Proposed FAR Rule on Government Property Would Affect Profit Negotiations
On August 6, 2009 a proposed FAR rule (FAR case 2008-011) was published for public comment. The proposed rule results from the efforts of an Ad Hoc team formed by the Government to address "feedback" on the sweeping 2007 revisions to Government property rules, and is being proposed in order to "add clarity and correction to the previous FAR rule". Among the many changes being proposed is a revision to FAR Part 15.404 (Proposal Analysis) that would require contracting officers to establish prenegotiation objectives for contract profit by excluding from consideration all contractor-acquired property, unless an item is expressly called out as a contract deliverable. "Contractor-acquired property" is a term of art, and means property acquired, fabricated, or otherwise provided by the contractor for performing a contract, and to which the Government has title. (Ref: FAR 45.101, Definitions.)
The Government holds title to contractor work in process (WIP) in many circumstances, depending on contract type and whether the Government is providing contract financing payments. Title passage is a complex topic and has sparked much controversy and litigation. That said, the Government property clause (52.245-1, June 2007) can help in making some general statements regarding passage of title. For instance, in cost-reimburseable contracts, title generally passes to the Government as costs are reimbursed. Title passes to the Government in fixed-price contracts only if the item is called out as a deliverable. (No doubt Government property purists are shaking their heads while reading this. Let me emphasize once again that the foregoing are general statements, subject to much refinement and nuance.) As noted, title passes to the Government--on a temporary basis--when a fixed-price contract contains contract financing clauses. For example, when performance-based payments (PBPs) are in use, title passes to the Government upon payment of a PBP and returns to the contractor upon liquidation of the PBP payments. (Ref. the PBP contract clause at 52.232-32.)
There are some, mostly attorneys, who claim that the term "title" as used in the Government property clauses actually means "lien"--as in, the Government does not actually take title to the items or to indirect costs allocated to those Government contracts, but instead holds a lien against them. Many other people point out that "title" means "title." More importantly, the Department of Defense has taken the position that "title" does, indeed, mean "title".
(I did say this was a complex topic. Some people lead happy, productive lives, have successful careers, and never have to deal with Government property issues. Others, such as the author, are not as lucky.)
In sum, should this proposed FAR rule become final as drafted, it is likely that any given proposal will have to address the new requirement. Further, it is likely that most contractors will be dealing with Government negotiators whose position(s) exclude fee or profit on the costs of contractor-acquired property. That is not to say that the Government's prenegotiation objectives must prevail in the negotiations, but this rule will almost certainly make it harder for contractors to achieve the levels of contract fee/profit that they have historically experienced.
One last note: the proposed rule says these changes to the Government's profit objective calculations are being made to FAR 15.404-4(a)(3). This makes no sense to me, as that is a section that contains only general statements regarding the Government's policy on contractor profit, and does not provide any detailed guidance. One would think that the appropriate home for this new direction would have been 15.404-4(c), which covers contracting officer responsibilities, and discusses the "how to" of creating a prenegotiation position on contractor profit. Perhaps this issue will be addressed in the final rule. ...
See the proposed rule here.
Comments on the proposed rule may be submitted here
in accordance with the directions for doing so, found in the proposed rule.
What’s New in the Aerospace/Defense Technology
A periodic update on cool things happening in the A&D world, with an emphasis on technology innovation. - Latest Approach to Vehicle Armor: Install Fabric. From the United Kingdom, Defense Industry Daily reports that the U.K.’s Ministry of Defense (MoD) Defense Science and Technology Laboratory has finished testing of AmSafe’s “Tarian” fabric armor. The Tarian (Welsh for “shield”) fabric is applied to vehicles in panels, and offers much the same protection against Rocket-Propelled Grenades (RPGs) as either reactive armor tiles or cage armor, at a weight savings of 50% compared to aluminum cages or 85% compared to steel cage armor. The fabric armor has been called “revolutionary” and, reportedly, is flame retardant and available in camouflage patterns. DID reports that the Tarian armor is already seeing service on Britain’s HET heavy trucks (manufactured by Oshkosh).
AmSafe website: MoD DSTL website: - Air to Ground Lasers: Protect the Popcorn. The U.S. Air Force has reported that a recent test of Boeing’s Advanced Tactical Laser (ATL) hit a ground target from a C-130 plane. The test weapon, described as “a kilowatt-class chemical oxygen iodine laser,” was developed under a $200 million program and is currently scheduled for more testing at White Sands Missile Range in New Mexico. According to GlobalSecurity.org, the ATL is designed to “place a 10-centimeter-wide beam with the heating power of a blowtorch on distant targets for up to 100 shots.”
Boeing website: GlobalSecurity.org website:
- IBM Wins Skynet Development Contract. The U.S. Department of Defense’s Advanced Projects Research Agency (DARPA) announced on August 3, 2009 that IBM had won a $16 million contract to enable “electronic neuromorphic machine technology that is scalable to biological levels.” I don’t know what that means, but it sounds scary. DARPA’s vision for the program, called “Systems of Neuromorphic Adaptive Plastic Scalable Electronics (SyNAPSE),” is “to break the programmable machine paradigm and define a new path forward for creating useful, intelligent machines.” Again, I don’t know what that means either, but if these new machines start searching for Sarah Connor, we all may be in trouble.
Project details: DARPA’s website:
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Study Finds that Recovery Act Funds Go to Companies Prepared to Receive Them
A study conducted by Government Executive magazine, using data from the website www.USAspending.gov, revealed what should have been obvious: roughly 25 percent of American Recovery and Reinvestment Act (ARRA) funds have gone to a small group of 17 "large, well-connected" government contractors, as reported by www.govexec.com.
The study showed that, $1.6 billion of the roughly $7 billion issued through July 15, 2009 has gone to 17 companies previously ranked among the Top 100 government contractors -- including such familiar names as Lockheed Martin, URS Corporation, Hewlett-Packard, Jacobs Engineering, CH2M Hill, and the Bechtel Group. In comparison, the study reports that the amount of ARRA funds issued to 1,137 small businesses in various socioeconomic categories was $1.45 billion.
The study further reports that much of the ARRA funds received by the large contractors are being issued by the Department of Energy (DOE) in order to accelerate environmental clean-up at former nuclear weapons sites. In fact, GovExec reports that the DOE plans to spend more than $39 billion in ARRA funds over the next two years, a figure "greater than its annual appropriation." The funds will likely continue to flow to large businesses instead of small businesses, as the DOE's needs (as well as the ability to pay for liability protection at the nuclear sites) favor "one-stop shops".
Although the news report claims ARRA funds are being disproportionately issued to large companies, creating a situation where "the rich are getting richer," in fact the statistics reported above should surprise nobody. The large government contractors know how to do business with the Federal government, they understand how to prepare proposals and grant applications, and they have the project management and accounting-related control systems to effectively manage the funds and meet mandatory reporting requirements. Compliance with the complex rules and regulations has always been a barrier to entering the Federal marketplace, and the ARRA legislation did nothing to bring down those barriers. To the contrary, ARRA funds carry with them additional and somewhat onerous reporting requirements that may prove difficult for those companies new to the Federal arena to comply with.
The lesson, once again, is that companies willing to invest in themselves will reap the rewards of contract and grant awards, while companies who fail to understand what is required (or to ignore those requirements) will see very little, if anything.
See the entire Govexec.com story here.
OMB Direct Federal Agencies to Get Serious About Contractor Performance Information
On July 29, 2009 the Whitehouse Office of Management and Budget (OMB) issued a memo entitled "Improving the Use of Contractor Performance Information" to all Federal Chief Acquisition Officers (CAOs) and Senior Procurement Executives (SPEs). The memo, citing a GAO report (GAO-09-374), called for Federal agencies to hold their contractors "accountable for past performance," and provides direction to CAOs and SPEs as to the methods for doing so. In particular, the memo describes recent changes to the Federal Acquistion Regulation (FAR) (effective July 1, 2009) that, among other things, create a single, government-wide repository for contractor performance information (called "Past Performance Information Retrieval System" or PPIRS), identify those agency officials reponsible for preparing interim and final performance evaluations, and mandate that achievement (or lack therof) of small business goals must be considered in evaluating contractor performance when the contract includes a Small Business Subcontracting Plan. The memo promises that the OMB will begin to "conduct regular compliance assessments and quality reviews to make certain that agencies subject to the CFO Act are submitting to PPIRS timely performance evaluations" and that part of the OMB reviews will be to ensure that "those evaluations provide clear, comprehensive, and constructive information that is useful for making future contract award decisions". The OMB memo states that evaluations are expected on all contract actions, including individual orders placed under ID/IQ or GWACS contracts, unless the price of those actions fall under a FAR or agency-specific threshold. Moreover, the OMB memo promises that the FAR soon will be revised to require reporting of all terminations for cause or default, as well as "defective cost or pricing information" into PPIRS. At this point it is unclear what is meant by "defective cost or pricing information" or when such would be reported. If the OMB is referring to "defective pricing" (i.e., submission of "cost or pricing data" that is subsequently found to be non-current, inaccurate or incomplete despite a contractor certification to the contrary) then that situation is already addressed by the Truth in Negotiations Act (TINA) and it is (again) unclear what a Contracting Officer would be reporting into PPIRS or when it would be reported, since an allegation of defective pricing can takes years to resolve, as the case makes its way through the Federal court system. Federal contractors have always been sensitive to evaluations and past performance information. As the new regulatory and agency guidance makes clear, agencies will be looking at new performance criteria (e.g., socioeconomic subcontracting percentages) and will be using that information to the benefit (or detriment) of contractors. It is not an especially well-known fact, but past performance evaluations have been deemed to be contracting officer decisions subject to appeal under the Contract Disputes Act; however, it is not yet clear whether these new regulations and corresponding agency policy and procedures will affect the ability of contractors to challenge evaluations they believe to be inaccurate. Regardless of their legal ability to appeal, it will be absolutely critical for contractors to review interim and final evaluations, to ensure that information entered into PPIRS is accurate and fair. The OMB Memo can be found here. The OMB report can be found here.
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