Piliero Mazza & Pargament, PLLC Vol. IV, Issue 4 May/June 2002
Legal Advisor
An Update for Federal Contractors and Commercial Businesses



DOD Proposes Rule to Require Competition on
Multiple Award Contracts for Services


Contract "Consolidation" Bill Introduced in Senate




DOD Proposes Rule to Require Competition on Multiple Award Contracts for Services

On April 1, 2002, the Department of Defense (DOD) published a proposed rule in the Federal Register that will require increased competition for agencies purchasing services under multiple award contracts.  The proposed rule is intended to implement Section 803 of the National Defense Authorization Act for Fiscal Year 2002 (Section 803). 

Section 803 was an outgrowth of a General Accounting Office (GAO) report that concluded DOD was abusing multiple award contracts by not providing contractors a fair opportunity to compete for individual orders.  The GAO Report raised concerns in Congress that DOD contracting offices were directing task orders to selected contractors without considering offers from competing contractors. 

Section 803 sought to address this concern by requiring each purchase of services in excess of $100,000.00 under a multiple award contract be made on a competitive basis.  Section 803 defines "multiple award contracts"to include GSA schedule contracts and any other indefinite delivery, indefinite quantity contract that it is entered into with two or more sources pursuant to the same solicitation. 

Under Section 803, in order for services to be purchased on "a competitive basis," a contracting agency must issue fair notice of its intent to make a purchase to all contractors offering such services under a multiple award contract.  Additionally, in order to comply with the Section 803 competition requirements, all contractors must be provided a fair opportunity to submit an offer in response to such notice and all offers must be fairly considered by the official making the purchase. 

Given the number of contractors on GSA Schedule contracts, Congress provided an exception to the notice requirement for purchases from GSA schedules.  Under this exception, DOD is only required to provide notice to as many Schedule contractors "as practicable."  Section 803 does not address what is "practicable," but requires that, at a minimum, the contracting officer receive offers from at least three qualified contractors or state in writing that no additional qualified contractors were able to be identified despite reasonable efforts to do so. 

Section 803 provides exceptions for the competition requirement where:

  • The contracting officer determines, in writing, that there is an urgent need for the services and the competition would create unacceptable delays;
  • Only one contractor is capable of providing the services;
  • The order is a logical follow-on to a task or delivery order that was already issued a competitive basis; or
  • It is necessary to place the order with a particular contractor in order to satisfy a minimum guarantee. 

In accordance with the requirement that implementing regulations be promulgated within 180 days, DOD published the proposed regulations, which amend Parts 208 and 216 of the Defense Federal Acquisition Regulation Supplement (DFARS).  The proposed regulations essentially repeat the terms of Section 803 and do not provide significant additional guidance for DOD contracting offices in implementing the competition requirements.  However, the regulations do provide that the contracting officer "should keep submission requirements to a minimum" and "may use streamlined procedures, including oral presentations."  Under the proposed regulations, the competition procedures are to be tailored to each acquisition and the competition procedures are to be set forth in each solicitation.  The proposed regulations require that the contracting officer consider:

  • Past performance on earlier orders under the contract, including quality, timeliness and cost control;
  • The potential impact on other orders placed with the contractors; and
  • Minimum order requirements. 

Contracting officers must also consider price or cost under each order as one of the factors in the selection decision and may not use any method (such as allocation or designation of any preferred awardee) that would result in unfair consideration of all awardees.

On April 29, 2002, a public hearing was held to discuss the proposed regulations.  Comments on the proposed regulations may be viewed on-line at http://emissary.acq.osd.mil/dar/dfars.nsf.



Contract "Consolidation" Bill Introduced in Senate

On May 7, 2002, Senator John Kerry (D-MA), the chairman of the Senate Small Business and Entrepreneurship Committee, and Senator Christopher "Kit" Bond (R-MO), ranking minority leader, introduced the "Small Business Federal Contractor Safeguard Act," to reform contract bundling.  If enacted, the legislation would likely lead to more small business contracting opportunities.

As many small business owners know, federal agencies are bundling contracts more frequently.  Under this process, several smaller contracts are "bundled" into one large contract that is awarded to a sole awardee.  Because these bundled contracts often involve several disparate contractual activities over a wide geographic area, small businesses with limited resources are often unable to compete for these contracts. 

While small business protections that limit bundling have been created over the years, federal agencies have found ways around these limits.  The legislation would provide additional protection for small business procurements by providing further restrictions on contract bundling.  First, the legislation changes the statutory term "contract bundling" to "contract consolidation."  The new definition for this term closes loopholes that have allowed federal agencies to consolidate contracts due to administrative expediency, rather than economic necessity.

Second, the legislation amends Small Business Act's economic research requirement. Currently, before bundling a contract, federal agencies must conduct market research proving that contract bundling is "necessary and justified."  According to Senator Kerry, agencies find this requirement onerous and frequently circumvent it when deciding to bundle a contract.

Under the legislation, economic research requirements would apply only if the total consolidated value of the contract exceeds $2 million.  A more extensive analysis would be required for consolidated contracts that exceed $5 million.  By setting these higher thresholds, the bill attempts to place the research burden on larger contracts that are more likely to preclude small business participation, while smaller contracts that small businesses could compete for would not be affected by these requirements. 

The Kerry/Bond bill does not directly tie contract bundling requirements to specific small business procurement participation goals.  This and the sponsorship of Senators Kerry and Bond make it likely that their committee will act on the legislation sometime this Congress.  However, the bill's fate in the full Senate is unclear at this time.    




As Congress begins to consider authorization and appropriations legislation for fiscal year 2003, the issue of outsourcing remains a hot topic.   Recent activity on the Fiscal Year 2003 Department of Defense (DOD) Authorization bill indicates that the issue will continue to be addressed in the upcoming year.  Additionally, a new Congressionally-mandated report promotes the use of outsourcing and proposes a number of short and long-term goals to implement uniform outsourcing procedures throughout the Federal government.

To save costs, federal agencies are increasingly outsourcing work that has traditionally been performed by government employees.   However, to assure that outsourcing will save money, some agencies use the procedures contained in Office of Management and Budget (OMB) Circular A-76 or some similar procedure. Under OMB Circular A-76, public-private competitions are used in most situations before governmental work is moved to the private sector.  However, use of the A-76 process is not required before contracting out.  Thus, there currently are no uniform requirements in agency outsourcing procedures.

In recent years, many attempts have been made to delay or eliminate the outsourcing process.   The most recent attempt was made by Representatives Tom Allen (D-ME) and Robert Andrews (D-NJ) who offered an amendment to the FY 2003 DOD Authorization Act in the House Armed Services Committee that would have reformed the outsourcing process.  This amendment was ultimately withdrawn. Additionally, Senator Richard Durbin (D-IL) has stated that he may offer amendments to future legislation that could, if adopted, change and delay future outsourcing procedures.

In an effort to obtain further guidance on outsourcing issues, the FY 2001 DOD Authorization Act established a Commercial Activities Panel (Panel) to study the policies and procedures in use for outsourcing of commercial activities from the federal government to the private sector. The Panel was comprised of 12 members, including the Comptroller General, representatives from the DOD, Office of Personnel Management, and the Office of Federal Procurement Policy, three representatives from private industry, and three current and former representatives of federal government employee unions. 

Perhaps most importantly for small businesses, the Panel also stated that public-private competitions should be the norm.  The Panel concluded that direct conversions should generally be used "only where the number of affected positions is so small that the costs of conducting a public-private competition clearly would outweigh any expected savings."  As an example, the Panel cited cases where direct conversions would be appropriate when no more than ten positions would be affected.  The Panel's conclusion that public-private competitions should be the norm may decrease use of preferential programs like the 8(a) Program under which civilian agencies can currently do direct conversions.  In addition, under Section 8014 of the Defense Appropriations Act, DOD may conduct direct conversions to firms owned by tribes, Alaska Native Corporations and certain other groups.

The Panel unanimously adopted a set of principles that are designed to guide the outsourcing process.  These principles included:

  • Recognition that certain Ainherently [email protected] cannot be outsourced;
  • Creation of a process that would allow public and private entities to Participate in competitions; and
  • Assurance that these competitions would consider both quality and cost factors. 

However, the Panel disagreed on how best to implement these broad principles.  A "supermajority" of the Panel (defined by the Panel as two-thirds of its twelve members) adopted a set of substantive and procedural recommendations for implementing outsourcing procedures.  However, the remaining four panelists disagreed with these procedures and provided written dissents.

The Panel's supermajority made long-term and short-term recommendations for implementation of outsourcing procedures. The supermajority concluded that outsourcing should ultimately be under the framework of the Federal Acquisition Regulation (FAR) and should incorporate key elements that are currently both in the FAR and in OMB Circular A-76.  Ultimately, the provisions would allow for public sector proposals in response to a broad range of agency solicitations, including in some cases, work that is currently contracted out and new work.  Public and private sector proposals would be considered under the same rules, and both sectors would have the same rights, including performance accountability and the right to protest. 

The supermajority concluded that several existing FAR and A-76 provisions should be included in the final FAR-based outsourcing provisions.   Among the FAR elements to be included are:

  • Statement of work requirements, including the right to protest a statement of work that a protestor believes unreasonably limits competition;
  • advance publication of award criteria;
  • Elimination of proposals with no reasonable chance for award and discussions with parties that have a reasonable chance; and
  • Debriefings for unsuccessful offerors.

Additionally, the following A-76 cost comparison provisions would be incorporated:

  • The A-76 framework for in-house cost estimates (until a new framework is developed);
  • The A-76 framework for calculating evaluated prices for private sector proposals to take into account items such as contract administration costs; and
  • Application of the A-76 conversion differential factor to whichever sector is currently performing the work.

The supermajority also proposed special FAR-based provisions for federal employees.   These provisions include:

  • A guarantee that an in-house proposal of a federal workforce that is currently performing the activity will not be eliminated from consideration without at least one round of discussions;
  • Allowances for award fees for Federal employees equivalent to those for private contractors; and
  • Increased protection for Federal employees displaced as the result of a public-private competition.

In addition to these long-term solutions, the supermajority also suggested short-term changes that, in their opinion, would improve the current public-private competition process.   These improvements include:

  • Encouraging increased labor/management cooperation throughout the process;
  • Strengthening conflict-of-interest rules;
  • Requiring independent agency audits of in-house cost estimates; and
  • Consideration of governmentwide use of the DOD's A-76 costing model.

The supermajority concluded that the OMB should develop and oversee the new process.  Additionally, the supermajority stated that many of the proposed changes can be implemented without statutory changes.  However, the Panel noted that it would be necessary to repeal or amend certain DOD-specific cost comparison statutes.  After these provisions are implemented, an "evaluation process" would occur to measure their effect.  The OMB and the General Accounting Office would then report to Congress on the effectiveness of the new procedures.  Based on these reports, Congress would then determine if additional legislation is warranted.

The supermajority's conclusions were not accepted by the Panel=s four dissenting members.   Two of the four dissenters represent government employee unions, while a third is a former government employee union president.  These dissenters complained of a "pro-contractor" bias on the Panel and stated that the Panel's use of a "subjective" FAR-based approach does not give federal employees sufficient opportunity to compete for their jobs.  Two of the dissenters recommended that Congress enact a streamlined demonstration project authority that allows the OMB to compare a modified A-76 process with the proposed FAR-based approach.

It is uncertain how federal agencies and the FAR Council will interpret the Panel's conclusions or if A-76 legislation and amendments will be debated before Congress adjourns this year. 


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