Service Contracting: An Integrated Approach William Cox, CPCM, MAM United States Department of...

Service Contracting: An Integrated Approach

William Cox, CPCM, MAM

United States Department of Veterans AffairsOffice of Acquisition and Materiel Management

Acquisition Assistance Division/[email protected]

April 11, 2007

Today’s Topics1. Introduction to Service Contracting2. Project Management of Service

Contracting3. Risk Management in Service

Contracts4. Financial Aspects of Service

Contracts5. Current Legislation About Service

Contracting6. Labor Laws for Service Contracting7. Contracts for Specialized Services

Chapter 1

Introduction to Service Contracting

Acquisition of Services

Applicable processes and practices in:– Acquisition Planning– Solicitation Development– Performance Assessment

Acquisition Planning

Determining your customer’s requirement

–Who is your customer–Meet with your customer–Reviewing recurring requirements

Market Research: Sum of Two Processes

Provides a general sense of the services available in the market place and their characteristics and capabilities.

+

Determine, with a high degree of confidence, whether any services will satisfy the need, or can be modified or tailored accordingly.

Market Research

Knowledge gained should assist in identifying: • Best methods for conducting a service acquisition • Best available sources for performing the services • Best marketplace practices • Best practices in the performance of services • Benchmarking performance standards/measures • Best practices in evaluation and use of incentives• Best strategies for socioeconomic considerations

How Market Research Can Help?

• Commercial practices• Level of competition• Buyer or Seller Market?• Price estimate• Delivery terms• Payment terms• Warranty terms• Insurance Requirements• Unit pricing terms• Contract type and length• Contract renewal terms• Commercial Clauses

• Commercial standards• Quality processes• Are metrics used?• Certifications/accreditations• Remedies-poor performance• Source Selection procedures• Sample Work Statements• Sample Contract Clauses• Marketing

literature/brochures• Monetary/non-monetary

incentives

Market Research Process

Step 1: Establish a group leader or facilitator for the acquisition team

Step 2: Define basic needs and identify type of service

Step 3: Compile a list of potential sources Step 4: Develop written survey or oral

interview questions Step 5: Conduct surveys or interviews Step 6: Document the market research

Identify Types of Services

• Process services (offsite) — performance of a particular task

• Expert services (on- or off-site) — application of creativity or intelligence

• Operational services (on-site) – service taking place on government property on a regular basis

Market Research Report Components• Description of need• Desired or required delivery schedule• Explanation of methodology

– Method used for compiling and refining list of potential suppliers/vendors

• Firms or organizations contacted– Summary of info received from firms

• Summary of commercial terms and/or performance-based characteristics

• Identification of price ranges

What are Statements of Work and Statements of Objectives?

• A Statement of Work (SOW) is a document describing the:– Minimum requirements for performance of tasks under a

contract – Standards of performance for determining if the requirements

have been met

• A Statement of Objectives (SOO) is a document describing the:– (1) Purpose;– (2) Scope or mission;– (3) Period and place of performance;– (4) Background;– (5) Performance objectives, i.e., required results; and– (6) Any operating constraints.

What is a Performance Work Statement (PWS)?

A Performance Work Statement is a document describing the work in terms of the required results rather than either “how” the work is to be accomplished or the number of hours to be provided, and it structures all aspects of the acquisition around the purpose of the work.


A PWS may be prepared by the Government or result from a Statement of Objectives (SOO) prepared by the Government where the offeror proposes the PWS. The solicitation will include instructions to offerors to submit a PWS with the proposal.


• Enable assessment of work performance against measurable performance standards; and

• Rely on the use of measurable performance standards and financial incentives in a competitive environment to encourage competitors to develop and institute innovative and cost-effective methods of performing the work.

Solicitation Development

• SOW, SOO, or Performance Work Statement• Unique Clauses for Services• Proposal Preparation Instructions• Evaluation Criteria

Key to Procurement Actions

• Establishing contracts from new solicitations

• Modifying existing contracts • Providing task orders and indefinite-

quantity contracts • Establishing the basis for other

documents • Evaluating performance

SOW or PWS Role In the Acquisition of Services• Identifies tasks required of the contractor • Contractually binds the document stating

those tasks the contractor must perform to get paid

• Engages the time and effort of a contractor to perform an identifiable task rather than to furnish an end item of supply

• Identifies either personal or non-personal service contracts

• Defines contractor efforts • Defines deliverables for services and data

SOW/PWS Format

• Scope • Definitions • Government-furnished property and

information • Contractor-furnished items • Specific tasks • Applicable Documents:

– Performance Requirement Summary (PRS) (Word Document)

– Performance Incentives (Word Document) – Others as necessary

Statement of Work or Performance Work Statement Writing Guidelines

Here are the steps when writing a Statement of Work SOW or PWS:

– Identify outputs.– Structure around the purpose of the

work to be performed. – Ensure completeness. – Communicate clearly

Ensuring Completeness

• Identify and define all tasks • Identify completion criteria for each task • Identify relationships between tasks • Exclude unnecessary tasks • Identify logical flow of tasks • Exclude how-to requirements • Make sure that requirements track to

performance standards and to evaluation criteria

Key to Writing Clearly

• Use active voice – The passive voice should not be used.

• Choose descriptive verbs• Distinguish between “shall/will” and

“should/may”• Avoid ambiguity – Eschew Obfuscation.• Avoid generalities, but do not over specify• Avoid agreements to agree• Define all abbreviations and acronyms• Use short sentences

Issues Unique To Different Types of Services• General issues:

– Payment schedule• 31 U.S.C. 3324 specifies that a payment under a

contract to provide a service or deliver an article for the United States Government may not be more than the value of the service already provided or the article already delivered.

• See FAR 32.403 and 32.404 for applicability and exclusions

– Time of performance– Authorization and changes

Issues Unique To Different Types of Services

Issues related to expert services– Delegation– Intellectual property– Patents– Copyright– Disclosure and confidentiality issues– License and royalties


Issues regarding process services– Scope - Define the limits of the work you want done.

The scope of the work is the most frequent source of disputes with service suppliers.

– Issues related to this type of service’s examples include:• Photocopying• Equipment Maintenance• Photographic Services• Data Processing

– Definition of Scope• Quality• Authorization• Completion


Issues regarding operational services– Liability– Insurance– Conduct– Compliance– Use of asset/materials

Key Use of SOW/PWS in Source Selection Process

Key to successful use of SOW/PWS in the source selection process:– Establishment of a clear relationship

between the SOW/PWS, Section L (instructions to offerors) and Section M (evaluation criteria)

Section L, Instruction to Offerors

…is that place in the solicitation where information and guidance is posted to guide offerors in preparing proposals in response to the solicitation.

Section M: Source Selection Criteria

Section M of the solicitation contains the evaluation factors for award. This part of a Request for Proposals is intended to represent a:– Clear communication from the Government to

potential offerors – Statement of what is most important to the

customer(s) or end-user(s) – Delineation of factors dealing with how proposals will

be evaluated

Illustration of the Relationship Between SOW/PWS, Section L & MStatement of Work Performance Requirement

Section L Section M

Provide taxi service so that pick up time is within 5 minutes of request time, 95% of the time.

The offeror shall describe how taxi service will be provided in accordance with the stated requirement.

The agency will evaluate the offeror’s approach for taxi service. The offeror will be evaluated for best value, in terms of technical merit and cost with additional consideration for the offeror’s relevant past performance track record.

Performance Assessment

• Quality Assurance Surveillance Plan (QASP) Development• Implementing Performance Assessment• Contractor Assessment Documentation

Quality Assurance SurveillancePlan (QASP)

• Government’s technical management plan of proposed actions to evaluate performance; not a contractual item (Formulated with SOW/PWS)

• Provides information to potential offerors on– What and when tasks are inspected– What standards will be employed– How assessment will be conducted

• Tailored to requirement (risk management tool)• Provide the means whereby deductions may

properly be taken for non-performance

Contractor Quality Control Plan

Those assessment methods identified in the QASP, together with the contractor’s quality control plan will help determine whether the contractor delivers the level of performance agreed to in the contract.

Implementing Performance Assessment• Insight vs. Oversight

– Shift in focus from process inspection to insight-oriented outcome

• Inspection of Services Clause– Gives the Government the right to inspect anytime,

anywhere– Requires the contractor to provide an inspection

system– Re-performance is required for deficient services

• Commercial Services Inspection and Acceptance Clause– Requires contractors to tender only acceptance-

conforming items– Reserves Government’s right to inspect services

tendered – Surveillance is minimized

Performance Assessment

• Performance assessment should focus on the:– Quality– Quantity– Timeliness of the performance outputs to

be delivered by the contractor• Not on the:

– Steps required– Procedures used to provide the product or

services

Contractor Assessment DocumentationThe record should contain as a minimum:

– The contractor number– A short description of the requirement being

surveyed– The contract paragraph number referencing the

requirement– The method of assessment and observation– The date, time, and location of assessment– The results of the assessment– The signature and title of the individual doing the

assessment

The Federal Supply Schedule Program a.k.a Multiple Award Schedule (“MAS”)• Provides Federal agencies with a simplified

process of acquiring commonly used supplies and services – In Varying quantities– While obtaining Quantity discounts

• Indefinite-delivery contracts are awarded using competitive procedures

• The firms provide supplies and services at stated prices for given periods of time

Industrial Funding Fee

• MAS contracts are funded through a ¾% fee paid to GSA by the agencies that purchase supplies and services

• The fee is incorporated into the price of supplies and services sold on the Schedule

What are the advantages of the MAS Program for buying agencies?

Provides buying agencies with:• The flexibility to select the best value item

that meets their needs at the lowest overall cost

• Ordering directly from the vendor• The relief from the requirements of:

– developing a SOW/PWS (except when ordering professional services),

– issuing a Request for Proposals, – and conducting a competition– administrative activity

How does the MAS Program work for Contractors?

• Contractors may join to sell a single service under a single Schedule or multiple services under multiple Schedules

• GSA determines that the vendor is responsible and the services are priced reasonably

• Reasonable pricing required of contractors by insisting that the Government be treated as the vendor’s “most favored customer”

• It does not guarantee sales for contractors– Only a $2,500 minimum requirement is placed by GSA

Competition Requirements for MAS Program

• Any “authorized purchaser” may purchase services from that vendor without additional competition

• Individual purchasers under the MAS Program do not need to to meet the requirements of “CICA”.– MAS contracts are awarded through “full and open

competition,”

• Agencies must comply with certain basic requirements set forth at FAR 8.404: – sole source awards are limited per FAR 8.405-6– several recent court decisions have emphasized the need

for agencies to review at least three Schedule price lists

Risks inherent in the MAS Program for Contractors• Volume Requirements• Product Requirements• Vendor Requirements

Risks inherent in the MAS Program for Buyers• Conflicts of Interest between GSA and

your agency• Software license agreements are

sometimes not included or, when included, conflict with federal law

• Need to retain complete copy of GSA schedule contract (not just the schedule itself) for contract administration

Current State of The MAS Program for Buyers

• Is quickly becoming the procurement vehicle of choice for many Government buyers

• Is open to most Government agencies • It is considered easy to use• Significantly reduces the administrative

burdens of traditional Government procurements

• Is becoming restricted with the Department of Defense

Current State of MAS Program for Contractors

• Almost every major purveyor of commercial services holds one or more Schedule contracts.

• Provides excellent revenue-generating opportunities without many of the burdens of traditional Government contracts

When Procuring Services, Agencies Must look to the following sources in the order

shown: Services available from the Committee for

Purchase from People Who Are Blind or Severely Disabled

Mandatory Federal Supply Schedules Optional use Federal Supply Schedules Federal Prison Industries, Inc. or commercial

sources

Organizational Conflicts of Interest

Organizational conflict of interests (OCI’s) exist when, because of other activities or relationships with other persons, a person is unable or potentially unable to render impartial assistance or advice to the Government, or the person's objectivity in performing the contract work is or might be otherwise impaired, or a person has an unfair competitive advantage.


DEAR 970.0371-6 -- Incompatibility between regular duties and private interests. (a) Employees of a management and operating contractor shall not be permitted to make or influence any decisions on behalf of the contractor which directly or indirectly affect the interest of the Government, if the employee's personal concern in the matter may be incompatible with the interest of the Government. For example: An employee of a contractor will not negotiate, or influence the award of, a subcontract with a company in which the individual has an employment relationship or significant financial interest; and an employee of a contractor will not be assigned the preparation of an evaluation for DOE or for any DOE contractor of some technical aspect of the work of another organization with which the individual has an employment relationship, or significant financial interest, or which is a competitor of an organization (other than the contractor who is the individual's regular employer) in which the individual has an employment relationship or significant financial interest.


DEAR 970.0371-6 -- Incompatibility between regular duties and private interests, continued: (b) The contractor shall be responsible for informing employees that they are expected to disclose any incompatibilities between duties performed for the contractor and their private interests and to refer undecided questions to the contractor.


GAO: Three types of OCI

1. Impaired Objectivity:– Science Applications Int’l Corp., B-293601 et al., May 3,

2004 (sustained)– PURVIS Systems, Inc. B-293807.3; B-293807.4, August

16, 2004 (sustained)2. Biased Ground Rules:

– Lucent Technologies World Services, Inc., – B-295462, Mar. 2, 2005 (denied)

3. Unequal Access to Information– Johnson Controls World Services, Inc., – B-286714.2, Feb 13, 2001 (sustained)


Reasons for Increasing OCI’s

1.The consolidation within the industries serving the U.S. Government, particularly in the information technology and defense industries

2.The Government is obtaining more and more services from contractors, and those services are increasingly likely to entail the exercise of judgment



3. The use of contract vehicles that invite “marketing” by the contractor risks fostering OCI’s (hunting license)– Usually Indefinite-Quantity, so guaranteed

amount is very low– When a company expresses a view on whether

its umbrella contract includes within its scope the goods or services that an agency wants, is the company viewed as having a conflict of interest?



4. The desire of the contracting officer to enhance the agency’s revenue stream on an interagency contract that earns fees can create what looks like an OCI, which could affect the agency’s objectivity in making determinations about the scope of the contract.

Chapter 2

Project Management of Service Contracting

Learning Objectives• Describe the nature of project management.• Construct a project network.• Perform critical path analysis on a project network.• Allocate limited resources to a project.• Crash activities to reduce the project completion

time.• Analyze a project with uncertain activity times.• Use the earned value chart to monitor a project.• Discuss the reasons why projects fail to meet

performance, time, and cost objectives.

The Nature of Service Project Management• Characteristics of Projects: purpose, life cycle,

interdependencies, uniqueness, and conflict.• Project Management Process: planning (work

breakdown structure), scheduling, and controlling. • Selecting the Project Manager: credibility, sensitivity,

ability to handle stress, and leadership.• Building the Project Team: Forming, Storming,

Norming, and Performing.• Principles of Effective Service Project Management:

direct people individually and as a team, reinforce excitement, keep everyone informed, manage healthy conflict, empower team, encourage risk taking and creativity.

The Nature of Service Project Management• The depth and breadth of service project

management depends on the degree of criticality of the project and how the contracting parties have allocated risk.

• When the government controls the processes and methods of project execution, it will generally retain responsibility for all aspects of project management.

• When a project is executed through a performance-based services contract, the contractor will be primarily responsible for project management.

Project Management Questions

• What activities are required to complete a project and in what sequence?

• When should each activity be scheduled to begin and end?

• Which activities are critical to completing the project on time?

• What is the probability of meeting the project completion due date?

• How should resources be allocated to activities?

Work Breakdown Structure (WBS)Work Breakdown Structure (WBS)

WBSA Simple

Toolto identify

What work/tasks must be done

Adapted from Reference Text, pg. 171

Graphic Display

1.0System

1.1Hardware

1.2Software

1.1.1Design

1.1.2Mfg.

Indented List

1.0 System

1.1 Hardware

1.1.1. Design 1.1.2. Mfg. 1.2 Software

WBS Levels

1

2

3

The WBS can be written functionally oriented or task oriented

WBS – Best PracticesWBS – Best Practices

• The WBS should be developed at an appropriate level of detail to manage the project.

• The WBS should be developed by the entire (multi-functional) project team to ensure completeness.

• Ensure the WBS includes all of the work contained in the contract Statement of Work (SOW).

• Your customer should review the WBS to ensure all project requirements are addressed.

Project PlanningProject Planning

Guidelines (What you must know)

Tools

What is to be done. • List of project deliverables• Work Breakdown Structure (WBS)• Scope of Work• Statement of Work

When it should be done and what is the current status.

• Gantt Chart• Milestone Chart• Critical Path Method (CPM)• Program Evaluation Review Technique (PERT)

Who is responsible for doing it. • Point of contact lists• Organizational Breakdown Structure (OBS)• Responsibility Assignment Matrix (RAM)

How much is it going to cost. • Business Case• Cost Breakdown Structure (CBS)• Earned Value Concept

Tennis Tournament Activities

ID Activity Description Network Immediate Duration Node Predecessor (days)1 Negotiate for Location A - 22 Contact Seeded Players B - 83 Plan Promotion C 1 34 Locate Officials D 3 25 Send RSVP Invitations E 3 106 Sign Player Contracts F 2,3 47 Purchase Balls and Trophies G 4 48 Negotiate Catering H 5,6 19 Prepare Location I 5,7 310 Tournament J 8,9 2

Scheduling Tool – Gantt ChartScheduling Tool – Gantt Chart

Gantt Chart

• Shows Start/finish and duration of various activities

• Easiest schedule to make

• Uses target dates – “Most Likely Time”

• Progress displayed by indicating actuals with symbol

• Tells least amount of information

Months

Determine Requirements ----------------------------------------

Assess Needs ---------------------

Identify Desires -----------------------TIME NOW

Design Hardware -------------------------------------------------------

Develop Preliminary Design -----------

Conduct PDR -------

Develop Final Design -------

Conduct CDR -----

Develop Hardware --------------------------------------------------------------------------

Design Hardware ----------------

Order Materials ------------------------

Develop Prototype ------------ -----------------------------------

Test Hardware --------------------

Manufacture ---------

Time PeriodTask Name

Early Start Gantt Chart for Tennis Tournament

ID Activity Days Day of Project Schedule 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20A Negotiate for 2 LocationB Contact Seeded 8 PlayersC Plan Promotion 3

D Locate Officials 2

E Send RSVP 10 InvitationsF Sign Player 4 ContractsG Purchase Balls 4 and TrophiesH Negotiate 1 CateringI Prepare Location 3

J Tournament 2

Personnel Required 2 2 2 2 2 3 3 3 3 3 3 2 1 1 1 2 1 1 1 1

Critical Path ActivitiesActivities with Slack

Resource Leveled Schedule for Tennis Tournament

ID Activity Days Day of Project Schedule 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20A Negotiate for 2 LocationB Contact Seeded 8 PlayersC Plan Promotion 3

D Locate Officials 2

E Send RSVP 10 InvitationsF Sign Player 4 ContractsG Purchase Balls 4 and TrophiesH Negotiate 1 CateringI Prepare Location 3

J Tournament 2

Personnel Required 2 2 2 2 2 2 2 2 2 2 2 2 2 3 2 2 2 2 1 1

Critical Path ActivitiesActivities with Slack

Scheduling Tool – Milestone ChartScheduling Tool – Milestone Chart

Milestone Chart

• Condensed graphic display

• Shows Milestones

– Planned Target dates

– Revised dates

– Actual dates

• Used on contracts of longer duration

• Does not show relationship between Milestones

Milestone

Determine Requirements

DesignHardware

DevelopHardware

CustomerAcceptance

TimeMonths

Network Schedules – CPM and PERTNetwork Schedules – CPM and PERT

Critical Path Method Program Evaluation Review Technique (CPM) and (PERT)

• Shows longest path through a project

• Shows the path with zero slack time (Critical Path)

• Critical Path – is the shortest time to complete a project

• Shows explicit relationships

• Coordinates the big picture

• To reduce the schedule you must reduce the time it takes to complete activities on the critical path – Called Crashing the Critical Path

• Lays out work flow

Scheduling Tool – Network SchedulesScheduling Tool – Network SchedulesCPM or PERTCPM or PERT

NetworkSchedules

• Developed from WBS

• Shows time to finish

• Shows activity interdependencies

• More difficult to make

• Provides more info than Gantt or Milestone charts

• May use Target time estimate (i.e. CPM)

• May use multiple duration estimates (most likely, optimistic, and pessimistic times) to calculate expected time (i.e. PERT)

Network Schedule

O = Event (Start/Finish) = Activity

Tennis Tournament Activity on Node Diagram

J2

B8

START

A2 C3 D2 G4

E10 I3

F4 H1

TS ES EF

LS LF

Notation for Critical Path Analysis

Item Symbol Definition

Activity duration t The expected duration of an activity

Early start ES The earliest time an activity can begin if all previous activities are begun at their earliest times

Early finish EF The earliest time an activity can be completed if it is started at its early start time

Late start LS The latest time an activity can begin without delaying the completion of the project

Late finish LF The latest time an activity can be completed if it is started at its latest start time

Total slack TS The amount of time an activity can be delayed without delaying the completion of the project

Completion Time Distribution for Tennis Tournament

Critical Path Activities D V A 2 4/36 C 3 4/36 E 10 144/36 I 3 36/36 J 2 0

= 20 188/36 = 5.2 = 2

Costs for Hypothetical Project

Cos

t

(0,0)

Schedule with Minimum Total Cost

Duration of Project

Total Cost

Indirect Cost

Opportunity Cost

Direct Cost

Activity Cost-time Tradeoff

C

C*

D* D Activity Duration (Days)

Normal

CrashSlope is cost to expedite per day

Cost

Cost-Time Estimates for Tennis Tournament

Time Estimate Direct Cost Expedite CostActivity Normal Crash Normal Crash Slope A 2 1 5 15 B 8 6 22 30 C 3 2 10 13 D 2 1 11 17 E 10 6 20 40 F 4 3 8 15 G 4 3 9 10 H 1 1 10 10 I 3 2 8 10 J 2 1 12 20 Total 115

Progressive Crashing

Project Activity Direct Indirect Opportunity TotalDuration Crashed Cost Cost Cost Cost 20 Normal 115 45 8 168 19 41 6 18 37 4 17 33 2 16 29 0 15 25 -2 14 21 -4 13 17 -6 12 13 -8

Normal Duration After Crashing ActivityProject Paths DurationA-C-D-G-I-J 16A-C-E-I-J 20A-C-E-H-J 18A-C-F-H-J 12B-F-H-J 15

Sources of Unexpected ProblemsCost Time Performance

Difficulties requiremore resources

Scope of workincreases

Initial bids orestimates were toolow

Reporting was pooror untimely

Budgeting wasinadequate

Corrective controlwas not exercised intime

Price changes ofinputs

Delay owing totechnical difficulties

Initial time estimateswere optimistic

Task sequencingwas incorrect

Required resourcesnot available asneeded

Necessary precedingtasks wereincomplete

Client-generatedchanges

Unforeseengovernmentregulations

Unexpectedtechnical problemsarise

Insufficientresources areavailable

Insurmountabletechnical difficulties

Quality or reliabilityproblems occur

Client requireschanges inspecifications

Complications withfunctional areas

A technologicalbreakthrough occurs

Earned Value Chart

Actual Cost

Today Dollars

Value Completed

Budgeted Cost (Baseline)

Days

AC

PV

EV

Co

st V

aria

nce

Sch

ed

ule

V

aria

nce

Time Variance

AT

WP

ST

WP

Chapter 3

Risk Management in Service Contracting

More Keys to Writing Clearly

• Be more or less specific.• Don't repeat yourself, or say again what you

have said before. • Never use a big word when a diminutive

alternative would suffice. • No sentence fragments. • And always be sure to finish what

Definition of RiskDefinition of Risk

Risk is a measure of the inability to achieve overall program objectives within defined cost, schedule, and technical constraints and has two components: (1) the probability of failing to achieve a particular outcome and (2) the consequences/impacts of failing to achieve that outcome. *

* RISK MANAGEMENT GUIDE FOR DOD ACQUISITION

Fifth Edition (Version 2.0)

(June 2003)

Definition of RiskDefinition of Risk

Risk is the possibility of suffering loss.* In a development project, the loss describes the impact to the project which could be in the form of diminished quality of the end product, increased costs, delayed completion, or failure.

* Software Engineering Institute and Webster’s Dictionary

Risk Management Overview

• Planning• Identification

• Assessment • Handling• Monitoring • Closure

Plan

Identify

AnalyzeHandling

Monitor

Documentation

Process Improvement

Planning

• Develop a Risk Management structure • Ensure integration within the current

program management framework• Identify key participants and stakeholders• Define roles and responsibilities• Define the processes and methodologies • Establish risk management tools,

parameters, reports and formats. • Train Program Team Members

Risk Management Planning Tips• Risk management plan must include clear

performance based metrics as inputs to your identification process.

• Create a committed project charter for the IPT dedicated to resolving risks without (first) requiring restructuring of the contract.

• Design and structure “how” team members will collaborate to implement effective processes, in order take advantage of these technologies.

• Be sure to evaluate and complete business process design first before building the process with electronic workflow tools

Identification

• Coordinated efforts of:

– Risk Manager

– Independent Assessments

– Program Team Members

• Defined communication streams

• Identify risk attributes

– Risk Definition

– Risk Elements

– Potential Impacts

Risk Management Task

Terms and Conditions

Legal Review and Comment

Cost and Price Data

Marketing Plans

Project Management Review

Business Development

Past Performance Data

Vendor Data

Subcontractor Data

Risk Identification Tips

• Ensure risk identification processes are within each team member’s responsibilities and yearly performance goals for the entire program team.

• Evaluate the use of technology tools to support proactive risk identification

Analysis

• Collect basis of estimates for the impact and likelihood of risk events from subject matter experts.

• Establish dispositions of low, medium, and high risks, and appoint a risk champion to manage mitigation.

• Understand appropriate use of quantitative methods, SME bias, and hypnotic statistical power

Risk Assessment Quantification

1 2 3 4 5

1

2

3

4

5 High

Medium

Low

Consequence

Lik

elih

ood

Antennae Bias

Days Delayed beyond Baseline Schedule Impact

300

120

0

180

60

0%

20%

40%

60%

80%

100%

0 50 100 150 200

Days Delayed (CAI)

Impact Probability

Module Adjustment

Algorithm Redesign

Antennae

Risk Quantification Tips

• The risk quantification process can be delayed for the technical person who wishes to “exhaustively study” the situation to determine a statistically significant BOE, rather than developing a rough-order of magnitude for decision-making.

• Evaluate use of Matrix- displays of quantification data to determine the best way to display risk data to support decisions at Program Management Review (PMR) meetings.

Handling• Develop Mitigations Plans

– Risk Champion– SME’s

• Collect relevant supporting documentation• Determine metrics to monitor Mitigation Actions• Develop Risk Closure Criteria

TIP: Reward successful risk champions and the team for their time efforts and ideas and include incentives in annual performance reviews.

Risk Management Monitoring • Collect status from risk champions• Monitor key plan metrics• Maintain current supporting documentation• Update the Risk Management Database • Monitor mitigation efforts • Generate and distribute summary and detail

reports to relevant Program Team members and Management

Closure

• Collect, verify, and analyze all requisite information pertaining to a potential risk closure

• Coordinate and agree risk closure with all relevant parties including Risk Champion

• Record the criteria supporting each risk close out including all supporting documentation

• Prepare and distribute regular reports detailing risk closures to the relevant parties (i.e Program Manager)

Continuous Process Improvement

• Determine program goals for the use of Six Sigma when evaluating process areas influenced by inter-company members, and look to align risk process metrics with the rest of your organization.

• Continuous process improvement capture provides projects with innovative methods to avoid mistakes of the past. Too often program members recall mistakes and do not leverage advantageous outcomes for good decisions.

• Successful mitigation strategies and risk identification processes are not collected for sharing within programs or across the organization.

Chapter 4

Financial Issues of Service Contracts

Financial Aspects of Service Contracts

Chapter Overview• Budgeting and Appropriations• Service Contract Types• Cost Allowability and Allocability• Cost Accounting Standards• Truth-in-Negotiations Act• Financing and Payment Arrangements

Financial Aspects of Service ContractsBudgeting and Appropriation Process -

Statutory requirements• 31 U.S.C. 1301(a); Appropriated funds used

only for the intended purposes• 31 U.S.C. 1301(d); Reprogramming of funds

cannot violate the intended use provision• 31 U.S.C. 1341 – The Anti-deficiency Act;

Spending limited to the amount stipulated in the appropriation;

• 31 U.S.C. 1502(a) – The Bona Fide Needs Rule; Provisions of the “Bona Fide Needs Rule” are to be followed.

Financial Aspects of Service ContractsContract Types and Characteristics• Firm Fixed-Price• Cost Reimbursable• Time-and-Materials• Labor Hour• Indefinite Delivery / Indefinite Quantity• GSA Schedule

Financial Aspects of Service ContractsCost Allowability and Allocability• Pertinent when actual cost data is used for estimating and

billing purposes.• Relevant contract clauses;

– FAR 52.215-2 – Audit and Records– FAR 52.215-10/11 – Price Reduction for Defective Cost or Pricing

Data– FAR 52.216-7 – Allowable Cost and Payment– FAR 52.232-7 – Payments under Time-and-Materials and Labor

Hour Contracts– FAR 52.232-20 – Limitation of Cost– FAR 52.232-22 – Limitation of Funds

• Contract type and characteristics govern the inclusion of contract clauses and resultant business infrastructure requirements

Financial Aspects of Service ContractsCost Allowability and Allocability• Fundamental accounting concepts

– Actual costs are determined based on full absorption accounting

– Actual costs are computed based on allowable costs• Fundamental business system capabilities• Accounting system

– Consistent definition of cost as direct or indirect– Identification and segregation of unallowable costs– Accumulation and reporting of costs at job or project

level and under general ledger control• Timekeeping and labor charging system – adequate

timekeeping practices and distribution of labor costs

Financial Aspects of Service ContractsCost Allowability and Allocability; Definitions• Actual cost• Allocable costs • Allowable costs • Direct cost • Final cost objective • Full absorption accounting• Indirect cost • Reasonable costs • Unallowable costs

Financial Aspects of Service ContractsCost Allowability and AllocabilityAttributes of an adequate accounting system• Consistency with GAAP• Segregation direct & indirect costs• Direct costs by contract, project, task order,

etc.• Allocation of indirect costs• Job costs under general ledger control • Adequate timekeeping system


Cost Allowability and AllocabilityAttributes of an adequate accounting system• Routine posting of books of account• Segregation of unallowable costs• Segregation of pre-production costs • Financial information for compliance with

notification and billing requirements• Provide reliable data for estimating


Cost Allowability and AllocabilityIndirect cost collection & distribution examples• Overhead

– Direct labor dollars – Direct labor hours– Direct labor dollars and fringe benefits

• Fringe Benefits– Direct labor dollars– Total salaries

Financial Aspects of Service ContractsCost Allowability and AllocabilityIndirect cost collection & distribution examples• Business Unit G&A Expense

– Total cost input– Direct labor dollars

• Home Office Expense– Total segment cost – Total segment sales– Three factor formula

Financial Aspects of Service ContractsCost Allowability and Allocability• Accounting practices for direct and indirect costs

must be consistently applied for US Government contracts

• Application of accounting practices is independent of the ability to bill or recover recorded costs under a US Government contract

• E.G, overtime cost normally accounted for and treated as a direct costs– Specific clause does not allow reimbursable under a given US

government contract as a direct cost– The cost is still accounted for as direct– The cost may not be reclassified and reimbursed as an overall

element of indirect expense

Financial Aspects of Service ContractsCost Accounting Standards• Purpose is to ensure consistent and

equitable accounting practices for cost– Measurement– Assignment– Allocation

• Administrative remedies provided for accounting practice changes or non-compliance


Cost Accounting Standards• Application to negotiated contracts in excess

of $500,000 unless otherwise exempt• Coverage

– Modified CAS coverage requires compliance with CAS 401, 402, 405 and 406

– Full CAS coverage includes applicability of all 19 standards

• Disclosure statement may be required for larger contracts or contractors

Financial Aspects of Service ContractsCost Accounting Standards• CAS 401 - Consistency in Estimating,

Accumulating, and Reporting Costs• CAS 402 - Consistency in Allocating Costs

Incurred for the Same Purpose• CAS 403 - Allocation of Home Office Expenses

to Segments• CAS 404 - Capitalization of Tangible Assets• CAS 405 - Accounting for Unallowable Costs• CAS 406 - Cost Accounting Period• CAS 407 - Use of Standard Costs for Direct

Material and Direct Labor

Financial Aspects of Service ContractsCost Accounting Standards• CAS 408 - Accounting for Costs of Compensated

Personal Absence• CAS 409 - Depreciation of Tangible Capital Assets• CAS 410 - Allocation of Business Unit General and

Administrative Expenses to Final Cost Objectives• CAS 411 - Accounting for Acquisition Costs of

Material• CAS 412 - Composition and Measurement of

Pension Cost• CAS 413 - Adjustment and Allocation of Pension

Cost

Financial Aspects of Service ContractsCost Accounting Standards• CAS 414 - Cost of Money as an Element of the

Cost of Facilities Capital• CAS 415 - Accounting for the Cost of Deferred

Compensation• CAS 416 - Accounting for Insurance Costs• CAS 417 - Cost of Money as an Element of the

Cost of Capital Assets Under construction• CAS 418 - Allocation of Direct and Indirect Costs• CAS 420 - Accounting for Independent Research

and Development Costs and Bid and Proposal Costs

Financial Aspects of Service ContractsTaxes – Department of Energy ContractsDEAR 970.2903-1 -- Applicability of state and local

taxes to the government: It is DOE policy to secure those immunities or exemptions from state and local taxes to which it is entitled under the Federal Constitution or state laws. In carrying out this policy, the Heads of Contracting Activities shall: (a) Take all necessary steps to preclude payment of any taxes for which any of the immunities or exemptions cited in this subpart are available. Advice of Counsel should be sought as to the availability of such immunities or exemptions;

Financial Aspects of Service ContractsTaxes – Department of Energy Contracts970.2903-1 -- Applicability of state and local taxes

to the government, continued:

(b) Acquire directly and furnish to contractors as Government furnished property, equipment, material, or services when, in the opinion of the Head of the Contracting Activity: (1) Such direct acquisition will result in substantial savings to the Government, taking into consideration any additional administrative costs; (2) Such direct acquisition will not have a substantial adverse effect on the relationship between DOE and its contractor; and (3) Such direct acquisition will not have a substantial adverse effect on the DOE program or schedules.

Financial Aspects of Service ContractsTaxes – Department of Energy Contracts

Payment in Lieu of Taxes Under the Atomic Energy Action of 1954 (DOE O 143.1)– Discretionary financial assistance to state and local

governments– DOE publishes policy guidelines it uses to guide decisions

with regard to applications by state or local jurisdictions for discretionary payments in lieu of taxes with regard to eligible real property that is not subject to State and local taxation because it is owned by the United States, is under the custody and control of DOE, and is used to carry out activities authorized by the Atomic Energy Act of 1954, as amended.

– Has exclusions if other acts are applicable

Financial Aspects of Service ContractsTruth-in-Negotiations Act (defective pricing)• Application to all negotiated pricing actions of

$650,000 or more unless:– Price is based on adequate price

competition– Price is set by law or regulation– Contract or subcontract is for a commercial

item– Requirement waived by the head of the

contracting activity

Financial Aspects of Service ContractsTruth-in-Negotiations Act (defective

pricing)• Contractors to certify that cost or

pricing data was complete, accurate, and current as of the date of agreement on contract price

• Price reduced if significant overpricing occurred because the government relied on defective cost or pricing data

Financial Aspects of Service ContractsTruth-in-Negotiations Act (defective pricing)• FAR 52.215-10(a) defines defective pricing• FAR 15.407, 15.408, 52.215-10 and 52.215-11

provides remedies• Government is entitled to

– Price reduction– Interest on any overpayment – Penalty equal to the amount of any overpayment, if

the contractor knowingly submitted cost or pricing data which were incomplete, inaccurate, or noncurrent

• Offsets are allowed


Truth-in-Negotiations Act (defective pricing)• Applicable pricing actions include

– Award of any negotiated contract (except for undefinitized actions such as letter contracts)

– Award of a subcontract at any tier, if the contractor and each higher tier subcontractor have been required to furnish cost or pricing data

– Modification of any sealed bid or negotiated contract (whether or not cost or pricing data were initially required) or subcontract

Financial Aspects of Service ContractsTruth-in-Negotiations Act (defective pricing)Cost or pricing data• All facts • As of the date of price agreement• That prudent buyers and sellers would reasonably

expect to affect price negotiations significantly• Certified as accurate complete, and current in

accordance with FAR 15.406.2• Factual, not judgmental, and are therefore verifiable• Includes the data that form the basis for the prospective

offeror’s judgment about future cost projections

Financial Aspects of Service ContractsTruth-in-Negotiations Act (defective pricing)Contractor obligations• Provide the government a parity of position

with respect to all the factual data supporting price proposals

• Update cost or pricing data, but not necessarily the proposal

• Cooperate during the conduct of a postaward audit

• Obtain cost or pricing data from subcontractors and prospective subcontractors.

Financial Aspects of Service ContractsTruth-in-Negotiations Act (defective pricing)Methods of protection• The preparation and consistent use of an

Estimating System Manual• The development of a sound pricing strategy• Constant updating of the cost or pricing data• Clear understanding of disclosure requirements• Documentation of the information that is disclosed• A well executed negotiation strategy• Careful planning for post-award audits


Truth-in-Negotiation Acts (defective pricing)Government has burden of proof that:• The information is cost or pricing data• Data existed and were reasonably available• Data were not properly submitted or

disclosed• Government relied on the defective data • Government reliance on the data caused an

increase in price

Financial Aspects of Service ContractsFinancing and Payment General• US Government paying offices usually have

30 days to pay• Specific agency may prescribe shorter period

(but no shorter than 7 days)• Audit or other review may delay payment• Payment request must be proper• Late payments may require US government

interest payment


Financing and Payment

Department of Energy Management and Operating Contracts

It is the policy of the DOE to finance management and operating contracts through advance payments and the use of special financial institution accounts. (DEAR 970.3200)

Financial Aspects of Service ContractsFinancing and Payment Payments under Time-and-Materials and Labor-Hour Contract• Hourly rates multiplied by the number of direct labor

hours performed• Vouchers normally

– Submitted monthly – To the contracting officer’s representative

• Timecards or other documentation to support incurred hours

• Contracting officer may withhold of 5 % per task order, with total amount withheld not to exceed $50,000

• Allowable direct materials per FAR 31.2• Normal indirect rates may be applied to materials

Financial Aspects of Service ContractsFinancing and Payment

Payments under Time-and-Materials and Labor-Hour Contracts

• Ceiling price established for contract or each order• Notification required of any expected overrun• Contractor not obligated to exceed the ceiling price• Government not obligated to pay in excess of ceiling

price• Interim payments subject to Prompt Payment Act for

services contracts, but not for other than services contracts.



Cost-reimbursable contracts; FAR 52.216-7, Allowable Cost and Payment

• Government shall pay when requested as work progresses

• No more than every two weeks (except small business)

• Allowable costs in accordance with FAR 31.2• Small business can bill more often than two

weeks

Financial Aspects of Service ContractsFinancing and Payment Cost-reimbursable contracts; FAR 52.216-7,

Allowable Cost and Payment• Reimbursable costs; “Costs” include:

– Recorded costs that have been paid for items and services purchased directly for the contract

– Incurred costs if the contractor is not delinquent in paying costs in the ordinary course of business

– Supplies and services and subcontractor financing payments if payments will be made

• In accordance with terms and conditions of subcontract or invoice

• Ordinarily within 30 days


Allowable Cost and Payment• Reimbursable costs; “Costs” include:

– Materials issued from inventory and placed into production

– Direct travel– Other direct in-house costs– Financing payments made to subcontractors– Allocable and allowable indirect costs

• Pension, post-retirement, profit sharing, etc. includable in indirect billing rate if funded timely


Allowable Cost and Payment• Billing rates

– Reimbursement at provisional billing rates– Anticipated final rates– Revised by mutual agreement

• Audit– Invoices to be audited any time– Payments reduced for unallowable costs– Payments adjusted for over/under billings



Cost-reimbursable contracts; FAR 52.216-7, Allowable Cost and Payment

• Final indirect rates established in accordance with FAR 42.7

• Final payment; contractor to submit– Completion invoice within 120 days of final rate

establishment– Assignment of refunds, rebates, credits, or other

amounts– A release discharging government liabilities

Financial Aspects of Service ContractsFinancing and Payment Fixed price contracts; FAR 32.5, Progress

Payments Based on Costs• Applies to fixed price contracts• Represents financing (loans) against

undelivered work• Customary; 80% of total costs (85% for small

business)• Higher rates considered "unusual" and

require approval by agency head


Payments Based on Costs• Progress payments approved as matter of

course if contractor– Is reliable, competent, and capable– Has an adequate accounting system– Is in sound financial condition

• All others require advance determination that– Contractor will liquidate– Government is protected against loss– Accounting system is adequate


Payments Based on Costs• Eligible costs

– Total costs incurred under the contract– Subcontractor financing payments under similar terms– Supplies and services and subcontractor financing

payments if payments will be made• In accordance with terms and conditions of subcontract or

invoice• Ordinarily in 30 days

– Pension, post-retirement, profit sharing, etc. includable in indirect billing rate if funded timely



Fixed-Price Contracts - Progress payments based on a percentage of completion

• Payments to be commensurate with work accomplished

• Percentage or stage of completion must be measurable

• Typically used for contracts with tangible deliverables

Financial Aspects of Service ContractsFinancing and Payment Fixed-Price Contracts; FAR 32.10, Performance-Based

Payments (FAR 52.232-28 (P) and FAR 52.232-32(C))• May be made against whole contract price• May be made against a deliverable (line item) price• Performance bases

– Specifically described events– Some measurable criterion of performance– Each event or performance criterion triggers a payment

• Events that do not qualify– Signing of contract– Exercise of options– Execution of modifications

Financial Aspects of Service ContractsFinancing and Payment Fixed-Price Contracts; FAR 32.10, Performance-

Based Payments• Performance Bases

– Events or criteria may be severable or cumulative– No payment for cumulative items until dependent is

accomplished– Severable items specifically identified in contract– Contract shall identify preconditions for successful

achievement of cumulative items

• If payments is on deliverable item basis, then each event or criteria shall be part of performance necessary for that deliverable and be identified to the line item

Financial Aspects of Service ContractsFinancing and Payment Fixed-Price Contracts; FAR 32.10, Performance-

Based PaymentsPayment amounts– Payments not to exceed 90 % of contract price if on whole

contract basis– Payments not to exceed 90 % of deliverable item price if on

CLIN basis– Amount of each payment to be specifically stated as dollar

amount or percentage of specific price– Payment amounts may be established on any rational basis– Payment schedule to be adjusted to reflect actions required

by modifications

Financial Aspects of Service ContractsFinancing and Payment Prompt Payment and Electronic Funds Transfer• If payment is not made by the specified due

date – Government will automatically pay an interest penalty – Without request from the contractor

• Provision does not apply to contract financing payments.

• Due date is usually later of– 30th day after paying office receives a proper invoice– 30th day after government acceptance of services

performed,

Financial Aspects of Service ContractsFinancing and Payment Prompt Payment and Electronic Funds Transfer

Proper invoice includes:– Contractor name and address– Invoice date and number– Contract number – Description, quantity, unit of measure, unit price, and

extended price of services performed– Name and address of contractor official– person to notify if defective invoice– Taxpayer Identification Number (TIN)– Any other information or documentation required by the

contract


Financing and Payment Prompt Payment and Electronic Funds Transfer• EFT to be used to make contract payments• Government will protect contractors' EFT

information from improper disclosure


Summary• Review the solicitation and contract terms

and conditions• Ensure that appropriate infrastructure exists

or will be implemented• Establish appropriate internal controls

Chapter 5

Current Legislation and Regulation Affecting Service Contracting

Overview of Regulatory Environment• Increased government procurement of

support services in the past several years• Surge in service procurements has been

greatly assisted by significant changes in laws and regulations (i.e., FASA)

• Increased sales and easing of rules creates the potential for actual or perceived abuses – This often leads Congress to go back and add

requirements to the procurement process

• The environment is always changing: Yesterday’s reform may be catalyst for tomorrow’s perceived abuse

GSA Schedule Requirements for DOD Ordering Agencies

• Section 803 of 2002 DoD Authorization Act imposed additional ordering obligations on DOD FSS service orders over $100,000– Ordering agency must contact as many schedule holders

as “practical”, and receive at least 3 responses from contactors capable of performing the requirements

• The Acquisition Advisory Panel (AAP) recently proposed making the Defense Department’s Section 803 rule for buying services apply to all agencies

• e-Buy established in response to increased competition requirements– Online ordering system where agencies can post RFQs and

attach SOWs for transmission to all or some of the schedule contractors on GSA Advantage!

– Allows agencies to fulfill Section 803 requirements easily

Services Acquisition Reform Act (SARA)of 2003

• Acquisition workforce and training• Business acquisition practices• Commercial item acquisitions• Other procurement flexibilities• Section 1423 created Acquisition

Advisory Panel (AAP) (http://www.acquisition.gov/comp/aap/index.html)

Performance-Based Acquisitions (FAR Subpart 37.6)

• Define the work in measurable terms of results• Define performance standards such as quality or

timeliness• Establish a QASP to measure performance against• Contracts are awarded competitively on best-value

evaluation criteria• Contracts are fixed-price completion type contracts, with

limited exceptions• OMB goal: 40% of all service contracts will be

performance-based by FY 2007– FAR 7.105(b)(4)(i) states that an ordering agency

must “provide rationale if PBSC contract will not be used”

Performance-Based Acquisitions (FAR Subpart 37.6) – AAP Recommendations• OMB’s government-wide quota of

requiring 40% of Acquisitions be Performance-Based should be adjusted to reflect individual agency assessments and plans for using PBA.

• OFPP should issue more explicit guidance and create a PBA “Opportunity Assessment” tool to help agencies identify when they should consider using performance-based acquisition.

Performance-Based Acquisitions (FAR Subpart 37.6) – AAP Recommendations• Publish a Best Practice Guide on

development of measurable performance standards for contracts.

• Modify the FAR to include an identification of the government’s need/requirements by defining a “Baseline Performance Case” in the PWS or SOO. OFPP should issue guidance as to the content of the Baseline Performance cases.

Performance-Based Acquisitions (FAR Subpart 37.6) – AAP Recommendations• OFPP should provide improved guidance

on types of incentives appropriate for various contract vehicles.

• Contracting Officer Technical Representatives (COTR’s), in PBA’s receive additional PBA training and be re-designated as Contracting Officer Performance Representatives (COPR’s).

Performance-Based Acquisitions (FAR Subpart 37.6) – AAP Recommendations

• OFPP should undertake a systematic study on the challenges, costs and benefits of using performance-based acquisition techniques five years from the date of the Panel’s delivery of its final report.

National Defense Authorization Act for Fiscal Year 2004

Specific focus on Title XIV ─ Services Acquisition Reform

• Adopted from the Services Acquisition Reform Act (SARA)– Stemmed from efforts of Congressman Tom Davis (R-

VA), Chairman of the House Government Reform Committee

– Signed into law by the President


Acquisition Workforce and Training• Section 1412 establishes a civilian acquisition

workforce training fund within GSA– Financed by 5% fee on the following non-DOD contracts

• Government-wide task and delivery-orders under Sections 303H and 303I of the Federal Property and Administrative Services Act

• Government-wide contracts for acquisition of IT under Section 11101 of Title 40, U.S.C.

• MAS contracts entered into by administrator of General Services

• Section 1414 voices emphasis on importance of government maintaining expertise in determining requirements for A&E services


Adaptation of Business Acquisition Practices• Section 1421 calls for each executive agency

to establish a chief acquisition officer and a senior procurement officer

• Section 1422 establishes a Chief Acquisition Officers Council

• Section 1427 establishes restrictions under which A&E services can be offered under GSA MAS contracts or governmentwide task and delivery-order contracts


Acquisition of Commercial Items• Section 1431 indicates a preference for PBSC by:

– Declaring maximum for PBSC contract to be $25 million– Establishes a Center of Excellence in Service Contracting

• Section 1432 authorizes conditional use of time-and-materials contracts and labor-hour contracts

• Section 1433 enhances the definition of a commercial item to include services that are sold for “specific outcomes to be achieved”


Mandate for Performance-Based SOW’s• This act clearly states a mandate for use of

this tool• Congress and the Bush Administration have

also encouraged its widespread use• Intent is to move away from heavily detailed

specifications and move toward more streamlined methods associated with private industry– Idea is to contract for results, not just pay for best

efforts


Section 818 of the 2007 Defense Authorization Act provides for fixed-price contracts for development programs, and requires the justification for the use of a cost type contract that explains how the program is so complex and technically challenging that it would not be practicable to reduce program risk to a level that would permit the use of a fixed-price type contract; and the complexity and technical challenge of the program is not the result of a failure to meet the requirements established in section 2366a of title 10, United States Code.

Commercial Items Contracts Now Include Time-and Materials and Labor- Hour Type Contracts

Effective February 12, 2007, the Federal Acquisition Regulation (FAR) expressly authorized the use of time-and-materials (T&M) and labor-hour (LH) contracts for commercial services under specified conditions. Before this change, commercial services were limited to firm-fixed-price (FFP) and firm-fixed-price with economic price adjustment (EPA) type contracts when using FAR Part 12 procedures, and services based on hourly rates were generally excluded. The FAR definition of commercial services now does not prohibit services sold based on hourly rates without an established catalog or market price for a specific service performed or a specific outcome to be achieved.

Commercial Items Contracts Now Include Time-and Materials and Labor- Hour Type Contracts

Contracting Officers are required to execute D&F's for T&M and LH types of contract for each order placed under those contracts. If an indefinite-delivery contract only allows for the issuance of orders on a time-and-materials or labor-hour basis, the D&F for the type of contract shall be executed to support the basic contract and shall also explain why providing for an alternative firm-fixed-price or fixed-price with economic price adjustment pricing structure is not practicable. The D&F for this contract shall be approved one level above the contracting officer, and for any D&F's that extend the performance period beyond five years, the head of the contracting activity must first approve the D&F.

Accountability in Contracting Act, H.R. 1362 – March 6, 2007

Requires the revision of the Federal Acquisition Regulation (FAR) to restrict the period to a maximum of one year for noncompetitive federal contracts issued for unusual and compelling urgency, unless the head of the executive agency concerned determines that the Government would be seriously injured by the limitation on the contract period.

Accountability in Contracting Act, H.R. 1362 – March 6, 2007

Amends the Federal Property and Administrative Services Act of 1949 to require specified executive agency heads to develop and implement plans to minimize the use of: (1) noncompetitive contracts; and (2) cost-reimbursement type contracts. Requires agencies to make justification and approval documents for noncompetitive contracts, including defense agency contracts, publicly available.

Chapter 6

Labor Laws Affecting Service Contracting

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The primary federal labor statutes

• Fair Labor Standards Act (FLSA)• Davis-Bacon Act (DBA)• McNamara-O’Hara Service Contract Act (SCA)• Walsh-Healey Public Contracts Act (WHA)• Contract Work Hours and Safety Standards Act

(CWHSSA)• Copeland Anti-Kickback Act (Copeland Act)• Worker Adjustment and Retraining Notification

Act (WARN)

Fair Labor Standards Act (FLSA)

• Employers to compensate their covered employees at a rate of one and one-half times the employee’s regular rate of pay

• Bans employers from hiring child laborers • Requires that men and women be paid equal

pay for work performed under similar working conditions requiring the same skills

• FLSA imposes certain recordkeeping requirements on employers covered by the Act.

FLSA Applicability

• Employers that have “employees handling, selling or otherwise working on goods or materials that have been moved in or produced for commerce” who have gross annual sales of $500,000 are presumptively covered by the FLSA

• All activities of public agencies are covered by the FLSA

• Numerous exceptions and exemptions for specific provisions

• Various state laws supplement applicability and enforcement

Davis-Bacon Act (DBA)• Requires payment of locally prevailing wages and fringe

benefits to laborers and mechanics employed to perform contracts for construction, alteration, or repair of public buildings.

• Workers must be paid “unconditionally” and not less often than once per week, without subsequent rebates or deductions (except for payroll tax and other related deductions).

• Contractor must post wage schedules in a visible location at the work site.

• Contractor must maintain payroll and related records pertaining to its compliance with the DBA provisions during performance of the contract and for three years thereafter.

• Proponents argue that it is necessary to prevent government contractors from underbidding each other by lowering workers’ salaries.

• The Act imposes a considerable bureaucratic and regulatory burden on government agencies and contractors.

DBA Applicability

• Every contract in excess of $2,000 to which the United States or the District of Columbia is a party, for construction, alteration, and/or repair, including painting and decorating, of public buildings or public works of the United States or the District of Columbia

• Types of contracts covered by the DBA include highway construction, dredging, demolition, and cleaning and painting of public buildings

• Requires both the prime contractor and all subcontractors to comply with the terms of the contract

Service Contract Act (SCA)

• Service employees who perform services under contracts covered by the SCA must be paid at the prevailing local wage rate as determined by the Department of Labor.

• Service employees include skilled and unskilled manual laborers and craftsmen, guards and watchmen.

• Establishes minimum fringe benefits.• Requires employers to maintain certain records and to

post required information at the workplace.• Imposes minimum safety and health standards for

workers.• Designed to address the concern that, by awarding

contracts to the bidder with the lowest proposed hourly wage rate, the government would contribute to an overall reduction in the wages of service employees.

SCA Applicability

• Every contract entered into by the United States or the District of Columbia in excess of $2,500 the principal purpose of which is to furnish services through the use of service employees.

• Services must be provided in the United States, including any State of the United States, the District of Columbia, Puerto Rico, or the Virgin Islands.

• Numerous exemptions.

Walsh-Healey Public Contracts Act (WHA)

All contractors who furnish materials, supplies, articles and equipment in any amount exceeding $10,000 must – Pay their employees not less than the prevailing minimum

wage for persons employed in similar positions in the locality;

– Compensate employees for overtime hours worked at the wage rate set forth in the Fair Labor Standards Act;

– Not hire any male worker under age 16 or any female worker under age 18; and

– Ensure that no part of the contract is performed under conditions that are unsanitary, hazardous or dangerous to the health and safety of the employees engaged in the performance of the contract (or subcontracts) .

WHA Applicability

• Any contract entered into by the United States or its agents.

• For the manufacture or furnishing of materials, supplies, articles, and equipment.

• In any amount exceeding $10,000 • Exceptions

– Contracts for public utility services including electric light and power, water, steam and gas;

– Deliverables completely manufactured or furnished outside the geographic limits of the United States, Puerto Rico, the Virgin Islands, or the District of Columbia; and

– Contracts awarded to sales agents or publisher representatives, for the delivery of newspapers, magazines or periodicals by the publishers thereof

– Contracts for the purchase of materials, supplies or equipment that may “usually be bought in the open market,” perishables, livestock and nursery products, or to agricultural or farm products processed for first sale by the original producers.

Contract Work Hours and Safety Standards Act (CWHSSA)

• No contractor or subcontractor contracting for any part of the work which may involve the employment of laborers or mechanics shall require or permit any such laborer or mechanic to work more than 40 hours in any workweek

• Unless the worker is paid a wage of time-and-one-half for all hours worked in excess of 40.

CWHSSA Applicability

• Any contract which may require or involve the employment of laborers or mechanics

• Upon a public work in the United States in any territory.

• Does not apply to:– Contracts of less than $100,000.– Contracts “done in accordance with the provisions of

the Walsh-Healey Public Contract Act.– Contracts for transportation by land, air, or water, or

for the transmission of intelligence, or for the purchase of supplies or materials or articles ordinarily available in the open market.

Copeland Anti-Kickback Act• Prevents employers from forcing, intimidating, or

threatening dismissal, or by any other manner whatsoever, employees to give up any part of the compensation to which he is entitled.

• The Act is intended to aid in the enforcement of the minimum wage provisions of the Davis-Bacon Act.

• Requires contractors and subcontractors to submit weekly statements detailing the hours worked and wages paid, including deductions, to workers.

• Maintain weekly payroll records on file for three years from the date of completion of the contract.

Copeland Act Applicability

• Any contract which is subject to federal wage standards.

• For an amount greater than $2,000.• For the construction, prosecution,

completion, or repair of public buildings or works financed in whole or in part by loans or grants from the United States.

Worker Adjustment and Retraining Notification Act (WARN)

• Intended to protect employees against unexpected losses of employment due to plant shutdowns or mass layoffs.

• Requires employers provide their employees with 60 days notice of impending plant closings or mass layoffs.– A “plant closing” occurs when a “single site of employment,” or a

discrete “operating unit” within a single site, shuts down, terminating the employment of SO or more employees — exclusive of “part-time” employees — during any 30-day period

– A “mass layoff’ occurs when a reduction, other than a “plant closing”, affects (i) one-third (33 percent) of the workforce — exclusive of “part-time” employees — but a minimum of 50 employees or (ii) 500 employees, at a “single site” of employment during any 30-day period

WARN Applicability

• Employers with 100 or more employees, other than “part-time” employees.– Test is met if in the aggregate, all of the employees

together work more than 4,000 hours each week, excluding overtime.

– Employees on temporary layoff who have a reasonable expectation of recall or who are on leave of absence also are included when determining whether the 100-employee test is satisfied.

• Exceptions– Natural disaster– Faltering company– Unforeseen business circumstances

Chapter 7

Contracts for Specialized Services

Department of Energy Contracts

Agency has contracts with various organizations to manage and operate (M&O) numerous sites– Predominantly cost-type contracts– Extensive set of regulations govern the

acquisition and oversight of the M&O contracts (FAR 17.6 and DEAR 970)

– Although no longer required to employ the “federal norm”, M&O contractors are still required to have approved purchasing systems

Advisory and Assistance Services

• The acquisition of advisory and assistance services is a legitimate way to improve Government services and operations.

• May be used at all organizational levels to help managers achieve maximum effectiveness or economy in their operations.

Applications and RestrictionsCan be used to:(1) Obtain outside points of view to

avoid too limited judgment on critical issues;

(2) Obtain advice regarding developments in industry, university, or foundation research;

(3) Obtain the opinions, special knowledge, or skills of noted experts;

(4) Enhance the understanding of, and develop alternative solutions to, complex issues;

(5) Support and improve the operation of organizations; or

(6) Ensure the more efficient or effective operation of managerial or hardware systems.

Shall not be- (1) Used in performing work of a

policy, decision-making, or managerial nature which is the direct responsibility of agency officials;

(2) Used to bypass or undermine personnel ceilings, pay limitations, or competitive employment procedures;

(3) Contracted for on a preferential basis to former Government employees;

(4) Used under any circumstances specifically to aid in influencing or enacting legislation; or

(5) Used to obtain professional or technical advice which is readily available within the agency or another Federal agency.

Research and Development• The primary purpose is to advance scientific and

technical knowledge and apply that knowledge to the extent necessary to achieve agency and national goals.

• R&D contracts are directed toward objectives for which the work or methods cannot be precisely described in advance.

• It is difficult to judge the probabilities of success or required effort for technical approaches, some of which offer little or no early assurance of full success.

• Process must encourage the best sources from the scientific and industrial community to become involved in the program.

Use of contracts (FAR 35.003)

• Contracts shall be used only when the principal purpose is the acquisition of supplies or services for the direct benefit or use of the Federal Government.

• Grants or cooperative agreements should be used when the principal purpose of the transaction is to stimulate or support research and development for another public purpose.

Acquisition Process

• In R&D acquisitions, the precise specifications necessary for sealed bidding are generally not available, thus making negotiation necessary.

• Fixed-price arrangement preference applies in R&D contracting only to the extent that goals, objectives, specifications, and cost estimates are sufficient to permit such a preference.

• Absence of precise specifications and difficulties in estimating costs with accuracy normally precludes using fixed-price contracting for R&D, the use of cost-reimbursement contracts is usually appropriate.

• Projects having production requirements as a follow-on to R&D efforts normally should progress from cost-reimbursement contracts to fixed-price contracts as designs become more firmly established, risks are reduced, and production tooling, equipment, and processes are developed and proven.

Architecture and Engineering Services• Unique source selection procedures are applied,

rather than the solicitation or source selection procedures prescribed in FAR Parts 13, 14, and 15.

• Services that do not require performance by a registered or licensed architect or engineer should be acquired pursuant to FAR Parts 13, 14, and 15.

• When the statement of work includes both architect-engineer services (that require performance by a registered or licensed architect or engineer) and other services, the contracting officer shall follow the A&E procedures.

Construction Contracting

• Sealed bid procedures are used for construction contracts, unless the contract will be performed outside the United States and its outlying areas.

• Generally, firm-fixed-price contracts shall be used to acquire construction.

• Special Aspects of Contracting for Construction– Disclosure of the magnitude of construction projects– Modified sealed bidding procedures– Statutory cost limitations– Liquidated damages– 2 phase design-build selection procedures

Personal Services Contracts

• Personal services contract" means a contract that, by its express terms or as administered, makes the contractor personnel appear to be, in effect, Government employees.

• The Government is normally required to obtain its employees by direct hire under competitive appointment or other procedures required by the civil service laws. Obtaining personal services by contract, rather than by direct hire, circumvents those laws.

Personal Services Contracts

• An employer-employee relationship under a service contract occurs when, as a result of (i) the contract's terms or (ii) the manner of its administration during performance, contractor personnel are subject to the relatively continuous supervision and control of a Government officer or employee. – Performance on site. – Principal tools and equipment furnished by the Government. – Services are applied directly to the integral effort of agencies or an

organizational subpart in furtherance of assigned function or mission.

– Comparable services, meeting comparable needs, are performed in the same or similar agencies using civil service personnel.

– The need for the type of service provided can reasonably be expected to last beyond 1 year.

– The inherent nature of the service, or the manner in which it is provided, reasonably requires directly or indirectly, Government direction or supervision of contractor employees

Information Technology Services

• When acquiring information technology services, solicitations must not describe any minimum experience or educational requirement for proposed contractor personnel (FAR 39.104).


• When acquiring software licensing, recommend not signing any contractor-provided license agreements

• Major items to consider when negotiating licensing terms and conditions– Self-termination provisions (conflicts with Contract

Disputes Act)– Entire agreement provisions (conflicts with other terms)– Advance payments (see FAR Subparts 32.2 and 32.4)– Indemnification– Software development on federal contracts allows for

the government to acquire unlimited rights (FAR 52.227-14)


• Major items to consider when negotiating licensing terms and conditions, continued:– Automatic renewal provisions (violate Anti-

deficiency Act)– In summary, don’t just sign a contractor’s

license agreement; use government-drafted contract documents as is done with other types of services

Utility Services

• Utility service" means a service such as furnishing electricity, natural or manufactured gas, water, sewerage, thermal energy, chilled water, steam, hot water, or high temperature hot water.

• The General Services Administration (GSA) is authorized to prescribe policies and methods governing the acquisition and supply of utility services for Federal agencies.

• GSA is authorized to contract for utility services for periods not exceeding ten years.

• GSA has delegated its authority to enter into utility service contracts for periods not exceeding ten years to:– The Department of Defense (DOD) is authorized to acquire utility

services for military facilities. – The Department of Energy (DOE) is authorized to acquire utility

services, and to enter into new contracts or modify existing contracts for electric services for periods not exceeding 25 years for uranium enrichment installations

– Connection charges only to the Department of Veteran Affairs.

Policies for Utilities Services

• Agencies shall acquire utility services by a bilateral written contract regardless of whether rates or terms and conditions of service are fixed or adjusted by a regulatory body.

• Agencies may not use the utility supplier's forms and clauses to avoid the inclusion of required provisions and clauses.

• Prior to acquiring electric utility services on a competitive basis, the contracting officer shall determine that such competition would not be inconsistent with state law governing the provision of electric utility service.

• Proposals from alternative electric suppliers shall provide a representation that service can be provided in a manner consistent with public law.

Indefinite Delivery Contracts

• Difference between IDIQ and Requirements Contracts– IDIQ is bound with a guaranteed

minimum; the contract maximum cannot be exceeded

– Requirements is bound through the guarantee of all of the supplies or services for the contract period; the contract estimated ceiling price may be exceeded

Multiple Award Schedule Contracts

• GSA uses the MAS program to establish long-term, government-wide contracts that permit Government offices and certain prime contractors to order from over four million commercial services and products.

• These contracts are indefinite delivery contracts, and orders can be placed directly off the GSA Schedule or through the GSA Advantage! Online system, https://www.gsaadvantage.gov .

• MAS contracts offer customers the advantages of the latest technology, quality services, convenience and most-favored-customer pricing.

Multiple Award Schedule Contracts

• Open market items may be included on orders provided that competition requirements are met for those items

• Blanket Purchase Agreements (BPA’s) may be issued for recurring items

• They may also offer shorter lead-times and lower administrative costs.

Questions?

Good Luck, and may your contracts be unambiguous!

References

1. Library of Congress, http://thomas.loc.gov/ (Track Legislation)

2. Acquisition Advisory Panel, http://www.acquisition.gov/comp/aap/index.html

3. Risk Management Guide for Information Technology - NIST (Jul 2002)http://csrc.nist.gov/publications/nistpubs/800-30/sp800-

30.pdf4. Acquisition Reform Journal Articles – Risk Mgmt

http://www.dau.mil/pubs/arq/2003arq/arq2003.asp5. Joint Aeronautical Commander’s Group (JACG)

Performance Risk Assessment Group (PRAG) Desk Guide http://acquisition.navy.mil/rda/content/download/1988/9868/file/abm99_24a.pdf

Service Contracting: An Integrated Approach William Cox, CPCM, MAM United States Department of...

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