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					                       Initiating Contract Administration

Contract Administration Planning

Definition         Contract administration planning consists of all activities involved in
                   setting up systems and procedures to ensure compliance with the contract
                   terms and conditions during contract performance.

                   Administration of any contract should be considered during the acquisition
                   planning period. However, a plan for effective contract management
                   cannot be finalized until after the contract is awarded. The plan is usually
                   refined during contract performance.

Planning           Planning initially involves reading the contract. Failing to the read the
                   contract is a frequent cause of contract administration problems. During
                   this planning period, it is important to identify and become familiar with
                   the requirements, objectives, and potential problem areas of the contractual

                   If you are responsible for administering the contract, read it even if you
                   awarded it.

Administration     At this point in the process, a determination has been made as to the
                   administrative office for the contract. Your organization may have retained
                   administrative functions, or may have delegated to the Defense Contract
                   Management Agency (DCMA)?

                   If functions are delegated to a Contract Administration Office (CAO), or to
                   a branch within your organization, close communications will be necessary
                   to ensure successful performance.

Contract           A contract administrator’s responsibility is to set up systems to mitigate the
administrator’s    risk to both the contractor and the Government when problems occur.
responsibilities   Keep in mind, a contract is a mutually binding legal relationship obligating
                   the seller to furnish supplies or services and the buyer to pay for them.
                   Therefore it is important for the administrator to ensure that contract
                   performance is satisfactory and in accordance with the terms and
                   conditions of the contract.

Planning Steps     The major steps involved in the administration planning process are listed

                           Step                              Action
                            1        Review the contract file.
                            2        Review/read the contract.
                            3        Develop a contract administration plan.
                            4        Identify contract administration team and define their
                            5        Develop key contract milestones.
                            6        Document your decisions.
                            7        Provide notice/instructions to team members and

Review contract   The first step is for the contract administrator to review the contract file to
file              identify and become familiar with the requirements, objectives, and
                  potential problem areas of the contract. Concentrate on those areas that
                  usually have the most relevance to contract administration activities.

                  The contract file checklist provides a listing of applicable documents which
                  makes an excellent starting point and will enhance your understanding of
                  contract requirements and potential problem areas.

                  Also review any meeting minutes of preaward conferences that may have
                  been held. You may find information that addresses critical issues such as
                  special clause interpretations, complex manufacturing processes that may
                  be of concern to the Program Manager and contractor, or other special
                  requirements critical to contract performance. All of these areas may have
                  an impact on your planning decisions.

Read the          Read each section of the contract, A, B, C, etc. While reading the contract,
contract          look for items such as criticality code, contract type, contract
                  administration office, dollar value of the contract, etc.

                  In addition, pay close attention to special terms and conditions that could
                  impact successful administration of the contract, i.e., progress payments,
                  advance payments, production progress reports, GFP, etc.

                  The FAR nor DFARS require the contracting officer to prepare a formal
                  contract administration plan. Agency/local guidance will dictate what sort
                  of contract administration plan is appropriate for the office administering
                  the contract. The plan may be written and somewhat formal or may consist
                  simply of a timeline for administration functions.
                  Prior to contract closeout it is the contracting officer who is responsible for
                  ensuring that both parties have complied with the terms and conditions of
                  the contract.
Formal contract   A formal plan is appropriate when the contract involves large dollar
administration    amounts or complex technical requirements that place many duties and
plan            responsibilities on both contracting parties.

                The plan should provide for an appropriate level of surveillance/monitoring
                to ensure contractor performance in accordance with the contract as well as
                timely and proper performance of the Government’s responsibilities.

Flexibility     Although the plan is finalized at contract award, it needs to be a flexible
                working document that permits updates over the contract’s duration as
                problems arise or conditions change. As the contract progresses, it may
                become necessary to shift responsibilities or add tasks that could not have
                been anticipated at the time of award.

Who prepares    The person administering the contract is responsible for preparing the
the plan?       contract administration plan. After all, the contract administration plan is a
                tool used by the contract administrator and the contract administration team
                to administer the contract. If the buyer/PCO is administering the contract
                (the “cradle to grave” role), the buyer/PCO prepares the contract
                administration plan. If contract administration is delegated to an ACO, the
                ACO prepares the contract administration plan. In developing the contract
                administration plan, the contract administrator should work with members
                from both the preaward and post-award teams, including the customer,
                buyer/PCO, and Government contract administration support personnel.

Key elements    One purpose of a contract administration plan is for ready reference of
                contract requirements. This would eliminate the need for the
                administrator(s) to review the contract multiple times. Key elements of a
                contract administration plan are identified below:

                   A list of terms and conditions related to administration

                   Contract milestones

                   Contractor reporting procedures

                   Quality assurance guidelines

                   Inspection and acceptance procedures

                   Names, roles, authorities, and limitations of authority for contract
                    administration team members

                   Milestones for reports from team members.

Identify team   In previous steps, you have identified all necessary tasks of administering
members and
define roles     the contract. Now you must identify who will have responsibility for those
                 tasks. Make sure that each task is clearly defined and any overlapping of
                 functions will not result in confusion among the team members.

                 In addition to specific tasks associated with the contract, identify who has
                 been delegated overall responsibility of normal contract administration
                 functions. Members of the team should receive a copy of the list of
                 participants and their roles and responsibilities. This will avoid any
                 duplication of effort.

                 The roles and authorities of these team members will depend on the size of
                 the organization as well as the size and complexity of the contract.

Develop key      Assign a timeframe for the completion of each task. These tasks include
contract         those performed by both Government and contractor personnel, from
milestones       contract award to contract closeout. Identify those tasks that are crucial to
                 the performance of another task. This is especially important when related
                 tasks are assigned to different team members for accomplishment or

Document your    Use formal written plans for high-visibility, high-dollar, or complex multi-
decisions        task contracts. Some agencies require written plans for certain
                 requirements and a specific format for these plans.

                 If your agency does not require a specific format, you may develop your
                 own. The idea here is to make sure that all actions and decisions are fully
                 incorporated into the contract file.

Post-award Orientation

Introduction     The post-award orientation is a mechanism that is very useful for
                 highlighting the Government’s, and the contractor’s post-award rights,
                 duties, and respective milestones that substantially affect contract
                 performance. All potential issues that may substantially affect
                 performance are identified and resolved. Resolution of each issue is fully
                 documented in a post-award report.

Post-award       Let’s review from your reading assignments the tasks covered in planning,
orientation      organizing and conducting a post-award orientation.

Determine need   FAR 42.501 and FAR 42.502 give factors to consider in determining
                 whether an orientation is necessary. Also, look at the following:

                    Contractual requirements when there is not a meeting of the minds
                   Milestones for Contract Administration
                   Need to provide general briefing on
                     security requirements, and/or
                     record retention
                  Environmental clauses in the contract
Determine type   There are several types of post-award orientations (see FAR 42.503; 504):

                        Telephone (not mentioned in FAR; should confirm in writing)
                        Letter
                        Formal conference

Plan the         Plan the orientation by considering the following:
                        Prepare the agenda, and establish time and place.

                        Coordinate Government representatives and participants, including the
                         contract administration office.

                        Conduct a Government-only session prior to meeting with the

Conduct the      Conduct the orientation in a business-like manner by:
                        introducing participants and providing names and phone numbers

                        reviewing the contract to ensure that the contractor understands his
                         duties and responsibilities, and

                   securing agreements on milestone resolution, if necessary.
Report of the    Prepare a report at the end of the conference which includes, at a minimum,
post-award       the following information:
                  Names and affiliations of all participants
                  Items discussed
                  Action items and responsible individual(s)
                  Due dates for the actions
                  Provide copies of the report to all participants, including the contractor.

Contract         Changes to the contract resulting from the orientation should only be made
modification     by a formal contract modification.

                 Reference: FAR 42.503-2

Document the file   Document the file, and obtain any other items needed from the contractor
                    as a result of the meeting. Failure to properly document and obtain
                    required certification (insurance, bonds, etc.) might have an adverse affect
                    on contract performance.

DD 1484             DD FORM 1484 may be used to prepare an agenda for a post-award
                    conference to ensure all important areas are covered. This form may also
                    serve as the documentation record.

                    Reference: DFARS 242.503-2, 242.503-3

DD Form 1484,       Post-award Conference Record

                                         SECTION 2. QUALITY ASSURANCE AND ENGINEERING
                                                      ITEMS           CLAUSE
                        (a)                      (x if applicable)   applicable)                                   (d)
                                                        (b)              (c)
 1. MIL-Q-9858
  2. MIL-I-45208A
 3. OTHER (Specify)











                                                      SECTION 3. PRODUCTION






                                                         SECTION 4. SECURITY






C. OTHER (Identify)

DD Form 1484, APR 86                                                 PAGE 3

                                SAMPLE CONTRACT ADMINISTRATION PLAN

Contract Number:
Plan Date:
Contractor Representative:
Brief Description of Work:
Contract Type:
Government-Furnished Supplies:
Performance Period:
Milestone Calendar for Specific Government Action:
I. Introduction (Format taken from an actual contract administration plan used by the Air Force. Note there is no prescribed
   format for Contract Administration Plans; this is only an example)
      a. Purpose
      b. Scope
      c. Item/Procurement History / Background

II. Roles, Responsibilities and Authorities Delegated
     a. Buying Activity
     b. Administrative Office
     c. Other Offices and Agencies (e.g., DCAA)

III. Conferences and Meetings
     a. Post-Award Conference
     b. Other (e.g., Pre-performance Conference)

IV. Training (If appropriate for the requirement)

V.   Delivery Order Process (If applicable)
     a. Typical Schedule in Days (Req. Identified/Day 1 - Award Mailed/Day 71)
     b. Events in DO and pre-performance process

VI. Financial Issues (Varies according to Contract Type: FFP would be different from CPIF)
    a. Cost Control
    b. Contract Financing Issues (Progress Payments, Guaranteed loans, Interim Vouchers, other methods involving Gov’t)
    c. Invoice Processing
    d. Reviewing financial reports
    e. Incentives (Cost or Performance if applicable)

VII. Contract Monitoring
     a. Required certifications and their timeframes (Which ones and the Gov’t & Contractor OPR’s)
     b. Submission of Waivers and Deviations
     c. QA and buying activity points of contact; agreements and reporting procedures
     d. Major subcontract QA provisions

VIII. Property Administration
     a. Appointment of the Property Administrator, Plant Clearance Officer and Government Property Specialist
     b. Government-Furnished or Contractor-Acquired Property to be furnished on the contract

Attachments (if applicable):
     Unique Forms or Sample Report Formats
     Policy Letters
     Memorandum of Agreement (MOA)
     Memorandum of Understanding (MOU)
     Procedural Guide(s)

                                                        Lesson 20

Introduction   The ability to modify contracts is a vital element in the conduct of our day-
               to-day business. It gives us the ability to react/adapt to the constantly
               changing environment in which we operate. Black’s Law Dictionary
               defines a modification as: a change; an alteration, which introduces new
               elements into the details or cancels some of them, but leaves the subject
               matter intact.

Procedures for Processing Modifications

Flowchart      The following flowchart outlines the procedures for processing
                                               Review proposed

                                        Determine whether to meet
                                        the requirement through a
                                        new procurement.

                                                Should a new
                                                procurement                 The contract remains “as is”
                                                be initiated?


                                           Determine whether to
                                           modify the contract.

                                                 Modify the           No
                                                                            The contract remains “as is”
                Obtain funding          Yes
                certification and any                                         Types of Modifications
                necessary approvals
                                                                              1. Supplemental agreements.
                                              Determine the type of           2. Change orders under a
                                              modification.                      changes clause.
                                                                              3. Unilateral changes under
                                                                                 other clauses.
                                                                              4. Administrative changes.
                                              Legal review IAW
                                              agency thresholds
                                              and policies.

                                              Modify the contract
                                              by issuing SF 30
                                              or equivalent.

                                         Distribute SF 30 IAW
                                         type of modification and
                                         local policy

Procedures for Processing Modifications, Continued

Overall          The big picture for processing a modification request resulting in
Procedures       modification issuance is depicted in the flowchart on the previous page.

                    Some of the information represents a review of CON101 and will
                 provide a helpful warm-up to our discussion of modifications.

Flowchart        Review proposed modification: Be sure to adhere to local policy/guidance
1, 2, 3, and 4   when reviewing a modification request for authorized signature(s), relative
                 to the actual request and for funding certification.

                 Determine whether to meet: Review the contract to determine if there are
                 any special terms and conditions and to determine whether the proposed
                 change is within the scope of the contract. A review of the contract
                 administration plan should provide pertinent contract information. For
                 changes outside the scope of the contract higher level approvals may be
                 required. We will discuss the scope of the contract later in this lesson.

                 Should a new procurement: If it is determined that the requested change is
                 inappropriate, then the contract should remain “as is”.

                 Determine whether to modify: If the requested change is determined to be
                 appropriate whether it is inside the scope of the contract or out of scope
                 then proceed with modification processing.

                 Obtain funding /approvals: DO NOT issue a modification causing an
                 increase in funding without first having obtained certification that funds are

                 Prior to proceeding with modification issuance you need to determine
                 whether or not a Determination and Findings, Justification and Approval,
                 or any other approval document is required and ultimately obtained.
                 Particularly when an out of scope modification is to be issued special
                 attention should be given to market research data as well as approvals for
                 other than full and open competition.

                                                                            Continued on next page

Procedures for Processing Modifications, Continued

Flowchart      Types of Modifications
               1. Supplemental agreements: Signed by the contractor and the
                  Contracting Officer. Used to set forth all sorts of agreements between
                  the parties, effecting changes that are either within the scope of the
                  contract or out of scope.

               2. Change orders: Government can direct the contractor to effect a
                  change within the parameters of the changes clause in the contract.
                  Change orders are required to be signed by the Contracting Officer only
                  and must be within the scope of the contract. We will discuss change
                  orders later in this lesson.

               3. Unilateral changes under other clauses: Such as exercising options,
                  issuing a stop-work order, terminating a contract. Required to be
                  signed by the Contracting Officer only.

               4. Administrative changes: Administrative changes do not effect the
                  rights of the parties and are required to be signed by the Contracting
                  Officer only. Examples of administrative changes are changes in the
                  appropriation data, and in payment or administration office designation.

Flowchart      Legal review: Knowledge of regulatory guidance, local guidance and
               sound business judgment, is necessary to determine when legal review is

               Modify the contract: The SF30 is used for modification issuance as
               indicated at FAR 43.301. Modification numbering information is at
               DFARS 204.7004 and instructions for completion of the SF30 are on the
               reverse side of the SF30.

               Distribute: Generally, final distribution includes all parties who received a
               copy of the contract and any additional addressees as necessary.

Modification Prohibitions

Transition         At this point we have briefly considered the overall process for
                reviewing a modification request through to actual modification issuance.
                Now we will look more closely at the process and discuss the decision-
                making issues throughout the process.

Prohibited      Determining when a specific proposed modification is prohibited is not
modifications   quite as cut and dried as one may think. Some issues are obvious, such as:

                   Illegal intent; to commit murder or to traffic illegal substances

                   Anti-deficiency violation

                   Exercising options subsequent to debarment of contractor (without

                   Increasing fee above the statutory limitation (without a deviation)

                   Buying and selling of Government contracts

                Consequently, we will explore some more commonly proposed
                modifications, applying existing clauses and utilizing sound business

Modification    Regulation strictly prohibits the Contracting Officer from issuing a
funding         modification that causes or will cause an increase in the total contract
                amount without first obtaining certification that funds are available.

                Reference: FAR 43.105

Changes Clauses

Purpose      The changes clauses used in contracts for noncommercial items constitute
             the contractual agreement between the Government and the contractor that
             provides the Contracting Officer with the authority to issue unilateral
             modifications (referred to as change orders), directing the contractor to
             effect a specific change.

             A change order is necessary when the cost of the change cannot be
             immediately negotiated, but the change must be immediately implemented.

             Change orders are numbered like any other modification.

Common       There are several basic changes clauses dependent upon contract type. The
attributes   clauses differ in content, but do have four common attributes:

                 The change must be within the scope of the contract.
                 The order to carry out the change must be in writing.
                 The change must be at the order of an authorized Contracting Officer.
                 The contractor may request an equitable adjustment.

                                                                     Continued on next page

Changes Clauses, Continued

What you can   The table below indicates the specific parameters of the changes clauses
change         listed.

                 FAR Clause    Contract Type         Contracting Officer can change
                 52.243–1      Fixed-price,         Specifications, when making
                               supplies              changes to Government-provided
                 52.243–2      Cost-                Method of shipment or packing
                               reimbursement        Place of delivery

                 52.243–1,     Fixed-price,         Description of services
                 Alt I         services, no         Time of performance (hours of
                               supplies              day, days of week)
                                                    Place of performance

                 52.243-1,     Research and       Drawings, designs, or
                 Alt. V        Development         specifications
                                                  Method of shipping or packing
                                                  Place of inspection, delivery or
                 52.243–3      Time-and-          Specifications, when making
                               material,           changes to Government-provided
                               Labor-hour          specifications
                                                  Description of services
                                                  Time of performance (hours of
                                                   day, days of week)
                                                  Place of performance
                                                  Method of shipment or packing
                                                  Place of delivery
                                                  Amount of Government-furnished

                 52.243-4      Construction         Specifications
                                                    Method of performance
                                                    Government furnished facilities,
                                                     equipment, materials, services, or
                                                    Directing acceleration in

                                                                       Continued on next page

Changes Clauses, Continued

Change order     The changes clauses require the contractor to submit a timely request for
definitization   equitable adjustment, i.e., within 30 days. However, if the Contracting
                 Officer decides that the facts justify it, the Contracting Officer may receive
                 and act upon a proposal submitted before final payment of the contract.

                 A unilaterally issued change order must be followed by a supplemental
                 agreement setting forth complete and final equitable adjustment. This
                 supplemental agreement is to contain a release statement indicating that the
                 agreement encompasses all claims under the change order.

                 Reference: FAR 43.204(c)(2)

                 Note: For commercial buys in accordance with FAR 12, Clause 52.212–4,
                       Contract Terms and Conditions—Commercial Items, indicates at
                       Subparagraph (c) Changes: Changes in the terms and conditions of
                       this contract may be made only by written agreement of the parties.

Scope of the Contract

Overview        An ‘in-scope modification’ ensures that the Contracting Officer does not
                place an undue burden on the contractor that is unrelated to the contract. It
                also ensures that ample opportunities exist for contractors to compete for
                new requirements.

                A change outside the scope of the contract is considered to be a cardinal
                change. Thus, any modification to a contract is either within scope or

Scope           In order to make a determination as to whether a proposed change is within
determination   the scope of the contract, consider the following:

                   What was reasonably within the mind-set of the parties at the time the
                    contract was entered into. This would be evidenced by documentation
                    of negotiations and, of course, the clauses and statement of work
                    incorporated into the contract.

                   Function of the end item.

                   Nature and purpose of the contract.

In-scope        The following are examples of in-scope changes authorized by the changes
examples        clauses or any other clause, such as:

                   Vehicle transmission or engine changes
                   Construction materials changes
                   Air versus surface transportation changes
                   Equipment motor/engine changes
                   Reduction or suspension of progress payments based on costs
                   Incorporation of value engineering changes

                                                                         Continued on next page

Scope of the Contract, Continued

Cardinal           Examples of changes not authorized by any clause include:
                      Addition of a line item for a canopy into a contract for jet engines
                      Specification changes to a jeep into a contract for armored tanks

Authorization for Cardinal changes should be the exception and not the rule, but cardinal
cardinal changes changes are not prohibited. The extent and formality of the
                   authorization/justification for a cardinal change will depend upon the dollar
                   amount of the change coupled with the reason for the change. While local
                   regulatory supplements and instructions must also be considered, FAR
                   requires a specific Justification and Approval for contracting actions in
                   excess of the simplified acquisition threshold when full and open
                   competition is not sought.

                   Reference: FAR 6.001, 6.303, 6.304

Modification Impact

Overview        There should be a reasonable and legal approach to measuring an equitable
                adjustment resulting from the contract change. It does not matter how the
                change arose; the principles of reasonableness and legality remain the

Equitable       An equitable adjustment seeks to provide equity to both contracting parties,
adjustments     and may involve both time and money. The Contracting Officer must keep
                in mind what is considered fair and what is legal. There is no ultimate
                correct technique for pricing out a change; the actual method or
                combination of methods used will depend on the facts of the specific
                contract. With any method, FAR 31.201-3 indicates that there shall be no
                presumption of reasonableness attached to cost incurred by the contractor.

                The five approaches to measuring an equitable adjustment are:

                   Specific cost
                   Reasonable value
                   Bruce case
                   Total cost
                   Jury verdict

Specific cost   This approach considers the specific cost the contractor experienced.
                Adjustment is based on the actual cost of the change to the contractor, with
                no consideration given to efficiencies or inefficiencies. With this approach
                we must take into consideration the potential for disrupting the integrity of
                the competitive aspect established from onset. Consequently, the specific
                cost approach isn’t always appropriate in a fixed-price contract. The
                contractor can separate the cost of effecting the change from unchanged
                work under the contract.

                                                                         Continued on next page

Modification Impact, Continued

Reasonable value   Reasonable Value is considered what a prudent businessperson would pay
                   in the competitive market. It’s a universal, objective determination of what
                   costs would be to contractors at large. A cost is reasonable, if in its nature
                   or amount, it does not exceed that which would be incurred by an ordinary
                   prudent person in the conduct of competitive business. This method of
                   measuring the amount of the equitable adjustment is prospective in nature,
                   thus it considers the cost expected to be experienced by any contractor.
                   The particular contractor’s cost experience is not considered. The
                   contractor can separate the cost of effecting the change from unchanged
                   work under the contract.

Bruce case         The Court of Claims held that the proper measure of the equitable
                   adjustment was the contractor's actual costs, reasonably incurred. “In
                   some cases historical or actual cost, reasonable cost, and fair market value
                   are the same, while in others, reasonable cost may be the same as either fair
                   market value or historical or actual cost, and in still others, reasonable cost
                   may be neither fair market value nor historical or actual cost.” (Bruce
                   Construction Corp. vs. United States, 324 F.2d 516 (Ct. Cl. 1963). This is
                   a compromise between the Specific Cost and Reasonable Value
                   approaches. Specific cost, and the cost which would be incurred by an
                   ordinary prudent person in the conduct of competitive business, are both
                   considered. The contractor can separate the cost of effecting the change
                   from unchanged work under the contract.

Total cost         Adjustment is based on the difference in the original contract price
                   (unchanged) and the actual cost of performing the contract as changed.
                   This is the LEAST PREFERRED method. This approach must be used
                   with care to avoid additional cost not attributable to the change itself, i.e.,
                   inefficiencies of the contractor or unrealistically low contract price.

Jury verdict       Adjustment is based on estimates from experts, due to the contractor’s and
                   Government’s inability to substantiate their position in an appellant forum.

                                                                               Continued on next page

Modification Impact, Continued

Contractor        A request for equitable adjustment in excess of the simplified acquisition
certification     threshold is to be certified by the contractor. In determining when the
                  dollar threshold requiring certification is met the aggregate amount of both
                  the increased and decreased costs shall be used. This certification is to
                  state that the request is made in good faith, and that the supporting data are
                  accurate and complete.

                  Reference: DFARS 243.204-70 and 252.243-7002

Claim Potential   What happens when you and the contractor cannot reach an agreement
                  relative to measuring an equitable adjustment? For example the contractor
                  is requesting $250,000.00 and you determine that $175,000.00 is the proper
                  amount for which the Government is liable. A disagreement of this nature
                  is defined as an issue in controversy and is covered in the Disputes Clause
                  at 52.233-1. First you should try to settle the issue in controversy under
                  Alternative Disputes Resolution (ADR). If the contractor refuses ADR
                  then you should issue a modification authorizing payment of the
                  $175,000.00. If the contractor accepts the $175,000.00 as payment in full
                  then it is a done deal, but if not …
                      you will need to issue a modification representing the Contracting
                      Officer’s final decision pursuant to the Disputes Clause. Using the
                      authority set forth in the Disputes Clause the modification should
                      authorize payment of the $175,000.00, deny payment of the $75,000.00
                      and advise the contractor of appeal rights pursuant to Disputes.

                  Note that Claims pursuant to Disputes are introduced in CON101 and
                  covered extensively in CON210, Government Contract Law.

                  Reference: FAR 52.233-1

Consideration     By definition, consideration is something of value in return for something
                  of value. Contrary to popular belief, consideration does not have to take
                  the form of money. Examples of non-monetary consideration are:

                     Change in FOB point from origin to destination
                     Training of Government personnel on utilization of item
                     Warranty provisions being added or extended.

                                                                            Continued on next page

Modification Impact, Continued

Interim       At this point we have discussed modifications that we are prohibited from
summary       issuing as well as changes that can be made under the authority of the
              changes clauses. We have also discussed the thought processes necessary
              for distinguishing what changes are within the scope of the contract and
              which changes are cardinal. Now as we talk about value engineering, we
              readily recognize that acceptance of a value engineering change proposal
              is a change within scope because a contract clause authorizes such.

Value Engineering

Overview      The value-engineering clause encourages contractors to submit cost
              reducing change proposals by promising them a share of the savings. The
              Government, in turn, benefits from process improvements developed by the
              contractors. In order to take advantage of these benefits and savings, the
              Contracting Officer must modify the contract to accept the value
              engineering change proposal.

Definition    Value engineering means an analysis of the functions of a program, project,
              system, product, item of equipment, building, facility, service, or supply
              directed at improving performance, reliability, quality, safety, and life-
              cycle costs.

              Reference: FAR 48.001

VECP          A value engineering change proposal (VECP) submitted by the contractor
              is a proposal that

                 is developed, documented, and submitted by the contractor
                 reduces overall cost to the agency
                 does not impair essential functions
                 requires a change to the instant contract to implement
                 is not expressly prohibited
                 is not required by another contract provision
                 is legal, and/or
                 is technically compatible.

              Note: Basically, anything required by the contract can be the subject of a
                    VECP except as noted next.

              Reference: FAR 48.001

                                                                   Continued on next page

Value Engineering, Continued

Not a VECP        A contractor change proposal that is not a VECP would involve a change

                     in deliverable end item quantities only

                     in research and development (R&D) items or R&D test quantities that
                      are due solely to results of previous testing under the instant contract, or

                     to the contract type only.

                  Reference: FAR 48.001

Supply or         The Supply or Services basic clause covers VECPs submitted on a
services VECP     voluntary basis. Alternate I covers mandatory submission of VECPs.
clause            Alternate II is a combination of voluntary and mandatory. In either case,

                     the Contracting Officer is to respond to a contractor-submitted VECP
                      within 45 days of its receipt

                     if the VECP is rejected, the Contracting Officer provides written
                      notification to the contractor explaining the reasons for rejection, and

                     the Contracting Officer’s decision to accept or reject all or any part of
                      any VECP and the decision as to which of the sharing rates applies is a
                      final decision and is not subject to Disputes clause or litigation under
                      the Contract Disputes Act of 1978.

                  Reference: FAR 48.103(c) and 52.248–1, -2 (architect), -3 (construction)

When a VECP        When is a VECP clause required?
clause is required
                     Contracts over $100,000

                     On contracts of lesser value if there is a potential of significant savings

                  Reference: FAR 48.201(a)

                                                                             Continued on next page

Value Engineering, Continued

When not to         The following are examples of when NOT to include a VECP
include a VECP       clause:
                  Commercial contracts that do not have packaging specifications or
                    other special requirements or specifications

                  Research & Development contracts other than full scale

                  For engineering services from not-for-profit or nonprofit

                  For personal services

                  When product/component improvement is on contract

                  When agency head exempts

                    Reference: FAR 48.201(a)

VECP savings        The following are VECP savings categories:
                  Acquisition Savings

                  Instant Contract

                  Concurrent Contract(s)

                  Future Contract(s)

                  Collateral Savings

                    Reference: FAR 48.104–1, –2,-3 or FAR 48.001

                                                                    Continued on next page

Novation Agreements

Overview         The Government may, when in its best interest, recognize the transfer of a
                 contract from one contractor to another contractor. To recognize the
                 transfer, the responsible Contracting Officer, after legal review, executes
                 the novation agreement and forwards a copy to the transferor and transferee
                 and retains a copy in the contract file. The responsible Contracting Officer
                 then prepares a modification incorporating a summary of the novation
                 agreement and attaches a complete listing of contracts affected.

Definition       A novation agreement is a legal instrument executed by the

                    Contractor (the transferor), who guarantees performance of the contract

                    Successor in interest (the transferee), who assumes all obligations under
                     the contract, and

                    Government, who recognizes the transfer of the contract and related

                 Reference: FAR 42.1201

Prohibited       Statute 41 U.S.C. 15 prohibits transfer of Government contracts (the
                 buying and selling of Government contracts).

                 Reference: FAR 42.1204

Not prohibited   The Government may recognize a third party as the successor in interest to
                 a contract when the third party’s interest arises out of the transfer of

                      all the contractor’s assets, or
                      the entire portion of the assets involved in performing the contract.

                      As measures to safeguard the Government’s interest,
                      the successor in interest must be determined responsible, and
                      a legal review is required.

                 Reference: FAR 42.1204

Change of Name Agreements

Overview     The Government may recognize a change in the contractor’s name when
             the contractor has legally changed its name. A change of name agreement
             is incorporated by a modification to the contract with a listing of all
             affected contracts.

Definition   A change-of-name agreement is a legal instrument that does not disturb the
             original contractual rights and obligations of the parties and is executed by

                contractor, who has legally changed its name, and
                Government, who recognizes the legal name change.

             Reference: FAR 42.1201

Continuity of Services

Overview          The Governments may require a contractor performing a service contract to
                  provide assistance during the transition to a successor. This would be
                  accomplished by issuing a modification under the authority of the
                  Continuity of Services clause.

Continuity of     The Continuity of Services clause is utilized in service contracts when the
Services clause   services under the contract are considered vital to the Government and
                  when difficulties during the transition from one contractor to another or to
                  the Government may occur.

                  The Continuity of Services clause simply conveys to the contractor that
                  services may be required after initial expiration of the contract, and that the
                  contractor may be required to furnish phase-in, phase-out services for up to
                  90 days after a successor is in place to perform.

                  Reference: FAR 37.110(c) and 52.237-3

Exercising the    The Contracting Officer is required to provide the contractor written notice
Government’s      that phase-in, phase-out services are required, and to what extent. The
rights            contractor is to negotiate in good faith the costs for extended services.

                  References: FAR 52.2373

Interim           Thus far we have looked at the procedures for processing modifications
summary           and discussed circumstances prohibiting a modification, as well as more
                  common modifications that are not prohibited and the impact of various

                Payment and Accounting Management

Introduction   In this lesson of instruction, the student should gain an understanding of
               various aspects of financial management, such as determination and
               computation of invoice and contract finance payments due the contractor,
               unallowable and direct costs issues, review of contractor’s estimating
               system, and Government collection of contractor debts.

Invoice Payments

ELO 1          At the conclusion of this unit of instruction, the student should be able to
               accomplish the following:

               1. Recognize invoice payment circumstances.

Introduction   Depending on local policy, much of the time, contracting personnel do not
               review or even see a contractor’s invoice. Nevertheless, it is important to
               have an understanding of when it might be appropriate to effect deductions
               in a contractor’s invoice. Generally, a Contracting Officer’s
               Representative would have reviewed the invoice first and passed it on to
               the contract administrator with a recommendation.

Overview       The FAR makes it mandatory for solicitations and contracts to specify
               payment procedures, payment due dates, and interest penalties for late
               invoice payment. This policy is accomplished by including FAR clause
               52.232-25, Prompt Payment, in these documents. The clause outlines the
               contents of a proper invoice and implements the policy and procedures of
               FAR 32.9. Our focus will be on invoices under service-type contracts as
               those are more likely to be encountered than invoices for supplies.

Definitions    Invoice payment: Government disbursement of monies for supplies or
               services that have been accepted by the Government. This includes
               payments for partial deliveries that have been accepted by the Government
               and final cost or fee payments where amounts owed have been settled.

               Invoice payments also include all payments made under the clause at
               52.232-5, Payments Under Fixed-Price Construction Contracts, and the
               clause at 52.232-10, Payments Under Fixed-Price Architect-Engineer

                  Contracts. Invoice payments are interest bearing if not paid by the due
                  Invoice payment due date: Is the later of either the 30th day after the
                  designated billing office has received a proper invoice from the contractor,
                  OR the 30th day after Government acceptance of supplies delivered or
                  services performed by the contractor; see the clause for exceptions for
                  subsistence or fast pay procedures.
                  Reference: FAR 32.905, 52.232-25(a)

Invoice review    Invoices requiring review prior to payment should receive top priority to
                  avoid the payment of an interest penalty. Information from Government
                  personnel, usually a Contracting Officer’s Representative (COR), is
                  required prior to determination of amount to be paid. The determination of
                  the amount to be paid requires review and application of:

                     the contractor’s invoice

                     payment clauses in the contract

                     written input from the COR, and

                     deductive language, when applicable, in the basic contract, delivery
                      order, or exhibits/attachments.

                  Reference: FAR 52.232–25(a)(4)

Notification to   Generally, written notification to the contractor is required when
the contractor
                     an invoice is not in accordance with the billing instructions of the
                      contract, and correction is required, and/or

                     moneys are being withheld or deducted for a contract noncompliance.

Contracting       The Contracting Officer’s responsibility for monitoring invoice payments
Officer           will be in accordance with the terms and conditions of the contract, as well
responsibility    as local policy/guidance.

Practical Exercise—Invoice Payments

Objective              1. Recognize invoice payment circumstances.

                       In this practical example the students will determine the appropriate
                       invoice reduction due to the contractor’s failure to perform all required

Instructions for   Analyze the Scenario. Answer the 3 questions. Be prepared to discuss
students           your answers. You will have 10 minutes to prepare your answers.

Scenario           Given: A performance based service contract containing deducts for
                   failure to perform.
                   Contractor’s invoice, in the amount of $31,311 for the 6th month of
                   performance. (The invoice is on the page following questions 1 through 3.)

                   There is written documentation from the COR indicating that the contractor
                   failed to accomplish all required tasks during the month. The
                   documentation indicates that the failures were in stairway and elevator
                   cleaning. The inspection report reflected the following WAS accomplished
                   for the 4 weeks of the month:

                                       Sweep and dust stairways               Clean elevators (all)

                      1st week                     2 times                             1 time
                      2nd week                     0 times                             0 times
                      3rd week                     1 time                              0 times
                      4th week                     1 time                              1 time

                   Review of the contract exhibit reveals the following :

                           weekly requirement for stairways is three times, at $2.07 per
                            time/failure, there are 53 stairways, and
                           for elevators is five times at $4.98 per time/failure, there are 6

                                                                                      Continued on next page

Practical Exercise—Invoice Payments, Continued

Questions     1. List any invoice discrepancies.

              2. Based on the COR’s input and the contract terms and conditions, what
              is the amount owed the contractor?

              3. Should the contractor be notified prior to reduction of invoice

                                                                      Continued on next page

Practical Exercise—Invoice Payments, Continued


                    Profitable Building Services, Inc.
                                 919 Crosstown Blvd.
                                Capitol City, DR 11811

                                                                    September 1, 20xx

         Terms: Net 20
         For the period of: August 1 - 31, 20xx

          Quantity          Description                  Amount Due

          1 Month                 Janitorial and Related Services       $31,311.00
                                  at Federal Office Building
                                  No. 3, Capital City, DR.

                           Total Due                      $31,311.00

          Please remit to: Profitable Building Services, Inc.
                           P. O. Box 666
                          Capitol, City, DR 11811

Assignment of Claims

Introduction       An assignment of claims is not a method of contract financing, but rather a
                   method of avoiding contract financing. By acknowledging an assignment
                   of claims, the Government agrees to effect payments due the contractor to a
                   financial institution, fostering private versus Government financing.

Overview           An assignment of claims is used when the contractor has utilized a
                   Government contract as security (collateral) for a private loan. The
                   contractor is assigning payments due, or to become due, to a financial

Prohibitions and   Under some circumstances an assignment of claims is prohibited. All of
conditions for     the following conditions must be met before the Contracting Officer may
use                acknowledge the assignment:

                      Payment(s) anticipated at $1,000 or more.

                      Assignee is a financial institution.

                      Contract does not expressly prohibit assignment.

                      Unless expressly otherwise permitted, the assignment
                          covers all unpaid contract amounts
                          is made to only one party, and
                          is not subject to further assignment.

                      Assignee must provide written notice of assignment with a true copy of
                       the assignment instrument.

                   Reference: FAR 32.802, DFARS 232.803

Assignment         Assignment cannot be acknowledged if it is inconsistent with other terms
requirements       and conditions of the contract. Confirm that:

                      The contract has been properly approved and executed.

                      The contract is one under which claims may be assigned.

                      The assignment covers only money due or to become due under the
                       instant contract.

                      The assignment itself is properly executed by those authorized.

                     The assignment contains no indication of contractor release or
                      disclosure of classified information.

                  Reference: FAR 32.805, 52.232–23

Notification to   Subsequent to the Contracting Officer’s review of the assignment and the
contractor        applicable contract, with all prohibitions, conditions, and assignment
                  requirements taken into consideration, legal review is highly
                  recommended. Following the review process, if the Government
                  determines that acknowledgment of the assignment is inappropriate, the
                  assignment should be returned with a written explanation. If the
                  determination is that the assignment is appropriate, the contractor should be
                  notified of this determination also.

Acknowledgment    Once the determination is made that the assignment is appropriate and
procedures        proper, the Contracting Officer need only sign acknowledgment of the
                  assignment in the space so indicating; and include in the contract file the
                  true copy of the instrument of assignment and the original of the notice of
                  assignment. Then the Contracting Officer is to make distribution by
                  forwarding two copies to the disbursing office, and a copy to the assignee.

                  Reference: DFARS 232.805

                  Regulation does not require that a modification to the contract be issued to
                  acknowledge an assignment of claims; however, it is a good idea to do so,
                  to afford visibility and trackability to the assignment.

                  Local policy/guidance should be consulted for specific instructions.

Release of        Should the contractor fulfill its obligation to the assignee (the financial
assignment        institution) prior to contract completion, a release of claims would be in
                  order. In such cases, the contractor must file a written notice of release
                  together with a true copy of the release of assignment instrument. The
                  Contracting Officer is to acknowledge the release, and advise the
                  disbursing office of the change.

                  Reference: FAR 32.805(e)

Contractor Indebtedness
Introduction          Contractors can become indebted to the Government in various ways. Our
                      focus will not be directed at how a contractor becomes indebted, but on
                      effective debt recovery. Much of the time a contractor will settle an
                      undisputed indebtedness upon a verbal request from Government
                      personnel. We will turn our attention to those instances when recovery is
                      not quite so simple.

Debt                  Any Government representative becoming aware of an actual or potential
determination         debt is to notify the responsible official for debt determination. The
responsible           responsible official for debt determination is generally based on how the
official              debt arose.


                      The disbursing officer is the responsible official for debt determination and
                      collection when the debt

                         results from overpayments or erroneous payments, or
                         is indicated in the contract and notice to collect is provided.

Debt                  The Contracting Officer is the responsible official for debt determination
determination         when the debt results from
official, continued      excess repurchase cost against a defaulted contractor’s account,

                         a quality deficiency, or

                         excessive usage of Government material.

                      From the examples cited, we can readily see that for a negotiable debt
                      situation, the Contracting Officer is the responsible official for debt

                      References: FAR 32.601, 32.605, 32.610, DFARS 232.605, 232.610

Control record        The responsible official must establish a control record for each contract
                      debt. The control record should contain at least the following information:

                       Name and address of contractor

                       Contract number

                       A description of the debt

                       The amount of the debt and the accounting and appropriation data to be

                       Date of debt determination

                       Date(s) of demand for payment

                       Amount and date of collections

                       Date of appeal or action under the disputes clause

                       Status of collections

                    Reference: FAR 32.606

Demand letter   A demand for payment shall be made as soon as the responsible official has
                computed the amount due. When the Contracting Officer is the responsible
                official for debt determination, generally the initial demand letter is from the
                Contracting Officer. This demand letter may represent a final decision of the
                Procuring Contracting Officer, pursuant to disputes. Whether the demand
                letter is from the Contracting Officer or disbursing officer, it shall include:

                   a description of the debt, including the debt amount;

                   notice that any amounts not paid within 30 days from the date of the
                    demand will bear interest at the current rate; and

                   notice that the contractor may submit a proposal for deferment if
                    immediate payment is not practicable or if the amount is disputed.

                A copy of the demand letter is to be provided to the payment office cited in
                the contract.

                Reference: FAR 32.610, DFARS 232.610

Debt recovery   Except for cases in which an agreement has been entered into for deferment
procedures      of collections, or bankruptcy proceedings against the contractor have been
                initiated, the contractor shall liquidate the debt by

                     cash payment (check) in a lump sum, on demand (made payable to the
                      U.S. Treasury with data indicating the reason for the payment), or

                     credit memorandum(s) to be credited against existing unpaid bills due the

                 To summarize the points thus far, we have covered debt determination, who
                 is the responsible official, preparation of the control record upon debt
                 determination, and the demand for payment being sent to the contractor.
                 When the Contracting Officer is the responsible official for debt
                 determination, 30 days following the issuance of the demand letter to which
                 the contractor has not responded, the Contracting Officer shall turn the matter
                 over to the disbursing officer for further collection actions.

                 Reference: FAR 32.606(d), DFARS 232.606

Routine setoff       A routine setoff is a common means of debt recovery. The disbursing
                     officer withholds from any invoice payment, the amount of the debt. It
                     does not matter if the debt arose against an Air Force contract and the
                     offset is from a Navy contract. The accounting gurus will charge the line
                     of accounting to be charged, and credit the line of accounting to be
                     credited. When this is done, the disbursing officer shall give the contractor
                     an explanation of the setoff.

                     In the event the contract is assigned under the clause under FAR Clause,
                     52.232–23, Assignment of Claims (Alternate I), discussed earlier in this
                     lesson, the disbursing officer may not setoff against the assigned contract.

                     References: FAR 32.611, 32.612

Debt deferment       Debt deferment simply means payment on the installment plan. The
                     Contracting Officer shall forward deferment requests to the contract
                     financing office of the contracting department or agency for a decision on
                     granting the deferment.

                     Reference: DFARS 232.610

Debt compromise To compromise a debt simply means to write it off, forget it. Only the
                     department/agency contract financing offices are authorized to compromise
                     debts covered by DFARS 232.6.

                     Reference: DFARS 232.616

Contractor’s Accounting and Estimating System

Introduction     A contractor’s accounting and estimating systems are separate systems that
                 should be consistent with and integrated with each other. An accounting
                 system is a system that sets forth the actual accounting for all costs in a
                 business unit. An estimating system is a system that sets forth the criteria
                 for formulating estimates when anticipated costs are not known.

                 Since both the accounting and estimating systems impact the cost charged
                 against Government contracts, we have a vested interest in the application
                 of the systems.

Review of        An accounting system review may be required prior to making payments
accounting       on cost-reimbursement contracts or prior to making progress payments
system           based on cost when the contractor’s accounting practices are not known.
                 There is no doubt the contractor will have an accounting system in
                 accordance with Cost Accounting Standards (CAS) or Generally Accepted
                 Accounting Principles (GAAP), but the system must also be able to
                 identify costs to the specific contract.

                 Reference: FAR 32.503–3

CAS              It is important for us to realize that there are costs associated with CAS
implementation   implementation. Because the Government is dictating the accounting
                 system (partially or completely), the Government does consider
                 implementation costs as allowable. It is believed that in the long run, cost
                 decreases in CAS-covered contracts will offset any implementation costs
                 the Government pays.

                 Once a business unit has received a CAS-covered contract, the business
                 unit then has the option of establishing a CAS system for

                    all work from GAAP to CAS,
                    only Government contracts from GAAP to CAS, or
                    CAS-covered contracts only.

                 In reaching this decision, a business unit will, among other things, take into

                    the dollar value of full CAS-covered contracts compared to modified or
                     non-CAS-covered contracts

                    balance of Government and non-Government work, and

                    ease in maintaining multiple accounting systems.

Request for      A business unit may be afforded an opportunity to request an equitable
equitable        adjustment on existing contracts. This is permitted when a CAS-covered
adjustment       award will result in accounting (voluntary or required) changes. In either
                 case, the contractor is to provide a cost impact proposal to the ACO.

                 When voluntary changes will result in increased cost to the Government,
                 no such increase shall be allowed until the ACO determines that the change
                 is desirable and not detrimental to the interest of the Government.

                 References: FAR 30.602, 30.602-3 and 52.2301

Negotiation of   The ACO negotiates, for all Government agencies, the equitable
equitable        adjustment on affected contracts for
                    CAS implementation,
                    changed standards,
                    new standards, and
                    changes in accounting practices resulting from a CAS requirement.

                 References: FAR 30.602, 30.603, and 52.230–6

CAS compliance   When the disclosed practices are determined to be in compliance with the
                 standards, everyone moves merrily along.

CAS              CAS noncompliance(s) often results in increased costs to the Government
noncompliance    under the CAS-covered contract. Therefore, when the disclosed practices
                 are determined to be noncompliant, the ACO shall provide written
                 notification to the business unit, allowing rebuttal, and subsequent re-

                 Should the business unit remain noncompliant, the ACO shall:

                    determine the general dollar magnitude of the noncompliance, AND

                    withhold up to 10 percent of the money due under the noncompliant
                     contract or subcontract, OR

                    determine that the noncompliance results in no material increase in
                     costs and notify the contractor or subcontractor that corrective action
                     should be taken.

                 Reference: FAR 30.6, 30.602-1(d)

Review of        A review of a contractor’s estimating system is required for a large
estimating       business, which, in the preceding fiscal year, received prime or

system            subcontracts totaling $50M or more for which certified cost and pricing
                  data were required.

                  Reference: DFARS 215.407-5-70(b)(2)(i)

Resolving         When a contractor has significant problems in its accounting system, the
accounting        Contracting Officer or auditor provides a written notification. Once the
system problems   contractor has resolved the problems, everyone moves merrily along.
                  Should the contractor not resolve the problem, then the Contracting
                  Officer, in conjunction with the auditor, will make a determination as to the
                  impact of the deficiency, and may

                     withhold further payments,

                     reduce payments, or

                     establish interim unilateral rates.

Resolving         As with the accounting system, a written notice is provided to the
estimating        contractor who has estimating system problems. Should the contractor not
system problems   resolve the problem, then the Contracting Officer, in conjunction with the
                  auditor, will make a determination as to the impact of the deficiency, and

                     use additional cost analysis techniques to determine the reasonableness
                      of the cost elements affected,

                     segregate the questionable areas as a cost-reimbursable line item,

                     reduce the negotiation objective for profit or fee, or

                     include a reopener clause that provides for adjustment when actual
                      costs are known.

                  References: FAR 15.407-5, DFARS 215.407-5-70(g)(2)

                              Financial Considerations

Overview        As we are all aware, the Government’s risks are quite high with a cost-
                reimbursement contract. Consequently, a mechanism to help protect the
                Government’s interest is essential. Such a mechanism exists with the two
                limitation clauses, used to aid in shielding the Government’s cost risks.

                Both the Limitation of Cost and Limitation of Funds are clauses expressing
                the extent of the Government’s cost liability, and setting forth contractor
                notification requirements when costs reach, or soon will reach, a specified
                percentage of the total estimated cost or the limit of the funds allotted.
                Limitation of Cost, FAR 52.232–20, is utilized in cost-reimbursement
                contracts that are fully funded. Limitation of Funds, FAR 52.232–22, is
                utilized in cost-reimbursement contracts that are incrementally funded.

Limitation of Funds/Costs
Alternatives    Notification to the Contracting Officer that the contractor is approaching
when reaching   the specified limitation may come from the contractor, or from Government
limitation      personnel monitoring the contract.

                Upon such notification, the Contracting Officer has various alternatives:

                       Provide extra funds and/or time to complete the contract as is.

                       Downscope the work to fit remaining funds.

                       Allow the work to continue until all funds are exhausted, allowing a
                        “natural death” of the contract/effort.

                       Cut losses by terminating the contract before more costs are incurred.

                Reference: FAR 32.704

Fact-finding    In order for the Contracting Officer to reach a determination of the best
                course of action, information is needed from the contractor and from
                Government representatives indicating:

                       the amount of funding required to complete the work called for in the

                       the time required to complete the work called for in the contract, and

                 what work can be accomplished with the remaining funds.
                Information needed from Government representatives will also include:

                        criticality of the work called for in the contract,

                     availability of additional funds, and

                     assessment of the contractor’s technical capability to complete the work
                      called for in the contract.

Compiling the    Once the information requested during fact-finding has been received, it
facts            must be put in proper perspective before acting on any alternative. Due
                 consideration should be given not only to regulatory constraints, but sound
                 business judgment must come to the forefront. There is nothing to be
                 gained by increasing the funds just to obligate expiring funds when the
                 contractor’s technical ability is doubtful.

Selecting an     When the facts are compiled, amount of available funding is known, and
alternative      criticality of the project is known, the decision-making process for each
                 alternative will be as follows:

                      IF . . .                        THEN . . .
                       funding is available          provide extra funding.
                         contractor is deemed
                          capable, and
                        completion of the project
                         is required
                      Funding is not available        downscope the project in alignment
                                                      with available funds
                                                       allow the work to continue until funds
                                                       are exhausted.
                      Additional funding is not       terminate now.
                      available and contractor’s
                      ability is doubtful
                      Additional funding is not       terminate now.
                      available and without
                      completion project is of
                      little or no value

Procedures for   The procedure for each alternative will require written input from
alternatives     Government representative(s) and written direction to the contractor. The
                 specifics of the written direction to the contractor will depend upon the
                 chosen alternative, and may be in letter form or by issuing a modification
                 to the contract. As discussed in a preceding lesson, a modification is
                 required for any change to the contract.
                                   Quality Assurance

Introduction     In this lesson, students should gain an understanding of commercial and
                 noncommercial remedies for contractor performance problems, and
                 determine when it’s appropriate to apply each respective remedy during
                 contract quality assurance. Students should also learn about DoD
                 requirements regarding the collection of contractor past performance

Quality Assurance—Commercial Remedies

Overview         Quality assurance is directed by the terms and conditions of the contract.
                 Sounds simple doesn’t it? Successful contract completion is achieved by
                 applying sound business acumen in executing the contract. This portion of
                 the lesson will examine a commercial situation and possible remedies.

Potential        The analysis of documentation provided by Government and contractor
problems         personnel should include a review of the following potential problems:

                     Late delivery
                     Nonacceptance
                     Nonconformance
                     Other breaches

                 These problems and possible remedies are described in detail in the
                 following chart.

            PROBLEM                      OPTIONS                             COMMENT
LATE DELIVERY                1. Reschedule the delivery date in   Appropriate when (1) there is a
                             exchange for consideration.          reasonable probability of delivery
                                                                  by the new date, and (2) the
                                                                  requiring activity can live with the
                                                                  new date.

Note: When the Contracting Officer      2. Reduce or suspend commercial       Appropriate when (1) commercial
has determined that the deliverable     finance payments under FAR            finance payments are being made,
has been or will be delivered late      clauses 52.232-29(a) or               and (2) performance of the
and that the delay is nonexcusable.     52.232-30(a).                         contract is endangered by the
                                                                              contractor's failure to make

                                        3. Accept late delivery and           Appropriate when (1) the contract
                                        impose liquidated damages.            provides for liquidated damages,
                                        (Liquidated damages can be            and (2) there is a reasonable
                                        incorporated by addendum to FAR       probability of delivery by a date
                                        52.212–4 if it is a customary         that the requiring activity can
                                        commercial practice for the           tolerate.

                                        4. Send a cure notice (10 days or     When there is little probability of
                                        more prior to the contract's          delivery by a date that the
                                        delivery date) or a termination       requiring activity can tolerate
                                        notice (immediately upon              and/or the contractor has not
                                        expiration of the delivery period).   offered adequate consideration.

THE DELIVERABLE HAS NOT                 1. Accept the deliverable without     When the nonconformance is
BEEN ACCEPTED AND DOES                  consideration.                        minor and obtaining consideration
NOT CONFORM TO THE                                                            is not in the Government's
CONTRACT'S REQUIREMENTS                                                       interests (per FAR 46.407(f)).

Note: When the Contracting Officer      2. Accept the deliverable in          When the requiring activity can
has determined that the deliverable     exchange for consideration.           tolerate nonconformance (per FAR
has not been implicitly or explicitly                                         46.407(c)).
accepted and does not conform to
contract requirements.
THE DELIVERABLE HAS NOT                 3. Reject the deliverable and       When there is a reasonable
BEEN ACCEPTED AND DOES                  obtain correction or replacement at expectation that a satisfactory
NOT CONFORM TO THE                      no cost to the Government.          replacement will be provided by
CONTRACT'S REQUIREMENTS,                                                    the delivery date in the contract,
continued                               Tell the payment office to          or, for consideration, within a
                                        withhold payment until an           reasonable time thereafter (see
                                        acceptable deliverable has been     option 1 under LATE
                                        furnished.                          DELIVERY).

                                        4. Reject the deliverable and send    When there is little expectation of
                                        a cure or termination notice.         receiving an acceptable product
                                                                              within a reasonable time.

THE DELIVERABLE HAS BEEN                1. Reject work after acceptance as If the Government reports the
ACCEPTED BUT DOES NOT                   provided in FAR 52.212–4(a).       defect to the contractor
CONTRACT'S REQUIREMENTS                                                         within a reasonable time after
                                                                                 the defect was discovered or
                                                                                 should have been discovered,

                                                                                before substantial change
                                                                                 occurs in the condition of the
                                                                                 item, unless the change is due
                                                                                 to the defect in the item.

                                        2. Invoke an express warranty.       If a warranty clause has been
                                                                             incorporated by an addendum to
                                        3. Invoke an implied warranty.       If an implied warranty applies
                                                                             (see FAR 52.212–4(o)).
OTHER BREACHES                          1. Invoke whatever remedy (if        Examples:
                                        any) is established in FAR clauses
Note: When the Contracting Officer      (if any) incorporated by addenda        Liquidated damages per FAR
has exhausted all efforts at informal   or checked in 52.212—5.                  52.219–16 for failing to
resolution of the problem.                                                       comply with the
                                                                                 subcontracting plan.

                                                                                Cancellation, suspension, or
                                                                                 termination of the contract
                                                                                 under FAR 52.222–26, Equal
                                                                                 Opportunity (incorporated by
                                                                                 reference if checked in FAR

                                                                                 Withholding of payments and
                                                                                  termination under FAR
                                                                                  52.222–41, Service Contract
                                                                                  Act of 1965, As Amended
                                                                                  (incorporated by reference if
                                                                                  checked in FAR 52.212–5).
                                        2. Suspend or reduce payments        When the supplies deliverable or
                                        under FAR 52.232–29 or               services due under the contract
                                        52.232-30.                           will NOT be delivered or
                                                                             performed in accordance with the
                                        3. Send a cure notice (10 days or    When the breach is of sufficient
                                        more prior to the contract's         magnitude to warrant termination
                                        delivery date).                      for cause.

Critical Incident—Commercial Remedies, Continued
ADDITIONAL    The UCC at §2–314 provides that goods are merchantable only if the
Commercial       Pass without objection in the trade under the description in the
Code (UCC)        contract.
article 2
                 If fungible (interchangeable, like items), are of fair average quality
                  within the description.

                 Are fit for the ordinary purposes for which goods of that type are used.

                 Run, within the variation permitted by the contract, of even kind,
                  quality, and quantity within each unit and among all units involved.

                 Are adequately contained, packaged, and labeled as the contract may

                 Conform to any promises or affirmations of fact made on the container
                  or label.

ADDITIONAL    The contractor has the following possible defenses under commercial law
INFORMATION   (UCC §2–314, 315, 316):
defenses         The warranty was specifically disclaimed in the contract, as tailored
                  (e.g., by the terms of a commercial warranty clause incorporated as an

                 The implied warranty is excluded or modified by course of dealing,
                  course of performance, or usage of trade.

                 The buyer agreed to a sale on an “as is” or “with all faults” basis.

                 Before entering into the contract, the buyer examined the goods or a
                  sample or model thereof as fully as desired, in which case there is no
                  implied warranty with regard to defects that an examination ought in
                  the circumstances to have revealed.

                 Before entering into the contract, the buyer refused the seller’s demand
                  that the buyer examine the goods (or a sample or model thereof), in
                  which case there is no implied warranty with regard to defects that an
                  examination ought in the circumstances to have revealed.

                                                                        Continued on next page

Critical Incident—Commercial Remedies, Continued

Conform to the   FAR 52.212–4(a) states that, “The contractor shall only tender for
requirements     acceptance those items that conform to the requirements of the contract.”

Express          The UCC states that express warranties by the seller are created by:
                    Any affirmation of fact or promise made by the seller to the buyer that
                     relates to the goods and becomes part of the basis of the bargain
                     creates an express warranty that the goods shall conform to the
                     affirmation or promise.

                    Any description of the goods, which is made part of the basis of the
                     bargain, creates an express warranty that the goods shall conform to
                     the description.

                    Any sample or model, which is made part of the basis of the bargain,
                     creates an express warranty that the whole of the goods shall conform
                     to the sample or model.

Formal words     The UCC also states that it is not necessary to use formal words such as
                 “Warranty” or “Guarantee” or even have a specific intent to make a

Opinion          The seller’s opinion of the goods or affirmation of the value of the goods,
                 in other words “puffing the goods,” does not create an express warranty.
                 For example: “This product is the best thing since sliced bread.”

Boards and       It is possible that the Boards and Courts may find FAR 52.212–4(a)
Courts           creates an express warranty. Keep an eye out for decisions in this area.

                                                                          Continued on next page

Critical Incident—Commercial Remedies, Continued

Contrast between A particular purpose differs from the ordinary purpose for which goods are
merchantability   used in that a particular purpose looks to a specific use by the buyer,
and fitness for a whereas ordinary purpose relates to how the goods are customarily used.
                  Example 1: Cars are generally used for the ordinary purpose of
                  transporting the family around town and on vacations, but a seller may
                  know that this particular car is to be used at the local speedway, a particular

                  Example 2: Shoes are generally used for walking upon ordinary ground,
                  but a seller may know that the buyer intends to climb Mount Everest.

Practical Example—Noncommercial Remedies
Set up            Follow the steps below to conduct the entire practical example.

                       Step                                Action
                        1        The objective of this practical example is for the student
                                 to evaluate input from contractor and Government
                                 personnel regarding contract performance, and to
                                 determine which actions are appropriate for resolution of
                                 specific problems.

                         2       Each part contains additional scenario information. The
                                 parts of the example are:
                                  Delays
                                  Stop-work
                                  Monitoring, Acceptance, and Inspection

                    Note: The term Quality Assurance Representative (QAR) is not used by
                          the Air Force. Their term is Quality Assurance Evaluator (QAE).

Letter from       The following letter was received from the CAN'T DO CORP. Utilize
Can’t Do Corp.   FAR 42.1304(d) and 52.242–17 in answering the questions.
Delays                                 CAN’T DO CORPORATION
                                         MR. JOE HERO, CEO

                 Mr. Contract Administrator
                 DCMAO Rim Rock
                 Hometown, USA

                 Dear Mr. Administrator,

                 Our company is gravely concerned about the poor quality and late delivery
                 of the Government-furnished raw material. Shortfalls in both areas are
                 contributing to the excess test failures of our cylinders, and are disrupting
                 the production schedule. This directly impacts the delivery schedule.
                 Although we’ve been experiencing excessive test failures, the cylinders,
                 when placed into operation, work just fine. Our industry reputation for
                 quality, and our own in-house assessment suggests that the Government is
                 not exposed to increased risk. We have been working extensively with Mr.
                 QAR and Mr. IS concerning the poor quality and late delivery of the raw
                 material, but it has been 60 days since we first brought this matter to the
                 attention of the Government. Thus far, you have provided no explanation
                 or any suggestions.
                 Correspondence to the Program Manager has yielded sympathy, but no
                 formal resolution.

                 Therefore, based upon the lack of guidance and definitive direction, I am
                 seeking relief under the Government Delay of Work Clause (52.242–17)
                 for my additional expenses, and am seeking an extension of the delivery
                 date until this issue is resolved.

                 My costs and increased expenditures are shown below:

                                       Labor being idle $5,000
                    Storage of Nonconforming Material      1,000/month
                                          Test Material    3,000
                         Calibration of Test Instrument    5,000
                                                   Total $14,000
                                          Profit @ 11%     1,100
                                     Entire Cost to date $15,100

                 We have calculated that each day of delay costs $500.

             We are committed to providing a quality product and are willing to work
             with our customer.

                                              Mr. Joe Hero

Additional   Fact-finding has revealed that the delivery of Government-furnished raw
background   material was indeed late. However, it was also established that the
             calibration of the testing machine used by Can’t Do was incorrect and
             required a special and expensive adjustment in order to bring it into
             tolerance. Although the machine was out of tolerance, adjustment and
             calibration did not resolve problems with the cylinder test failures. Thus,
             the specs for the test became more suspicious. The contractor was
             convinced that we should pay for his calibration cost because it was an
             expense related to the test, and hence, a cost attributed to the delay.

             Once the decision was made that the late delivery of raw material was
             indeed the fault of the Government, the ACO began to examine FAR
             clause 52.242–17, to formulate a response to Mr. Hero.

Questions    Answer the following questions in your own words.

             1. Is this an excusable delay?

             2. What are the factors that you will consider in your response to the

             3. What is an appropriate time extension?

Scenario     The ink is barely dry on the modification settling the delay issue. During
Stop -Work   the ACO’s fact-finding process, he learned from the program manager that
             a new machining fluid is about 60 days away from market availability, and
             preliminary tests indicate that its by-product is environmentally safe. The
             program manager is willing to halt production until the new machining
             fluid is available. Based upon this technological breakthrough, the PCO is
             ready to initiate a stop-work order. Because you were close to the
             situation, he asks you to prepare a draft stop-work order and include any
             information that would fit into an impact statement. In the spirit of
             teamwork, you draft a letter for the PCO.

Question 1   1. Using FAR 42.1303 and 52.242–15, list the information needed in a
                stop-work order. Identify the areas that would be included on the fact

Question 2        2. The environmentally safe fluid arrived on day 21 of the stop-work
                     order. The program manager and contractor were thrilled and wanted
                     to begin using it immediately. The PCO asks for your help in preparing
                     the order to lift the stop-work order. Summarize the steps for the

Scenario A        The Can’t Do Corp. seems to be back on track following the lifting of the
Monitoring,       stop-work order. While negotiating an equitable adjustment for the stop-
Acceptance, and   work order, you also negotiated an equitable adjustment to relax the
Inspection        specification, subject to the technical approval of the Government engineer.
                  The Government engineer now concurs that the test specification was
                  unduly restrictive. The contractor notifies the Defense Contract
                  Management Agency—Rimrock that he has 10 items ready for inspection.
                  The QAR schedules an appointment for Thursday, the day before the
                  contract delivery date, to inspect the items. According to all indicators, all
                  should go well.

                  The program manager is energized by an urgent requirement for the Doom
                  System for a secret peacekeeping mission. Currently, the contractor is
                  scheduled to deliver 10 this month and another 10 next month.

                  The QAR arrives and begins the inspection of the Doom System in a
                  meticulous and professional manner. Aware of the political pressures, his
                  heart begins to sink when he discovers rust on the exhaust stack. He
                  scrapes the rust with his pocketknife and determines that it may be more
                  than surface rust.

                  The contractor argues that the minor nature of the nonconformance does
                  not pose a risk to the Government and should not delay acceptance.

Practical Example—Noncommercial Remedies, Continued

Scenario B        Being courageous and having a sound mind, the QAR decides to reject the
Monitoring,       items as nonconforming. The contractor quickly prepares and submits a
Acceptance, and   minor nonconformance acceptance request to the ACO. Anxious to get a
Inspection        response, the ACO faxes the request to the buying activity with a reminder
                  that the contract delivery date is the next day.

                  The PCO contacts the program manager and finds out that his technical
                  staff will need 5 days to make a decision concerning the issue of minor vs.
                  major nonconformance.

                  Looking at the big picture, the ACO could envision a business deal
                  whereby the Government accepts the items with the minor
                  nonconformance (if deemed a minor nonconformance) in exchange for
                  consideration. In this situation, consideration could be a reduced price or
                  accelerated delivery on the remainder of the contract. The PCO informs
                  you (ACO) that a decision on the nonconformance will not be forthcoming
                  until the following Tuesday, at which time a decision will be made on the
                  delivery status. In light of this information, you begin to think about the
                  delivery extension and possible forms of consideration that would be

Question 2        What are the options available to the Government? What would you pose?

                                                                          Continued on next page

Practical Example—Noncommercial Remedies, Continued
Scenario—C        True to form, the buying activity gets back to you with a decision that the
Monitoring,       rust is considered to be a minor nonconformance. Armed with this
Acceptance, and   information, you make your offer to the Can’t Do Corp. Mr. Joe Hero
Inspection        accepts your offer to accept the items with the minor nonconformance, and
                  agrees to provide the next 10 items rust-free while accelerating the delivery
                  schedule by 2 weeks. Additionally, the ACO incorporates the Liquidated
                  Damages clause into the contract for further protection.

                  The first 10 items were accepted with the minor nonconformance,
                  temporarily relieving the contractor of pressure. The next 10 items were
                  scheduled for delivery within 15 days. Unfortunately, solving the rust
                  problem was not an easy fix, requiring extensive research. Despite the best
                  efforts of the contractor, the new delivery date was missed.

Question 3        What are your options?

Question 4        What actions would you take?


Overview          One of the major ways of accomplishing this socioeconomic goal is by
                  requiring large business concerns competing for contracts exceeding
                  $550,000 ($1,000,000 for construction), and that has subcontracting
                  possibilities, to submit subcontracting plans. The Contracting Officer must
                  then review and evaluate the plans to determine if they are acceptable.

                  References: FAR 19.705–4; 19.702(a)(1)and (2)

Determining the   Before we examine the types and content requirements of a small business
need              subcontracting plan, we need to determine whether a contractual action
                  actually requires a plan. In making the determination, the Contracting
                  Officer shall:

                     determine whether the contract action will meet the dollar threshold

                     determine whether subcontracting possibilities exist by considering if
                      contractors normally perform the work or acquire the items in-house or
                      through subcontracts and are there likely to be product prequalification

                     have determination of no subcontract possibilities approved at a level
                      above the Contracting Officer and placed in the contract file

                  Reference: FAR 19.705-2(a)-(c)

Negotiated        In solicitations for negotiated acquisitions, the Contracting Officer may
procurements      require the submission of subcontracting plans with initial offers, or at any
                  other time prior to award. In determining when subcontracting plans
                  should be required, as well as when and with whom plans should be
                  negotiated, the Contracting Officer shall consider

                    the integrity of the competitive process,
                   the goal of affording maximum practicable opportunity for small, small
                     disadvantaged, women-owned small business concerns and historically
                     black colleges and universities, or minority institutions,
                   the burden placed on offerors.
                  Reference: FAR 19.705-2(d)

Types of Subcontracting Plans

Types of plans   The chart below shows the different types of subcontracting plans that may
                 be submitted.

                          Plan Type                             Description
                   Individual plan               The individual plan relates only to a
                                                 specific contract including a separate
                   (FAR 19.701, 52.219–          part for each option, if any.
                   Master plan                   An approved master plan

                   (FAR 19.704(b), 52.219–          may be established on a plant or
                   9(f))                             division-wide basis

                                                    must contain all the required
                                                     elements, except goals, and

                                                    is effective for 3 years after approval
                                                     or for the life of the individual
                                                     contract into which it is

                                                 (Goals and any deviations must be
                                                 included in an individual subcontracting
                   Commercial product plan       The approved annual plan shall remain
                                                 in effect during the offeror’s fiscal year
                   (FAR 19.701; 52.219–          for all of the offeror’s commercial
                   9(g))                         products.

                   Comprehensive                 DoD test program to determine whether
                   Subcontracting plan           comprehensive subcontracting plans on a
                   (DFARS 219.702)               corporate, division, or plant-wide basis
                   Section 834 of Pub. L.        will reduce administrative burdens while
                   101-189                       enhancing subcontracting opportunities.
                                                 [October 1, 1990 through September 30,

Contents of a Subcontracting Plan

Required       The Contracting Officer must ensure that each subcontracting plan includes
elements       the eleven elements shown below, which are prescribed in FAR 19.704(a)
               and DFARS 219.704.
                Number                                 Element
                    1       Separate goals for
                             small business concerns (SB)*

                                 Veteran- owned small business (VOSB)
                                 Service-disabled veteran-owned small business
                                  (SDVOSB) (FAR states that these may be included in
                                  the subcontracting plan for VOSB and therefore do not
                                  require a separate goal)
                                 HUBZone small business
                                 small disadvantaged business concerns (SDB), goal
                                  includes subcontracts with: historically black colleges
                                  and universities (HBCU), and minority institutions
                                 women-owned small business concerns (WOSB)

                           These are separately addressed for the base contract and each
                           option (if any). *NISH subcontracts count towards SB goals
                           (DFARS 219.703)
                   2       A statement of total dollars planned to be subcontracted and a
                           statement of the total dollars planned to be subcontracted to
                           SB, VOSB, SDVOSB, HUBZone, small disadvantaged and
                           women-owned small business concerns.
                   3       Description of the principal types of supplies and services to
                           be subcontracted and identification of types to be
                           subcontracted to SB, VOSB, SDVOSB, HUBZone, SDB and
                   4       Description of method used to develop subcontracting goals

                   5       Description of method used to identify potential sources for
                           solicitation purposes.
                   6       A statement as to whether or not the offeror included indirect
                           costs in establishing subcontracting goals, and method used to
                           determine the proportionate share of indirect costs to be
                           incurred with SB, VOSB, SDVOSB, HUBZone, SDB and
                   7       The name of an individual who will administer the offeror’s
                           subcontracting program, and description of duties.
                                                                      Continued on next page

Contents of a Subcontracting Plan, Continued

Required         This table is continued from the previous page.
                          8        Description of efforts the offeror will make to ensure
                                   that SBs, VOSB, SDVOSB, HUBZone, SDBs (to
                                   include HBCU & MI), and WOSBs have an equitable
                                   opportunity to compete for subcontracts
                          9        Assurances that the offeror will include
                                   subcontracting flow-down provisions
                         10        Assurance the offeror will cooperate in
                                   studies/surveys and provide required reports.
                         11        Offeror provides description of the types of records
                                   maintained to demonstrate procedures adopted to
                                   comply with requirements and goals in the plan; and
                                   description of its efforts to locate SBs, VOSB,
                                   SDVOSB, HUBZone, SDBs and WOSBs and to
                                   award subcontracts to them.

Reviewing and Evaluating the Plan

Transition       The Contracting Officer must ensure that the offeror’s make or buy
                 program does not conflict with the offeror’s proposed subcontracting plan
                 and is in the Government’s interest. If the contract involves products or
                 services that are particularly specialized or are not generally available in
                 the commercial market, consider the offeror’s current capacity to perform
                 the work and the possibility of reduced subcontracting opportunities.

                 Reference: FAR 19.705–4(d)(4)

Review of plan   The Contracting Officer reviews the subcontracting plan allowing the SBA
                 resident procurement center representative an opportunity to review it also.
                 The cognizant contract administration office is responsible for reviewing,
                 evaluating, and approving master subcontracting plans, with support from
                 the small business specialist in evaluating a contractor’s performance and
                 compliance with its plan.

                 References: FAR 19.705–5; DFARS 219.706

Zero goals       Adequate subcontracting plans do not have zero goals without supporting
                 rationale. In DoD, a small disadvantaged business goal of less than 5
                 percent must be approved two levels above the Contracting Officer.

                 Reference: DFARS 219.705–4

Subcontracting   The subcontracting goals should be set at a level for which there is a
goals            reasonable expectation that the offeror can achieve them. Take care not to
                 negotiate an increase in the goal if it is apparent that a higher goal will
                 significantly increase the Government cost or seriously impede attainment
                 of acquisition objectives.

Reviewing the    Try to identify information in the subcontracting plan that would indicate
plan             its effectiveness in achieving the goals, such as:

                    designating a company official to administer the subcontracting program

                    listing procedures adopted to comply with the plan, and

                    listing records to be maintained.

Procedure        The following table summarizes the steps in reviewing and evaluating the
                 contents of the subcontracting plan in accordance with FAR 19.705–4 and
                 DFARS 219.705–4.

                        Step                                Action
                         1       Review for adequacy of required elements prescribed by
                                 FAR 19.704.
                          2      Consider past participation of SB, VOSB, SDVOSB,
                                 HUBZone, SDB, WOSB, HBCU, and MI concerns as
                                 prime or subcontractors in similar acquisitions.
                          3      Consider proven methods of involving SB, VOSB,
                                 SDVOSB, HUBZone, SDB, WOSB, HBCU, and MI
                                 concerns as subcontractors in similar acquisitions.
                          4      Consider relative success of methods offeror intends to use
                                 to meet goals and requirements of the plan as shown by
                                 the offeror’s records.
                          5      Evaluate offeror's past performance in awarding
                                 subcontracts for same or similar products/services to SB,
                                 VOSB, SDVOSB, HUBZone, SDB, WOSB, HBCU, or

                          6      Evaluate offeror's overall past performance in awarding
                                 subcontracts to SB, VOSB, SDVOSB, HUBZone, SDB,
                                 WOSB, HBCU, or MI.
                          7      Ensure goals are attainable relative to subcontracting
                                 possibilities, pool of eligible subcontractors available to
                                 fulfill opportunities and actual contractor performance in
                                 meeting goals on prior plans.
                           8      Ensure goals are consistent with the offeror’s cost or
                                  pricing data or information other than cost or pricing
                           9      Evaluate offeror’s make or buy program to identify
                                  conflicts with proposed subcontracting plan.
                          10      Evaluate subcontracting potential, given offeror's make or
                                  buy program/policies, nature of products or services to be
                                  subcontracted, known availability of SB, VOSB,
                                  SDVOSB, HUBZone, SDB, WOSB, HBCU, and MI in
                                  area where work is to be performed, and offeror's long-
                                  standing contractual relationships with suppliers.

Offeror          You may assist the offeror by providing information on established small,
assistance       small disadvantaged, and women-owned small business subcontractors, as
                 well as any firms known to be potential subcontractors. Also, FAR 5.206
                 allows contractors to use the Government-wide Point of Entry (GPE) to
                 publicize subcontracting opportunities.

                 Reference: FAR 19.705–4 (d)(6)

Determining      Determine the offeror non-responsible and/or ineligible for an award if:
responsibility      the offeror historically has a poor record of compliance with
                     subcontracting plans (FAR 9.104-3)

                    an acceptable plan is not submitted or negotiated within the time specified
                     by the Contracting Officer (FAR 19.702(a)(1); 52.219–9(c)), or

                    the plan initially submitted or as revised does not incorporate the required
                     elements and is, therefore, unacceptable (FAR 19.705-4).

Incorporating the Plan

Incorporate plan   The Contracting Officer will ensure that the acceptable subcontracting plan
into contract      is incorporated into and made a material part of the contract.

Reviews and        The administrative Contracting Officer is responsible for monitoring,
approvals          evaluating and documenting the contractor’s compliance with the plan.
                   However, you must inform the SBA of the award of your contract by
                   providing the documents as prescribed by FAR 19.705–6 and shown in the
                   following chart.

                                Submit the                              To the
                      award document                      Assistant Regional Administrator
                                                          for Procurement Assistance in
                                                          the SBA region where the
                                                          contract will be performed.
                      subcontracting plan and             Assistant Regional Administrator
                      associated approvals of             for Procurement Assistance in
                      company-wide plans for              the SBA region where the
                      commercial products                 company's headquarters is
                      subcontracting plans submitted      SBA resident procurement center
                      for an Invitation for Bids (IFB)    representative for concurrent
                      final subcontracting plan for
                      negotiated contracts or
                      subcontracting plan or the          cognizant ACO.
                      determination that none is

Interim            As we discussed earlier, a subcontracting plan is placed into the contract
summary            pursuant to the requirements of FAR 19.705-5, 19.708(b)(1), 52.219-9, and
                   DFARS 252.219-7003 or 252.219-7004. The action to monitor the
                   subcontracting plan implementation effort by the contractor will be
                   accomplished by the activity responsible for administration of the contract.
                   We will now turn our focus to the administration of a contract containing a
                   subcontracting plan.

Subcontracting Plan Compliance

Monitoring         The Contracting Officer administering the contract is responsible for
                   monitoring, evaluating, and documenting contractor performance under the
                   clause prescribed in 19.708(b) and any subcontracting plan included in the
                   contract. The contract administration office shall provide the necessary
                   information and advice to support the Contracting Officer, as appropriate.

ACO                The administrative Contracting Officer should monitor the contractor’s
responsibilities   compliance with the subcontracting plan and furnish the following:

                      Information on the extent to which the contractor is meeting the plan's
                       goals for subcontracting with eligible small business concerns (SB),

                      Veteran- owned small business (VOSB), Service-disabled veteran-owned
                       small business (SDVOSB), HUBZone small business, small
                       disadvantaged business concerns (SDB) (SDB goal includes subcontracts
                       with historically black colleges and universities (HBCU), and minority
                       institutions (MI)), and women-owned small business concerns
                       (WOSB)small business.

                       Information on whether the contractor's efforts to ensure the
                        participation of SB, VOSB, SD VOSB, HUBZone, SDB, and WOSB
                        are in accordance with its subcontracting plan;

                       Information on whether the contractor is requiring its subcontractors to
                        adopt similar subcontracting plans;

                       Immediate notice if, during performance, the contractor is failing to
                        meet its commitments under the clause prescribed in 19.708(b) or the
                        subcontracting plan;

                       Immediate notice and rationale if, during performance, the contractor is
                        failing to comply in good faith with the subcontracting plan;

                       Immediate notice that performance under a contract is complete, that
                        the goals were or were not met, and, if not met, whether there is any
                        indication of a lack of good faith effort to comply with the
                        subcontracting plan.

                   Reference: FAR 19.706

                                                                              Continued on next page

Subcontracting Plan Compliance, Continued

Clauses             If FAR 52.219–9 and DFARS 252.219-7003 are in a contract, then FAR
                    52.219–16, Assessment of Liquidated Damages, must also be included.
                    (Note that contracts with contractors which have comprehensive
                    subcontracting plans approved under the test program described in DFARS
                    219.702(a) are not subject to liquidated damages; those contracts should
                    have DFARS clause 252.219-7004 instead of FAR 52.219-9 and DFARS

                    Reference: FAR 19.708(b)(2), 219.702(a)(ii)(d)

Assessment of       FAR 19.705–7 covers noncompliance and assessment of liquidated
liquidated          damages. Maximum practicable utilization of SB, VOSB, SD VOSB,
damages             HUBZone, SDB, and WOSB as subcontractors in Government contracts is
                    a matter of national interest with both social and economic benefits. When
                    a contractor fails to make a good faith effort to comply with a
                    subcontracting plan, these objectives are not achieved, and 15 U.S.C.
                    637(d)(4)(F) directs that liquidated damages shall be paid by the

Determining         In determining whether a contractor failed to make a good faith effort to
good faith effort   comply with its subcontracting plan, a Contracting Officer must consider:

                       the totality of the contractor's actions, consistent with the information
                        and assurances provided in its plan;

                       that failure to meet its subcontracting goals does not, in and of itself,
                        constitute a failure to make a good faith effort;

                       that even with diligent efforts to comply with its subcontracting plan,
                        unavailability of anticipated sources or unreasonable prices may
                        frustrate achievement of the contractor's goals.

                    Reference: FAR 19.705-7(d)
                                                                               Continued on next page

Subcontracting Plan Compliance, Continued

Indicators – not    When considered in the context of the contractor's total effort in
good faith effort   accordance with its plan, the following may be considered as indicators of
                    a failure to make a good faith effort:

                       failure to attempt to identify, contact, solicit, or consider for contract
                        award SB, VOSB, SD VOSB, HUBZone, SDB, and WOSB;

                       failure to designate a company official to administer the subcontracting
                        program and monitor and enforce compliance with the plan;

                       failure to submit Standard Form (SF) 294, Subcontracting Report for
                        Individual Contracts, or SF295, Summary Subcontract Report, in
                        accordance with the instructions on the forms or as provided in agency

                       failure to maintain records or otherwise demonstrate procedures
                        adopted to comply with the plan; or

                       the adoption of company policies or procedures that have as their
                        objectives the frustration of the objectives of the plan.

                    Reference: FAR 19.705-7(d)

Noncompliance       If, at completion of the basic contract or any option period (or for
                    commercial plans, at the close of the fiscal year for which it is applicable),
                    a contractor has failed to meet its subcontracting goals, the Contracting
                    Officer shall take the following actions:

                            Step                                 Action
                             1         Review all available information for an indication that
                                       the contractor has not made a good faith effort to
                                       comply with the plan.
                             2         Document the file accordingly. If contractor made a
                                       good faith effort to comply, the only action needed is
                                       documentation. (But see next step, when applicable.)

                                                                                Continued on next page

Subcontracting Plan Compliance, Continued

Noncompliance,   This table is continued from previous page.
                        Step                               Action
                         3         If Contracting Officer decides that contractor has
                                   failed to make a good faith effort to comply with its
                                   subcontracting plan, give the contractor a written
                                   notice that:

                                      specifies the failure advises that the contractor may
                                       have to pay liquidated damages;

                                      gives the contractor an opportunity to demonstrate
                                       what good faith efforts have been made;

                                      provides the contractor a period of 15 working
                                       days (or longer as necessary) to respond; and,

                                      states that failure of the contractor to respond may
                                       be taken as an admission that no valid explanation
                         4         Consider all pertinent data, including any data
                                   submitted by the contractor in response to the notice,
                                   and make a final decision.
                         5         If the decision is that the contractor failed to make a
                                   good faith effort to comply with its subcontracting
                                   plan, issue a Contracting Officer’s final decision to
                                   that effect which:

                                      requires payment of liquidated damages; and,

                                      states that the contractor has the right to appeal
                                       under the Disputes clause.

Amount of        For other than commercial plans, the amount of damages attributable to the
liquidated       contractor’s failure to comply shall be an amount equal to the actual dollar
damages          amount by which the contractor failed to achieve each subcontracting goal.

                 Reference: FAR 19.705-7(b)

                                                                           Continued on next page

Subcontracting Plan Compliance, Continued

Liquidated       For commercial plans approved under FAR 52.219-9, the Contracting
damages --       Officer that approved the plan shall:
commercial plans
                     Perform the functions of the Contracting Officer under this subsection
                      on behalf of all agencies with contracts covered by the commercial

                     Determine whether or not the goals in the commercial plan were
                      achieved and, if they were not achieved, review all available
                      information for an indication that the contractor has made a good faith
                      effort to comply with the plan, and document the results of the review;

                     If a determination is made to assess liquidated damages, in order to
                      calculate and assess the amounts of damages, the Contracting Officer
                      shall ask the contractor to provide—

                         (i) Contract numbers for the Government contracts subject to the

                         (ii) The total Government sales during the contractor's fiscal year;

                         (iii) The amount of payments made under the Government contracts
                          subject to that plan that contributed to the contractor's total sales
                          during the contractor's fiscal year; and

                     When appropriate, assess liquidated damages on the Government's
                      behalf, based on the pro rata share of subcontracting attributable to the
                      Government contracts. (See example on next page.)

                                                                            Continued on next page


Overview     Now we will focus on Part 44 of the FAR (Subcontracting Policies and
             Procedures) and the applicable contract clauses. The criticality of the
             clauses cannot be stressed enough because they are the mechanism utilized
             to protect the Government’s interest in how the prime spends Government
             funds. Advance notification and consent requirements are integrated to
             ensure that sound business judgments are included in the process.

Definition   FAR 44.101 defines consent to subcontract as the Contracting Officer’s
             written consent for the prime contractor to enter into a particular

             Reference: FAR 44.101

Purpose      Consent to subcontract is a mechanism designed to protect the
             Government’s interest in subcontracts issued by the prime. Actions
             required by both the Government and the contractors are delineated in FAR
             Part 44 and the respective clauses in the contract.

Transition   Reviewing each individual proposed subcontract action is tremendously
             time consuming. However, by reviewing (and approving when appropriate)
             the contractors’ purchasing systems, we can cut down on the actions
             involved in the review process.

                                                                    Continued on next page

Consent, Continued

Contractor’s    The contractor purchasing system review is a complete evaluation of the
purchasing      contractor’s purchasing of materials and services and how he manages his
system review   subcontracting from identifying the requirement through completion of
                subcontract performance.

                The objective is to evaluate the efficiency and effectiveness with which the
                contractor spends Government funds and complies with Government policy
                when subcontracting. The review provides the ACO a basis for granting,
                withholding, or withdrawing approval of the contractor’s purchasing system.

                This function is the responsibility of the ACO. In DoD, the ACO and the
                respective responsibility usually rests within the Defense Contract
                Management Agency (DCMA).

                Reference: FAR 44.3 and DFARS 244.301

Consent with    Consent to subcontract with an approved purchasing system is not required
an approved     unless the Contracting Officer specifically identifies, in 52.244–2(e), by
purchasing      subcontract number or class of items, subcontracts requiring consent to
system          protect the interests of the Government. For fixed-price-type contracts, this
                consent to subcontract in accordance with 52.244-2(c) is required only on
                unpriced contract actions.

                This consent may be necessary if it has been determined that such action is
                required to protect the Government adequately because of the subcontract
                type, complexity, or value, or because the subcontract needs special

                Reference: FAR 44.201-1(a), 52.244–2(e)

                Note to Instructor: Remind students that an approved purchasing
                system does not affect the determination of allowability, allocability, or
                reasonableness under a cost-reimbursement contract. Under a cost-
                reimbursement contract, even with an approved purchasing system, all
                costs must still be determined to be allowable, allocable, and reasonable
                before payment can be made.

                                                                           Continued on next page

Consent, Continued

Consent without     For any contract type other than a fixed-price-type contract, if the
an approved         contractor does not have an approved purchasing system, consent to
purchasing          subcontract is required for any subcontract that is
than fixed-price-      cost-reimbursement,
type contracts
                       time-and-materials, or
                       labor-hour type; or
                       fixed-price and exceeds the greater of SAT or 5 percent of the total
                        estimated cost of the contract.

                    Reference: FAR 44.201-1(b), 52.244–2(d)

Consent without     For fixed-price-type contracts that exceed the simplified acquisition
an approved         threshold, if the contractor does not have an approved purchasing system,
purchasing          consent to subcontract is required under any unpriced contract action to the
system--fixed       prime contract (unpriced modification or unpriced delivery order to the
price-type-         prime contract) that results in a subcontract that is
                       cost-reimbursement,
                       time-and-materials, or
                       labor-hour type; or
                       fixed-price and exceeds the greater of SAT or 5 percent of the total
                        estimated cost of the contract
                       identified in 52.244–2(e) by subcontract number or class of items

                    Reference: FAR 44.201-1(b), 52.244–2

FAR/DFARS           See the following FAR/DFARS cites governing consent:
cites governing
consent                FAR 44.202-2, Considerations
                       FAR 44.203, Consent Limitations
                       DFARS 244.202-2, Considerations

                    Note: Go to the above FAR cites and cover the specific considerations
                      and limitations regarding consent to subcontract with the students.

                                                                             Continued on next page

Consent to Subcontract Flowchart
                                                                 Does the                                       Is the
      The contractor                                        contractor have an           Y                                         N
      a new subcontract.                                   approved purchasing                                fixed
                                                                                                          contract price?
                                          Consent                                        Consent
                     N                       not                                            not                   Y
                                          required                      N                required

               Does the                                                                                     Does the
          subcontract result                                        Is the                             subcontract result
                                             Y                                                N
   from an unpriced contract action                            prime                            from an unpriced contract action
        to the prime contract?                                    fixed
                                                              contract price?                        to the prime contract?

                                                                        N                                         Y

                                                                                                               Is the
                                                                                              N       subcontract identified
                                                                    Is the
                                                                                                      by subcontract number
                                                          • Cost-reimbursement,                         or class of items in
                 Is the
                                                     time-and-materials, or labor-hour                     52.244-2(e)?
        subcontract identified        N                                                  N
        by subcontract number                           • Fixed-price exceeding the
          or class of items in                            greater of SAT or 5% of
             52.244-2(e)?                                  total estimated cost of
                     Y                                                                                        required
Advance Notification

Advance            Under cost-reimbursement contracts, even if the contractor has an
notification       approved purchasing system and consent is not required, contractors are
                   required by statute to notify the agency before the award of

                       any cost-plus-fixed-fee subcontract ; or

                       any fixed-priced subcontract (for DoD) that exceeds the greater of the
                        SAT or 5 percent of the total estimated cost of the contract.

                   Reference: FAR 44.201-2(a)(b); 52.244-2 (f)

Other prior        FAR 52.209–6, Protecting the Government’s Interest when Subcontracting
notice clause      with Contractors Debarred, Suspended or Proposed for Debarment,
                   prescribes prior notice to the Contracting Officer prior to placing a
                   subcontract with an “excluded source.”

                   Reference: FAR 52.209–6

Requiring, analyzing, incorporating, and managing subcontracting plans from a large
business contractor is a major way of fulfilling the Government’s socioeconomic policy
that eligible small business concerns (SB), Veteran- owned small business (VOSB),
Service-disabled veteran-owned small business (SDVOSB), HUBZone small business,
small disadvantaged business concerns (SDB) (SDB goal includes subcontracts with
historically black colleges and universities (HBCU), and minority institutions (MI)), and
women-owned small business concerns (WOSB) business concerns shall have the
maximum practicable opportunity to participate in contracts and subcontracts, consistent
with efficient performance.

Consent to subcontract is a mechanism designed to protect the interest of the Government
in certain contractual arrangements. By obtaining advance notification prior to
subcontracting, the Government is afforded the opportunity to verify that the purchase is
in accordance with the contract and regulatory guidance, as well as the application of
sound business judgment.

                             Government Property

Introduction       This lesson includes both pre-award and post-award aspects of Government
                   property. In this lesson, the student should gain an understanding of the
                   application of Government property issues. Proper application contributes
                   immeasurably to successful contract completion.

Attention gainer   Providing property to a contractor requires insight not only on the
                   type of contract under which the property might be provided, but also
                   the contractor’s property control system.

                   Consider the following: Your contract with a lawn maintenance
                   contractor requires the contractor to possess all property (equipment)
                   necessary to maintain your lawn. Halfway into the contract, the
                   contractor tells you that all of his equipment is in use on other
                   contracts. He now asks if he can use your property, including your
                   personal John Deere riding mower, to maintain your lawn. How
                   might this affect the contractual relationship between you and the

Classification of Property

Classifying        The Government is not concerned with what the contractor wishes to label
Property           a piece of property unless the Government is going to take title, i.e., pay for
                   it directly. So unless an item falls into one of the following classifications,
                   it is not contractually recognized as Government property, even though it is
                   burdening overhead rates.

                   For example, as you read through this chapter, note that there is a type of
                   property classified as special tooling and nothing called tooling. The
                   reason for this is simple: a contractor can charge the Government for
                   special tooling as a direct item of cost. Tooling is, however, an indirect

Policy             The basic policy concerning property is that the contractor is expected to
                   furnish all assets required for performance of the contract. However, there
                   are circumstances when it is necessary to furnish Government property to a

                 Note: A number of current contracting initiatives go against the
                       overarching policy that the contractor is expected to furnish all
                       assets required for performance of the contract. These include
                       some privatization and outsourcing initiatives, and A-76 studies
                       that result in conversion from in-house Government positions to
                       contractor provided services operated under contract. Some of
                       the resulting implications may include competitive advantage,
                       liability on the part of the Government for replacing property,
                       and transitioning property between contractors due to
                       subsequent contract award to other than the incumbent.

                 Reference: FAR 45.102

Classes of        Government property is broken down into a number of classifications.
Government        Those classes are relevant since the classification determines how the
property          property will be treated at various stages of the procurement and
                  throughout the life of the property.

Table             The table provides definitions, and competition and pricing considerations
                  for each type of Government property.

   Type of                                                   Competition and Pricing
   Property                    Definition                          Considerations
        Facilities Real property and plant equipment    Making facilities available can
                 for production, maintenance,           significantly increase competition
FAR 45.301       research, development or testing.      for major production efforts, while
                 For DoD, plant equipment includes      eliminating the need for duplicative
DFARS 245.301 industrial plant equipment (IPE),         investment by competitors.
                 other plant equipment (OPE).
Industrial plant IPE is a subcategory of facilities.    Making IPE available can
equipment (IPE) Plant equipment in Federal stock        significantly increase competition
                 group 34 with an acquisition cost of   for major production efforts, while
DFARS 245.301 $15,000 or more used for cutting,         eliminating the need for duplicative
                 abrading, grinding, shaping,           investment by competitors.
                 forming, joining, heating, treating,
                 or otherwise altering the physical
                 properties of materials, components
                 or end items entailed in
                 manufacturing, maintenance,
                 supply, processing, assembly, or
                 research and development
Other plant      OPE is a second subcategory of         Making OPE available can
equipment (OPE) facilities. Plant equipment,            significantly increase competition

                  regardless of dollar value, used in or         for major production efforts, while
DFARS 245.301 in conjunction with the manufacture                eliminating the need for duplicative
                  of components or end items relative            investment by competitors.
                  to maintenance, supply, processing,
                  assembly, or research and
                  development operations. OPE
                  excludes equipment categorized as
                  Property that may be incorporated              Breaking out key components can
Material          into or attached to a deliverable end          increase competition and reduce
                  item or that may be consumed or                component prices. Furnishing
FAR 45.301        expended in performance of a                   proprietary components can increase
                  contract. It includes assemblies,              effective competition on larger
                  components, parts, raw and                     systems.
                  processed materials, and small tools
                  and supplies that may be consumed
                  in normal use while performing a
  Special tooling Jigs, dies, fixtures, molds, patterns,         Government provision of special
                  taps, gauges, other equipment and              tooling increases competition by
FAR 45.101        manufacturing aids, components of              reducing the need for investment for
                  these items; and replacement of                items that can only be used for one
                  these items, which are of such                 contract or project. Government
                  specialized nature that without                ownership and right to use tooling
                  substantial modification or                    limit producer ability to obtain a
                  alterations their use is limited to the        lock on the competition because of
                  development or production of                   unique tooling capacity.
                  particular supplies or parts thereof;
                  or to particular services.
Agency-peculiar Personal property that is directly               One firm should not gain a
                  related to the mission of one                  competitive advantage due to their
FAR 45.301        agency; i.e., items and integral               Agency-peculiar property on hand.
                  components of military weapons                 Example: F-22s, machine guns, M1
                  systems, along with the related                Abrams tanks, NASA space shuttle.
                  peculiar support equipment which is            See comments above.
                  not readily available as a
                  commercial item.

Special Test Equipment   Single or multipurpose integrated       Government provision of special
                         test units engineered, designed,        test equipment increases
FAR 45.101               fabricated, or modified to              competition by reducing the need
                         accomplish special purpose testing      for investment for items that can
                         in performing a contract. It consists   only be used for one contract or
                         of items or assemblies of equipment     project. In some cases special test
                         including standard or general           equipment may be one of a kind,
                         purpose items or components that        and only available from the

                   are interconnected and                  Government.
                   interdependent so as to become a
                   new functional entity for special
                   testing purposes.


Policies/Procedures for Providing Government Property

Introduction       The overall policy for providing Government property to contractors is the
                   same regardless of the timing of the determination. Under both
                   circumstances we consider policy, risk, and the classification of the specific
                   property. Similarly, we consider inclusion of provisions and/or clauses.

                   In the pre-award arena we concern ourselves with avoiding a competitive
                   advantage. While in the post-award arena we concern ourselves with
                   obtaining adequate consideration. In either situation we follow the
                   procedures set forth in the clause at 52.245-9, Use and Charges (Deviation)
                   when applicable.

Policy             Ordinarily, contractors are required to provide all property necessary to
                   perform a contract. Exceptions may occur if they are in the best interest of
                   the Government, for example, issues regarding:
                      standardization
                      national security
                      assisting small, women-owned, and small disadvantaged businesses
                      economics, and/or
                      enhancing competition.

                   Reference: FAR Part 45.102; 45.302-1

Best interest of   The Contracting Officer should make a determination that providing
the Government     Government property is in the best interest of the Government.

                   After utilizing sound business judgment in making your determination,
                   document the contract file accordingly (e.g., a memorandum for record, or
                   any other requirement specified by your agency).

Risk               Any pre-award or post-award consideration for providing Government
determination      property should be weighed against the risks to the Government. These

                     Contractor may be entitled to equitable adjustment for late delivery of
                      Government property or property not suitable for its intended use.
                      (Exception—property provided “as is.” (Reference: FAR 52.24517,
                      Special Tooling)
                     Government may be responsible for replacement of lost, damaged, or
                      destroyed Government property.
                     Contractor keeps records for Government property—increased overhead
                     Government is responsible for disposal—demilitarization, hazardous

Facilities        Under facilities, the Government may be providing anything from a single
                  piece of plant equipment to an entire plant itself, a Government-Owned,
                  Contractor-Operated (GOCO) Plant. Reasons for providing facilities are to
                  support industrial preparedness programs, or if a contractor does not have—
                  and cannot obtain—facilities required to complete a contract.

                  There are 10 policy exceptions under 45.302-1(a) and (d) where the
                  Government may provide facilities.

                  Reference: FAR 45.302–1 through-7; DFARS 245.302

Material          Providing material may be necessary to achieve significant economy,
                  standardization, or expedited production.

                  Reference: FAR 45.303–1&2; DFARS 245.303-2

Special tooling   Special tooling shall be offered for use in Government work if it will not
                  disrupt programs of equal or higher priority, it is otherwise advantageous to
                  the Government, and use of special tooling is authorized under FAR

                  Reference: FAR 45.306-1 through –5

Special test      Contracting Officers shall offer existing Government-owned special test
equipment         equipment to contractors consistent with the conditions in 45.306-1(a).

                  Contracting Officers may authorize contractors to acquire special test
                  equipment for the Government when it is advantageous to the Government
                  under the criteria in FAR 45.306-3(a) and existing special test equipment is
                  not available.

                   When special test equipment or components are known, the solicitation
                   (and contract) shall separately identify each item to be furnished by
                   Government or acquired or fabricated by the contractor for the Government.

                   References: FAR 45.307-1 and -2; DFARS 245.307-2(b)(1)

Agency-peculiar    Agency-peculiar property may be needed by a contractor for use as a
property           standard or model, for testing the contractor’s end item, or to establish
                   compatibility. It may be provided under a facilities, supply, or services
                   contract using the appropriate clause, or through a special bailment

                   Note: Instructor may cover this as a sidebar. When a contractor will
                   be responsible for preparing requisitioning documentation, include in
                   the contract the requirement to prepare the documentation in
                   accordance with DoD 4000.25-1-M, Military Standard Requisitioning
                   and Issue Procedures (MILSTRIP). Copies are available from the
                   address cited at 251.102(e) 2.b (2). Procedures DFARS 245.303-2

                   For mapping, charting, and geodesy property, see DFARS 245.310.

                   References: FAR 45.310, DFARS 245.310, FAR 51.102 – 103

Implications of Providing Property

Positive effects   One positive effect of providing Government property is reducing contract
                   costs. Contract costs can be reduced, by shifting investment risk from the
                   contractor to the Government. Cost savings can be attributed to the use of
                   items that exist in Government inventory for current and follow-on
                   contracts. Also, in some cases, the Government may be in a better position
                   to purchase production materials at better market prices than a contractor.
                   These are positive aspects for the contractor.

                   Positive aspects for the Government are the probable reduction in contract
                   costs and the possibility of moving Government equipment from one
                   contractor to another, which would allow multiple contractors to participate
                   in an acquisition, and thus avoid a sole source situation.

                                                                            Continued on next page

Implications of Providing Property, Continued

Negative effects   Property control responsibility and liability for Government property can
                   be considered a negative aspect. FAR 45.102(e) states that contractors
                   shall be required to be responsible and accountable for, and keep the
                   Government’s official records of Government property in their possession
                   or control (see FAR 45.105 for exceptions).

                   Therefore, a negative effect is the large amount of administrative effort
                   required on the part of the contractor to track and maintain Government-
                   furnished property (GFP). Large companies with a substantial amount of
                   Government property have entire departments dedicated to property
                   administration, and small firms can easily be overwhelmed by the
                   administrative burden. This ultimately increases the costs the Government
                   must bear.

                   Another negative effect is that the Government may bear the risk of loss for
                   Government property. If the contractor loses, damages or destroys
                   Government property, the Government generally has to replace it or pay
                   for its replacement, including associated costs, e.g., delay in contract

                   References: FAR 45.102(e),45.103, 45.105

Accounting for     This requirement does not relieve the Government of an equal
Government-        administrative burden. If GFP is not properly administered, it could be lost
furnished          or used inappropriately on non-Government work. Proper tracking and
property (GFP)     accounting for GFP is a critical area of concern for DoD activities. This
                   responsibility is assigned to the agency performing contract administration.
                   The effectiveness of the procedures depends on proper planning in the
                   early stages of the acquisition cycle.

                   Reference: FAR 45.104

                                                                           Continued on next page

Implications of Providing Property, Continued

Competitive     The Government must ensure that the issue of competitive advantage is
advantage       considered when planning for the use of GFP in solicitations and resultant
                contracts. Any competitive advantage that may exist through the
                possession of Government property by a contractor must be eliminated to
                the maximum extent practical.

                Note to Instructor: Bids or proposals must be evaluated in such a way
                as to eliminate an advantage. This is done through the use of a rental
                equivalent charge or other factors. Any evaluation factor must be
                identified and described in the solicitation.

                Reference: FAR 45.102, 45.2

Post-award      Key elements in a post-award determination to provide Government
determination   property include:

                   Written request, approval, and a contract modification

                   Determination of consideration (FAR 45.203)(Fair Rental)

                   Application of the appropriate property clause in the contract

                   Determination of reasonableness (FAR 31.201–3), allowability (FAR
                    31.201–2), and allocability (FAR 31.201–4)

                   Determination of the property classification to ascertain whether the
                    property will be provided on a rental or rent-free basis (FAR 45.4)

                Reference: FAR 45.3

                                                                         Continued on next page

Implications of Providing Property, Continued

Consideration     When, after award, a contractor requests the use of special tooling or
and rental for    special test equipment, the Administrative Contracting Officer shall obtain
GFP               a fair rental or other adequate consideration if use is authorized. The value
                  of the items, if known, and any amount included for them in the contract
                  price shall be considered.

                  Reference: FAR 45.203

Transferring of   Government property shall be transferred only if there is a requirement
Government        under the gaining contract. Transfers of Government property, as
property          Government-furnished property, shall be documented by a modification to
between           the gaining contract. A modification or other documentation listing all
contracts         items of property transferred is required for the losing contract.

                  Reference: FAR 45.311

Cost-             A contractor’s ability to receive reimbursement under a cost-reimbursement
reimbursement     contract may be restricted through property-related FAR clauses, or policies
contract          related to the furnishing of Government property.

Example–          Suppose a contractor wants to purchase computers that will enhance his
cost-             management operation under a cost-plus-fixed-fee contract. The contractor
reimbursement     purchases the computers and submits a voucher for reimbursement.
                  Should we authorize reimbursement for the computers?

                                                                            Continued on next page

Implications of Providing Property, Continued

Discussion of the   The Contracting Officer generally should not allow the purchase of desktop
example--cost-      computers under a “cost-type contract”, but it happens every day.
contract               By definition, computers are classified as facilities (see DFARS

                       Contractors shall furnish all facilities required for performing
                        Government contracts except as provided in FAR 45.302–1.

                    If the contractor still chooses to buy these items, the Government will not
                    reimburse the costs for the disapproved items.

Special test        Under negotiated contracts containing the clause at 52.245–18, Special
equipment (STE)     Test Equipment, the contractor must notify the Contracting Officer if it
                    intends to acquire or fabricate special test equipment. The Contracting
                    Officer may approve, disapprove, or furnish the STE from available
                    existing Government STE.

Non-Government Use of Government Property

Non-Government      Non-Government use of Government property is allowed with the proper
use of              approvals. The classification of the Government property affects the
Government          approval requirements and the procedures for authorizing non-Government
property            use of Government property. The Contracting Officer must verify the
                    availability of the Government property, and make the determination that
                    it’s in the Government’s interest to allow non-Government use of the
                    Government property.

                    Reference: FAR 45.4, DFARS 245.4

Rental charges      When a contractor requests the use of Government property on non-
for non-            Government or commercial work, we can use rental formulas to calculate
Government use      the amount of rent (consideration) we should charge the contractor. The
of GFP              procedures in the clause at 52.245-9 Use and Charges (Deviation*) are
                    used to calculate rental charges.

                    *DoD Class Deviation DAR 9-O0011 dated 30 AUG 99 located at the end
                    of this lesson.

Government Responsibility in Providing Property

Instructor Note    Facilitate discussions getting the students to give examples of personal
                   experiences. Identify actions they can take in the future to ensure
                   their customers are fully aware of their liability.

Documentation      Once the Government has made the determination to provide Government
                   property or to authorize use of Government sources, the Government must
                   document Government property requirements.

Government         The Government is responsible to provide property to the contractor that is:
                      either ‘as is’ or is suitable for its intended use, and
                      delivered on time.

                   If the Government fails to comply with either condition, a contractor may
                   have a sufficient basis to file for an equitable adjustment.

Suitable for use   Suitable for its intended use means the property is usable for its intended
                   purpose without any unnecessary roadblocks in terms of work or cost in the
                   performance of the contract.

                   Reference: FAR 45.308-1, 52.245-2(a)(2)

Example: GFP       The Government entered into a contract with a contractor for air
not suitable for   conditioners. The contract required the air conditioners to cool a particular
use                size room without exceeding certain noise requirements. Under the
                   contract, the Government-furnished the contractor with motors to power air

                   On a previous contract the motors provided by the Government were
                   brand, spanking new. This time the motors were “previously owned”
                   (used), rebuilt. The rebuilt motors, according to the Government, would
                   power the air conditioners to the same extent as the new motors would.
                   The contractor did not dispute this.

                   However, the contractor claimed that the rebuilt motors created extra work
                   and cost because it had to add sound suppression devices to the air
                   conditioners as a result of the extra noise from the rebuilt motors in order
                   to meet the contract’s noise requirements.

                   The rebuilt motors created unnecessary roadblocks that the contractor had
                   to leap in order to meet the terms of the contract.

As is              Property may be furnished “as is.” However, the Government must
                   disclose any known defects. Unknown defects are the contractor’s risk of
                   using “as is” property.

                   Reference: FAR 45.308, 52.245.19

Timeliness         The Contracting Officer or contract specialist should ensure that the
                   solicitation and resulting contract specifically state a calendar date or a
                   number of days after award that the property will be delivered. This
                   requires the Contracting Officer to coordinate requirements in advance, and
                   generally prevents unforeseen and unwanted occurrences during contract

Identification     Also, property should be clearly identified in the solicitation by using such
                   information as serial or part number(s), quantities, unit cost, and other
                   relevant information identifying the property to the particular acquisition.

                   Reference: FAR 45.505-1

Contractor Responsibility—Property Control System

Property           Property administration is a normal contract administration function to be
administration     performed by the cognizant Contract Administration Office.
                   Reference: FAR 42.302(a)(26)

Property           A Property Administrator (PA) is an authorized representative of the
Administrator      Contracting Officer assigned to administer the contract requirements and
                   obligations relating to Government property. Similar to Contracting
                   Officers, Property Administrators require formal selection, appointment, or
                   termination (in writing).
                   Reference: FAR 45.501; DFARS 245.7001

Property           The PA is primarily responsible for the review and approval of the
Administrator      contractor’s property control system. These responsibilities include:
                      Approving in writing, a contractor’s written property control system

                      Approving in writing, a contractor’s unwritten property control system
                       after PA determination that a written system is unnecessary

                      Reviewing contractor’s property control systems to assure compliance
                       with Government property clauses included in the contract

                      Notifying the contractor in writing when it’s property control system
                       does not comply with FAR 45.5 or other contract requirements

                      Notifying the Contracting Officer when a contractor does not correct
                       deficiencies in it’s property control system within a reasonable time

                     Requesting property administration support from another contract
                      administration office
                   Reference: FAR 45.104, 45.502

Contractor         A contractor’s responsibility and accountability for Government property
responsibilities   includes:

                      Establishing and maintaining a written property control system to
                       control, protect, preserve, and maintain all Government property.

                      Taking any necessary corrective action if the Property Administrator
                       finds any portion of the contractor's property control system to be

                      Maintaining and making available property records required by FAR 45
                       (contractor records of Government property are the official Government
                       property records; FAR 45.105(a))

                      Accounting for all Government property until relieved of that

                      Furnishing all necessary data to substantiate any request for relief from
                       responsibility for Government property

                      Requiring subcontractors being provided Government property under
                       the prime contract to comply with the requirements of FAR 45

                      Including in the contractor's property control system, procedures for
                       assuring subcontractor compliance

                   Reference: FAR 45.502

Reducing           Upon the request of the Property Administrator (for the prime), the

effort             contractor may accept the system approval of a supporting Property
                   Administrator (for any subcontractors) instead of performing duplicative
                   actions to assure the subcontractor's compliance.

Basic              FAR 45.505–1 provides the basic information that will be found in a
information in     property control system. Additional information required for specific
property control   categories of Government property is provided.

                                                                           Continued on next page

Government Property—Property Control System, Continued

PA actions upon    If the Property Administrator finds any portion of the contractor's property
finding that a     control system to be inadequate, the contractor must take any necessary
property control   corrective action before the system can be approved. If the contractor and
system is          Property Administrator cannot agree regarding the adequacy of control and
inadequate         corrective action, the matter shall be referred to the Contracting Officer.

                   Reference: FAR 45.502(e)

Follow-on ACO      Upon the request of a Property Administrator, the ACO shall:
                      notify the contractor in writing of required corrective actions and a
                       schedule for completion of corrective actions

                      caution the contractor that failure to take corrective actions will result
                       in withholding or withdrawing system approval

                      advise the contractor that its liability for loss of or damage to
                       Government property may increase if approval is withheld or

                   Reference: FAR 45.104(c)

The bottom line    The Property Administrator can relieve a contractor of liability (through
                   approval of the contractor’s property control system), but only the ACO
                   can assess a liability determination (through disapproval of the contractor’s
                   property control system and/or determination upon loss, damage, or

Liability for Loss, Damaged, or Destruction of Government Property

Two forms of        The extent of the contractor’s liability for Government property is either:
                       Full Risk of Loss or

                     Limited Risk of Loss

Full risk of loss   Under a competitively awarded fixed-price contract, the risk of loss is on
                    the contractor, except for reasonable wear and tear and property consumed
                    in performance. Full risk of loss means that the contractor is responsible
                    for any loss, damage or destruction to Government property.

                    Reference: FAR 52.2452(g)

Limited risk of     Usually, under cost-reimbursement contracts or noncompetitive fixed-price
loss                contracts, the Government acts as a self-insurer where the contractor’s risk
                    of loss is limited. Limited risk of loss means that the contractor is
                    responsible for loss, damage, or destruction of Government property only
                    when there is:

                       Private Insurance Reimbursement

                       Willful misconduct by contractor senior management personnel

                       Lack of good faith by contractor senior management personnel

                       As otherwise specified in the contract

                    References: FAR 45.106(b)(2), FAR 52.245-2 (Alternate I), FAR

                    Note that a contractor’s failure to implement an adequate property control
                      system could be an example of lack of good faith by contractor senior
                      management personnel.

                                                                        Continued on next page

Liability for Loss, Damaged, or Destruction of Government Property,

Instructor Note   Facilitate discussion on the value of property personnel as business

Key Players       The Property Administrator (PA) and the Administrative Contracting
                  Officer (ACO) are the key players in the assessment and determination of
                  contractor liability for lost, damaged, or destroyed Government property.
                  Expertise and input can and should also be solicited from industrial
                  specialists, quality assurance, and other contract administration personnel.
                  Remember, the PA can relieve a contractor of liability (through approval of
                  the contractor’s property control system), but only the ACO can assess a
                  liability determination (through disapproval of the contractor’s property
                  control system and/or determination upon loss, damage, or destruction).

                  Reference: FAR 45.503

Title in Property

Contractor –      Contractor-acquired property is property acquired or otherwise provided by
acquired          the contractor for performing a contract and to which the Government has
property          title. It is important to understand when the Government takes title and
                  under what conditions.

                  By definition, Government property is property for which title vests in the

                  Reference: FAR 45.101 (a)

Fixed-price       Under a routine fixed-price contract, the contractor has title to all property
contract          acquired. The Government may have no interest in acquiring title to the
                  “property,” if it is only concerned with the deliverable end items.
                  Generally, the Government takes title to the end items upon delivery,
                  inspection, and acceptance by the appropriate Government representative.
Government        Under FAR 52.245–2, if the Government is going to furnish property to the
retains title     contractor, the Government has and will retain title to that property (FAR
                  52.245–2(c)(1)) until such time as the Government decides to consciously
                  and deliberately relinquish or transfer title through a disposal action, sale or

                  Reference: FAR 52.245–2

When does title   FAR 52.2452(c)(3) specifies the time at which ownership of facilities and
pass?             special test equipment changes hands; i.e., “Title to each item...acquired by
                  the contractor for the Government under this contract shall pass to and vest
                  in the Government when its use in performing this contract commences, or
                  when the Government has paid for it, whichever is earlier, whether or not
                  title previously vested in the Government.”

                  Paragraph (c)(4) specifically outlines timeframes and actions that vest title
                  in the Government for material. In order for this section to apply, the
                  contract must specify a line item for the acquisition of material. Then, title
                  passes at different times under different circumstances.

                  Title in regards to special tooling is specified in the clause at 52.245-17 (b).

                  Reference: FAR 52.245–2(c); 52.245-17(b)

Line item         The Government’s title rights under a fixed-price contract stem from the
                  line item in the contract that identifies that property. Without the line item,
                  the Government does not attain title. Indication of when title passes may
                  be shown through other clauses, special terms and conditions, listings in
                  the specification and schedules, or other unique options.

Government        Government financing may also affect title. For example, FAR 52.232-16,
financing         Progress Payments, states that title vests in the Government upon payment.
                  Advance payment may also affect title.

Cost-             Under a cost-reimbursement contract, the Government has title to all
reimbursement     property acquired by the contractor. Also, under the cost-reimbursement-
contract          type contract, it does not matter whether the property is special tooling,
                  special test equipment, facilities, or material. The clause covers all
                  property. Although reimbursement of contract costs may be considered a
                  post-award issue, it is also a consideration in planning the acquisition.

                  Reference: FAR 52.245–5(c)

Disposition of Government Property

Disposal Planning     Disposal planning should begin once the Government has decided to
                      provide Government property to a contractor. Contracting Officers can
                      improve the disposition of Government property by including disposition
                      instructions in the contract or modification when possible.

Disposition of        When the contractor no longer needs Government property, the disposition
Government            process begins in accordance with FAR Part 45.6 and DFARS 245.6.
property              Property classified as Right to Title Special Tooling will follow the process
                      described in FAR clause 52.245–17, Special Tooling.

Plant clearance       The duties and responsibilities of Plant Clearance Officers (PCOs) are
officer               listed in DFARS 245.7002. Like Contracting Officers, and Property
                      Administrators, Plant Clearance Officers require formal selection,
                      appointment, or termination (in writing). Their duties include:

                         determining the appropriate method of disposal for items not selected
                          for Federal agency use or donation,

                         ensuring final plant clearance is accomplished, and

                         advising and assisting Government and contractor personnel in actions
                          related to proper and timely disposal of contractor inventory.
Disposal priorities   Proper disposition saves the Government money and enhances proper
                      contract closeout. An agency may exercise its rights to require delivery of
                      any contractor inventory. This includes transfers of Government property
                      to another Government contract. If the agency does not exercise these
                      rights, the contractor inventory shall be disposed of by one of the following
                      methods in the priority indicated:

                         Purchase or retention at cost by prime contractor or subcontractor of
                          contractor-acquired property.

                         Return of contractor-acquired property to suppliers.

                         Use within the Government through the use of prescribed screening

                         Donation to eligible donees.

                         Sale (including purchase or retention at less than cost by the prime
                          contractor or subcontractor).

                         Donation to public bodies in lieu of abandonment.

             Abandonment or destruction.

          Reference: FAR 45.603

Summary   Ideally, the contractor should provide all property required to perform a
          Government contract. Providing Government property can have both
          positive and negative affects.

          On the positive side, providing Government property may result in
          reducing contract cost by shifting investment costs to the Government (for
          property that it already owns). There is also an economy of scale when the
          Government purchases production material or enhances competition by
          preventing sole source situations.

          The downside of providing Government property is the increased overhead
          cost for the contractor to track, maintain, and dispose of Government
          property. Classification of Government property affects acquisition,
          maintenance, and disposal.

          Insertion of proper clauses into the solicitation and resultant contract is
          critical to ensure that Government property is properly authorized, counted,
          maintained, and disposed of at contract completion. Evaluation
          methodology was discussed to ensure that all competitors were provided a
          level playing field if Government property is provided.

          Administration of a contract requires close scrutiny and proper
          implementation of the terms and conditions to ensure success. The
          Property Administrator in close coordination with the ACO and PCO
          (Plant Clearance Officer) usually performs property administration.

          Property Administration encompasses:
           Responding to a post-award request for Government property by
             examining the classification of the property, terms of the contract, and
             rationale for the request.

             Reviewing the contractor’s property control system to ensure that
              Government property is properly maintained, accounted for, and
              utilized. Disapproval of the contractor’s property control systems has
              monetary and liability implications.

             Participating in liability recommendations concerning lost, damaged, or
              destroyed Government property. Guidance is found in the terms of the
              contract and applicable clause.

             Ensuring proper disposition, which saves the Government money and

                       enhances contract completion.

Contract Clauses

                    Facilitate discussion on when to use certain clauses.
Instructor Note

Clause charts       As has been previously stated, it is the responsibility of the Contracting
                    Officer to ensure that the appropriate provisions and/or clauses are
                    included in the solicitation and resultant contract to protect the rights of the

                    Illustrated in the following charts are provisions and clauses prescribed in
                    FAR and DFARS for inclusion in the solicitation and resulting contract
                    that includes some type of Government property. The number, title, and
                    prescription reference are indicated.

                                     Property Clauses

                                        GOVERNMENT PROPERTY
          Number                                 Title                   Prescription Reference
    FAR 52.245–1            Property Records                          FAR 45.106(a)
    FAR 52.245–2            Government Property (Fixed-Price          FAR 45.106(b)(1)(2)(3)
                            Contracts), & Alt I & Alt II
    FAR 52.245–3            Identification of Government-furnished    FAR 45.106(c)
                            Property (Fixed-Price Contracts)
    FAR 52.245–5            Government Property (Cost-                FAR 45.106(f)(1)(2)
                            Reimbursement, Time-and-Material, or
                            Labor-Hour Contracts), & Alt I
    FAR 52.245–6            Liability for Government Property         FAR 45.106(g)
                            (Demolition Services Contracts)
    DFARS 252.245–7001      Reports of Government Property            DFARS 245.505–14
    FAR 52.245–7            Government Property (Consolidated         FAR 45.302–6(a)
    FAR 52.245–8            Liability for the Facilities              FAR 45.302–6(b)
    FAR 52.245–9            Use and Charges; Use and Charges          FAR 45.302–6(c)
                            (Deviation) 30 Aug 99 DAR 99-0011         Deviation attached
    FAR 52.245–10           Government Property (Facilities           FAR 45.302–6(d)

    FAR 52.245–11           Government Property (Facilities Use) & Alt   FAR 45.302–6(e)(1)(2)

                                          SPECIAL TOOLING
    FAR 52.245–17          Special Tooling                                       FAR 45.306–5
                                    SPECIAL TEST EQUIPMENT
    FAR 52.245–18          Special Test Equipment                                FAR 45.307–3

                                      OPTIONAL CLAUSES

                                      GOVERNMENT PROPERTY
    FAR 52.2454           Government-Furnished Property (Short Form)         FAR 45.106(d)
    DFARS 245.2457000     Government-Furnished Mapping, Charting and         DFARS 24531070
                           Geodesy Property
    FAR 52.245–12          Contract Purpose (Nonprofit Educational            FAR 45.302–7(a)
    FAR 52.245–13          Accountable Facilities (Nonprofit Educational      FAR 45.302–7(b)
    FAR 52.245–14          Use of Government Facilities                       FAR 45.302–7(c)
    FAR 52.245–15          Transfer of Title to the Facilities                FAR 45.302–7(d)
    FAR 52.245–16          Facilities Equipment Modernization                 FAR 45.302–7(e)
    DFARS 252.225–7003     Restriction on Acquisition of Carbon, Alloy, and   DFARS 245.301–7
                           Armor Steel Plate

Fixed Price         Key elements of the clause
Government          a. GFP                                          f. Access
Property              - Timely delivery                             g. Risk of Loss
                      - Suitable for use                            h. Equitable adjustment
                    b. Changes to GFP                               i. Final accounting and
                      - Decrease or substitute                         disposition
                    c. Title                                        j. Abandonment
                    d. Use of GP                                    k. Communications
                    e. Property Administration (FAR 45.5            l. Overseas contracts

                    Reference: FAR 52.245-2

Cost                Key elements of the clause
reimbursement       Basically the same as the fixed price clause except for:
                    c. Title provisions and
                    g. Liability provision

Introduction       In this lesson of instruction, the student should get an understanding of
                   commercial and noncommercial terminations. This includes gaining an
                   understanding of how to apply the policies and clauses that govern
                   termination settlements processed in accordance with each respective
                   termination type.

Attention gainer   What does the Government do if it no longer has a need for an item on
                   contract? What if an item that is currently on contract becomes
                   obsolete due to technological changes? Do we allow the contract to
                   continue? No! The Government has a tool for these situations that
                   has no commercial counterpart. It’s called a termination for
                   convenience. Of course, the regulations regarding a termination for
                   convenience depend upon the nature of the acquisition (commercial or

                   What does the Government do if a contractor fails to perform even
                   after the Government attempts to persuade the contractor to resolve
                   or correct the unsatisfactory performance? We wield our “Big Stick”
                   of course! In contracting, our “Big Stick” is the termination for
                   default in noncommercial acquisitions, and the termination for cause
                   in commercial acquisitions.

General Principles for Terminations

Introduction       Contracting Officers have the authority and responsibility to terminate
                   contracts for acquisitions in whole or in part for the convenience of the
                   Government or for default, only when it is in the Government’s interest. In
                   this first section, we will look at the general principles that apply to all
                   terminations, commercial and noncommercial.

Applicable         The following terms apply to commercial and noncommercial terminations,
termination        respectively:
                            Commercial (FAR 12)                Noncommercial (FAR 49)
                        Termination for cause               Termination for default
                        Termination for convenience         Termination for convenience

Authority          The termination clauses authorize Contracting Officers to

                       terminate contracts for convenience, or for default, and
                       enter into settlement agreements.

Notice of       The Contracting Officer shall terminate contracts for convenience or
termination     default only by a written notice to the contractor (see FAR 49.601). When
                the notice is mailed, it shall be sent by certified mail, return receipt
                requested. When the contracting office arranges for hand delivery of the
                notice, a written acknowledgment shall be obtained from the contractor.

                The notice shall state:

                   that the contract is being terminated for the convenience of the
                    Government (or for default) under the contract clause authorizing the
                   the effective date of termination,
                   the extent of termination,
                   any special instructions, and
                   the steps the contractor should take to minimize the impact on
                    personnel if the termination, together with all other outstanding
                    terminations, will result in a significant reduction in the contractor's
                    work force.

                In addition, the contracting officer may amend or rescind a termination
                notice as well as reinstate the terminated portion of a contract in whole or
                in part.

                Reference: FAR 49.102(a)(c)(d)

Duties of the   After the contracting officer issues a notice of termination, the TCO is
TCO             responsible for

                   negotiating any settlement with the contractor, including a no-cost
                    settlement if appropriate;
                   scheduling and completing audit reviews and negotiations, giving
                    particular attention to the need for timely action on settlements
                    involving small business concerns (this is done in conjunction with the
                   directing the action required of the prime contractor;
                   examining the settlement proposal of the prime contractor and, when
                    appropriate, the settlement proposals of subcontractors (see FAR
                    49.108-3(b)(c)for other duties relating to subcontractors);
                   promptly negotiating the settlement with the contractor and,
                    entering into a settlement agreement.

                Reference: FAR 49.101(d) and FAR 49.105(a)

Duties of prime   After receipt of the termination notice, the contractor must comply with the
contractor        notice and the termination clause of the contract, except as otherwise
                  directed by the TCO. The notice and clause applicable to convenience
                  terminations generally require that the contractor comply with the duties
                  outlined at FAR 49.104.

                  Reference: FAR 49.104 (a)-(i)

Rights of the     FAR 49.104(b) requires the prime to “terminate all subcontracts related to
prime/sub-        the terminated portion of the prime contract”; therefore prime contractors
contractor        have a right to include a termination clause in their subcontracts for their
                  own protection.
                  The subcontractor has no contractual rights against the government upon
                  the termination of a prime contract, but may have rights against the prime
                  or intermediate sub with whom it has contracted.

                  Reference: FAR 49.108-2; 49.108-5

Special           Congressional notification is required for any termination involving a
termination       reduction in employment of 100 or more contractor employees. Proposed
requirements      terminations must be cleared through department/agency liaison offices
                  before releasing the termination notice or any information to the contractor.

                  Under certain conditions, notifications must also be made directly to the
                  Secretary of Labor in addition to the contractor.

                  Reference: DFARS 249.7001/7003

Termination for Convenience (T4C)
Definition        Termination for convenience means the exercise of the Government’s right
                  to completely or partially terminate performance of work under a contract
                  when it is in the Government’s interest.

                  Reference: FAR 2.101

Reasons to        The Contracting Officer may terminate a contract for convenience when
terminate for
convenience          if after termination (originally processed as a termination for default), it
                      is determined that the contractor was not in default, or that the default
                      was excusable;
                     the Government requirements are reduced, eliminated, or changed;

                      technological advances lead to requirement changes.

When not to       When the price of the undelivered balance of the contract is less than
terminate for     $5,000, the contract should not normally be terminated for convenience but
convenience       should be permitted to run to completion.

                  If the same item is under contract with both large and small business
                  concerns and it is necessary to terminate for convenience part of the units
                  still to be delivered, preference shall be given to the continuing
                  performance of small business contracts over large business contracts
                  unless the chief of the contracting office determines that this is not in the
                  Government's interest.

                  Reference: FAR 49.101(c)(e)

Costs of          Some of the costs of a termination for convenience include the
termination for
convenience           profit/fee on work accomplished whether delivered or not, and
                      contractor costs of preparing a settlement proposal.

Termination for Default (T4D)—Fixed-Price

Definition        Termination for default means the exercise of the Government’s right to
                  completely or partially terminate a contract because of the contractor’s
                  actual or anticipated failure to perform its contractual obligations.

                  Reference: FAR 2.101

Reasons to T4D    The Contracting Officer may terminate a contract for default when the
                  contractor fails to

                      deliver the supplies or to perform the services within the time specified
                       in the contract or any extension,
                      perform any other provision of the contract, or
                      make progress and that failure endangers performance of the contract.

                  Reference: FAR 49.402

Factors to         The following are factors to consider when determining whether to
consider when      terminate a contract for default:
terminating for
default               The terms of the contract and applicable laws and regulations
                      The specific failure of the contractor and the excuses for the failure
                      The availability of the supplies or services from other sources
                      The urgency of the need for the supplies or services and the period of
                       time required to obtain them from other sources, as compared with the
                       time delivery could be obtained from the delinquent contractor
                      The degree of essentiality of the contractor in the Government
                       acquisition program and the effect of a termination for default upon the
                       contractor's capability as a supplier under other contracts
                      The effect of a termination for default on the ability of the contractor to
                       liquidate guaranteed loans, progress payments, or advance payments
                      Any other pertinent facts and circumstances

                   Reference: FAR 49.4023(f)

Procedures in      The following are some courses of action available to the Contracting
lieu of T4D        Officer in lieu of termination for default when in the Government’s

                      Permit the contractor, the surety, or the guarantor to continue
                       performance of the contract under a revised delivery schedule.
                      Permit the contractor to continue performance of the contract by means
                       of a subcontract or other business arrangement with an acceptable third
                       party, provided the rights of the Government are adequately preserved.
                      If the requirement for the supplies and services in the contract no longer
                       exists, and the contractor is not liable to the Government for damages as
                       provided in FAR 49.4027, execute a no-cost termination settlement
                       agreement using the formats in FAR 49.6036 and 49.6037 as a guide.

                   Reference: FAR 49.4024

Costs associated   The following are some costs which may be associated with a termination
with a T4D         for default:

                   •    Administrative costs of managing the terminated contract including
                        responding to interrogatories, litigation reports, depositions,
                        settlements, etc.
                      Administrative cost of managing any reprocurement contract
                      Legal cost of defending the Government’s termination for default

T4D and small   The Contracting Officer should, whenever practicable, consult with the
business        small business specialist before proceeding with a default termination.

Delinquency     Under a T4D, the contracting officer is required to provide the contractor
notices         with a delinquency notice prior to terminating a contract. There are two
                types of notices:

                   Cure notice
                   Show cause notice

                Reference: FAR 49.402-3(d)(e); 49.607

General Principles-Settlements

Introduction    As previously stated, the termination clauses give the contracting officer
                the authority to enter into settlement agreements with contractors as a result
                of a termination. This section will address the general principles regarding
                those settlements.

No cost         The contracting officer shall effect a no-cost settlement instead of issuing a
settlement      termination notice when

                   it is known the contractor will accept one,
                   government property was not furnished, and
                   there are no outstanding payments, debts due the government, or other
                    contractor obligations.

                Reference: FAR 49.101(b)

Methods of      Settlement of terminated cost-reimbursement contracts and fixed-price
settlement      contracts terminated for convenience may be effected by

                   negotiated agreement,
                   determination by the TCO (if not settled by agreement)
                   costing-out under vouchers using SF 1034, Public Voucher for
                    Purchases and Services Other Than Personal, for cost-reimbursement
                    contracts (as prescribed in Subpart 49.3), or
                   a combination of these methods.

                  When possible, the TCO should negotiate a fair and prompt settlement with
                  the contractor.

                  Reference: FAR 49.103

Settlement by     If the contractor and TCO cannot agree on a termination settlement, or if a
determination     settlement proposal is not submitted within the period (1 year) required by
                  the termination clause, the TCO shall issue a determination of the amount
                  due consistent with the termination clause, including any cost principles
                  incorporated by reference.

                  Reference: FAR 49.1097(a)

Contractor        The contractor may appeal, under the Disputes clause, any settlement by
appeal of         determination, except when the contractor has failed to submit the
determination     settlement proposal within the time provided in the contract and failed to
                  request an extension of time. The pendency of an appeal shall not affect
                  the authority of the TCO to settle the settlement proposal or any part by
                  negotiation with the contractor at any time before the appeal is decided.

                  Reference: FAR 49.1097(f)

Subcontract       Contractors shall settle with subcontractors in general conformity with the
settlement        policies and principles relating to settlement of prime contracts in FAR
procedures        subparts 49.1, and 49.2 or 49.3. Remember that

                     each subcontractor settlement must be supported by accounting data
                      and other information sufficient for adequate review by the
                      Government, and,
                     in no event will the Government pay the prime contractor any amount
                      for loss of anticipatory profits or consequential damages resulting from
                      the termination of any subcontract. (See FAR 49.1085(a) (1).)

                  Reference: FAR 49.1083

Audit of prime    The TCO
and subcontract
settlements          shall refer each prime contract settlement proposal of $100,000 or more
                      to the appropriate audit agency for review and recommendations;
                     may submit settlement proposals of less than $100,0000 to the audit
                      agency, and

                     shall refer subcontract settlements received for approval or ratification
                      to the appropriate agency when
                           the amount exceeds $100,000 and/or
                           the TCO wants a complete or partial accounting review.

                  Reference: FAR 49.107

Settlement        At the conclusion of negotiations, the TCO must prepare a settlement
negotiation       negotiation memorandum describing the principal elements of the
memorandum        settlement for inclusion in the termination case file and for use by
                  reviewing authorities.

                  Reference: FAR 49.110

Cost principles   The cost principles and procedures in FAR Part 31 shall be used in
                  asserting, negotiating, or determining costs relevant to termination
                  settlements under contracts with other than educational institutions.

                  FAR 31.20542, Termination Costs outlines the incurrence of costs or the
                  need for special treatment of costs that would not have arisen had the
                  contract not been terminated.

                  Reference: FAR 49.110; 31.205-42


Attention gainer   We need to recognize that a tremendous effort has already gone into
                   the acquisition from inception, contract planning, formation, and
                   administration. Thus, we need to come to terms with the necessity to
                   look back to ascertain that both parties did in fact fulfill all
                   contractual obligations. For the most part, our job schedules only
                   permit this type of reflection at the point of closeout. As taxpayers, it
                   should be important to each of us that the Government does receive all
                   it is due, including the return of Government property when that is an
                   issue. Additionally, with shrinking budgets, de-obligation of excess
                   funds has become more important; those excess funds could make it
                   possible for you to get an on-line service that otherwise your command
                   could not afford.

Introduction       There is nothing glamorous about closing out contracts. Consider,
                   however, the satisfaction in assuring completion of all contract

Instructor Note    Emphasize that the importance of good business practices ensures the
                   work is complete. Facilitate discussion from a business advisor
                   viewpoint. Use examples from students’ work experience to
                   personalize the lecture.

Conditions for Closeout

Overview           Actual closeout of a contract occurs when the Procuring Contracting
                   Officer signs the DD Form 1594, Contract Completion Record, or other
                   form of completion statement.

Ensuring          There can be numerous matters to be considered prior to closing out a
required contract contract. Such matters include, but are not limited to, the following:
actions are
complete          • Disposition of Government property
                   • Reconciliation of unliquidated balances
                   • Establishment of final billing rates
                   • Patent Rights Reports

                   To assist in ensuring that all required contract actions have been
                   satisfactorily accomplished, utilize DD Form 1597, Contract Closeout

                   Reference: DFARS 204.8041

Conditions for     While the actions required prior to closeout will vary from contract to
closeout           contract, some conditions must exist for any contract to be considered for
                   closeout. The condition common to all contracts prior to closing is that the
                   contract be physically complete. For a contract to be physically complete,

                      the Government must have inspected and accepted all deliverables
                       (supplies or services); and

                      all options, if any, have expired; or

                      a notice of complete contract termination has been issued to the

                   Reference: FAR 4.8044

Closeout Prohibitions and Resolutions

Unresolved value   When the contractor submits a value engineering change proposal (VECP),
engineering        that issue must be resolved prior to contract closeout. The following
issues             guidelines should be followed in resolving specific value engineering
                   issues and in determining if closeout is appropriate:

                       IF . . .                                THEN . . .
                       technical input, responding to a        decline acceptance under the
                       contractor-submitted VECP,              clause; decision is not subject to
                       indicates that the Government           Disputes clause.
                       would not benefit by accepting
                       the VECP                                Contract is a closeout candidate.
                       technical input, responding to a        accept under the clause
                       contractor-submitted VECP,
                       outlines substantial Government         Contract is not ready for
                       benefits upon acceptance of the         closeout.

                       a VECP was previously accepted          The contract is not ready for

                    under the contract and the 3-year       closeout.
                    future savings period has not

                    References: FAR 48.1041(a) and 52.2481(i)(1)

Final indirect   For contracts requiring settlement of final indirect cost rates for general and
cost rates       administrative and overhead costs, the settlement must be reached before
                 closeout can be considered. The contractor’s proposal for final indirect
                 cost rates is to be submitted as soon as the contractor has been able to
                 determine actual cost (i.e., upon conclusion of the fiscal year in which the
                 contract reached physical completion). The contractor’s proposal is to
                 include certification that all included costs are allowable. The contractor is
                 required to submit a proposal for final indirect costs within 180 days after
                 expiration of the fiscal year in which the contract reaches physical

DCAA audit       Following receipt of the contractor’s proposal, generally an audit by
report           DCAA is required to verify the rates proposed. Once the Contracting
                 Officer has received the audit report and prepared the Government’s
                 negotiation position, the following guidelines should be followed in
                 determining if closeout is appropriate:

                    IF . . .                            THEN . . .
                    agreement can be reached with       authorize final payment.
                    the contractor
                                                        Contract is a closeout candidate.
                    agreement cannot be reached          issue final decision pursuant to
                    with the contractor                   disputes, and

                                                           authorize determined final

                                                        Contract is not ready for closeout.

                 Should the amount of undefinitized indirect cost be under $1M, the
                 contract might be considered for quick closeout. Quick closeout is
                 discussed later in the lesson.

                 Reference: FAR 42.7

                                                                           Continued on next page

Closeout Prohibitions and Resolutions, Continued

Questionable    For contracts requiring review of cost data prior to payment, all cost issues
costs           must be resolved before closeout can be accomplished. For direct or
                indirect questionable costs, the contractor must be provided a written notice
                to which a response is requested. Once the contractor’s response has been
                considered, the following guidelines should be followed in determining if
                closeout is appropriate:

                   IF . . .                         THEN . . .
                   negotiations with the            authorize final payment.
                   contractor are successful in
                   resolving all questionable       Contract is a closeout candidate.
                   negotiations with the               issue final decision pursuant to
                   contractor are not successful        disputes, and
                   in resolving all questionable
                   costs                               authorize determined final

                                                    Contract is not ready for closeout.

Final fee       A final fee determination must be made for any incentive contract.
                Once final costs or prices are established and the fee is determined, the
                following guidelines should be followed to determine if closeout is

                   IF . . .                         THEN . . .
                   based on a predetermined         authorize final payment.
                                                    Contract is a closeout candidate.
                   not based on a formula, such     authorize final payment.
                   as award fee, and contractor
                   accepts award fee                Contract is a closeout candidate.
                   not based on a formula, such     authorize final payment; decision not
                   as award fee, and contractor     subject to disputes.
                   disagrees with award fee
                   determination                    Contract is a closeout candidate.

                                                                          Continued on next page

Closeout Prohibitions and Resolutions, Continued

Cost under      When a contract has been partially or completely terminated for the
terminated      convenience of the Government, the termination settlement must be
contracts       established before closeout can be considered. Once the contractor’s
                proposal has been received and verified, the following guidelines should
                be followed in determining if closeout is appropriate:

                  IF . . .                            THEN . . .
                  negotiations with the contractor     authorize final payment.
                  result in agreement
                                                           Contract is a candidate for
                  negotiations with the contractor       issue final decision pursuant
                  do not result in agreement, and         to disputes, and
                  contractor has provided all
                  requested data                         authorize determined final

                                                      Contract is not ready for
                  negotiations with the contractor    authorize final payment; decision
                  do not result in agreement, and     not subject to disputes.
                  contractor has not provided all
                  requested data, or responded to     Contract is a candidate for
                  15-day notice                       closeout.

               Reference: FAR 49.1097

Outstanding    A contract cannot be closed out when there are any outstanding claims
claims or      against either party. Once determination is made relative to claims or
disputes       disputes, the following guidelines should be followed in determining if
               closeout is appropriate:

                  IF . . .                            THEN . . .
                  there are no outstanding claims     contract is a closeout candidate.
                  Contracting Officer has issued a    contract is not ready for closeout.
                  final decision pursuant to
                  disputes and the 1-year appeal
                  timeframe has not lapsed

Quick Closeout

Quick closeout   The term “quick closeout procedures” applies to the determination of final
procedures       indirect cost rates. Under quick closeout procedures, the contractor has not
                 yet been able to determine actual final cost rates and/or the Government
                 has not verified the proposed rates. Negotiations with the contractor are
                 based on what the contractor and the Government “believe” the actual rates
                 to be, based on recent audit and historical data.

Using quick      When the following conditions are met, the Contracting Officer shall
closeout         negotiate using quick closeout procedures:
                    Contract is physically complete.

                    Unsettled indirect costs are insignificant and do not exceed $1M, and do
                     not exceed 15 percent of total unsettled indirect costs allocable to the
                     contractor’s cost-type contracts for that fiscal year.

                    Agreement can be reached on a reasonable estimate of allocable dollars.

                 Once agreement is made, and final payment authorized, then the contract is
                 a candidate for closeout.

                 Reference: FAR 42.708


Lesson summary   In this lesson we have discussed circumstances under which contracts can
                 be closed out, including the resolution, when possible, of those issues
                 prohibiting closeout.


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