The topics addressed by this Manual are developed according to a standardized format, which consists of three parts: (1) Requirements, (2) Discussion and (3) Best Practices.
Where a requirement exists in the third-party procurement regulations which grantees must follow, a table entitled REQUIREMENT will set forth the pertinent sections of the FTA Circulars, the Master Agreement (MA), the Code of Federal Regulations (CFR's) or an FTA Dear Colleague Letter. When there is a mandatory requirement it will be clearly set forth as such.
Following the statement of the requirement, or if there is no requirement as such, there will be a discussion section giving some definition and guidance concerning the meaning or purpose of the topic being presented.
In those situations where the Federal or grantee practices have proven to be effective, the Manual will present these best practices for the assistance and guidance of the grantee. The procedures and practices presented are not mandatory unless so identified. These best practices are meant to be informative and helpful to the grantee community. They are offered for the guidance and assistance of the grantee, but it is also recognized that a grantee may have a unique situation that precludes it from adopting the procedures of another grantee in a certain area.
This Circular sets forth the requirements a grantee must adhere to in the solicitation, award and administration of its third party contracts. The Circular contains 54 mandatory procurement standards that grantees must meet in their procurement operations. These 54 standards are set forth in Appendix B.19 - Mandatory Procurement Standards Worksheet. The Worksheet provides cross-references to specific paragraphs in the Circular where the standards may be found and a column for grantees to cross-reference the standards to their own policies and procedures. Grantees are encouraged to review their written procurement policies to ensure that they cover each of the 54 mandatory standards.
The requirements of the Circular are based on the common grant rules found at 49 CFR Part 18 (State and Local Governments) and 49 CFR Part 19 (Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations), and the Federal Transit Laws. The Best Practices Procurement Manual will state the requirements of this Circular wherever they pertain to a topic being covered by the Manual. Since this Circular is updated periodically, grantees must ensure that they consult the latest edition of the Circular.
This Circular replaces 4220.1D dated 4-15-96 and Change 1, dated 8-4-98. The Circular incorporates policy updates contained in several Dear Colleague letters issued since 1996.
Annotated Circular - FTA has also published an annotated version of this Circular with interpretive comments. These comments were developed to help avoid incorrect interpretations of the Circular that have evolved over time. The comments explain what FTA believes the law and regulations conveyed through the Circular actually require of its grantees. As applicable laws, regulations and contracting practices evolve, FTA will use the annotated Circular to convey its views to FTA grantees and the transit industry as a whole. As changes are made in the comments, a date will be inserted with the change to notify the reader of when the change was made.
Grantees are required to process their requests for waivers and approvals required by FTA Circular 4220.1E through their regional FTA offices. The regional FTA offices will instruct grantees as to the required content and format of these requests. The FTA Administrator has established the FTA signatory levels for granting waivers, and for the approval of actions which require FTA approval in the Circular, as follows:
Authority to grant waivers - Administrator
Authority to grant approvals - Associate Administrator for Administration
Waivers pertain to those third party contract actions which a grantee is not authorized to take under the Circular, but for which FTA has authority to make exceptions.
Approval/disapproval covers third party contract actions which a grantee is authorized to take under the Circular only after receiving FTA approval. An example would be the use of advance payments for an individual procurement.
The FTA Master Agreement contains standard terms and conditions governing the administration of a Project supported with Federal assistance awarded by the FTA through a Grant Agreement or Cooperative Agreement with the Recipient. The FTA Master Agreement is updated annually at the start of each fiscal year (October 1) and published on the FTA web site. 1 The FTA Master Agreement contains procurement requirements that may be referenced in the Best Practices Procurement Manual.
This Manual will frequently contain references to the FAR. These references are, with one exception, always for information purposes and are not intended to suggest that grantees must follow the FAR. 2 Neither grantees nor their contractors are required to follow the FAR. The FAR citations are given in order to inform grantees how the Federal government treats a particular issue but the Federal practices are not binding on grantees.
The Federal Acquisition Regulation is available at the following internet address: http://www.arnet.gov/far.
The FTA Administrator periodically issues Dear Colleague Letters to the FTA grantee community. When these letters affect grantee procurement operations by imposing new FTA requirements or clarifying earlier FTA policy statements, the Manual will be updated to reflect the new Dear Colleague Letter. Those Letters that affect grantee procurement operations are contained in Appendix A.2 of the Manual.
The FTA HelpLine web site (see 1.1.8 below) contains a link to important FTA documents, such as Circulars, Dear Colleague Letters, etc. You may access these documents by using the Online Tools & Resources. You may also access FTA documents at the FTA web site address: http://www.fta.dot.gov/ under the "grantee" page tab.
FTA conducts periodic reviews of its grantee's procurement systems. These reviews are conducted in accordance with the Guide for Procurement System Reviews which FTA has developed in order to evaluate the grantee's compliance with the requirements of FTA Circular 4220.1E. Grantees now have access to this Guide and can effectively evaluate their own procurement system's compliance with FTA Circular 4220.1E using the Guide. Section III.2 of the Guide contains checklists for each type of contract to be reviewed as well as for the procurement system-wide elements that FTA also evaluates. The Guide is now available on the Internet.
Audit Follow-Up and Tracking System - Grantees should consider adopting a tracking system for following up on the findings generated by FTA Procurement System Reviews (PSRs), FTA Triennial Reviews, and other public audits or internal audits conducted by the agency's own management staff. The Los Angeles County Metropolitan Transportation Agency (LACMTA) has developed an in-house, MS Access-based database to manage audit findings and track corrective actions to ensure they are implemented as proposed. This tracking system - the Findings and Recommendations Management System (FARMS) - is a central repository for all audits, findings, recommendations, audit responses, proposed corrective actions, and audit follow-up and close-out information. Information can be sorted in a variety of ways such as by executive area, audit source, findings, dates, or recommendation status (e.g., open, closed). Tickler reports are routinely routed to inform appropriate parties of approaching or missed deadlines and quarterly reports of implemented actions are routed to management. This system enables the agency to track who proposed to do what by when. The system is especially valuable when agency management changes (usually with voting cycles) and incoming managers need to be made aware of commitments made by their predecessors. LACMTA has seen a number of benefits from their tracking system:
LACMTA has agreed to make their system available to any agency that wishes to implement an audit follow-up and tracking system capability. 3
FTA has initiated a Third Party Procurement HelpLine to provide a means for FTA customers to get answers to their procurement questions. The goal is to answer questions within 48 hours of receiving them. The web site also contains a topical index to Frequently Asked Questions and helpful links to important FTA documents, the FAR, the BPPM, etc. The Internet address is: Online Tools & Resources.
FTA has developed a Procurement System Self-Assessment Guide for grantees. This Guide is provided for assessing those particular areas of procurement that have historically been the most problematic, as determined by oversight reviews of transit agency procurement systems (the Procurement System Reviews conducted by FTA). The Guide discusses the top ten areas of deficiency consistently found during the Procurement System Reviews.
As defined by the Federal Acquisition Regulation, a "contract" means a mutually binding legal relationship obligating the seller to furnish the supplies or services (including construction) and the buyer to pay for them. Contracts would include bilateral instruments, awards and notices of awards; job orders or task assignment letters issued under basic ordering agreements; letter contracts; orders, such as purchase orders, under which the contract becomes effective by written acceptance or performance; and bilateral contract modifications. Contracts do not include grants and cooperative agreements. 4
The parties to a contract must possess the legal capacity to enter into the contract, and they must assent to the terms of the contract. The terms of the agreement must not require the performance of an illegal act by the parties. Contracts may be either oral or written in form. The subject matter of a contract determines which primary law applies. Generally, Common Law rules apply for contracts. However, the Uniform Commercial Code (UCC) Article 2 applies when the contract is for the sale of goods.
Offer, acceptance and consideration are three essential elements of a contract.
Offer - The offer to enter into a contract can be made by either party to the contract. In third party contracting, the offer is normally made by the contractor. The grantee issues solicitations for offers either by an Invitation for Bid (IFB) or a Request for Proposal (RFP). The offer is made when the contractor submits a signed bid or proposal in response to the grantee's solicitation. In small purchases, however, the roles are reversed. The grantee issues a purchase order, which is an offer, to buy supplies or services at a specified price (usually obtained by a Request for Quotation that the grantee has issued earlier).
The party to whom the offer is made, the offeree, may accept the offer until it is terminated by the offeror. Termination of an offer can occur in one of many different ways:
Acceptance - The offer must be accepted unequivocally. The offeree must accept the offer without changing or qualifying the terms of the offer. If the terms are changed, the offer is rejected and a counter-offer is made. This terminates the original offer.
The offer may be accepted by any reasonable means of communication (i.e., fax, telephone, etc.) unless the offeror indicates a specific method of acceptance. As a general rule, the acceptance is effective when mailed by the offeree, except where the offeror specifies the acceptance must be received by a specific date and time.
Grantee procurements involve two processes for acceptance of offers. When the grantee has issued an IFB or RFP, acceptance occurs when the grantee assents to the terms made by the bidder or offeror in its bid or proposal. The grantee accepts the offer by signing the contract and issuing the offeror a notice of award. For small purchases the contractor accepts the offer made by the grantee in its purchase order by either signing the order (contract), if so required by the purchase order, or by actually performing in accordance with the terms of the purchase order.
Consideration - Each party must give consideration for an agreement to be a contract. Consideration exists when something of value is given up in a bargained-for exchange. The following must exist:
Statute of Frauds - Generally, the Statute of Frauds dictates whether contracts should be oral or written. In order to be enforceable, the Statute of Frauds requires certain contracts to be written and signed by the party charged with performing the contract. The following contracts must be in writing:
Consult your state law for applicable requirements.
If a material mistake has been made by one or both parties, there is a possibility the contract is voidable. If a material mistake was made by both parties (mutual mistake), either party has the option to void the contract. If a material mistake was made by one party (unilateral mistake), the contract remains valid. However, if the other party is aware of or should have been aware of the mistake, the contract is voidable.
Many organizations may be overlooking procurements which could benefit from the application of the procedures outlined in this manual. These overlooked areas would include: utility services, mailing/shipping services, telephone service, electric and gas service. In the past these areas have been under the control of a single source supplier, but recent deregulation has, or will soon, open up many of these areas to competitive procurement possibilities.
One of the principles of contracting with Federal funds received directly or indirectly from FTA is a recognition that, as a condition of receiving the funds, certain specific Federal requirements must be met not only by the recipient of the funds (the grantee) but also by sub-recipients and a grantee's third party contractors. The Federal requirements to be met by the grantee's third party contractors will be defined by the clauses included in the grantee's third party contracts. It should also be noted that third party contractors are not required to follow FTA Circular 4220.1E in their subcontracting activities.
The specific requirements for your particular grant of funds will be found in the FTA Master Agreement incorporated into the Grant Agreement or Cooperative Agreement that was executed by you as a grant recipient. Different rules apply depending upon whether you, as the recipient or subrecipient, are a state, local, or Indian tribal governmental entity or whether you are an institution of higher learning, a hospital, or another non-profit organization. Also, depending upon the type of Federal funds you receive (e.g., operating assistance) or the nature of the capital project you are involved in, the contractual sphere of Federal requirements may include your procurements regardless of whether Federal funds are actually drawn down to fund payments in a particular procurement.
As the person responsible for procurement within your agency, you must be aware that compliance with Federal requirements is a condition of receipt of Federal funds. Failure to comply with these provisions may, in accordance with the terms of your Grant or Cooperative Agreement, be grounds for default of that agreement and result in the loss of the funds.
Recipient - Any entity that receives Federal assistance directly from FTA to accomplish the project. The term "Recipient" includes each FTA "Grantee" as well as each FTA Recipient of a Cooperative Agreement. Except as FTA permits otherwise, the Recipient is the entire legal entity even though only a single organization within that entity is designated as the Recipient in the Grant Agreement or Cooperative Agreement 6.
Subrecipient - Any entity that receives Federal assistance awarded by an FTA recipient rather than from FTA directly. The term "subrecipient" also includes the term "subgrantee," but does not include "third party contractor" or "third party subcontractor 7."
It is important to determine whether your agency is a recipient or subrecipient so as to determine what third party contracting rules under the Circular and 49 CFR Parts 18 and 19 (the "common grant" rules) are applicable to your procurements.
What Third Party Contracting Requirements Under 49 CFR Parts 18 and 19 and FTA Circular 4220.1E are Applicable to Recipients and Subrecipients?
Section 15 of the FTA Master Agreement contains the requirements to comply with applicable procurement standards of 49 CFR Part 18.36 (state, local, and tribal governments) or 49 CFR Part 19.40 through 19.48 and Appendix A (hospitals, non-profits, and institutions of higher learning). For purposes of this discussion, it is important to recall that "recipient" includes "grantee," and "subrecipient" includes "subgrantee" other than third party contractors and subcontractors.
Paragraph 4 of the FTA Circular 4220.1E outlines four distinct rules relating to the applicability of the procurement requirements to recipients/grantees or subrecipients/subgrantees:
"...the Recipient agrees to include appropriate clauses in each third party contract stating the third party contractor's responsibility under Federal law, regulation, or directive, including any necessary provisions requiring the third party contractor to extend applicable requirements to its subcontractors to the lowest tier necessary."
FTA Master Agreement, Section 2.e.(2)(a).
"This Circular applies to all FTA grantees and subgrantees that contract with outside sources under FTA assistance programs. FTA grant recipients who utilize FTA formula funds for operating assistance are required to follow the requirements of this circular for all operating contracts. These requirements do not apply to procurements undertaken in support of capital projects completely accomplished without FTA funds or to those operating and planning contracts awarded by grantees that do not receive FTA operating and planning assistance."
FTA Circular 4220.1E, Paragraph 4.
"Project means activity or activities (task or tasks), listed in the Project Description, the Approved Project Budget, and any modifications stated in the Conditions to the Grant Agreement or Cooperative Agreement applicable to the project."
FTA Master Agreement, Section 1.l.
There are several aspects of your grant agreement which together establish the sphere of procurements to which Federal requirements may apply. In general you may undertake capital projects wholly without Federal funds, and be confident that your grant agreements will not affect those procurements. However, Federal grant requirements apply to many contracts in addition to the contracts between you and your suppliers for which you intend to draw down Federal payments. Generally, the concept is that solely because of the receipt of Federal funds by a grantee, certain clauses and federal requirements are required to be included in contracts within the contractual sphere. There are four procurement contexts to which the concept is important:
These concepts are highlighted below so you can be aware of them in your capital project planning and procurement planning processes. Each Federal requirement has applicability criteria deriving from statute, regulation, or policy. The sphere of contracts to which the requirements apply, if they are otherwise applicable, is affected by these four concepts:
Flow Down – Perhaps the easiest determinant of the sphere to visualize is the concept of "flow-down." Federally required clauses and requirements, as a general rule, are required to be included in each third party contract at every tier and in each subrecipient agreement at every tier 10. When clauses are required to flow down, the clauses and requirements flow down to all levels of the Federal funding chain beginning with the grantee.
Inclusion of Federal Requirements when Receiving Operating Assistance - The second example of the sphere involves grantees receiving operating assistance. In this instance, all grantee procurements except for capital projects undertaken without Federal funds, must include all of the Federal requirements that would be included if the operating budget were fully Federally funded and must comply with the Circular 11. FTA maintains that one dollar of Federal operating assistance converts the operating funds of the transit property so that all such funds of the property therefore become subject to Federal requirements. The rules on this dimension of the sphere are clear -- if you receive operating assistance, the requirements of the Circular apply, even if you do not intend to use that assistance in support of any procurement action (e.g., you intend to apply all the operating assistance to pay salaries of your direct-hire bus operators).
Inclusion of Federal Requirements in Federally Funded Capital Projects - FTA has recently taken the position that, when a capital project requires a full funding grant agreement,
. . . the Federal 'undertaking' in a Fully Funded Grant Agreement (FFGA) will no longer be segmented into Project and Local Activities. All activities related to a Federal undertaking will be identified as the Federal Project. The Federal funds will be distributed among all the activities in the project at a level funding ratio equal to the percentage of Federal financial participation in the entire project. Thus, all the elements and activities of the project, as described in the FFGA will be funded, in part, with Federal funds; and, the requirements attached to the use of Federal funds will apply to each such task, unless otherwise exempted as provided in the applicable laws, regulations and policies. 12
Regardless of how large or small the percentage of Federal funding is, where a full funding grant agreement with the FTA is executed, all elements of the project identified in the agreement are within the sphere and must be procured in compliance with Federal requirements.
Minimal Operable Segment - In the case of a multi-task capital undertaking, the sphere includes a segregable portion of the undertaking, or a project portion that has independent functional utility. Under this concept, FTA and your agency identify a segment of the overall undertaking that represents the minimal segment that can be feasibly operated independently. Imagine you are able to overmatch Federal funds to construct a badly needed new fueling station with 85% state and local money. FTA's policies may not apply to every related expenditure of these state and local funds, e.g., landscaping or a nearby tire storage structure; however, neither will FTA apply its policies to the mathematically minimum portion of the project with no independent utility (e.g., applying FTA policies to the roof, alone); rather you must define a segregable project with FTA to which the Federal requirements apply, and you may then have additional latitude in the remaining portions undertaken without Federal funds. The full funding grant agreement will cover all of the necessary elements to build and operate the segment -- a station at each end of the segment, land to build the stations on, rail cars to run on the segment, systems to support the rail cars, rail on which the cars will run, etc. Federal requirements of the Circular apply to all of the individual contracts relating to these elements because they are part of the minimal operable segment and within the Federal contractual sphere. 13
Details and Best Practices for meeting the requirements for various types of contract actions that are described below can be found in other sections of the manual.
FTA Circular 4220.1E defines the requirements a grantee must adhere to in the solicitation, award and administration of its third party contracts. Such contracts would include the procurement of supplies, services, equipment and construction.
The requirements of FTA Circular 4220.1E apply to the procurement of legal and associated services, such as paralegals, investigators, expert witnesses, etc. if Federal funds are being used to fund these contracts (i.e., if receiving operating funds or if the legal services are funded by a capital grant).
As noted above, the requirements of FTA Circular 4220.1E apply to the procurement of legal and associated services, such as paralegals, investigators, expert witnesses, etc. if Federal funds are being used to fund the contracts for legal services. FTA Circular 4220.1E would not apply if the legal services are funded entirely with local funds. The Circular requires such services to be procured competitively, as with other types of services. However, there may be cases where the grantee has pending litigation which might be jeopardized through a public disclosure which would result from advertising the procurement beforehand. In such cases the grantee may have valid grounds for limiting the competition to the degree of not publicly advertising the procurement. In such cases a waiver request should be submitted to the FTA.
These are contracts with individuals that result in those individuals becoming "employees" of the agency. These are not "third party contracts" within the meaning of FTA Circular 4220.1E, and thus the requirements of that Circular do not apply to employment contracts. The term "employment contract" does not refer to a contract that retains a consultant to perform temporary services for the agency. The individual retained on these consultant-services contracts remains an independent contractor and does not become an employee of the agency; thus these contracts are not "employment contracts, and they are subject to the requirements of FTA Circular 4220.1E
Requirements related to the acquisition, use and disposal of real property may be found in the following regulations:
The acquisition of real property, either by purchase or lease, is not subject to the requirements of FTA Circular 4220.1E. Real property is defined in 49 CFR Section 18.3 as "land, including land improvements, structures and appurtenances thereto, excluding movable machinery and equipment." The acquisition of easements and rights of way are considered real estate acquisitions and the requirements discussed herein pertain to these types of acquisitions. Real property acquisition, use and disposal is also covered by FTA Circular 5010.1C, Chapter II-2; 49 CFR Part 18.31; 49 CFR Part 24 Subpart B; and by the FTA Master Agreement, Section 19. 14 It is important that the grantee be familiar with the requirements established by FTA in Circular 5010.1C, Chapter II-2. This circular establishes procedures to be followed by grantees in the following areas:
FTA Circular 4220.1E, paragraph 7.e. encourages inter-governmental procurements:
Piggybacking - Your Agency may be able to take advantage of existing contracts awarded by other governmental entities for goods and services which you currently need. This practice has become known as "piggybacking." Piggybacking is defined by FTA Circular 4220.1E, paragraph 6.e, as follows:
"Piggybacking" is an assignment of existing contract rights to purchase supplies, equipment, or services. 18
The use of piggybacking, which involves assignment of contracts or portions of contracts from the original purchasing agency to another agency, is discussed in the BPPM, Section 6.3.3 Joint Procurements of Rolling Stock and "Piggybacking." Appendix B.16 of the BPPM contains a Piggybacking Worksheet that will assist a grantee wishing to piggyback another agency's contract to work through the FTA requirements that must be met in order for piggybacking to be permissible.
Adding Federal Clauses to Existing Contracts - FTA’s policy regarding the addition of Federal clauses to existing contracts distinguishes between State GSA-type contracts and contracts awarded by other grantees. For example, in the recently issued Circular 4220.1E, paragraph 7.e.(1), FTA allows grantees to modify State GSA-type contracts and add Federally- required clauses and certifications when the grantee issues the first purchase order against the contract. However, FTA has taken the position that grantees may not add Federal clauses and certifications to their own contracts or those of other grantees in order to purchase against these contracts with Federal funds. The rationale is that, in a State GSA-type contract, the purchase order is the transit community’s initial work on the contract - much as any buy off the Federal GSA IT schedule will be when a grantee chooses to use this Federal contract. In other cases (like transit agency A buying off transit B’s contract), the transit-unique rules are in place and known from the beginning, there is no expressed intent in the common grant rule (as with State schedules) to balance the rules against each other, and it would infer that a transit agency could essentially wash away most Federal rules by laundering Federal funds through another transit agency. In short, the integrity of the system would be threatened by extending the after-the-fact option beyond schedule purchases.
Joint Procurements - You may also wish to plan procurements in advance with other agencies or governmental users, and competitively award contracts that several governmental entities can draw upon to meet their needs. Such an approach would create economies of scale, reduce procurement lead times in the case of being able to use existing contracts, and reduce administrative effort and expense. Any third party contracts resulting from or utilized by grantees under inter-governmental agreements are subject to the requirements of FTA Circular 4220.1E. Inter-governmental agreements not involving third party contracts would not be subject to FTA Circular 4220.1E. The topic of joint procurements that makes use of advance planning by several agencies is discussed in the Section 6.3.3 "Joint Procurements of Rolling Stock and "Piggybacking."
Piggybacking - If it appears that there may be an existing governmental contract which may be used for a specific need, you will first want to obtain a copy of the entire contract and review it carefully to determine if it contains the provisions required by FTA Circular 4220.1E. This is an important first step, because the requirements of the Circular apply to procurements made through inter-governmental contracts and assignments. If the contract lacks required provisions, you may be able to have it modified by the awarding Agency to include the necessary Federal clauses. Among the steps you may want to take are the following:
Joint Procurements - When it appears that your agency has a common requirement with another governmental user, and that a joint procurement is feasible, you will want to carefully consider whether a joint procurement will result in obtaining the best price for all of the parties to the procurement. It is quite possible that substantial differences in the requirements (delivery schedule, quantities, location, etc.) of one party to the joint procurement will result in increased costs to the other parties and thereby negate other benefits of a joint procurement such as lower solicitation costs. You must also determine whether the different funding sources have different procurement regulations, especially where there are Federal and non-Federal requirements affecting contract clauses, etc. Should conflicts occur, grantees should consult their respective legal counsels or request FTA pre-award review of their procurement (as permitted by FTA Circular 4220.1E, Paragraph 5.b.)
FTA Circular 4220.1E, paragraph 4, defines the applicability of the Circular to subgrants:
49 CFR Section 18.37 – Subgrants requires States and all other grantees to ensure that their subgrantees comply with certain requirements. These requirements are discussed below.
Subgrants themselves are not "third party contracts" within the meaning of FTA Circular 4220.1E, and thus the requirements of that Circular do not apply to the subgrant awards. However, to the extent that the subgrantee contracts with third parties, the FTA Circular applies to such contracts awarded by the subgrantee.
All subgrantees are required to include in their contracts the clauses required by Federal statutes and executive orders and their implementing instructions. See BPPM Appendix A.1 Federally Required and Other Model Contract Clauses.
Subgrantees which are institutions of higher education, hospitals or other nonprofit organizations, and all subgrantees of grantees which are not States, are required to administer their contracts in accordance with all of the requirements of FTA Circular 4220.1E Third Party Contracting Requirements. Subgrantees of states (excluding institutions of higher education, hospitals or other non-profit organizations) are authorized to follow state law and procedures when awarding and administering contracts.
If you are a grantee awarding subgrants with FTA funds, you will want to have an overview system in place for periodic reviews of your subgrantees to ensure that they are in compliance with the requirements of FTA Circular 4220.1E and the requirements of 49 CFR Part 18.37. The Federal government practice (FTA) is to perform periodic Procurement System Reviews (PSRs) of its grantees, evaluating their procurement activities against the requirements of the circular. FTA has developed a Procurement Systems Review Guide for its review teams, and you may want to obtain a copy of this guide for your review of subgrantees. (See BPPM Section 1.1.7 - FTA Procurement System Reviews above). You should note that 49 CFR Part 18.37 imposes a responsibility on all grantees to ensure that their subgrantees have included all Federally required clauses in their contracts and that the subgrantees are aware of requirements imposed on them by Federal statute and regulation, including those requirements imposed by 49 CFR Part 18. 49 CFR Part 18.37(a)(3) specifically mentions a responsibility to include a clause in all cost reimbursement subgrants that the subgrantee comply with Part 18.42, which deals with retention and access requirements for records.
Requirements related to the lease of equipment and facilities may be found in the following regulations:
Since equipment leases are considered "third party contracts" within the meaning of FTA Circular 4220.1E, the requirements of that Circular apply to such procurements. FTA Circular 4220.1E requires a lease versus purchase analysis to determine the most economical approach to any given procurement. FTA Circular 5010.1C, Chapter II-3(d), deals with maintenance requirements under leases. The FTA Master Agreement references regulations dealing with Capital Leases (49 CFR Part 639).
Lease vs. purchase alternatives - It is usually less economical to lease equipment than to purchase it. However, there are some instances where this is not true. For example, short-term leases of equipment which is required for a short time or for a unique task may be reasonable and economically sound. It may also be advisable to lease equipment that undergoes rapid technological change such as personal computers and other IT related equipment. In some cases, it is easier to have equipment maintained if it is leased. But long term leases and leases for items that should be purchased and capitalized but cannot be because of budget constraints are not economically prudent. If a decision is made to lease equipment, a lease vs. purchase analysis should be made. The analysis should be appropriate to the size and complexity of the procurement. In determining whether the lease of equipment is feasible, the following factors must be considered:
49 CFR Part 18.25 Program Income states that grantees are encouraged to earn income to defray program costs.
FTA Circular 4220.1E Third Party Contracting Requirements requires grantees to use competitive selection procedures in the award of revenue contracts.
The FTA Administrator's Dear Colleague Letter C-98-25, dated October 1, 1998 defined revenue contracts and stipulated requirements regarding competitive selection procedures, five-year term limits (no longer applicable) and requests for waivers. The FTA Dear Colleague Letter C-08-02, dated May 29, 2002 rescinded the requirement that grantees obtain FTA approval for contract terms longer than five years.
It is critical to first determine the primary purpose of the contract. If it is to procure supplies or services, then it is not a revenue contract. For example, management and para-transit contracts are not revenue contracts because the primary purpose is to manage a project or operate a service. Royalties received as a by-product of a development or supply contract, e.g. software, would not be considered a revenue contract. Disposal of Project property would be another example that would not be considered a revenue contract.
If the primary purpose is to generate revenue then the contract is a revenue contract. Advertising, concessions (food and news-stands), use of right-of-ways, licenses, and land leasing are some examples of revenue contracts. The definition of a revenue contract developed by FTA is as follows:
A revenue contract is any third party contract whose primary purpose is to either generate revenues in connection with a transit-related activity or to create business opportunities utilizing an FTA-funded asset.
There are three concepts involved in the definition of a revenue contract. First, the objective of revenue contracts is to lower program costs, and thereby reduce both the federal and the grantee's financial contribution. Creative ways of generating these revenues are encouraged, and FTA uses broad latitude in approving them.
Second, revenue generation for the transit agency is a business opportunity for the business community. Such business opportunities can take various forms, such as: advertising, land development, concessions, and utilization of right-of-ways.
Third, an FTA-funded asset is anything that has been purchased, in whole or in part, with FTA funds as part of an approved transportation budget. This can include funds for acquisition, operating expense or maintenance. Grantees must have a detailed familiarity with the approved budgets to know if a particular activity is included and funded by federal funds, in which case it would be governed by federal requirements.
All revenue generated activity involving third-party contracts must follow an important requirement of FTA Circular 4220.1E:
- The requirement for competitive selection procedures applies to all business opportunities including all revenue generating contracts.
Competition - The competitive process usually consists of a formal bid or proposal process but it does not always have to. Grantees may use their own judgment about how to meet the intent of the competition requirement, but they must document the record to show how competition requirements were met.
Disadvantaged Business Enterprises - DBEs should have the maximum opportunity to participate in both contracts and subcontracts that use any federal funds. The grantee is responsible for taking all necessary and reasonable steps to ensure that DBEs have maximum opportunity to compete for revenue contracts since these contracts are considered business opportunities.
Contract Term - The five-year contract term limit was rescinded by FTA's Dear Colleague Letter of May 29, 2002. For a discussion of establishing appropriate contract terms, see BPPM Section 2.2.1 - Contract Period of Performance Limitation.
Flow-down Requirements - Generally, if federal funds (not assets) are not used to generate revenues, then there are no requirements to include federal clauses in the revenue contract itself.
Unsolicited Proposals - These may come forth when companies see an opportunity to use the transit system (an FTA-funded activity) to enhance their business interest. It may appear from such proposals that no other company could offer the same product or service. However, this does not justify a sole source contract. If the idea or activity is of interest to you, the concept should be evaluated on its own merit and revenue producing potential. If the decision is to implement it, then a competitive process should be used to select the contractor, unless you determine that the proposed concept itself is proprietary.
It is important to always keep in mind the requirement for competition.
The New York City Transit Authority (NYCTA) has experience in many of the areas of revenue generation:
The NYCTA procurement office does not handle the revenue generation contracts. Various departments of the transit agency are responsible for the revenue contracts, like the Advertising Department and Real Estate Department. These Departments are aware of the federal requirements and follow them to obtain third-party contractors.
NYCTA was approached recently by a company, which submitted an unsolicited proposal, who wanted to install an electronic information system on the subway cars. The company wanted to program the system so that riders would know what was overhead, e.g. Wall Street, theater district. New York City decided to investigate the concept first to determine if it was something that they wanted to do to enhance the subway system. Deciding that they liked the idea, they then prepared an RFP and solicited vendors on a competitive basis.
Metropolitan Atlanta Rapid Transit Authority (MARTA) received an unsolicited proposal from a company about use of subway right-of-way for linking Atlanta with fiber optic cable using MARTA's system-wide conduits. MARTA determined that they had unused conduits and could lease space in them to various telecommunication companies. They contacted the regional FTA office and received their approval for a non-exclusive RFP to seek competitive proposals for twenty-year leases. This has produced successful revenue contracts. 19
FTA Circular 9300.1 Capital Program: Grant Application Instructions, Appendix B, “Joint Development Projects.”
Federal Register Notice, March 14, 1997, FTA Policy on Transit Joint Development. This clarifies the relationship between transit laws and regulations and FTA policy regarding property disposition, leases of property, and sale of property affecting program income and the definition of “highest and best transit use” for joint development.
FTA Circular 5010.1C Grant Management Guidelines states:
FTA Circular 4220.1E Third Party Contracting Requirements states the requirements the grantee must adhere to in third party contracting. Specifically, note:
FTA is encouraging transit systems to undertake transit-oriented joint development projects (TODs) with either new grants or with property acquired under previous grants. The property can be associated with rail, bus or other transit facilities.
The purpose of a joint development project is to:
Where the grantee retains effective continuing control for mass transit purposes, all proceeds of sale, lease or other encumbrance of the property will be treated as program income for use by the transit system to meet capital and operating needs. The very nature of a joint development project requires long-term relationships between the various contracting parties due to issues related to land use, zoning, financial investment, long-term leases, multiple contracting parties, construction, and management. The Federal Register notice of March 14, 1997, clarified and addressed apparent inconsistencies in the use of revenues. This Notice states:
Grantees are advised to submit the joint development proposal to the FTA regional office in accordance with the Federal Register notice of March 14, 1997, paragraph entitled "Procedures." The proposals to FTA should include:
Competition is an important requirement in the development of the project. Requirements for full and open competition of the proposed project can be obtained by: public announcements in the newspapers and trade journals; building a solicitation list that is inclusive and not exclusive; developing a realistic response time for developers, knowing that developers have to frequently build a "team" to respond to the RFP; having realistic criteria to judge the responses; having an evaluation team with broad and diverse experience rate the proposals; and, competitive negotiations.
Flow-down requirements dealing with Federal clauses in a joint development project will follow the federal funds. It must be determined whether and to what degree Federal regulations apply, particularly to the privately funded, non-transit portion of the project. These regulations could include: National Environmental Policy Act, Davis-Bacon Act, Buy America Act, labor protection arrangements, and third-party procurement requirements. You should determine (with FTA's assistance as necessary) the most appropriate procedures for satisfying any flow-down requirements, given the particular circumstances of your project.
Atlanta's transit system, Metropolitan Atlanta Rapid Transit Authority (MARTA), is involved in a joint development project called the Lindbergh Center. Their objective is to build a village that will: increase ridership, be high-density mixed use, be a livable community, generate long-term revenue, integrate the station and development. They have addressed the issues, been through the procurement process, and selected a developer. How did they do this? They began by working first with their FTA regional office in explaining what they wanted to do. Next, they developed three requests for proposals (RFPs) leading to three contracts for: marketing the property, evaluating the development proposals, and the development itself.
The question of open and full competition was met through the marketing strategy. The marketing plan was critical in reaching out to developers who might bid on the project. MARTA set a target of 500 developers to reach through a variety of methods: a predetermined listing of potential developers, advertising in major newspapers (Wall Street Journal), national and international solicitations. An outside management consulting firm was retained to assist MARTA in the evaluation of developers' proposals. The Development RFP detailed the requirements of the expected development proposals. Included in the evaluation factors was a category of "maximize revenues and returns to MARTA." The process was successfully completed and a developer has been chosen. 20
Requirements related to the generation of program income, and the disposition of surplus equipment, supplies and real property may be found in the following regulations:
FTA interprets Circular 4220.1E as applying to contracts for the disposition of surplus supplies, equipment or property. Grantees are also advised to be familiar with other regulations that specifically address the disposition of property, especially FTA Circular 5010.1C, Chapter II – Management of Real Property, Equipment and Supplies.
It is important that the grantee be familiar with the disposition requirements of FTA Circular 5010.1C, Chapter II-2(c) and 3(f). This Circular establishes procedures to be followed by grantees in a variety of situations, and grantees need to carefully review these requirements. They pertain to circumstances such as:
Transfer of Assets No Longer Needed – 49 USC 5334 (g)(1) allows for the transfer of assets no longer needed by the grantee. If a grantee decides an asset acquired with FTA funds is no longer needed for the purpose for which it was acquired, the grantee may request FTA approval to transfer the asset to a local governmental authority to be used for a public purpose with no further obligation to FTA. The Secretary of Transportation may authorize a transfer for a public purpose other than mass transportation, but only if the Secretary decides -
The decision to permit the transfer must be in writing and include the reasoning that supports the transfer.
Sale of Assets No Longer Needed – 49 USC 5334 (g)(4) allows for the sale of assets no longer needed, subject to the approval of the Secretary of Transportation. When real property, equipment, or supplies acquired with FTA funds are no longer needed for mass transportation purposes as determined under the applicable assistance agreement, the Secretary may authorize the sale, transfer, or lease of the assets under conditions determined by the Secretary. The net income from asset sales, uses, or leases (including lease renewals) must be used by the grantee to reduce the gross project cost of other capital projects carried out with FTA funds.
One transit agency has developed detailed procedures for disposing of surplus items. 23 These include:
FTA Circular 4220.1E, paragraph 4, addresses the issue of the Circular's applicability to (a) operating contracts, (b) contracts utilizing Congestion Mitigation and Air Quality (CMAQ) and Job Access/Reverse Commute (JARC) project funds, and (c) preventive maintenance contracts which are funded with FTA formula capital funds:
If a transit property receives FTA formula funds for operating assistance, all grantee procurements must comply with FTA Circular 4220.1E except for capital projects undertaken without Federal funds or those operating and planning contracts awarded by grantees that do not receive FTA operating and planning assistance. Grantees whose net operating deficit is financed by Federal funds cannot segregate any of their operating or planning contracts so that they are exempt from the requirements of the Circular. The Circular must be applied to all such contracts.
When grantees receive CMAQ and JARC funds for operations projects, the Circular requirements must be followed for those specific contracts using CMAQ and JARC funds. However, the use of these particular funds for operations does not trigger the applicability of the Circular to all operating contracts as is the case with FTA formula funds.
FTA Circular 4220.1E, paragraph 7.q. recognizes E-Commerce as an allowable means to conduct procurements. If a grantee chooses to utilize E-Commerce, written procedures must be developed and all requirements for full and open competition must be met.
The Best Practices Procurement Manual (BPPM) intends to cover the topic of E-Commerce at a later date when industry experience has been sufficient to indicate some "best practices" for the transit industry. In the meantime, the Dear Colleague Letter of May 29, 2002 reminds grantees that E-Commerce is an allowable means to conduct procurements. If a grantee chooses to implement an E-Commerce system, written procedures must be developed and all the requirements of FTA Circular 4220.1E must be met, including the requirement for "full and open competition" as stated in FTA Circular 4220.1E, Paragraph 8a.
2 - Grantees are required to use the Federal cost principles in FAR Part 31 to determine allowable costs on cost-type contracts and when negotiating (fixed) prices for contracts and modifications that are based on estimated costs. See BPPM Sections 22.214.171.124 and 126.96.36.199.
3 - Contact Michael Flores, LACMTA Audit Manager, at 213-922-6345 or firstname.lastname@example.org.
4 - FAR 2.101.
8 - See Paragraph 6.b., FTA Circular 4220.1E for definition of "State." Note that the definition in both the paragraph of the Circular and 49 CFR Part 18.3 specifically excludes "local governments" (as defined therein as well) from the definition of a "State." Thus, if you are a city government and a recipient/grantee, and if your state has a procurement statute that applies to "local government" procurements, you still must comply with the Circular and the provisions of 49 CFR Part 18.36(b) through (t). However, if you are a subrecipient/subgrantee of your state, you shall follow state law and procedures. The differences between these two instances may be subtle, but they are real differences that should be considered and addressed.
9 - Id. at Paragraph 7.a.
10 - The flow-down of clauses is not an absolute requirement; e.g. Drug and Alcohol Testing requirements may apply only to the work of the prime contractor.
12 - Letter from FTA Administrator to Executive Director, Dallas Area Rapid Transit dated March 3, 1992, page 2.
13 - In discussing statutory and regulatory requirements, Paragraph 16 of FTA Circular 4220.1E advises grantees to contact other Federal agencies for specific guidance concerning the cross-cutting requirements of those agencies. Section 8.1 of the BPPM, which discusses the Federal contract clauses, will cross-reference other agencies requirements whenever possible.
15 - Sub-paragraph (1) looks primarily to State government contracts that allow subordinate government agencies to buy from established schedules akin to the GSA schedules in Federal practice. FTA believes grantees may buy through these contracts provided all parties agree to append the required Federal clauses in the purchase order or other document that effects the grantee’s procurement. When buying from these schedule contracts, grantees should obtain Buy America certification before entering into the purchase order. Where the product to be purchased is Buy America compliant, there is no problem. Where the product is not Buy America compliant, the grantee will still have to obtain a waiver from FTA before proceeding.
16 - Sub-paragraph (2) reflects FTA’s belief that grantees should consider combining efforts in their procurements to obtain better pricing through larger purchases. Joint procurements offer the additional advantage of being able to obtain goods and services that exactly match each cooperating grantee’s requirements. We believe this is superior to the practice of ‘piggybacking’ since ‘piggybacking’ does not combine buying power at the pricing stage and may limit a grantee’s choices to those products excess to another grantee’s needs.
17 - Sub-paragraph (3) reflects grantees’ continuing ability to assign contractual rights to others - ‘piggybacking.’ FTA believes it is extremely important that grantees ensure they contract only for their reasonably anticipated needs and do not add quantities or options to contracts solely to allow them to assign these quantities or options at a later date.
19 - Metropolitan Atlanta Rapid Transit Authority (MARTA), contact Mr. Durham Hamilton, Director of Program Management, at 404-848-4409, to discuss Atlanta's fiber optic cable contracts.
20 - Metropolitan Atlanta Rapid Transit Authority (MARTA), Ms. Lisa DeGrace, Director of Contracts and Materials at 404-848-5467, to discuss Atlanta's transit oriented development and other revenue contracts.
21 - Equipment with a unit market value of $5,000 or less, or supplies with a total aggregate value of $5,000 or less, may be retained, sold or otherwise disposed of with no obligation to reimburse FTA, providing useful service life requirements have been met.
22 - The situations covered by the Circular include more than those listed above, and grantees need to carefully review the Circular instructions.
23 - New York City Transit. Contact Mike Zacchea, (646) 252-6204.
24 - If the material to be sold does not meet the criteria for competitive bidding, solicitation and advertising of individual items offered for sale would be a responsibility of the Sales Department, not Procurement.
25 - As a general rule, the circular, along with the underlying requirements in the Federal transit laws and regulations, applies whenever Federal funds are involved. Those grantees authorized to use formula funds for operating assistance must apply the circular to all operating contracts – even if they are able to administratively segregate the federal funds to non-contract operating expenses. The ability to use formula funds for operating assistance hinges upon a grantee’s total operating expenses and the portion of those expenses not offset by operating income. Since the entire range of operating expenses is considered in this calculation, each segment of those operating expenses must be subject to Federal standards. Grantees that are not authorized to use formula funds for operating assistance are not required to apply the circular to their operating contracts.
26 - Congestion Mitigation and Air Quality (CMAQ) and Job Access/Reverse Commute (JARC) funds may be used for operations by all grantees. The circular must be applied to all contracts that are funded, in part, by CMAQ or JARC funds. Using CMAQ or JARC funds for a specific operating contract or contracts does not trigger the requirement to apply the circular to other operating contracts. This is because the calculation required to use formula funds for operations contracts is not required as a prerequisite to using CMAQ or JARC funds for operating contracts.
27 - Grantees who use formula capital funds for preventative maintenance contracts must apply the circular to those contracts. If, through their accounting procedures, these grantees are able to allocate the Federal funds to discrete maintenance contracts, only those discrete contracts must adhere to the circular. If unable to allocate federal funds to discrete maintenance contracts, the circular applies to all maintenance contracts. Capital projects that don’t include Federal funding are not required to conform to the circular.