Office of Federal Procurement Policy; Policy Letter on Subcontracting Plans for Companies Supplying Commercial Items

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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy; Policy Letter on

Subcontracting Plans for Companies Supplying Commercial Items

AGENCY: Executive Office of the President, Office of Management and

Budget (OMB), Office of Federal Procurement Policy (OFPP).

ACTION: OFPP is issuing a Policy Letter on ``subcontracting Plans for

Companies Supplying Commercial Items.''

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SUMMARY: Section 8(d) of the Small Business Act (15 U.S.C. 637(d)

requires that each contract that exceeds $500,000 ($1 million in the

case of construction), and that offers subcontracting opportunities,

include a requirement that the apparent successful offeror negotiate a

subcontracting plan which shall become a material part of the contract.

These requirements have been implemented by prior OFPP Policy Letters

and subsequent promulgation in the Federal Acquisition Regulation

(FAR).

Sections 8104 and 8203 of the Federal Acquisition Streamlining Act

of 1994 (FASA), Public Law 103-355, establish a preference for the

acquisition of commercial items. In establishing this preference,

Congress expressed concern that implementing policies ease the burden

of government-unique requirements for companies supplying commercial

items. In response to this concern, the policy on subcontracting plans

is being revised to reduce the burden of government-unique requirements

on contractors that supply commercial items.

This Policy Letter focuses on contracts and subcontracts for

``commercial items'' as defined in section 8001 of FASA. Annual

commercial subcontracting plans that relate to a company's commercial

and noncommercial production are authorized for:

(a) prime contracts for commercial items, or

(b) subcontractors that provide commercial items under a prime

contract, whether or not the prime contractor is supplying a commercial

item.

In addition, the Policy Letter states that commercial plans, when

authorized under the Policy Letter, shall be the preferred method of

compliance with the requirements of section 8(d) of the Small Business

Act. The policy letter reinforces that these provisions for

subcontracting plans for commercial item contractors do not in any way

relieve contracting officers, prime contractors or subcontractors of

their responsibilities for assuring that small, small disadvantaged,

and women-owned small businesses have the maximum practicable

opportunity to participate in contracts awarded by Federal agencies.

SUPPLEMENTARY INFORMATION: A proposed Policy Letter and request for

comments was published in the February 7, 1995 Federal Register (60 FR

7229). Forty-three comment letters were received in response to the

Federal Register notice, of which, 28 were from the private sector. A

summary of the more significant comments received and OFPP responses to

them follows:

1. Standard From 294

Many personnel from the private sector commented that this Policy

Letter would eliminate the Standard Form 294, a report that they

considered integral as an indication of a government contractor's

compliance with federal mandated small business and small disadvantaged

business subcontracting goals on a contract by contract basis. While

there will be some reduction in the submission of Standard Form 294 as

a result of this revised policy, it should be noted that there has been

a policy in place since 1980 that allows prime contractors supplying

commercial items to use commercial plans which eliminates the

requirement to submit the Standard Form 294. This policy was introduced

in OFPP Policy Letter 80-2, dated April 29, 1980. For the past fifteen

years, prime contractors supplying commercial items have not been

required to submit the Standard Form 294. The information has been

reported in summary through the Standard Form 295 (Summary Subcontract

Report). The new policy letter is drafted to reemphasize the FASA's

preference for the acquisition of commercial items. The Conference

Report (H.R. 103-712) recognized the specific authority already

provided in policy and subsequent regulation for commercial (e.g.,

corporation, company, division, plant, or product line) rather than

contract-by-contract subcontracting plans for subcontractors providing

commercial items. The report also noted that traditional business

practices by commercial manufacturers does not lend itself to unique

government related orders. Under OFPP policy, all other contract awards

not involving commercial items will require submission of

subcontracting plans on a contract-by-contract basis and the submission

of the Standard Form 294.

2. Liquidated Damages

Many personnel from the private sector commented that the Policy

Letter eliminates the liquidated damages penalty for government

contractors that refuse to comply with subcontracting goals. OFPP has

not eliminated the liquidated damages penalty; that language is

contained in the FAR and various OFPP Policy Letters. Additional

guidance on liquidated damages and the assessment of liquidated damages

is contained in the draft Policy Letter on Subcontracting Plans that is

being published concurrently with this Policy Letter.

3. Enforcement and Administration of Subcontracting Plans

Some personnel from both the government and private sector stated

that more guidance is needed on enforcement and administration of

subcontracting plans. We agree that the government needs to more

strongly administer and monitor subcontracting plans. In order to

emphasize that policy, we are publishing a draft Policy Letter on

Subcontracting Plans concurrently with this Policy Letter. The draft

Policy Letter on Subcontracting Plans especially focuses on the

contracting officer's responsibility to monitor the plan and list

methods that the contracting officer can use in considering whether a

good faith effort has been made.

4. Inconsistencies With Past Policy Letters

A few commentors stated that the Policy Letter is inconsistent with

past Policy Letters. We are adding language to this Policy Letter that

states that it supersedes any provision inconsistent with prior policy

letters. We are also publishing a draft Policy Letter on Subcontracting

Plans concurrently with this Policy Letter that, when issued in final,

will supersede and cancel OFPP Policy Letter 80-1, ``Public Law 95-507,

Section 211, Subcontracting: Agency Coordination with the Small

Business Administration Resident Procurement Center Representatives,''

dated January 24, 1980; OFPP Policy Letter 80-2, ``Regulatory Guidance

on Section 211 of Public Law 95-507,'' dated April 29, 1980; Supplement

No. 1 to Policy Letter 80-2, dated May 29, 1981; and OFPP Policy Letter

80-4, ``Women's Business Enterprise Program,'' dated April 29, 1980.

5. Classification of Commercial Items

Several commentors requested that OFPP develop a comprehensive list

of commercial items with appropriate product and service codes in order

to

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avoid confusion regarding what purchases qualify for the designation of

commercial items. OFPP feels that the definition of commercial items in

FASA and the corresponding implementing regulations provides sufficient

information on what constitutes a commercial item. The development of a

comprehensive list to be used by agencies would be time consuming,

inflexible, require constant updating, and impose micro-management.

DATES: The Policy Letter is effective 30 days from the date of

issuance. It directs that governmentwide regulations be promulgated to

implement the policies contained therein within 210 days from the date

this Policy Letter is published in the Federal Register.

FOR FURTHER INFORMATION CONTACT: William Coleman, Deputy Administrator,

202-395-3503 or Linda Mesaros, Deputy Associate Administrator, 202-395-

4821. The address is Office of Federal Procurement Policy, 725 17th

Street, NW, New Executive Office Building, Room 9001, Washington, DC

20503. To obtain a copy of this Policy Letter, please call the

Executive Office of the President's Publication Office at 202-395-7332.

Steven Kelman,

Administrator.

Policy Letter 95-1

To the Heads of Executive Departments and Establishments

Subject: Subcontracting Plans for Companies Supplying Commercial

Items

1. Purpose. The purpose of this Policy Letter is to establish

policies on the requirement for subcontracting plans for companies

supplying commercial items.

2. Authority. This Policy Letter is issued pursuant to section 6

of the Office of Federal Procurement Policy Act, as amended, 41

U.S.C. 405.

3. Definition. Commercial plan means a subcontracting plan

covering the offeror's fiscal year and which is applicable to the

entire production of commercial items sold by either the entire

company or portion thereof (e.g., corporation, company, division,

plant, or product line). As used in this Policy Letter, the term

``commercial item'' is a product of service that satisfies the

definition of commercial item in section 8001 of FASA (41 U.S.C.

403).

4. Background. Section 8(d) of the Small Business Act (15 U.S.C.

637(d)) requires that each contract that exceeds $500,000 ($1

million in the case of construction), and that offers subcontracting

opportunities, include a requirement that the apparently successful

offeror negotiate a subcontracting plan which shall become a

material part of the contract. The requirement for subcontracting

plans does not apply to small businesses. The above requirements

have been implemented by OFPP Policy Letter 80-2 ``Regulatory

Guidance on Section 211 of Public Law 95-507'' dated April 29, 1980,

and Supplement No. 1 dated May 29, 1981, and further implemented in

Part 19 of the Federal Acquisition Regulation (FAR). OFPP Policy

Letter 80-2 specifically authorized the use of an annual commercial

subcontracting plan that relates to the contractor's commercial and

noncommercial production when the government is acquiring a

commercial item.

Sections 8104 and 8203 of the Federal Acquisition Streamlining

Act of 1994 (FASA), Public Law 103-355, establish a preference for

the acquisition of commercial items by the Department of Defense and

civilian agencies. In establishing this preference, Congress

expressed concern that implementing policies ease the burden of

government-unique requirements for companies supplying commercial

items. The Conference Report (H.R. 103-712) recognizes the unique

circumstance faced by commercial contractors and the specific

authority already provided in regulation and policy for commercial

plans rather than contract-by-contract plans.

The report cites OFPP Policy Letter 80-2, FAR 52.219-9(g), and

519.704(b) of the General Services Administration Acquisition

Regulation which provide express authority for commercial plans. The

Report states:

``Because contractors and subcontractors offering commercial

items tend to rely on their existing network of suppliers rather

than entering new subcontracts to fill government orders, the

requirements applicable to the company-wide subcontracting plans of

commercial companies differ from the requirements applicable to

individual subcontracting plans of non-commercial companies. See

e.g. sections 519.704(c)(2), 519.705-5 and 519.705-6(b) of the GSA

FAR Supplement. For example, a single company-wide plan authorized

by these regulations is likely to address subcontracting

opportunities at both the prime contract and subcontract levels,

obviating the need for the filing of individual contract-by-contract

or subcontract-by-subcontract plans. Title VIII of the bill is not

intended to require any changes to such practices.'' (emphasis

added)

In response to this concern, the policy on subcontracting plans

is being revised to reduce the burden of government-unique

requirements on prime contractors and subcontractors that supply

commercial items.

5. Policy. The following policy applies governmentwide to

contracts and subcontracts for ``commercial items'' as defined in

section 8001 of FASA and implementing regulations:

(1) It is a fundamental policy of the Federal government that a

fair proportion of its contracts be placed with small businesses,

small businesses owned and controlled by socially and economically

disadvantaged individuals, and small businesses owned and controlled

by women and that such businesses participate in subcontracting

under government prime contracts.

(2) When the requirements for a subcontracting plan under

section 8(d) of the Small Business Act apply, annual commercial

subcontracting plans that relate to a company's commercial and

noncommercial production are authorized for:

(a) prime contracts for commercial items, or

(b) subcontractors that provide commercial items under a prime

contract, whether or not the prime contractor is supplying a

commercial item.

(3) Furthermore, it is the policy of the United States

Government that commercial plans, when authorized under this Policy

Letter, shall be the preferred method of compliance with the

requirements of section 8(d) of the Small Business Act. In all

solicitations expected to offer subcontracting opportunities which

trigger the requirements for a subcontracting plan, the Government

shall inform prospective offerors of the opportunity for themselves

and/or their subcontractors to develop commercial plans if they are

supplying commercial items. This would apply whether or not the

prime contractor is supplying a commercial item.

(4) This policy is in addition to the existing policies cited in

Section 3 of this Policy Letter. This Policy Letter supersedes any

provisions inconsistent with prior OFPP Policy Letters.

6. Contracting Officer Responsibilities. Contracting officers

shall ensure that:

(1) These provisions for subcontracting plans for commercial

item contractors do not in any way relieve contracting officers,

prime contractors or subcontractors of their responsibilities for

assuring that small, small disadvantaged and women-owned small

businesses have the maximum practicable opportunity to participate

in contracts awarded by Federal agencies.

(2) The use of a commercial subcontracting plan does not relieve

a contractor of the requirement to make a good faith effort to

comply with the requirements of the subcontracting plan.

(3) Contracting officers should impose liquidated damages as

applicable when contractors fail to comply with subcontracting

plans.

(4) When a contractor has a commercial plan previously approved

by another agency's contracting activity or another Federal agency

for the company's fiscal year, the contracting officer shall obtain

a copy of the plan and the approval document from the contractor.

These documents shall be incorporated into the contract.

(5) Since a commercial plan may be applicable to contracts

awarded by more than one contracting activity or Federal agency,

contracting officers must ensure that the commercial plan is not

allowed to expire prior to the negotiation of a new commercial plan.

This eventually may occur when the contract of the contracting

officer monitoring the plan is completed and no new contract is

awarded to that contractor during the contractor's fiscal year. To

prevent such an occurrence, 30 days prior to contract completion,

the contracting officer monitoring the commercial plan shall obtain

from the contractor the name of the contracting officer

administering the contract with the latest completion date and

arrange for the transfer of the monitoring responsibilities to that

contracting officer.

7. Regulatory Responsibilities. The Federal Acquisition

Regulatory Council shall ensure that the policies established herein

are

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incorporated in the FAR within 210 days from the date this Policy

Letter is published in the Federal Register. Promulgation of final

regulations within that 210 day period shall be considered issuance

in a ``timely manner'' as prescribed in 41 U.S.C. 405(b).

8. Information Contact. Questions regarding this Policy Letter

should be directed to William Coleman, Deputy Administrator, 202-

395-3505 or Linda Mesaros, Deputy Associate Administrator, 202-395-

4821, facsimile 202-395-5105. The address is Office of Federal

Procurement Policy, 725 17th Street, NW, Washington, DC 20503.

9. Judicial Review. This Policy Letter is not intended to

provide a constitutional or statutory interpretation of any kind and

it is not intended, and should not be construed, to create any right

or benefit, substantive or procedural, enforceable at law by a party

against the United States, its agencies, its officers, or any

persons. It is intended only to provide policy guidance to agencies

in the exercise of their discretion concerning Federal contracting.

Thus, this Policy Letter is not intended, and should not be

construed, to create any substantive or procedural basis on which to

challenge any agency action or inaction on the ground that such

action or inaction was not in accordance with this Policy Letter.

10. Effective Date. This Policy Letter is effective 30 days

after the date of issuance.

Steven Kelman,

Administrator.

[FR Doc. 95-23881 Filed 9-25-95; 8:45 am]

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