators will learn of this participation, but rather when. From this perspective, it is better to report and reconcile involvement by suspended/debarred contractors before they have been engaged than to overcome such a hurdle half-way through, or towards the end, of a procurement effort. It is not your business’ fault that a lower-tier subcontractor was suspended/debarred, and this modification helps ensure that you remain faultless and in the clear.
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Adam Munitz is a lawyer at Fluet Huber + Hoang, a full service law firm focused on the needs of growing government contractors. Adam specializes in Government Contracts Law and Export Compliance. You can reach him by email here.
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