2.2 Long Term Planning (5/96)
2.3 Annual Planning (5/96)
2.4 Source Selection Plan (5/96)
FTA Circular 4220.1E, paragraph 5a – Grantee Self-Certification, states that FTA intends to rely on grantees' [annual] "self certifications" that their procurement system meets FTA requirements to support the required finding [by FTA] that a grantee has the technical capacity to comply with Federal procurement requirements.
FTA Circular 4220.1E, paragraph 7b – Contract Administration System, requires grantees to maintain a contract administration system that ensures that contractors perform in accordance with the terms, conditions, and specifications of their contracts or purchase orders.
Centralize - To concentrate procurement actions and decisions in one person or group within an organization.
Contracting Officer - A procuring official who has delegated authority, usually including authority to sign contracts and amendments on behalf of the procuring agency for one or more specific contracts.
Contracting Officer's Technical Representative (COTR) - A representative of the procuring agency who has more limited authority than the contracting officer, usually including providing technical direction to the contractor.
As a Contracting Officer you are responsible both for your contract’s cost-effectiveness and its compliance with Federal and state requirements. It is easier to fulfill these responsibilities if most of the decisions and contractual actions concerning procurement are focused in one or more individuals who are familiar with procurement requirements and procedures. These actions begin with planning and solicitation of offers, include communication with offerors and contractors, and continue through contract acceptance and warranty enforcement. Except in very small organizations, the contracting responsibilities will often reside with different individuals than the individuals who would best understand the functional and performance requirements of the goods or services. These latter persons are your internal customers.
You and the leadership of your organization need to clearly understand the scope of the procurement function and organize responsibilities to accomplish several objectives:
These objectives require the clear definition and assignment of procurement responsibilities. A specific aspect of that assignment, the need for autonomy, is discussed in more detail in the following section of the Manual.
Identification of Need - The initial identification of need is one aspect of the procurement cycle that is generally the sole responsibility of your internal customers (i.e., program or technical personnel for whom you are procuring goods or services). However, you may be in a position to facilitate the consolidation of procurements of different internal customers with the same need.
Procurement Planning – Preparation of procurement planning, on the other hand, should be exclusively a procurement function. If your agency has not conducted formal planning, this process is a way to establish the need for a separate procurement function and demonstrate its value to the organization. Specific suggestions for useful planning activities are discussed below under long range and annual planning cycles.
Preparation of Specifications – Preparing specifications or statements of work is usually a customer function. Generally, customers have the greatest understanding of functional and performance requirements; however, the procurement function should play at least an advisory role in order to avoid exclusionary specifications and to encourage free and open competition.
Solicitation of Offers – The solicitation of offers (including invitation for bids and request for proposals) is usually the first important public action the agency takes, and it should clearly be the responsibility at this point of the procurement staff. Customer team members are often helpful in compiling lists of potential offerors, and should participate in the procurement process, but communications with offerors and the official action of soliciting offers is a procurement function.
Communications – If communication with offerors is decentralized, one offeror may obtain more information about the agency's preferences or evaluation process than the others. It is a general practice (except at the smallest agencies) to restrict communication with offerors to only procurement personnel so that no offeror could gain an advantage or apparent advantage over another.
Evaluation of Offers – Procurement personnel will usually request and rely upon their technical customers to evaluate the technical merits of proposals and assess the offeror’s ability to perform the contract successfully. The Procurement Officer must oversee the technical evaluation to ensure it is consistent with the evaluation criteria published in the RFP and that the contract file is adequately documented to reflect the relative strengths, deficiencies, weaknesses and risks of the various proposals. It is important that the technical evaluation provide a clear narrative of the proposals’ relative merits and not merely a numerical rating of the proposals. To maintain the overall integrity of the procurement, the procurement function normally must at least approve the selection and (if it does not have sufficient authority) will often present the recommendation to the final authority.
Administration – You should play a continuing role in the administration of the contracts, particularly in changes and disputes. Acceptance of goods and services and payment approvals always require your review. In simpler or routine situations, a receiving report or COTR acceptance can be matched to your original purchase order to ensure proper control.
Centralization / Decentralization – Many organizations find it more efficient to permit customer groups, particularly those with a large number of similar, small procurements, to perform some of the functions normally performed by the procurement office (e.g., solicitation and evaluation of offers up to a specific dollar amount). However, in these cases, procurement personnel can provide a valuable oversight role, providing forms, procedures, and technical assistance. Although decentralized procurement can reduce the administrative cost of the procurement and be more responsive to a customers' needs, if it is uncontrolled, it could eventually result in situations involving non-compliance, unwise contracting, or unethical practices. It is a best practice to ensure that no employee undertakes any of the procurement functions without clear authority and guidelines.
Autonomy of the procurement function, or its independence from internal customers, is important to carrying out procurement responsibilities without undue influence by the customers and users of the goods and services procured. While the degree of autonomy and organizational reporting relationships will vary with the size of the organization and its policies, autonomy enables procurement personnel to give unbiased consideration to procurement principles and requirements, as well as to the schedule, budget, functional and other requirements of the internal customers.
A debate has raged for years between those who are process oriented (procurement officials and compliance departments such as legal, internal audit, or grants) and those who are program oriented (maintenance managers, engineers, project managers).
Some degree of autonomy of the procurement function is necessary organizationally and functionally so that procurement personnel will be free from undue influence or pressure in the award and administration of contracts. The obvious solution to the conflict between "process" and "program" is to have a team in which each member recognizes the strengths and capabilities of the other team members and appreciates the role each side brings to the contract table. This sounds easy to accomplish but, in most practical situations, is very difficult to achieve 1. Failure to achieve unity and teamwork within the agency in the awarding and administration of public contracts creates frequent opportunities for a contractor to take advantage of a contentious staff relationship to its financial advantage (and the agency's financial disadvantage). Achieving proper balance between groups requires delicate balancing of personalities and corporate objectives, a strong executive, and a well-trained staff. It must also be recognized that there is no textbook answer that will work in every situation and in every agency.
In addition to balancing the roles of program and process interests in making procurement decisions, the payment of your agency's funds to contractors generally requires three independent concurring actions. The requirement for independent concurring actions is sometimes called "internal control," as it is a method for the agency to control the propriety of its actions internally, rather than requiring external reviews and control. While best practices differ, all authorities recognize a fundamental need for a system of checks and balances in the overall procurement process. In an organization with no checks and balances, if an individual perceived a need for a staff car, that person could draft the specifications for the car, prepare the solicitation document, order the car, approve the contract, inspect the preparation of the car, administer the contract, accept the car after delivery, sign the agency check to pay the dealer, and use the car in a manner the person deemed appropriate. It should be obvious that an organization and procurement process such as this would not be credible and would be subject to great abuse, actual or perceived. As a result, most public and private agencies divide those functions among, at least, three distinct elements within its organization.
The procurement and payment activities are "process" functions ensuring that the goods are bought and paid for in accordance with the terms of the contract. The "program" activity is to determine what is needed and that it is obtained within the time required and budget allocated.
Degree of Autonomy - From a narrow procurement perspective, the procurement activity would enjoy the highest degree of autonomy where it reports directly to the governing policy board of your organization. Most transit organizations have too much direct operating responsibility to permit this degree of autonomy. Three solutions are:
In medium and large systems, if the contracting function is not separated from the program office, there is an inadequate system of checks and balances on the procurement process. Overall, procurement personnel should have enough autonomy or checks and balances to achieve a quality product at a fair and reasonable price without real or apparent conflicts of interest in the solicitation, evaluation or award.
Long-term procurement planning (i.e., planning more than one year in advance) is one option to be considered by large transit systems and by systems planning a major transit investment, complex capital project, or a substantial number of operating contracts that will span several years. Systems without current major capital projects may find that annual planning is adequate.
Procurement plans covering several years may be an improvement over partitioning or consolidation in major projects as a way to facilitate the most cost-effective project management and delivery. The plans can identify major changes in procurement work load, and can obviate any tendency to rush procurement decisions or activities in ways that result in waste (e.g., through failure to consolidate major procurements) or risk non-compliance (e.g., through inadequate notice and non-competitive awards).
Plan Contents - A long-term procurement plan would identify the major procurements projected over the next two to five years. The multi-year element of the Transportation Improvement Program (TIP) is a good starting point for identifying future capital projects and their corresponding procurement requirements. Typically, the procurement plan includes any fixed guideway projects, revenue rolling stock replacements or fleet expansions, and major construction projects. In the case of fixed guideway and other construction projects, where multiple procurements may be involved, the plan would identify the initial strategy for packaging the design, construction, and equipment. Consideration would also be given to turnkey procurements and to long term projects that are not public works. The latter would include major software systems, fleet overhaul and ADA operational service.
Major Projects - Often major design/construction and rail vehicle procurements are planned seven to ten years in advance of needed completion because several interdependent contracts may have to be awarded in order to accomplish the project. The time intervals typically required to accomplish these contract awards might include:
The planning and design processes can change this schedule significantly, and few procurements require this length of time. When major projects are undertaken, a comprehensive procurement plan that outlines these major projects along with the rest of your procurement workload will be extremely helpful. Bus procurements and major electronic/data systems generally require at least three years of advance planning.
49 USC § 5326(b) limits the procurement of rolling stock and replacement parts to no more than five years’ requirements under a single contract, even though delivery may take place beyond five years from the date of the initial contract.
FTA Circular 4220.1E, paragraph 7.m, addresses the five-year contract term limitation for rolling stock and replacement parts. It also requires that contract terms for all other types of contracts be based on sound business judgment.
FTA Circular 4220.1E, paragraph 8 – Competition, requires all procurement transactions to be conducted in a manner providing for full and open competition.
FTA Circular 4220.1E, paragraph 7.i – Written Record of Procurement History, requires grantees to maintain records detailing the history of a procurement.
On May 29, 2002, the FTA Administrator issued Dear Colleague Letter C-08-02 rescinding FTA’s long-standing five-year contract term limitation for all contracts except those for rolling stock and replacement parts. The limitation on rolling stock and replacement parts remains in effect since the limitation is a statutory requirement and not an FTA policy. 2 The new FTA policy is now expressed in FTA Circular 4220.1E, paragraph 7.m - Contract Term Limitation.
Prior to this letter, FTA Circular 4220.1D, paragraph 7.m - Contract Period of Performance Limitation, had limited the period of performance of DOT-assisted supply and service contracts to five years, inclusive of options, without prior FTA approval. 3 As a result of this rescission of the contract term limitation, grantees will no longer be required to obtain prior FTA approval for contract terms longer than five years. 4 The rescission of the five-year term limit applies not only to new contract awards, but to existing contracts as well. Grantee procurements will continue to be reviewed by FTA for compliance with the "full and open competition" principle stated in FTA Circular 4220.1E paragraph 8a, and grantees will continue to be responsible for conducting their procurements in accordance with sound business practices. Grantees are expected to be judicious in establishing and extending their contract terms.
Although FTA no longer requires prior approval for contract terms longer than five years, grantees remain responsible for conducting their procurement transactions in accordance with the "full and open competition" principle expressed in FTA Circular 4220.1E, paragraph 8a. As with any procurement action, grantees should ensure that their procurement files adequately document their decision making process. This record should include the rationale for the contract period of performance.
Period of Performance Criteria – Periodic re-competition of contracts preserves competition and keeps prices competitive. Without periodic competition the incumbent will not have the pressures of a competitive market to keep prices reasonable or an incentive to maintain satisfactory performance. There are, however, criteria that the grantee can employ when deciding upon the term of a contract. Some of these criteria are suggested below.
Revenue Contracts – It is FTA policy to afford all persons an equal opportunity to access FTA-funded assets. FTA also encourages its recipients to maximize non-farebox revenues. This can be done through contractual or other appropriate arrangements, which involve the use of FTA-funded assets without interfering with its transit use. FTA had previously invoked a five-year term limit as one way to balance these potentially conflicting policies. It is important for grantees to document their revenue contract files with an economic analysis that demonstrates how these dual objectives were accomplished. If the contract opportunities allow for free and open competition, then the Grantee’s procurement policies will address FTA’s equal opportunity policy. Where however, there is a limit to the number of firms who will be awarded contracts, then the grantee should include an economic analysis in the contract file to justify the contract term. The economic analysis should explain why the specific period of performance was necessary for the recovery of the contractor’s investment and a reasonable economic return. In performing this analysis, grantees may wish to conduct a market survey to obtain information and recommendations from prospective offerors to determine what the typical up-front investment will be and what kind of contract period would be required for the offerors to recover that investment and realize a reasonable economic return on that investment. Grantees should document their files with this information, showing the conclusions reached with respect to the contract period of performance finally selected.
Supplies – Typically the contract period of performance for supplies will be dictated by the grantee’s foreseeable needs and such factors as economic quantity breaks, warehousing space, shelf life, technology concerns, etc. When the grantee perceives that there may be an opportunity to increase competition through a larger purchase, the grantee may wish to conduct a market survey of potential suppliers to determine if they would make an offer under a different contracting scenario. For example, it may be that they were discouraged from bidding because the up-front investment (non-recurring costs of tooling, etc.) would be prohibitive over a relatively short contract period/limited quantity buy. However, if the period were extended and the quantity increased, these potential suppliers might be induced to participate. This is in effect what one large transit agency has done successfully. 5 Thus, the shortest contract period/minimum quantity buy may not necessarily be the optimum decision. Grantees will need to exercise some diligence in determining if longer/larger contracts might be in their best interests. If they decide to do that, they should document their files showing the benefits obtained from the longer contract periods.
When deciding the best period of performance for on-going services contracts, grantees need to consider the up-front investment by potential offerors for specialized personnel training and other non-recurring start-up costs (e.g., relocation) that must be recovered over the life of the contract. Once again, grantees should consider a pre-solicitation industry outreach to discuss with individuals in the industry what they may see as up-front investments that must be recovered from the profits anticipated by the contract. These discussions should reveal what the industry needs in terms of a contract life in order to submit competitive prices against the incumbent. These facts need to be documented in your contract files as you reach an agency decision on the proper period of performance of the services contract.
Grantees are authorized to procure rolling stock or other supplies and services by a number of methods. These include buying on an annual or on an as-needed basis, and also on a multi-year or multiple-year basis. The distinction between the multi-year and multiple year methods is as follows:
Multi-Year Contracting - multi-year contracting is a method by which the grantee procures its needs for the entire life of the contract, even though funding for the entire contract is not available at the time of contract award. The contract requires the contractor to deliver the entire requirements of the contract. Option provisions are unnecessary. Because the grantee does not have sufficient funds for the entire contract at the outset of the contract, it will be necessary to recognize in the contract that the grantee may have to cancel the contract at some point if additional funds are not forthcoming. Grantees may have to include cancellation costs in the contract in the form of an advance agreement for any program year or portion thereof canceled by the grantee (but cancellation costs are not required to be included if the contractor will accept a contract without them). Additional information on multi-year contracting, while not binding on grantees, is discussed in the Federal Acquisition Regulation (FAR), Subpart 17.1 - Multi-year Contracting.
Multiple Year Contracting - multiple year contracting is a method by which the grantee awards a contract for a base period of one or more years, with option provisions for future years' requirements. The base period of the contract is a firm and fully funded requirement. Beyond the base period, the grantee uses option provisions, which may be exercised unilaterally at the discretion of the grantee as additional funding becomes available. There is no need for the inclusion of cancellation payments since the exercise of the options is totally within the discretion of the grantee.
Additional information on multiple year contracting, while not binding on grantees, is discussed in the Federal Acquisition Regulation (FAR), Subpart 17.2 - Options.
Term of Contracts – As noted above in Section 2.2.1 – Contract Period of Performance Limitation, 49 USC § 5326(b) limits the procurement of rolling stock and replacement parts to no more than five years under a single contract, even though delivery may take place beyond five years from the date of the initial contract.
2.3.1 Sources and Contents
Every transit organization can carry out annual planning; large systems may maintain multi-step planning processes with substantive documents that are carried forward from year to year. Small systems may prepare the plan simply through preparation of a list of known procurements at the beginning of a planning cycle (i.e., in budget preparation or in the mandated planning process).
A basic purpose for maintaining formal plans regarding procurements well in advance of issuing the solicitations is to enable more deliberate and coordinated decision-making in moving forward with the procurements and related activities. In addition, procurement planning is the best opportunity to identify potential consolidation of procurements (e.g., several internal customers purchasing furniture or personal computers in the same time-frame). Larger agencies may find that procurement consolidation yields substantial savings. More specifically, an advance procurement plan is a good way for the agency to document its compliance with paragraph 7(d) of FTA Circular 4220.1E which states, "Grantee procedures shall provide for review of proposed procurements to avoid purchase of unnecessary or duplicative items. Consideration should be given to consolidating or breaking out procurements to obtain a more economical purchase."
The advance procurement plan also proves useful in responding to procurement challenges. It provides an early record of decisions that were made for business purposes before the receipt of offers and without the possibility of competitive bias. Contracting officials should recognize that the plan is fluid and that their customers' needs will change, but even this change can be more orderly if the base plan has been documented. A change is simply accomplished through a plan update, rather than being passed around by word of mouth or memorandum, which tends to result in confusion and indecision.
Sources for Plans - The preparation of an advance procurement plan can begin with data already prepared for service and financial planning purposes. Both state and local Transportation Improvement Programs list major Federally funded projects for all modes of transportation. While the preparation of the plans is the responsibility of the local Metropolitan Planning Organization and the state, most transit agencies are involved in assisting with development of the transit element of the plans, which lists their projects separately. An internal capital budget is another source, which may have more detailed or up-to-date information on planned capital procurements.
Although projects funded with operating funds are often smaller and the operating budget does not usually offer as much specificity, contracting officials may be able to identify many planned procurements from the operating budget as well. Historical usage is another valuable source for the plan, particularly when compared to the operating budget.
Another method available to assist with preparation of the plan is to conduct a survey of internal customers. They may provide more detail on the budgeted projects and may be able to identify projects that are not differentiated in the budget. An annual survey of the major customers will encourage the customers themselves to plan their needs for goods and services.
Annual procurements, which account for a great deal of activity, such as parts, fuel, and other supplies, can be projected at most agencies based on historical need and agency-wide plans and projects.
Plan Contents - In addition to the identity of each procurement, plans normally identify the customer contact(s) (at medium and large agencies), time requirements, and funding sources. Tentative start dates, publication dates, opening dates and award dates are usually based on the type and size of the procurement contemplated. Time should be allowed for:
Complex projects will require more time for preparing specifications. Negotiated procurements will require more time after receipt of offers. If governing board approval is required, and the governing board meets on a fixed schedule, time would be added for this step. In all major procurements and cases where negotiated procurement is utilized, the planning process can evolve into a source selection plan for each procurement.
In the case of procurement of complex systems, such as rail transit systems or advanced rail vehicles, an advanced procurement plan concept includes planning, not only for the prototype development, testing, and acceptance of the system, but also the life cycle support of the system, which includes training of maintenance personnel, maintenance infrastructure, such as electronic design diagrams and parts catalogs, long term availability of parts, and technical support.
2.3.2 Independent Grantee Cost Estimate
FTA Circular 4220.1E, Paragraph 10 provides that grantees must perform a cost or price analysis in connection with every procurement action, including contract modifications. The method and degree of analysis is dependent on the facts surrounding the particular procurement situation, but as a starting point, grantees must make independent estimates before receiving bids or proposals.
A logical element of your annual procurement plan is a cost estimate for each major procurement. It is normally cost-effective to have an independent cost estimate that also satisfies the Federal requirement and to have such an estimate at some time before receiving bids or proposals. You may obtain such estimates from published competitive prices, results of competitive procurements, or estimates by in-house or outside estimators.
BPPM Appendix B.20 – Independent Cost Estimate Form, provides a format and guidance for grantee in-house estimators that should be helpful. This form was developed by one transit agency to assist its user organizations with the development of independent cost estimates and statements of work.
The following are purposes of establishing a cost estimate using a method independent from the prospective offerors in advance of the offer:
Although it may seem self-evident that the agency has at least implicitly prepared a cost estimate in deciding to proceed with a procurement, many projects can change in scope without clear communication among the people responsible. For example, a management information system for parts inventory control may seem cost-effective, but may grow during discussions to include unanticipated electronic imaging, scanning of repair manual diagrams, unanticipated distributed processing devices, and multi-user programming. An independent cost estimate prepared when the agency first undertook the project could alert all involved that the project had grown beyond the scope originally intended. A deliberate decision to reduce the scope or revise the cost estimate can be made at each step of the project's development.
The cost estimate is essential information for procurement planning. It gives the contracting official some indication of the complexity of the project and the degree of investment that offerors will want to make in the procurement process, thus allowing planning of procurement time and personnel. It is also the basis for determining which procurement procedures apply to the project. If the cost estimate exceeds $100,000, for example, a competitive solicitation is normally required. (State or local requirements may be stricter.) Similarly, certification and bonding requirements imposed by Federal regulations are triggered based on the value of the contract. (See "Methods of Procurement" FTA Circular 4220.1E, § 9; "Bonding Requirements", § 11; "Buy America," Master Agreement § 14 (a); "Debarment and Suspension" Master Agreement §3 b.) However, the application of these and most other requirements depends not on the cost estimate, but on the contract amount.
A final purpose of the independent cost estimate is for price analysis. Either a cost or price analysis is required for every contract and every change order so that the essential objective of a reasonable price is assured. The adequacy of the price or cost analysis is a critical responsibility of the contracting official. In many contract awards the bids alone may be adequate to assure a reasonable price. However, in all negotiated procurements, most contract changes, sealed bids where price competition was not sufficient, and non-competitive awards, further analysis is required. An independent cost estimate prepared before receipt of offers is invaluable in these circumstances. The estimate alone may, if prepared with sufficient detail and reliability in the contracting official's judgment, be sufficient to determine whether the price is reasonable. It will at least supplement other pricing data in making the determination. Because cost analysis can be time consuming, expensive, and raise disputes, the availability of an independent pre-bid estimate, which allows for price analysis and obviates cost analysis, is worth material pre-bid effort.
In these circumstances, it is essential that the grantee’s cost estimate be developed independently from the offerors’ pricing submissions. If a bus purchase is being prepared, for example, the prospective offerors should not be relied upon for the independent cost estimate, except in the form of prior bids submitted with adequate competition.
Any price analysis or data collection performed after receipt of the offers, in addition to consuming valuable time during the limited validity of the offers, will not be as probative as data collected before the receipt of the offers. An independent cost estimate prepared before the receipt of the offers does not raise the question of whether the particular data and analysis was consciously or unconsciously intended to justify the award.
Construction - In some cases, cost estimates may be difficult to obtain or may lie outside the competence of agency personnel. In the case of construction projects, a design firm may already be under contract and may perform this service. In some cases, the agency's in-house personnel who have participated in design or past construction efforts may be the most professional and reliable cost estimators.
Supplies and Equipment - Equipment estimates can often be prepared from published price lists or from past competitive procurements updated with inflation factors. Grantees may find relevant pricing data by contacting other agencies that obtained competitive bids for the same equipment or supplies. In the case of specialized equipment, care must be taken that the source of the estimates is not disproportionately obtained from one supplier.
Services - Professional services often range widely in both price and quality, and are often being acquired precisely because the agency personnel are unfamiliar with the subject matter. Therefore, your in-house personnel may not be qualified to estimate the cost of a major professional service contract. In these cases, it may be worth obtaining a professional cost estimate by a firm not interested in the final procurement. Other grantees are a valuable source of cost estimating information if they have undertaken similar projects. The contracting official should obtain and, when appropriate, update the independent cost estimate in the manner best suited to the circumstances of the particular procurement. Because reasonable price is a key objective of every procurement, and is also a critical Federal interest in Federally funded procurements, an independent cost estimate should be prepared for every action before offers are received.2.4.1 File Documentation
FTA Circular 4220.1E, Paragraph 7.i - Written Record of Procurement History requires grantees to maintain records detailing the history of a procurement. As a minimum, these records shall include:
A properly documented procurement file provides an audit trail from the initiation of the acquisition process to the beginning of the contract. The file provides the complete background, including the basis for the decisions at each step in the acquisition process. A well-documented file speaks for itself, without need of interpretation from the contract administrator. A well-documented file also supports actions taken, provides information for reviews and investigations, and furnishes essential facts in the event of litigation or legislative inquiries.
Documents recording the key steps in each procurement are important for a number of reasons, including the following:
Many procurement reviews, while finding few problems with the underlying decisions or procurement results, may reach negative conclusions and make unwanted recommendations simply because well considered decisions were not well documented. Noting briefly why you did what you did may help you and your agency, as well as satisfy the requirements of the "Third Party Contracting Requirements" Circular.
Where appropriate, the procurement documentation file should contain:
Purchase order forms (electronic or manual) and standard files for small purchases can be designed to make the recording of most of the relevant data for small purchases automatic. Bid and proposal files, particularly if you use sealed bids under $100,000 can also be standardized to facilitate recording the appropriate data. For larger procurements, there are often memoranda or correspondence that, if assembled in the file, address many of the key issues.
The procurement file and the contract administration file can be coordinated by standard practice, so that nothing between bid opening (or proposal receipt) and notice of award is omitted.2.4.2 Full and Open Competition 22.214.171.124 Full and Open Competition Principle
FTA Circular 4220.1E, Paragraph 8.a requires all procurements to be conducted in a manner providing full and open competition. This requirement finds its way into Paragraph 9.h. of the Circular which limits the use of noncompetitive contract awards to those situations when the award of a contract is infeasible under small purchase procedures, sealed bids, or competitive proposals and at least one of several specifically named circumstances are present. Thus, contracts with a value of more than $100,000 shall be awarded by sealed bid or competitive negotiation unless there is an explicit exception.
FTA Circular 4220.1E, Paragraph 8.a considers the following practices to be restrictive of competition:
Competition - The process by which two or more vendors attempt to secure the business of a third party by the most favorable price, quality, and service.
Exclusionary - Tending to limit competition for reasons other than business or bona fide policy goals, such as price, quality, and service.
Full and open competition is the guiding principle of procurement requirements and practices. You constantly seek to permit and encourage meaningful interest and offers from all entities. Your practices should be selective or rule out offerors only for business reasons (cost, quality, and delivery). Because it is often easier not to accommodate a potential new offeror, and easier to deal with fewer entities, you must vigilantly cultivate ways to increase competition at reasonable expense.
The principle of full and open competition has one primary and two secondary purposes. The primary purpose is to obtain the best quality and service at minimum cost. In other words, to get the best buy. The secondary purposes are to guard against favoritism and profiteering at public expense, and to provide equal opportunities to participate in public business to every potential offeror.
Best Buy - The primary purpose of free and open competition is to obtain for your customers (and the passengers, funding partners, and local community or other vested interest) the optimum combination of cost with goods and services. The most cost-effective procurement, the greatest value, and the best buy are all related terms. The premise is that suppliers competing with each other will make efforts to optimize the price and quality for you, even though it minimizes their profit percentage.
A countervailing view is that having to compete increases the cost of the goods and services. Some offerors will state, "If I can have a sole source contract, I can hold the cost down for you." This is a short-term perspective that is destructive in the long run. Even if a lower price can be obtained in isolated circumstances, the odds are that in most cases you can obtain a better buy through open competition. As in all procurement practices, you can also benefit in the long run from establishing a highly consistent expectation on the part of your suppliers; they will compete more cost-effectively and with less difficulty, if they are confident that free and open competition is your consistent practice. To succeed, you should diligently root out the tendency to pursue false, short-term economies of limiting competition in favor of free and open competition.
A provocative assertion is that, "A unique characteristic of good public purchasing is the underlying principle that more importance is ultimately attached to the ways and means of obtaining prices than to prices themselves." 7 Whether this is true or whether the best buy is more important than the means of procurement, it is certainly true that you may be the voice in your transit system for protecting procurement principles, particularly the principle of free and open competition, against the occasional short-sighted views of your customers.
Favoritism and Profiteering - The concern that suppliers or public agents may profit unjustly at public expense through poor procurement practices is a constant theme in the history of government procurement. While eliminating unjust gains does serve to achieve the best price, the acute concern that suppliers or pubic officials may exploit public procurements for their own gain at public expense is of great significance and plays a major role in the public's overall confidence in a transit operating entity.
Offerors' Opportunity - Scrupulously fair treatment of all offerors will foster the most satisfactory relations with the offerors in the long run. Similarly, a firm expectation of free and open competition is generally valued by the supplier community. However, there can be circumstances where a supplier's right to participate is at odds with the procuring agency's interest in the best buy. Examine the case of failure of a delivery agency or the postal service to deliver a proposal document. Although missing the proposal deadline was not the fault of the proposer, its right to participate in public business does not prevail over the procuring agency's interest in proceeding with public business. Indeed, in some jurisdictions, a disappointed bidder has no standing to enforce the competitive procurement laws. However, to the extent Federal precedents apply to your procurement, your offerors have an implied contract of fair-dealing during the procurement process. 8 So while your primary goal is the best buy, and an offeror may have no vested right to participate nor vested profit interest in the possibility of participating, the offeror does have a right to fair dealing during the solicitation and selection process. To the extent that it is not inconsistent with the best buy, you will want to treat all potential offerors as fairly as possible.
The following are illustrative of practices you can undertake to advance competition.
Partner Information - You can undertake outreach programs with your supplier partners by preparing brochures that give background information about your agency and contain assistance in the most practical ways to identify opportunities to do business with your agency.
Partner Treatment - You can establish an ethic in your organization of treating suppliers as partners in the delivery of transit service. Everything from the telephone manner of agency staff to the consideration shown in arranging conferences and presentations can contribute to an increase in competition.
Advertisement - A traditional practice to increase competition, and still one of the most meaningful, is widespread advertising to the extent practical. Developing economical means to widen access to your procurement advertisements, such as use of the internet and private bid room services, is an area worthy of continual review and effort.
126.96.36.199 Restraints on Competition
FTA Circular 4220.1E Paragraph 8.a. requires:
"All procurement transactions will be conducted in a manner providing full and open competition. Some of the situations considered to be restrictive of competition include, but are not limited to . . . Specifying only a "brand name" product instead of allowing "an equal" product to be offered."
Paragraph 8.c. requires:
"...All solicitations shall:
(1) Incorporate a clear and accurate description of the technical requirements for the material, product, or service to be procured. Such description shall not, in competitive procurements, contain features that unduly restrict competition....
...When it is impractical or uneconomical to make a clear and accurate description of the technical requirements, a "brand name or equal" description may be used as a means to define the performance or other salient characteristics of a procurement. The specific features of the named brand which must be met by offerors shall be clearly stated."
Approved Equal - An item or service which has been approved by the procuring agency as equal to the brand name item originally specified.
Salient Characteristics - Those qualities of an item that are essential to ensure that the intended use of the item can be satisfactorily realized. The term is mainly used in connection with a brand-name-or-equal description, which should set forth those salient physical, functional, or other characteristics of the referenced product that an equal product must have in order to meet the Authority's needs.
Brand Name - A name of a product or service that is limited to the product or service produced or controlled by one private entity or by a closed group of private entities. Brand names may include trademarks, manufacturer names, or model names or numbers that are associated with only one manufacturer.
Design Specifications - Specifications based on the design of a product or service. Typical design specifications may include dimensions, materials used, commonly and competitively available components, and non-proprietary methods of manufacturing.
Performance Specifications - Specifications based on the function and performance of a product or service under specified conditions, preferably conditions that can be reproduced for testing purposes. Performance specifications may include useful life, reliability in terms of average intervals between failure, and capacity.
Brand names (e.g. "Motorola Metrocom," "Webasto Heater") are among the most restrictive types of specification. Design and performance specifications are the preferred alternatives. However, in some cases using sealed bids, you may not be able to ensure you will receive an acceptable product without mentioning a brand name. (In negotiated procurements this is less often necessary because a performance or design specification can be used and the proposed brands can be reviewed during negotiations.) If you must use a brand name in your specification, you can still allow bidders to substitute an equal product with a different brand name. You may reserve the right to determine whether a particular brand or model is equal to the one you specified. If you use a brand name and allow equal brands, you must also specify the salient characteristics of the specified brand that will be among the criteria used in determining whether a suggested substitute is equal to the specified brand or not.
If a grantee believes that a specific brand name must be used in a specification and that it cannot accept any alternative product; i.e., it cannot allow a vendor to propose "an equal" product, the grantee must process this as a sole source (non-competitive) procurement action through the proper approving officials within the grantee’s organization prior to release of the solicitation.
The restriction on brand names serves the central purpose of maximizing free and open competition to obtain the best buy. If you specify a brand name with no opportunity for substitution, the original supplier of the brand name has an effective monopoly. This results in exorbitant prices and cessation of innovation and product development. In complex equipment and construction contracts where a large number of components are specified, the use of brand names can be even more restrictive than in procurement of individual units because the proliferation of brand names discourages the prime contractor from considering substitutes which might contribute to a more cost-effective end product. Therefore, in the long run, you will get the best buy if you avoid the use of brand names as much as possible.
In procuring complex systems, however, such as rolling stock and electronic systems, where reliability or other performance standards are mission critical to your transit service, you and your customers may not be able to specify a component in terms of design or performance and still ensure that your lowest responsive and responsible bidder will offer you a satisfactory component. In these cases, some price and quality competition can be preserved by allowing the substitution of equal items with other brand names. If you are the one who will determine which brand names are equal to the one specified, then you have not sacrificed any control over the quality of the product. This competition by substitution is facilitated by listing the salient characteristics, such as you would use if you used a design or performance specification, (e.g., "10-year life under varying voltage conditions of transit bus electrical systems"), so that bidders will be able to judge which brands may be equal to the specified brand.
Design and Performance Specifications - You can work with your customers to see if brand names can be removed from the specification by substituting design or performance specifications. Like many of the qualities of fully open and competitive procurement practices, this is an effort that may seem over-zealous under the time pressure of a specific procurement, but you can constantly seek to remove restrictions and improve the competitiveness of your procurement processes so that you generally achieve the best buy. If adequate design and performance specifications cannot be prepared, listing several acceptable brand names is far better than specifying just one.
"Or Approved Equal" - Whenever brand names are used, there are several ways you can clarify beyond a doubt that the brand name is used merely as a specification and not as a statement of a preference for the specific product specified. One way is to include a phrase such as "or equal," "or approved equal," or "similar in design, construction and performance" with the brand name. Many standard equipment and construction documents also contain a clause in the general provisions that states that even if the phrase "or approved equal" is inadvertently omitted, it is implied after any brand name. If you specify "or equal," you shall clearly set forth those minimum essential characteristics and standards to which the material, product or service must conform if it is to satisfy its intended use. 9
Some of the onus of restriction is lifted for a large volume of transit procurements by the "Third Party Contracting Requirements" Circular's sanction for noncompetitive procurement of associated capital maintenance items from the original equipment manufacturer. The Circular states:
Procurement by noncompetitive proposals may be used only when the award of a contract is infeasible under small purchase procedures, sealed bids, or competitive proposals and at least one of the following circumstances applies: (e) the item is an associated capital maintenance item as defined in 49 U.S.C. §5307(a)(1) that is procured directly from the original manufacturer or supplier of the item to be replaced. 10
The Circular requires, however, that "the grantee must first certify in writing to FTA; (a) that such manufacturer or supplier is the only source for such item; and (b) that the price of such item is no higher than the price paid for such item by like customers. 11"
Approval Process - If you have listed enough salient characteristics and the brand name is an insignificant factor in the overall procurement, you may simplify the procurement by not requiring approval. The contractor would then have the right to substitute a product. The ultimate determination of whether the substitute was equal to the brand specified, if contested, would be through the dispute resolution process culminating in the courts.
The better practice, however, is to provide an approval process, preferably prior to bid opening, so that bidders, in finalizing their bids will be confident about their right to substitute a brand they consider to be more cost-effective than the one specified. This will also give you confidence about the product or service you will receive. (Brand names may be used in competitive negotiation for complex systems, but the approval process need only require approval prior to award rather than at proposal submission. Approval of equal brands is usually simply a part of the discussions or negotiations.) You will want to avoid requiring bidders to wait until after award to obtain approval, because a disapproval at that time may place a bidder (now contractor) in financial jeopardy and may prompt litigation.
If you want to require pre-bid approval, the solicitation can specify a time and format for requesting approval of equal brands. Typically, this is the same time and format used for requesting other changes in the specifications.
Approve requests for substitution whenever you determine that the offered product is equal in all material respects to the products referenced. Offers need not be rejected because of minor differences in design, construction, or features, which do not affect the suitability of the product for its intended use.
Determinations typically identify, or incorporate by reference, identification of the specific products, which the contractor is to furnish. Such identification can include any brand name, make or model number, and descriptive material. You may want to issue your determination, particularly any approval, to all bidders by addendum or as your procedures provide. (In some competitive negotiations where early and open discussion of creative integration of substitute brands is important, issuance of approvals to competing proposers is considered to constitute leveling the playing field, which would discourage open negotiations. You can consider keeping design innovations confidential but issuing approval of equal brand names to all proposers.) As with other substantive addenda to a solicitation, consider extending the bid period if the approvals are issued shortly before the scheduled bid opening, to allow all bidders to take advantage of the information prior to the bid opening.
Even if you have a pre-bid approval process, a contractor can normally request additional approvals after award. Consider clarifying in your solicitation that the contractor who waits until after award proceeds at its own risk.
Written Standards of Conduct
|49 CFR § 18.36(b)(3) establishes for the Department of Transportation the government-wide requirement that state and local government grant recipients must have written standards of conduct for procurement personnel:|
Such a conflict would arise when the employee, officer, or agent, any member of his or her immediate family, his or her partner, or an organization which employs or is about to employ any of the parties indicated herein, has a financial or other interest in the firm selected for an award. The officers, employees, and agents of the recipient shall neither solicit nor accept gratuities, favors, or anything of monetary value from contractors, or parties to sub-agreements. However, recipients may set standards for situations in which the financial interest is not substantial or the gift is an unsolicited item of nominal value. The standards of conduct shall provide for disciplinary actions to be applied for violations of such standards by officers, employees, or agents of the recipient.
Such a conflict would arise when any of the following has a financial or other interest in the firm selected for award:
(2) Any member of his/her immediate family,
(3) His or her partner, or
(4) An organization that employs, or is about to employ, any of the above.
The grantee's officers, employees, agents, or Board members will neither solicit not accept gifts, gratuities, favors, or anything of monetary value from contractors, potential contractors, or parties to sub-agreements. Grantees may set minimum rules where the financial interest is not substantial or the gift is an unsolicited item of nominal intrinsic value. To the extent permitted by state or local law or regulations, such standards of conduct will provide for penalties, sanctions, or other disciplinary action for violation of such standards by the grantee's officers, employees, or agents, or by contractors or their agents.
Conflicts of Interest: Personal and Organizational
As an ethics requirement, Section 3(a) of the FTA Master Agreement requires the written standards of conduct to encompass both personal and organizational conflicts of interest and defines them as follows:
40 CFR § 1506.5(c) concerns the engagement of a consultant for the preparation of an environmental impact statement. It states the following:
A. Why Conflicts of Interest Pose a Problem
Every citizen is entitled to have confidence in the integrity of government. Therefore, when using public funds for the purchase of goods or services, each FTA grantee must prevent its personnel from taking any action that might result in -- or even create the appearance of -- a personal or organizational conflict of interest. Avoiding conflicts of interest, through the implementation of written standards of conduct, benefits the grantee in many ways and leads to a more efficient and credible organization, while failure to deal with conflicts may not only adversely impact the project itself but may also jeopardize the grantee’s ability to receive or retain federal funds. 12
B. Responsibility of Grantee
The grantee is responsible for avoiding both personal and organizational conflicts of interest. Thus, grantees should be vigilant in preventing and mitigating possible conflicts.
C. Standards of Conduct
Each grantee must have written standards of conduct governing the performance of its personnel involved in the selection, award and/or administration of contracts. 13 The standards must prohibit the grantee's or sub-grantee's officers, employees or agents from soliciting or accepting gratuities, favors or things of monetary value from contractors, potential contractors, or parties to sub-agreements. The standards may contain minimum rules where the financial interest is not substantial or the gift is an unsolicited item of nominal intrinsic value. To the extent permitted by State or local law or regulations, the standards should provide for penalties, sanctions, or other disciplinary actions for violations of such standards by the grantee's and sub-grantee's officers, employees, or agents, or by contractors or their agents. These written standards must prohibit personal and organizational conflicts of interest, real and apparent.
D. Personal Conflicts of Interest
Personal Conflict of Interest: A personal conflict of interest arises when one of the grantee’s employees (including contractor employees), officers, board members, or agents (including outside consultants) involved in the selection, award or administration of a third party contract or sub-agreement 14 supported by Federal funds -- or a member of his or her immediate family, partner, or outside employer or prospective employer -- has a financial interest in the entity selected, or competing, for the contract. 15 A personal conflict of interest also arises where any grantee employee, officer, board member, or agent solicits or accepts gifts, gratuities, favors, or anything of monetary value from a contractor, potential contractor, or party to a sub-agreement. 16 In addition, a personal conflict of interest arises where any such person uses his position, or non-public information gained during his work for the grantee, for personal gain, including gain inuring to an immediate family member, partner, or current or potential employer. These scenarios can result in potential organizational conflicts for employers, or personal conflicts of interest for the individual.
E. Organizational Conflicts of Interest
Organizational Conflict of Interest: An organizational conflict of interest occurs where - because of other activities, financial interests, relationships, or contracts - a contractor is unable, or potentially unable, to render impartial assistance or advice to the grantee; the contractor’s objectivity in performing the contract work is or might be impaired; or a contractor has an unfair competitive advantage. 17 Organizational conflicts of interest can cause two distinct problems: bias and unfair competitive advantage. 18
Bias arises when a contractor is placed in a situation where it may have an incentive to distort its advice or decisions. Whenever the grantee is awarding a contract that involves the rendering of advice, the grantee must consider whether there exists the potential for a conflict of interest on the part of the contractor rendering the advice. 19
Unfair competitive advantage occurs when one contractor has information not available to other contractors in the normal course of business. For example, an unfair competitive advantage would occur when a contractor developing specifications or work statements has access to information that the grantee has paid the contractor to develop, or information which the grantee has furnished to the contractor for its work, when that information has not been made available to the public. Because this information enhances the contractor’s competitive position in the procurement process, it represents an unfair competitive advantage over the other offerors. One solution to this problem is to fully disclose all information to all prospective offerors for a reasonable period of time prior to the grantee’s receipt of proposals for the follow-on work. Another example where an unfair competitive advantage might arise is where a contractor is allowed to write specifications or statements of work around its own or an affiliate’s corporate strengths or products and then compete for a contract based on those specifications. The grantee can prevent such an unfair advantage by placing reasonable restrictions or even a prohibition on the contractor’s involvement in the subsequent procurement. If an individual employee has access to inside information, a possible solution would be to wall off that employee, so he cannot give his employer an unfair competitive advantage. Grantees should exercise care that specifications do not provide an unfair competitive advantage to any party. Grantees should also be alert to affiliations among contractors that might give one contractor an unfair competitive advantage over others.
Note: A competitive advantage is not always unfair. A contractor may have a fair competitive advantage by virtue of its prior experience, its expertise, its more efficient operations, etc. Occasionally an incumbent contractor may have what appears to be an insurmountable competitive advantage by virtue of its previous work for the grantee. An advantage of this type may not necessarily be unfair.
F. The "Appearance of Conflict" Standard
As stated above, FTA rules prohibit conflicts of interest -- both real and apparent. This rule applies to both personal and organizational conflicts of interest. Thus, each grantee’s written code of conduct must prohibit real and apparent conflicts, not just actual conflicts of interest. The grantee should utilize the "reasonableness" standard to determine whether an "apparent" conflict of interest exists: Would a reasonable person with all the material facts believe there appears to be a conflict?
G. Environmental Consultants
The Council on Environmental Quality (CEQ) has enacted regulations that address the use of consultants in the environmental process. 20 These regulations are intended to prevent contractors who are hired to study alternatives and potential environmental impacts of proposed projects from presenting and profiting from biased recommendations.
The CEQ regulation at 40 CFR Section 1506.5 "prohibits a person or entity from entering into a contract with a federal agency to prepare an environmental impact statement (EIS) when that party has at that time and during the life of the contract pecuniary or other interests in the outcomes of the proposal. Thus, a firm which has an agreement to prepare an EIS for a construction project cannot, at the same time, have an agreement to perform the construction, nor could it be the owner of the construction site." See "Guidance Regarding NEPA Regulations," 48 Fed. Reg. 34263 (July 18, 1983). FTA recognized this principle in the bid protest case of JMA v. LACMTA, MTA RFP #PS-4310-0964 (2001), holding as follows: "FTA understands the CEQ regulations to prohibit an EIS contractor from being awarded a contract that includes work dependent upon the completion of the EIS and issuance of a ROD."
CEQ rules do not prohibit a consultant responsible for preparing an EIS from submitting a proposal on work connected with the project after the completion of the EIS. Indeed, in guidance offered by the CEQ, the Council expressed concern that "some agencies have been interpreting the conflicts provision in an overly burdensome manner." See "Guidance Regarding NEPA Regulations," 48 Fed. Reg. 34263 (July 18, 1983). The Council explained that, "[i]n some instances, multidisciplinary firms are being excluded from environmental impact statement preparation contracts because of links to a parent company which has design and/or construction capabilities. Some qualified contractors are not bidding on environmental impact statement contracts because of fears that their firm may be excluded from future design or construction contracts…. The result of these misunderstandings has been reduced competition in bidding for EIS preparation contracts, unnecessary delays in selecting a contractor and preparing the EIS, and confusion and resentment about the requirement." Thus, the Council does not prohibit an EIS contractor from bidding on work connected with the project after the contractor has completed all performance required for the EIS, but it does prohibit situations where the contractor has an interest in the outcome of the EIS "at that time or during the life of" the EIS contract.
H. Insisting on Impartiality
Each grantee is entitled to impartial advice from its consultants, based solely on what is best for the transit system and the community, and not for the benefit of persons with conflicting financial or other interests. For additional protection, the grantee not only should enforce its own written standards of conduct but insist, perhaps through the use of certifications, that each of its employees, board members, officers, or other agents (as well as contractor personnel) observe any relevant code of professional responsibility governing his or her conduct, such as the codes governing the conduct of lawyers, engineers, architects, planners, and accountants. Among other things, this requirement would demonstrate to the grantee’s employees and contractors the importance placed by the grantee on avoiding conflicts of interest.
I. Grantee Decision to Proceed in Spite of Conflict of Interest.
Finally, when a grantee has done all that reasonably can be done to avoid, neutralize, or mitigate a real or apparent conflict of interest, and if it is in the grantee’s best interest to proceed with the contract despite the conflict, the grantee needs to document its decision. Documentation should include what steps were taken or considered, and justification for the conclusion reached, before proceeding with the contract. 21
Every Agency employee involved in the award or administration of contracts must be given a copy of the Agency's (or State's) written standards of conduct, and they should be required to sign a statement that they are familiar with and will abide by these standards. 22 These statements should be signed as a condition of employment. It would be well to review and sign them again annually as part of the employee's annual performance evaluation as a means of reinforcing the importance of ethical conduct by the Agency's employees.
In some Agencies, the General Manager has issued a memorandum to all employees summarizing the most sensitive issues dealing with ethical conduct and emphasizing the importance of avoiding even the appearance of conflicts of interest. One public Agency has inserted such a memorandum into its Procurement Manual, together with the standards of conduct. 23
One area of particular sensitivity concerns "outside employment." Employees must understand what kinds of activities or outside employment (actual or prospective) are inconsistent with their Agency responsibilities; e.g., furnishing advice or services to a firm which is bidding on or planning to bid on a contract with the Agency, or which is doing business presently with the Agency. One strategy employed by firms bidding on contracts is to offer employment to critical procurement or technical personnel working on the procurement (if the firm is selected for award). This kind of situation creates a financial conflict of interest for those employees to whom offers have been made. Employees need to be forewarned of these and similar tactics which they may encounter in the course of their Agency work. The Agency may want to conduct training sessions for all Agency personnel doing sensitive work in the acquisition of Agency equipment or services.
Many public Agencies have adopted disclosure statement requirements for certain positions. These disclosure statements require that employees occupying designated positions within the Agency disclose their investments in businesses which engage in certain activities related to the business of the Agency. Reportable interests might include companies engaged in manufacturing rail transit rolling stock and related components, transit equipment suppliers, construction companies engaged in transit systems, etc.
The FTA Circular requires penalties, sanctions, or other disciplinary action for violation of the standards of conduct by the grantee's employees or by contractors. The lack of explicit penalties in grantees' procurement policies and procedures is a recurring observation made in the FTA Procurement System Reviews. Grantees need to adopt explicit written penalties for their employees and contractors who violate their standards of conduct.
The following is an outline of the steps that each grantee should consider taking before and during the procurement process and during project administration. Conflicts also can occur even before the pre-contracting phase begins, so grantees should always be vigilant to the possibility of a conflict.
A. THE PRE-CONTRACTING PHASE
1. Prepare Written Codes of Standards of Conduct. FTA requires that each of its grantees maintain a written code of standards of conduct applicable to its employees (including contractor employees), officers, board members, and agents (including outside consultants) involved in the selection, award or administration of contracts. Each grantee should consult with its counsel, as well as its procurement personnel, as to whether its code of conduct complies with FTA’s requirements as set forth in Section 3 of FTA’s Master Agreement, Paragraphs 7(c) and 8(a)(5) of FTA Circular 4220.1E, Third Party Contracting Requirements (April 15, 1996), and 49 CFR § 18.36 and Part 19, as applicable. Moreover, the grantee should provide a copy of its code of conduct to each of its employees, board members, officers, and other agents.
2. Require Financial Disclosure Statements and/or Non-Conflict Certifications. When determining how to deal with potential conflicts of interest, a grantee may choose "proactive" measures, "reactive" measures, or a combination approach. "Proactive" measures are designed to identify and prevent potential conflicts prospectively. For example, a grantee interested in employing proactive measures should consider requiring each of its employees (and others potentially involved in the procurement process) to file an annual disclosure statement concerning his or her financial and employment status and that of immediate family members (to the extent state and local law permit such a financial disclosure requirement). 24 With this information on file, the grantee can "proactively" determine, ahead of time, whether any of its employees (etc.) have interests in any of the potential or actual contractors on a particular project. The grantee, for example, can run a search on the parents, subsidiaries, and affiliates of bidders and contractors, as well as on any companies listed on employee disclosure statements, and get a broad picture of any potential conflicts. If a conflict is discovered, the grantee can -- again, "proactively" -- wall off any employee who may have a potential conflict from a particular project, thus avoiding the need for later action.
In some cases a grantee may require its contracting personnel (officers, board members, agents, etc., as applicable) to submit a "non-conflict" certification on a project-by-project basis, before that person commences work on the selection, award or administration of a contract. Such certification would state that neither the employee (etc.) nor any member of his or her immediate family has a financial or employment interest in any of the relevant bidders or contractors for the procurement in question. If the employee identifies a real or apparent conflict of interest, then the grantee can take action to mitigate it. This is a different, somewhat "reactive," approach than requiring annual financial disclosure statements.
There are pros and cons to both approaches. With annual financial disclosure statements, the grantee attempts to identify and mitigate conflicts as early as possible in the procurement process; but in order for this approach to be effective, the grantee’s reviewer must both review the disclosure statements and perform relevant research as well as be aware of the various corporate interconnections. An advantage of a project-specific disclosure statement is that it serves as a regular reminder to employees of the importance of conflict avoidance, and thus may prevent some conflicts of interest from arising in the first place. Realistically, however, requiring disclosure statements on a project-by-project basis generally is too onerous for the grantees that handle many procurements every year. Moreover, this somewhat "reactive" approach puts a serious burden on the individual employee (etc.) to "self-certify" that he has no conflict on a particular project, with the understanding that the grantee will hold him accountable for the veracity of that certification. It is also possible that an individual employee, unaware of the ownership or other links between prospective bidders or contractors and the financial interests he holds, may unknowingly self-certify that no conflict exists.
The two approaches, however, are not mutually exclusive, and the best approach may be a combination of proactive and reactive tools. Ultimately, each grantee must determine for itself the preferable approach, considering the costs involved in administering its program and any other matter the grantee deems pertinent to the decision. As indicated above, any program requiring certifications or disclosure statements from employees also should apply those requirements to the other categories of individuals listed in FTA Circular 4220.1E, specifically, officers, board members, and agents, including consultants and contractors involved in the selection, award or administration of contracts. Finally, the grantee should ask its counsel to review the form of its financial disclosure statements or non-conflict certifications for compliance with local, state, and federal law before they are issued.
3. Obtain Certifications of Compliance with Professional Codes of Conduct. The grantee should consider requiring each of its employees, board members, officers, and agents to identify in writing any code of professional responsibility governing his or her conduct, and to certify that to the best of his or her ability he or she will comply with that code whenever conducting business on behalf of the grantee. To be effective, such a requirement must be coupled with a mechanism for reporting violations to the appropriate enforcement entity.
4. Prepare Written Procedures for Addressing Personal and Organizational Conflicts of Interest. The grantees’ written procedures should establish not only a means of identifying conflicts but also a predictable method of resolving them. For example, once a personal conflict has been identified, mitigating measures may include creation of blind trusts, recusal or other limits on scope of participation, procedures to allow the employee back inside the information bubble if the conflict ends (e.g., the company that the employee owns stock in does not win the contract), etc. The written procedures may address:
The grantee should seek the assistance of counsel in preparing written procedures for resolving conflicts of interest.
B. THE PROPOSAL STAGE
1. Define the Project to Avoid Potential Conflicts. Grantees should anticipate potential conflicts and structure procurements accordingly. For example, the grantee should not allow a company that prepares the specifications for procurement to supply the products as well. Also, the grantee should be careful to structure the project so as to avoid conflicts among contractors and subcontractors. For example, on a large project, the grantee could avoid possible bias by procuring one contractor to perform the needed evaluation independently, and then initiating a new procurement to obtain any system that may be required and excluding the first contractor from that second competition. 25
2. Consider Advance Restrictions. When the grantee awards separate contracts on related procurements, it might consider placing notice of an advance restriction in the solicitation where a conflict may arise. It is far better to identify a potential conflict involving two contracts in the first solicitation than to award the first contract and then address the conflict when awarding the second contract. Prime contractors should be required to inform prospective subcontractors (and to give evidence that they have done so) that the subcontractors also could be subject to the restrictions in future contracting. This way, each bidder (prime and subcontractors) for the first contract will be aware of the situation and can make its own choice about which contract to pursue. When an advance restriction is desired, consider including:
3. For Environmental Impact Statement Contracts, Comply with CEQ Regulations. Regulations promulgated by the Council on Environmental Quality require each contractor who develops an environmental impact statement to sign a disclosure statement (prepared by the grantee) certifying that it has no financial or other interests in the outcome of the proposed project. 26 This requirement is intended to prevent contractors who are hired to study alternatives and potential environmental impacts of proposed projects from presenting and profiting from biased recommendations. Pursuant to the regulations, grantees must require the submission of a disclosure statement in RFPs for consulting services so that such conflicts can be identified early in the contracting process. The grantee also must comply with 40 CFR § 1506.5 and "Guidance Regarding NEPA Regulations," 48 Fed. Reg. 34263 (July 18, 1983), explained above in Section G of the Discussion.
4. Consult With Legal Counsel. Before defining the scope of any project or publishing any document describing the project, such as a statement of work, the grantee should ask its counsel to review the project and any descriptive documentation for compliance with conflicts rules.
C. THE SELECTION AND AWARD PHASE
1. Review Disclosure Statements (if required by the grantee) for Potential Conflicts with Bidders. If the grantee requires its procurement staff to submit annual financial disclosure statements or project-specific disclosure statements, the grantee should review the information on such statements for potential conflicts before any procurement staff begins work on the selection process. If the employee’s work on the project would cause a real or apparent conflict, then the grantee should reassign his or her duties on the project to another employee.
2. Obtain No-Conflict Certifications from contract personnel (if required by the grantee). If the grantee requires its contract personnel who will participate in the administration of a contract to submit no-conflict certifications, then the grantee should furnish information on the likely bidders to the contractor. Each contractor employee who will be assigned to work on the procurement should submit his or her certification to the grantee’s reviewing official before the selection process begins. If a contractor employee fails to submit the required no-conflict certification, then the grantee should direct the contractor to reassign that employee’s duties to another employee who has complied with the certification requirement.
D. THE ADMINISTRATION PHASE
1. Monitor Contract Staff/Contractor Compliance with Conflicts Rules. During the administration phase of a project, the grantee should require each of its employees (etc.) involved in the project to report any changes in his or her financial holdings or other interests that might cause a conflict of interest. Similarly, the grantee should require the contractor to report any changes in the company’s financial holdings, newly developed contractual or other relationships, or those of its parents, subsidiaries, and affiliates. In this way, the grantee can monitor the situation and address personal or organizational conflicts that might arise during the administration phase of the project.
2. Obtain Certifications from Contractor Personnel Governed by Professional Codes of Responsibility. Before a contractor begins work on a project, the grantee should consider requesting a written statement from any contractor personnel working on the project whose conduct is governed by a professional code of responsibility, in each case identifying any relevant code and certifying that he or she will comply with its rules on all grantee-related work.
E. THROUGHOUT THE ENTIRE PROCESS
1. Consult with Legal Counsel. Grantee procurement and technical personnel are encouraged to work closely -- and proactively -- with their legal counsel throughout the procurement process to review all situations that appear to have the potential for a conflict of interest. Counsel can help in any number of ways, including reviewing written materials for compliance with conflicts of interest rules, preparing restrictive contracting clauses suitable for the particular situation, and helping to restructure the project to avoid conflict situations. Counsel may also suggest that involvement by FTA Regional Counsel would be appropriate and solicit Regional Counsel’s advice when necessary.
2. Mitigate Conflicts. As potential conflicts arise during the procurement process, the grantee must take steps to avoid the conflict or, if that is not possible, mitigate its effects. For example, where a grantee’s board is responsible for awarding contracts, a board member with an interest in a project bidder should disclose his interest and recuse himself from the selection process. As another example, where an employee has an interest in a project bidder, the grantee could create a "fire-wall" preventing the employee from providing the bidder with any information gained during his employment with the grantee that would give the bidder an unfair competitive advantage. As always, the grantee should consult with counsel in formulating an appropriate approach to any conflict situation.
Paragraph 15.h of the Master Agreement states:
i. Architectural, Engineering, Design, or Related Services. ...Provided a sufficient number of qualified firms are eligible to compete for the third-party contract, geographic location may be a selection criterion....
Paragraph 8.b of FTA Circular 4220.1E states:
b. Prohibition Against Geographic Preferences. Grantees shall conduct procurements in a manner that prohibits the use of statutory or administratively imposed in-State or local geographical preferences in the evaluation of bids or proposals, except in those cases where applicable Federal statutes expressly mandate or encourage geographic preference. This does not preempt State licensing laws. However, geographic location may be a selection criterion in procurements for architectural and engineering (A&E) services provided its application leaves an appropriate number of qualified firms, given the nature and size of the project, to compete for the contract.
The prohibition against geographic preferences as stated in FTA Circular 4220.1E is based upon 49 CFR Part 18.36 (c) (2). The only exception noted to this prohibition is in the procurement of architectural and engineering (A&E) services, where knowledge of local conditions and building codes is a relevant factor in the quality of the A&E services. One public Agency, in its procurement procedures manual for A&E contracts, recognizes the importance of the A&E's knowledge of local conditions, and requires that A&E proposals be evaluated in terms of their:
Knowledge of the locality of the project, provided that application of this criterion leaves an appropriate number of qualified firms, given the nature and size of the project. 27
This Agency has stated its policy in terms which are focused on the one generally accepted reason for allowing geographical preferences - an A&E firm's demonstrated knowledge of local conditions, which is a factor affecting the quality of the final product. This same Agency prohibits geographic restrictions, except for those permitted by FTA for A&E services, not only for its own procurements but for those of its contractors as well. 28 Some grantees have used very localized geographical restrictions in their solicitations for parts or services which must be furnished on a short lead-time basis; e.g., within one or two hours of the request. A much better approach, and one that is not prohibited by the FTA Circular, would be to require an ability by the contractor to respond within the time frame needed, and not to stipulate a geographical restriction in the solicitation. The reason is that many parts suppliers maintain a staff which is capable of quick response even though they are not in the immediate city or county of the grantee.Grantee procurement officials are sometimes confronted with pressure from their Board members to place contracts with local firms, and it is necessary for the grantees to include explicit statements in their procurement policies and procedures that geographical restrictions are prohibited except for A&E procurements, citing the FTA prohibitions in FTA Circular 4220.1E, paragraph 8.b.
Paragraph 8.d of FTA Circular 4220.1E states:
Prequalification of bidders and products has been used in several circumstances, such as when an Agency is procuring critical equipment with exacting performance requirements, or critical services which are needed on a quick-reaction basis. A qualified products list (QPL) is a listing of products which have been tested and found to have satisfied all of the specified requirements. The products on the list may be supplied by any responsible vendor bidding on the procurement. The qualified bidders list (QBL) is a listing of bidders who are manufacturing more complex items, such as buses, requiring sophisticated manufacturing and quality control procedures. These bidders must be reviewed carefully to determine if their internal controls and procedures will produce satisfactory end products. These pre-qualification procedures may also be appropriate for companies who wish to bid on procurements for furnishing critical services, such as quick reaction services for repairs, etc. Only those bidders on the qualified bidders list may supply the products or services specified. The Federal government has used this practice for critical military equipment, such as jet engine turbine blades, or for critical quick-reaction services such as ship repairs. Transit Agencies using this procedure of establishing a qualified products list (QPL) often cite a rationale of: "For reasons of efficiency, economy, compatibility, or maintenance reliability, there is a need for standardization as to various supplies, materials, and equipment." 29
Documenting Your Decision to Establish a QPL or QBL - Care must be taken to ensure that prequalification procedures are not used to restrict full and open competition. Toward this goal Federal Agencies are required to justify in writing the necessity for establishing a prequalification requirement. 30 Some transit Agencies have also chosen to follow this practice of documenting the reasons why a particular part or service is being placed on a qualified products list (QPL) or a qualified bidders list (QBL), although they are not required to do so by FTA. 31
Qualifying During Solicitation Period - Some Transit agencies have two different policies as to bids offering products which have not been qualified prior to the solicitation. When using non-Federal funds, the Agency will not allow bidders to offer non-qualified products in response to a solicitation--bidders must obtain certification of their product before, and independently of, any solicitation for that item. When using grant funds, however, grantees must allow vendors an opportunity to qualify their products during the solicitation period (FTA Circular 4220.1E, Paragraph 8.d). A grantee would not be expected, however, to delay a proposed award (extend the solicitation period) in order to afford a vendor the opportunity to demonstrate that its product meets the standards in the specification. The Federal procurement rules do not require Federal Agencies to delay awards, and the standards applicable to these Agencies should be appropriate for grantees as well. 32
Paragraph 9.c. of FTA Circular 4220.1E authorizes procurement by the Sealed Bid/Invitation For Bids (IFB) method when certain conditions are present. Among those listed is the condition that:
(c) The procurement lends itself to a firm fixed price contract and the selection of the successful bidder can be made principally on the basis of price.
Paragraph 9.d. authorizes procurement by the Competitive Proposal/Request for Proposals (RFP) method and either a fixed price or cost reimbursement type contract may be awarded.
Paragraph 7.i. requires that grantees document their reasons for selecting the contract type as a part of the written record of procurement history.
Paragraph 10.e. prohibits the cost plus a percentage of cost method of contracting.
The selection of contract type is probably the single most important decision that the procurement specialist will make in the acquisition process. A properly selected contract type will work in the interests of the buying Agency to provide a product or service which meets the Agency's needs at a reasonable price without undue risks to the contractor and without excessive contract administration costs and contractor claims. A contract poorly suited to the complexity of the requirement, and the degree of specificity of the specifications or statement of work, can cause a disastrous situation for both the contractor and the Agency. When Agencies have complex requirements, and performance uncertainties make it difficult to predict the costs of performance in advance, some type of flexibly- priced contract should be considered. Where the length of contract performance extends over a long period of time, some type of economic price adjustment terms may be necessary. When requirements are repetitively acquired, and a history is established, the Agency should be able to more clearly define the requirement, and contractors should be able to assume greater risks of performance at fixed prices. Grantees have a very wide latitude in structuring a contract type which affords the best incentive to the contractor for delivering the particular product or service being acquired.
There are two broad categories of contract types: fixed-price contracts and cost-reimbursement contracts. Within these two families of contract types there are a number of subtypes offering differing degrees of incentives. At the extremes are the firm-fixed-price contract, in which the contractor has complete responsibility for the costs of performance and the resulting profit or loss, and the cost-plus-fixed-fee contract, in which the contractor has virtually no risk for performance costs and the fee (profit) is fixed. Between these two extremes are the various incentive-type contracts where the degree of cost risk and profit incentive can be tailored to meet almost any specific program situation.
All fixed-price contract types impose upon the contractor an obligation to deliver the product specified in the contract, and he is not entitled to payment of the stipulated price unless he delivers the product and it meets the specifications called out in the contract. On cost-reimbursement contracts the contractor is obligated only to give its "best efforts" in order to be paid the costs of performance. (The fee, however, is earned for complete performance of the contract, and if less than full performance is made, the buying Agency is entitled to a reduction of the fixed fee based on the percentage of completion of the work.)
A firm-fixed price contract establishes a single price, or a series of line item or unit prices, that are not subject to any adjustment on the basis of the contractor's cost experience in performing the contract. The contractor takes full responsibility for the cost and profit outcome, and thus the contractor has maximum incentive to control costs and complete the contract on schedule. This contract type represents the least administrative burden upon the contracting parties; e.g., it is not necessary for the buyer to monitor contractor costs or to perform contract closeout audits. In some cases, however, there may be a need for audits if, for example, change orders have been issued on a cost-reimbursable basis.
Firm-fixed-price contracts are appropriate for acquiring commercial items, or for supplies or services which can be clearly defined with either performance/functional specifications or design specifications, and where performance uncertainties do not impose unreasonably high risks upon the contractor. 33 This aspect of performance risk is important to judge realistically, for if contractors are put into positions of undue risk and the worst case happens, the buying Agency can look forward to excessive claims, possible litigation, a poor-quality product where the contractor has "cut corners" to save money, and in some cases, the bankruptcy of the contractor or refusal to complete the contract. High-risk performance situations will also result in contractors building costly contingencies into their prices for risks that may never occur, resulting in higher than necessary prices and excessive profits on that contract.
Fixed Price Contracts With Economic Price Adjustment - Fixed-price contracts may provide for price adjustments (upward or downward) when specified contingencies occur. These contracts are typically used when there is serious doubt about the stability of selected costs or prices over an extended period of contract performance. For example, a five-year fixed-price contract may present an unusually high cost risk to a contractor for certain commodity prices or labor costs, and the parties may agree to use an economic price adjustment clause. Price adjustments may be based on published indices, actual cost experiences of the contractor for certain materials or labor, or increases or decreases in published prices for specific items. The contract will define the circumstances under which the economic price adjustment will be made and the means whereby it will be calculated. Using economic price adjustment clauses is an excellent way to deal with high-risk situations and avoid having to price the initial contract on the basis of contingencies that may never occur. This technique may also be necessary to get contractors to accept fixed-price contracts that have a lengthy performance period. 34
You may want to refer to the Federal Acquisition Regulations (FAR), Subpart 16.203 - Fixed-price contracts with economic price adjustment, and the related contract clause language in FAR 52.216-2,3,4. These FAR provisions and contract clauses are not required to be followed by FTA grantees but they may prove helpful in structuring contract language for specific contingencies. The FAR may be accessed online at http://www.arnet.gov/far/.
Steel Price Escalation Clauses – Following are two examples of steel price escalation clauses used by transit agencies. The first clause (Sound Transit) uses a one-time price adjustment. The second clause (New York City Transit) allows for multiple price adjustments.
One-Time Price Adjustment - Following is an example of an economic price adjustment contract clause used by Sound Transit one transit agency to provide for one steel price increase during the period of the contract. Note that this clause:
Multiple Price Adjustments - Following is an example of an economic price adjustment clause developed by New York City Transit for solicitations. This provision allows for multiple price adjustments during the period of the contract. Note that this clause refers to the “Scrap Steel” index, but any index could be used depending on the material being procured.
Paragraph 10.d of FTA Circular 4220.1E requires that Federal cost principles (described in FAR Part 31) be used to determine the allowability of costs incurred on third party cost-reimbursement contracts financed with Federal funds. However, grantees may reference their own cost principles if they comply with Federal cost principles.
Paragraph 10.e of FTA Circular 4220.1E prohibits the cost-plus-a-percentage of cost method of contracting.
The cost-reimbursement contract is one that provides for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling on expenditures that the contractor may not exceed without the approval of the contracting officer. Cost-reimbursement contracts are suitable for use when the uncertainties of performance do not permit costs to be estimated with sufficient accuracy to use a fixed-price contract.
Completion vs. Term Form - Two forms of cost-type contracts are available for describing the contractor's responsibility: the completion form and the term form. The completion form describes the scope of work by specifying an end product or definite goal. This form requires the contractor to complete the work and deliver the end item as a condition for payment of the entire fee. If the contractor fails to complete the contract, the buying Agency is entitled to a reduction in the amount of the fee. This would mean that if the contractor expended all the estimated cost and the work was not complete, and the Agency decided not to add more funds (estimated cost) to the contract, the contractor would not be entitled to full payment of the original fixed fee. The term form of contract describes the work in general terms and obligates the contractor to devote a specified level of effort for a stated time period. The fixed fee is payable at the expiration of the stated time period if the contractor has indeed furnished the specified level of effort. Extension of the time period is a new acquisition involving new cost and fee agreements (unless the original time period expires and there remains a level of effort to be provided, in which case the Agency may have the right to extend the period of performance so as to use the remaining level of effort).
Federal Cost Principles - FTA Circular 4220.1E Paragraph 10.d. requires grantees to use Federal Cost Principles to determine allowable costs under cost-type contracts. 49 CFR 18.22, Allowable Costs, defines the Federal Cost Principles for various types of contractors. Contracts with commercial concerns are required to use FAR Part 31 Cost Principles and Procedures, or grantees may use their own cost principles if they are consistent with FAR Part 31.
Allowable Cost and Payment Clause - Cost-type contracts will need to include a clause or clauses addressing several important issues regarding the payment of allowable costs. The clause used in Federal contracts would be useful as a guide concerning the issues that need to be addressed. 37 The matters covered by the FAR clause, and that should be defined in a grantee's contract (though the FAR clause itself is not required), would include:
Adequacy of Contractor's Accounting System - It is important to determine the adequacy of the contractor's accounting system for cost-type contracts before awarding such a contract. 41 Care must be taken to assure that the accounting system can properly identify contract costs by segregating them from the costs of other jobs in the accounting records. Likewise it is important that the system of allocating indirect costs to jobs/contracts produces a distribution of costs which is fair and reasonable.
Paragraph 7.j. of FTA Circular 4220.1E states:
j. Use of Time and Materials Contracts. Grantees will use time and materials contracts only:
1. After a determination that no other type of contract is suitable; and
Time-and-materials (T&M) contracts may be used for acquiring supplies or services. These contracts provide for the payment of labor costs on the basis of fixed hourly billing rates which are specified in the contract. These hourly billing rates would include wages, indirect costs, general and administrative expense, and profit. There is a fixed-price element to the T&M contract - the fixed hourly billing rates. But these contracts also operate as cost-type contracts in the sense that labor hours to be worked, and paid for, are flexible. Materials are billed at cost, unless the contractor usually sells materials of the type needed on the contract in the normal course of his business. In that case the payment provision can provide for the payment of materials on the basis of established catalog or list prices in effect when the material is furnished. These contracts also may provide for the reimbursement of material handling costs, which are indirect costs, such as procurement, inspection, storage, payment, etc. These indirect costs are billed as a percentage of material costs incurred (similar to the billing of overhead costs as a percentage of direct labor). Such material handling costs must be segregated in a separate indirect cost pool by the contractor's accounting system and must not be included in the indirect costs included as part of the fixed hourly billing rate for direct labor. It would always be prudent to obtain a pre-award audit of the contractor's accounting system to determine the adequacy of the system to properly segregate material handling costs from other overhead costs being billed with the fixed hourly rates for labor.
Use Only When No Other Type Will Work - The FTA Circular requires that you make a determination, before using this type of contract, that no other type of contract is suitable. The reason why this type of contract is the least preferable of all allowable types is that it creates a disincentive for the contractor to complete the contract in a timely manner. Since each labor hour expended carries with it a profit (and a predetermined overhead charge) built into the fixed hourly rate, the contractor is motivated to work as many hours as possible. There is no incentive to complete the contract quickly, and thus minimize total costs to the buyer. (In a CPFF contract the fee is fixed in dollar terms at the outset of the contract, allowing the contractor to earn the fee whenever the work is complete, thus providing some incentive to finish the contract as quickly as possible.)
Subcontracts - If your T&M contract will involve subcontracts for large dollar items or services, you will need to evaluate whether the contractor's material handling costs should be charged to these large dollar subcontracts as an indirect cost (as an overhead type of charge), because to do so may result in an inequitable allocation of these indirect costs to your contract. This is because the large dollar value subcontract will absorb a far greater proportion of the indirect cost pool than it should, based on a reasonable assessment of the material handling costs actually generated by the subcontract versus those generated by all other materials procured by the contractor for other customers. When this situation arises you will want to negotiate an advance agreement with the contractor as to the charging of material handling costs. It may be more equitable to pay for the cost of subcontract administration on a direct charge basis; i.e., the labor cost for the subcontract administrator charged directly. Or you may want to negotiate a reduced indirect material handling cost rate to be charged to the subcontract (which represents a more equitable allocation of the material handling costs actually generated by the subcontract).
Ceiling Price - You will need to specify the Agency's maximum obligation (ceiling price) in the contract; i.e., the limitation of the Agency's financial obligation which the total funds allotted to the contract will allow. The contractor may not exceed this funding limitation without your written authorization in the form of a contract modification adding more funds.
Proper Agency Surveillance - This type of contract requires a high degree of Agency surveillance during performance in order to provide reasonable assurance that efficient methods and cost controls are used by the contractor.
Avoid Cost Plus Percentage of Cost Arrangements - As discussed below under CPPC contracts, care must be taken not to structure an agreement which compensates the contractor at a predetermined percentage (for overhead or profit) of actual costs incurred. If you break out the overhead and profit from the labor rate and call for them to be billed as separate rates based on actual labor costs incurred, you will have an illegal cost plus percentage of cost situation. Overhead and profit must be recovered as a part of the fixed hourly billing rate for labor, as discussed above. You may allow the contractor to bill material handling costs as an indirect cost rate applied to actual material costs, provided the contractor segregates material handling costs in the accounting system. You should conduct a contract cost close-out audit of the material handling cost pool and adjust the rates billed to those actually incurred (as you would do for an overhead rate on a cost-reimbursement contract). However, where the actual material handling costs are not large, Agencies may elect to close out the T&M contract without a final cost audit of the material handling cost pool.
Labor hour contracts are a variation of the time and materials contract, differing only in that materials are not supplied by the contractor. You should use this type of contract only when no other would be suitable, and you need to document your determination if you choose to use this type of contract.
FTA Circular 4220.1E clearly prohibits the use of this contracting method. CPPC contracts are prohibited by statute and FTA may not grant waivers for grantees to use this method of contracting. 42 Grantees must not only avoid using this type of contract themselves, they must also insert clauses in their cost-type contracts that prohibit their prime contractors from using CPPC subcontracts. Care must be taken to avoid any kind of agreement whereby the contractor's fee would be increased automatically with increases in a particular cost element. Generally, any contractual arrangement whereby the contractor is assured of greater profits by incurring additional costs will be held illegal. The obvious problem with this form of contract is that profits increase in proportion to dollars spent, thus providing a positive incentive to inefficiency. To fall within the definition of CPPC, the agreement must provide that the contractor's compensation, or some portion of it, will be computed as a percentage of some of the costs of performance. So for example, it is not permissible to pay for overhead (indirect) costs by establishing a predetermined percentage in advance and stipulating that overhead expense will be reimbursed as a stated percentage of some other cost such as direct labor. The problem with this arrangement is that such compensation may be greater than the contractor's actual and final overhead expenses, which means the payment becomes additional profit. In the same way, a time-and-materials contract which called for payment of overhead and profit at predetermined percentages of 15% and 10% of cost incurred was held to be illegal. 43
This is not to prohibit provisional overhead rates which are audited and adjusted to actuals at the end of the contract, nor does it prohibit provisional or interim fee payments based on costs being incurred, because the total fee is fixed at the inception of the contract and will not increase with increases in actual costs. It is also permissible to pay a material handling charge as a percentage of material costs incurred if the contractor has a separate material handling cost pool. This indirect cost pool should be audited after contract completion, and the billed rates should be adjusted to actuals based on the audit.
Another way of avoiding the problem is to include overhead and profit in fixed rates for labor. This is done in time-and-materials and labor hour contracts where contractors are paid one rate for each hour of labor performed. This type of arrangement is not illegal, but it still tends to operate as a disincentive to control cost (more hours worked equals more profits), and for this reason should be avoided whenever other contracting options exist.
Payment is the buyer's most important contractual obligation. Payments are the principal source of funds during contract performance allowing the contractor to continue working. Delays in payments can have a serious effect on the contractor's ability to continue performance. When less than full payment is made of a contractor's invoice, the terms "withholding" and "setoff" are commonly used to describe the refusal to make full payment. The term "final payment" usually implies that both parties to the contract have fulfilled all of their responsibilities.
There are two major types of contract payments: (1) payments for completed items of work (including partial payments), and (2) progress payments based on costs incurred or upon a percentage of completion of the work. Another type of payment, which is used only under extraordinary circumstances, is payment in advance of doing the work (advance payments).
Payment of the contract price is due upon completion of the work and submission of the contractor's invoice. When the contract authorizes delivery or performance in increments, payment of a portion of the contract price may be made before the contract is completed. Such payments are referred to as partial payments. Partial payments are not considered to be a financing technique but they can be an important means of providing funds for performance, and they should be used whenever the contract can be structured in terms of incremental stages or deliveries and there are appropriate acceptance criteria for the supplies, services or completed subsystems of a larger system. In other words, when the Agency can safely inspect, test and accept these units and make a "final" payment for those items delivered, without having to worry about their functioning as part of a larger system, then partial payments should be established in the contract.
FTA Circular 4220.1E, Paragraph 12, "Payment Provision in Third Party Contracts," states:
Advance payments are actually a method of financing and not a method of paying for work completed or items delivered. They are made prior to a contractor's incurrence of costs in order to enable the contractor to perform the contract. The Federal Government places severe restrictions on its own use of advance payments (FAR coverage may be found at FAR Subpart 32.4). As indicated below in the paragraph "Exceptions to the Prior Approval requirement," when advance payments are generally accepted industry practice, FTA does not require prior approval.
The FTA Circular requires FTA approval before grantees may use this form of financing on third-party contracts. However, the FTA Dear Colleague Letter dated June 15, 2001 clearly restricts the advance payment prohibition to those contracts where the grantee is using FTA funds for the advance payment. If the advance payments are being made with non-FTA funds, then FTA has no involvement in the decision and need not approve of it. Grantees are free to use local funds to finance their contractors in this manner if they deem it appropriate. The Dear Colleague Letter also covers the situation where a grantee may wish to use local funds for advance payments before a grant has been awarded or before FTA has issued a letter of no prejudice to the grantee. In these cases FTA will not reimburse the grantee later for such payments.
Exceptions to the Prior Approval Requirement- The FTA requirement for prior approval of advance payments does not apply to transactions where it is "generally accepted industry practice" to pay in advance. In these situations, grantees may make advance payments without prior FTA approval. These situations would include (but not necessarily be restricted to) the following types of transactions:
Best PracticesNew York City Transit (NYCT) completed a major procurement for rail cars in which there were two payment schedules in the Request for Proposals (RFP). The first was a payment schedule containing milestone payments totaling 20% of the price of cars paid prior to the acceptance of the first test trains. A second or "Alternate" payment schedule had milestone payments of 42% of the price of cars paid prior to the acceptance of the first test trains. Contractors were required to submit proposals based on both payment scenarios, as well as any alternative payment plan they wished to propose. NYCT requested that the Federal Transit Administration (FTA) provide written concurrence to make advanced payments up to approximately 45% of the price of the cars if there was appropriate consideration for greater payments made up front. In addition, NYCT required that an Advanced Payment Bond or Letter of Credit be provided in the full amount of the price of cars paid prior to the acceptance of the first test trains. FTA provided their written concurrence to NYCT's request.
|Paragraph 12.b of FTA Circular 4220.1E states:|
Progress payments are a means of financing contractors that are performing fixed-price contracts (a) under unusual circumstances where a contractor cannot get private financing at a reasonable cost, or (b) where the commercial practice for the item being procured is for the buyer to provide financing (e.g., rolling stock procurements). 47 There are two major types of progress payments: those based on costs and those based on a percentage of completion of work. Both types are considered contract-financing methods (see FAR 32.102). Progress payments may be appropriate if:
A number of contract provisions expressly authorize the withholding of payments. See, for example, the Davis-Bacon Act Clause 51 or the Contract Work Hours and Safety Standards Act Clause. 52 The standard Federal government clause for the payment of fixed fee on CPFF contracts calls for a 15% withholding of the fixed fee until the contractor submits a certified final indirect cost rate proposal and otherwise complies with the final deliverable documentation requirements of the contract (e.g., delivery of the final report concerning inventions made under the contract).
Limitation on Withholding - In the event you decide to withhold payments on a contract, you must take care that the amount of money withheld bears a reasonable relationship to the unsatisfactory work; in other words, the amount withheld must represent a reasonable estimate of the contractor's potential liability. 53 Moreover, the amount withheld must not be so great that it impairs the contractor's ability to perform. 54 You may also wish to consider a clause limiting the amount of payments that may be withheld in total under all clauses of the contract, as is the practice on Federal contracts. 55
Final Payment - Final payment is made to the contractor when it has satisfied all of the deliverable requirements called for by all provisions of the contract, including all of the required documentation. Final payment signifies that the performance obligations of both parties to the contract have been satisfied. Before making a final payment, therefore, you should obtain a signed release from the contractor releasing the Agency from any further claims by the contractor. You should also ensure that the program office has signed a receiving and inspection report certifying that all deliverable items have been received, inspected, and accepted as being in conformance with the contract specifications.
Retainage on Construction Contracts - For a discussion of retainage on Construction Contracts, see BPPM, Section 10.1, paragraph entitled Retainage and the problems of contractors who quit work.
2.4.5 Indefinite Delivery Contracts
When the exact times or the exact quantities of future deliveries are not known at the time of contract award, or when the shelf life of the product needed is short, grantees may wish to consider some form of indefinite delivery (ID) contract. Indefinite delivery contracts offer a number of advantages that will be discussed below with each type of ID contract. As a general rule, however, ID contracts permit the grantee to maintain inventories at minimum levels and provide flexibility with respect to shipments to various user locations. It also facilitates decentralized ordering by users at different locations.
There are three types of indefinite delivery contracts:
1. Definite-quantity contracts,
2. Requirements contracts, and
3. Indefinite quantity (IQ) contracts (commodities)/Task order contracts (services).
188.8.131.52 Definite-quantity Contracts
A definite-quantity contract is one which provides for delivery of a definite quantity of specific supplies or services during a time period which is fixed, with deliveries or performance to be scheduled at designated locations at the time each order is placed under the contract. This type of contract is appropriate when the grantee knows in advance how many total items it will need during the contract period but is uncertain as to the exact time or the exact amount of its needed deliveries to any given location. The supplies or services called for by this type of contract must be regularly available from the supplier or available after a short lead time. For guidance as to ordering quantities above the quantity stated in the contract, see section 184.108.40.206 below, paragraph entitled Orders above the stated maximum.
A requirements contract is one in which the grantee commits to place all of its requirements for a particular item or service with a particular contractor during a specified contract period, with deliveries or performance to be scheduled at the time each order is placed under the contract. This type of contract is used when quantities and/or the times of needed deliveries are uncertain. It permits flexibility to the grantee in both quantities and delivery schedules. It may also shorten the delivery time of a product that has a longer production lead time because the contractor knows that the grantee will obtain all of its requirements under its contract and in this situation contractors may be willing to maintain some level of inventory. A requirements contract also allows for the ordering of supplies or services after requirements become known. It differs from the indefinite quantity contract in that it promises the contractor that all of the grantee's requirements for the particular item will be procured from the contractor, whereas the indefinite quantity contract makes no promise of this nature and may in fact be one of several (multiple) contracts awarded for the same item or service. The requirements contract may produce better prices for the grantee in that the contractor is assured from the beginning that all supplies or services of the type called for will be procured from the contractor during a stated period of time. The disadvantage to the grantee is that it will be committed to order all of the designated supplies at the contracted price even if it later learns that the supplies can be ordered elsewhere more cheaply.
Estimated total quantity - When this type of contract is used, grantees should state a realistic estimated total quantity in the solicitation and in the resulting contract. This estimate is not a guarantee by the grantee that it will buy the estimated quantity, but is a good faith estimate of what the requirements are likely to be. The estimate should be based on records of previous requirements as well as the most current information available.
Maximum and minimum quantities - The contract should protect the contractor by stating a maximum limit of the contractor's obligation to deliver. This maximum limit may be expressed for the entire contract, as well as for each individual order and for any particular period of time within the contract period of performance. Minimum order amounts may also be expressed for each order placed and for the contract as a whole. Minimum order amounts, however, are not required for this type of contract because the grantee's commitment to buy its requirements from the contractor represents the legal consideration necessary to make the contract binding. For guidance as to ordering quantities above the maximum amount stated in the contract, see section 220.127.116.11 below, paragraph entitled Orders above the stated maximum. It should be noted that the minimum and maximum quantities in a requirements contract are for the contractor's protection and do not necessarily limit the grantee's procurement authority to order more units (since the grantee has contracted to award all of its requirements to the contractor). Thus the grantee's authority to add units to a requirements contract without re-competition is founded on its initial promise to award all of its requirements to the successful contractor and such additions would not constitute an impermissible increase in scope (as would be the case with an indefinite-quantity contract when the grantee seeks to add units above the stated maximum - see below).
An indefinite-quantity contract is one that provides for an indefinite quantity of supplies or services, within limits that are stated in the contract, to be provided during a time period that is fixed in the contract. Deliveries of the supplies or performance of the services are scheduled by placing orders with the contractor. This type of contract may be appropriate when the grantee cannot predetermine, above a specified minimum, the precise quantity of supplies or services that will be required during the contract period, and it is inadvisable for the grantee to commit itself for more than a minimum quantity. Indefinite-quantity contracts offer several advantages:
1. minimum inventory levels of supplies can be maintained,
2. shipments can be direct to users in various locations,
3. they permit flexibility in both quantities and delivery scheduling,
4. supplies or services can be ordered after requirements become known, and
5. the grantee's obligation is limited to the minimum quantity specified in the contract.
Minimum and maximum quantities - To ensure that the contract is binding, a minimum number of units must be stated in the contract, and it must be more than a nominal quantity. There must also be a stated maximum of units that may be ordered. Indefinite-quantity contracts should never be "open ended," where no maximum quantity is stated. This practice has led to serious problems when agencies attempt to "piggyback" the open ended contracts of other agencies by ordering quantities that were never included in the original competitive process. (See section 6.3.3--Joint Procurements of Rolling Stock and "Piggybacking.") The contract may also state maximum or minimum quantities that may be ordered under each task or delivery order and the maximum that may be ordered during a specified period of time within the contract's period of performance.
Orders above the stated maximum - If it becomes necessary to order quantities above the maximum stated in the contract, (which would be the number of units included in the original competitive process), such orders should generally not be processed as "change orders," ("change orders" must be within the scope of the original competition), but should be processed as "new procurements." These new procurements may either be competed or, if circumstances warrant, processed as "noncompetitive procurements" in accordance with the grantee's internal approval process for noncompetitive ("sole source") procurements. Grantees should anticipate the possibility of needing additional quantities when they compete the contract award initially and, if necessary, include option provisions for additional quantities in the original competitive bidding. In this way if additional quantities are needed they may be procured under the original contract without having to justify them as a "sole source" add-on.
Multiple Award/Task Order contracts - Grantees may wish to consider making multiple contract awards for the same or similar supplies or services under a single competitive solicitation. This may be appropriate in order to ensure the quality or timeliness of deliveries by not limiting the grantee to a single supplier who may not perform according to the grantee's expectations or needs or who may not be able to meet peak delivery requirements. In this event, another supplier is immediately available to assure that needs will be met.
The Federal Acquisition Regulations (FAR), Subpart 16.504 - Indefinite-Quantity Contracts, addresses the issue of multiple awards in 16.504(c). The FAR expresses a preference for making multiple awards of indefinite-quantity contracts under a single solicitation for the same or similar supplies or services if (i) a recurring need for the supplies or services is anticipated, and (ii) the agency cannot predetermine its needs above a specified minimum, and (iii) when it would be inadvisable for the agency to commit itself for more than a minimum quantity. The FAR envisions the award of multiple task order contracts in which individual task orders would be issued following competitive solicitations to the original awardees.
If multiple awards are made, grantees must advise prospective bidders of the procedures that will be used in issuing orders to the contractors selected for award, including the criteria that will be used to provide the selected contractors with a fair opportunity to be considered for each order issued. The criteria may include such items as past performance on earlier tasks or orders issued under the contract, quality of deliverables, timeliness of deliveries, and other factors considered relevant by the grantee. It is important that price or cost be one of the selection factors considered for each order awarded. If the original contract did not establish the price for the supply or service, the grantee will have to solicit cost or price proposals for each order.
The FAR does provide for exceptions to the requirement that all awardees be provided a fair opportunity for each order awarded. These would include situations where -
Chapter Footnotes1 - For formal assistance in implementing a team process see Howard, Jennifer M. and Miller, Lawrence M., Team Management: Creating Systems and Skills for a Team-Based Organization (The Miller Consulting Group, Inc., 1994) or Leinberger Robin et al, The Art of Business Process Management: A guidebook, (KPMG Peat Marwick, LLP, 1993).
2 - The limitation is expressed in terms of buying no more than five years’ requirements even though delivery may occur beyond five years from the date of the contract.
3 - This limitation did not apply to construction contracts or to leases of real property for the life of the transit asset to be constructed on such property.
5 - Contact Mr. John Trotta, Vice President, Purchasing/Warehousing, Chicago Transit Authority, at
7 - The Council of State Governments, National Association of State Purchasing Officials, Law Enforcement Assistance Administration, and Peat Marwick Mitchell & Co., State and Local Government Purchasing (1975) p. 6.2.
8 - United States v. John C. Grimberg Co., 702 F.2d 1362, 1367 (Fed. Cir. 1983) (in banc).
11 - Id.
12 - FTA Master Agreement Sections 3(a) and 3(a)(1); 49 CFR § 18.36(3); FTA Circular 4220.1E, Paragraph 7(c). In addition, many state and local jurisdictions have laws and regulations, which address both the conduct of public employees and the relationship between public entities and private businesses. These vary in nature, and may impose both civil and criminal sanctions on violators.
14 - This interpretation applies to both subcontractors and general contractors providing procurement-related services to a grantee.
15 - A personal conflict also arises where a person whose financial interests are attributed to the employee has a conflict - either because that person is an employee, prospective employee, officer, director, or agent of a contractor or competing entity, or because that person has a financial interest in the contractor or competing entity. The financial interests of the following are attributed to an employee: a member of the employee’s immediate family, his partner, or his outside employer or prospective employer. FTA Circular 4220.1E Paragraph 7(c).
16 - See FTA Circular 4220.1E Paragraph 7(c); 18 CFR § 18.36(3)(iv); FTA Master Agreement Section 3(a). However, “[t]he Recipient may set minimum rules where the financial interest is not substantial, or the gift is an unsolicited item of nominal intrinsic value.” FTA Master Agreement Section 3(a); see also FTA Circular 4220.1E Paragraph 7(c); 18 CFR § 18.36(3)(iv). These are known as “de minimus” gifts, and do not result in either a real or apparent conflict of interest. For FTA and other Federal employees, the level is set at $20 per occasion, with a maximum of $50 per calendar year from the same source (including affiliates). In many cases, however, the best response to a gift offered is a simple, “Thank you, but no thank you.” Section 3(a) of the FTA Master Agreement requires that grantees include in the standards of conduct penalties, sanctions, or other disciplinary actions for violations of the code, to the extent permitted by state or local law.
17 - See FTA Circular 4220.1E Paragraph 8(a)(5). The Federal Acquisition Regulations also provide a helpful definition of organizational conflict of interest: “Organizational conflict of interest means that because of other activities or relationships with other persons, a person is unable or potentially unable to render impartial assistance or advice to the Government, or the person’s objectivity in performing the contract work is or might be otherwise impaired, or a person has an unfair competitive advantage.” 48 CFR § 9.501.
18 - Generally, an organizational conflict arises because a person or entity has or appears to have loyalties to, or a financial interest in, two organizations that may have competing or differing interests from each other -- one of them being the grantee. For example, an organizational conflict would arise if an employee or a consultant serves as a member of a public or quasi-public body with regulatory authority over a project or has a stake in its outcome. This arises most often where architects sit on design review or zoning boards.
19 - Federal transit law requires grantees to award contracts through a process of full and open competition. Organizational conflicts of interest that give any party an unfair competitive advantage impede full and open competition, and thus are considered “restrictive of competition” under Paragraph 8(a)(5) of FTA Circular 4220.1E.
20 - Mergers and acquisitions have had a strong effect on contracts in the environmental area, thus warranting a separate discussion of this topic.
21 - This is consistent with the approach used in Federal contracting as set forth in FAR 9.504(e), where a contract can be awarded in spite of a conflict when the contracting officer determines that it is in the best interest of the Government to do so.
22 - Recommendation of the ABA Model Procurement Code, § R12-202.01.
23 - BART Procurement Manual, Attachment B.
24 - Each grantee also should consult with its counsel before requiring annual financial disclosure statements to confirm that the requirement complies with any labor agreements applicable to the grantee.
25 - In large undertakings, this may involve multiple, related consulting, planning, design, technical oversight or technical evaluation contracts. Grantees can work with persons experienced in the field to decide how to segment the procurements and what restrictions to impose.
26 - 40 CFR § 1506.5. Note that if a contractor has a financial interest in the outcome of the proposed project, the contractor should inform the grantee of its interest. Under appropriate circumstances, the grantee may choose to waive the conflict of interest after careful consideration (see Discussion Section I).
27 - Los Angeles County Metropolitan Transportation Authority. Procurement Manual Section 908)(e).
28 - Ibid., Section 2314.
29 - Ibid., Section 407.5. Also San Francisco Bay Area Rapid Transit District (BART). Procurement Manual, Section II-7.
30 - FAR Section 9.202.
31 - Los Angeles County Metropolitan Transportation Authority. Procurement Manual, Section 407.5(1)(a).
32 - FAR, Section 9202(e).
33 - Many state laws require construction contracts to be awarded at a firm fixed price.
34 - It is important that the grantee's project budget reflect an allowance for any potential increase in volatile commodity prices (e.g., steel).
35 - The FAR price escalation clauses in FAR 52.216-2,3,4 include a maximum aggregate price increase of 10 percent; however, the FAR also gives the Contracting Officer latitude to increase this maximum percent if circumstances warrant.
36 - When using a steel escalation article, only the cost of material is escalated or deescalated and no other costs such as labor or machinery.
37 - FAR 52.216-7 - Allowable Cost and Payment.
38 - FAR 52.216-8 - Fixed Fee.
39 - FAR 52.216-8 - Fixed Fee.
40 - Advance agreements cannot provide for the allowability of costs that the cost principles have determined to be unallowable (e.g. interest).
41 - If a cost type subcontract is to be awarded by the prime, the subcontractor's accounting system must also be adequate.
42 - 10 U.S.C. 2306(a) and 41 U.S.C. 254(b).
43 - 46 Comp. Gen. 612 (B-159713) (1967).
44 - FTA has redrafted the paragraph related to progress payments to account for the practical reality that taking title to work in progress may not be desirable in some cases.
45 - Progress Payments in construction contracts may be made on a percentage of completion method in accordance with 49 CFR 18.21(d). This payment method may not be used in non-construction contracts.
46 - “Adequate security” should reflect the practical realities of different procurement scenarios and factual circumstances. For example, adequate security may consist of taking title to work in progress in a rolling stock procurement, receiving a draft document in a consulting contract, or receiving some portion of recurring services under a services contract. Grantees should always consider the costs associated with this security (e.g., bonds or letters of credit must be purchased in the commercial marketplace) and the impact those costs have on the contract price, as well as the consequences of incomplete performance as they consider what constitutes adequate security for a given procurement.
47 - The term progress payments does not apply to cost-type contracts, and is to be distinguished from advance payments, which are payments made before work begins (see BPPM section 18.104.22.168).
48 - Both of the conditions noted are almost always present on construction projects.
49 - FAR Clause 52.232-5 Payments Under Fixed-Price Construction Contracts.
50 - 49 CFR 18.21(d) authorizes the percentage of completion method for construction contracts only.
53 - Norair Eng'g. Corp., GSBCA 3539, 75-1 BCA, paragraph 11,062.
54 - Bailey v. Secretary of Labor, 819 F. Supp. 261 (D. Alaska 1993).
55 - FAR Clause 52.232-9.