Third Party Contracting Requirements

DEPARTMENT OF TRANSPORTATION

Federal Transit Administration

[Docket No. 94-B]

Third Party Contracting Requirements

AGENCY: Federal Transit Administration, DOT.

ACTION: Notice of availability of Third Party Contracting Requirements,

Circular 4220.1C.

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SUMMARY: On September 7, 1994, the Federal Transit Administration (FTA)

published a Notice in the Federal Register announcing its decision to

revise its Third Party Contracting Guidelines, Circular 4220.1B, to

incorporate new provisions included in the Intermodal Surface

Transportation Efficiency Act of 1991 (Pub. L. 102-240,

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October 28, 1991) and to update and streamline third party procurements

made with FTA financial assistance. On December 19, 1994, FTA published

a Notice in the Federal Register extending the comment period to

January 18, 1995. This Notice announces the adoption and availability

of FTA's revised Circular 4220.1C, retitled ``Third Party Contracting

Requirements,'' and discusses changes FTA made as a result of comments

received in response to the two previous Notices.

EFFECTIVE DATE: FTA Circular 4220.1C is effective as of October 1,

1995.

FOR FURTHER INFORMATION CONTACT: Carolyn S. Thompson, Procurement

Analyst, Office of Procurement, (202) 366-5470. FTA will mail copies of

the Circular to all of its grantees. Other interested parties may

obtain a copy of the Circular by sending a self-addressed mailing label

to: Office of Procurement, Room 7405, 400 Seventh Street, S.W.,

Washington, D.C. 20590.

SUPPLEMENTARY INFORMATION:

I. Introduction

On September 7, 1994, FTA announced its intent to update its third

party procurement requirements in FTA Circular 4220.1B, ``Third Party

Contracting Guidelines,'' and solicited public comment (59 FR 46294).

On December 19, 1994, FTA extended the comment period until January 18,

1995, to allow interested parties additional time to comment (59 FR

65427).

FTA sought particular comment on two issues. First, FTA proposed to

continue its mandatory pre-award review and approval of certain

procurements to be made by FTA recipients. Second, FTA proposed to

continue to apply the revised circular to procurements made with

Federal operating assistance.

After reviewing the comments, FTA determined that most of the

difficulties faced by persons engaging in third party contracting

stemmed from uncertainty as to what procedures and policies were

required by Federal law and regulation and what procedures were

recommended but not mandatory. A related problem was the seemingly

haphazard way in which procurement information was disseminated to

grantees and contractors.

To resolve these difficulties, FTA has considered (1) whether it

should cancel Circular 4220.1B and simply require grantees to comply

with the Department of Transportation's ``Uniform Administrative

Requirements for Grants and Cooperative Agreements to State and Local

Governments,'' and ``Uniform Administrative Requirements for Grants and

Agreements with Institutions of Higher Education, Hospitals, and Other

Non-profit Organizations, 49 CFR Parts 18 and 19, respectively

(collectively, the common grant rules); (2) whether it should continue

to issue procurement alerts and oral guidance; (3) whether audits and

procurement system reviews are appropriate ways to ensure that grantees

understand FTA's third party contracting requirements; (4) whether it

should develop additional written guidance and training programs to

help grantees understand the applicable contracting requirements; and

(5) whether it should continue to require that grantees submit

extensive information for FTA's pre-certification and/or pre-award

review.

After review of the comments received, FTA has decided that its

third party contracting circular should contain only the minimum

requirements of the common grant rules, related Executive Orders, and

statutes, along with statements of FTA policy, and that provisions

interpreting the requirements and recommending practices should be

contained in a ``Third Party Procurement Manual,'' which would be

updated regularly. The revised Circular, FTA 4220.1C, has thus been

renamed ``Third Party Contracting Requirements.'' Consequently,

Circular 4220.1C is streamlined, straightforward, and much shorter than

its predecessor. The ``best practices'' manual, currently under

development, is to be supplemented by additional procurement training

for FTA staff and grantees.

For a detailed analysis of the changes reflected in the revised

Circular, see the following discussion.

II. Analysis and Comments

FTA received 52 comments in response to its Federal Register

Notices:

Transit Agencies................................................... 35

Cities and Counties................................................ 6

State DOTs......................................................... 3

Trade Associations................................................. 3

Private Businesses................................................. 3

Labor Unions....................................................... 1

Individual Citizens................................................ 1

A. Self-certification. FTA proposed to continue 4220.1B's self-

certification process whereby certain recipients are required to submit

a self-certification and summary description of their procurement

procedures. However, recognizing that 49 CFR Part 18 has been in place

for nearly a decade and that a reduction of process and paper is

desirable, FTA is establishing in Circular 4220.1C a new self-

certification process, applicable to all grantees, which does not

require submission of supporting documents. The certification will be

made through the ``Certifications and Assurances for FTA Assistance''

checklist, which is submitted to FTA at the beginning of each fiscal

year and updated and published annually in the Federal Register. In

place of reviewing written documents, FTA will verify compliance with

FTA's requirements through ``Triennial Reviews'' and ``Procurement

System Reviews,'' in which a grantee's procurement procedures are

reviewed on-site and in-depth.

B. Pre-award Review of Contracts. FTA proposed to continue to

review certain procurement contracts before grantee award to the

successful bidder. While the majority of commenters did not respond to

this proposal, one commenter argued persuasively that FTA should not

conduct pre-award reviews of third party contracts. This commenter

wrote that as a State agency it

operat[es] to a well established procurement law and regulations

that are based on the Model Procurement Code for State and Local

Governments. All procurements over $10,000, including sole source

and single bids, are subject to considerable public scrutiny and

public notice. Adding FTA review to such a process is totally

redundant and amounts to wasted resources on the part of FTA.

FTA agrees and has eliminated all routine pre-award reviews of

third party contracts in favor of periodic, post-grant reviews. Under

this new process, FTA may still conduct pre-award reviews if

appropriate in a given situation, and grantees may request such

reviews.

C. Multi-Year Contracting. FTA had proposed to add a provision

addressing ``multi-year contracts,'' a contracting method designed to

reduce costs by promising a contractor work over a number of years,

even though Federal funds are appropriated for only one year. This

technique is intended to save money by enabling the contractor to

amortize start-up costs and requiring the same price-per-unit over the

life of the contract. FTA further proposed to require an FTA recipient

to address the possibility of cancellation.

Commenters expressed some concerns and sought clarification. For

instance, one commenter noted that requiring constant unit prices over

the life of a contract would cause vendors to inflate their prices

during the early years of a multi-year contract. Another asked that the

term ``cancellation costs'' be clarified. This proposal has not been

adopted in Circular 4220.1C because it is not a mandatory requirement;

the use of ``multi-year contracts'' will be addressed in the ``Third

Party

[[Page 53453]]

Procurement Manual'' in which FTA will discuss the benefits of using

this process and include model contract clauses.

D. Bonding Requirements. FTA proposed two general bonding

requirements. For construction or facility improvement contracts or

subcontracts exceeding $100,000, a grantee could use its own bonding

policy if approved by FTA. If not approved by FTA, the grantee would be

required to obtain from contractors: (1) A bid guarantee equivalent to

5 percent of the bid price; (2) a performance bond for 100 percent of

the contract price; and (3) a payment bond for 50 percent of the

contract price for contracts less than $1 million, 40 percent of the

contract price for contracts between $1 million and $5 million, and

$2.5 million for contracts over $5 million. Although FTA did not

propose specific requirements regarding the use of bonds in non-

construction contracts, we discouraged their use.

The commenters who responded to this issue generally favored its

adoption. Thus, in 4220.1C, FTA addresses construction or facility

improvement contracts or subcontracts exceeding $100,000. Whether a

grantee requires bonds for non-construction contracts is a matter left

to local discretion. Guidance on this subject may be included in the

``Third Party Procurement Manual.''

E. Options. Although only one grantee commented on the proposal

regarding the use of options, we are aware that this is a controversial

issue. Instead of adopting this proposal, 4220.1C provides that if a

grantee chooses to use options, three requirements apply: (1) the

option must have been evaluated as part of the contract award

(otherwise it is a sole source procurement); (2) the option must be

exercised in accordance with contractual terms and conditions at the

time the contract is awarded; and (3) at the time it is exercised, the

option price must be determined to be the most advantageous for the

grantee. Moreover, FTA has removed the restriction that an option may

not be greater than 50 percent of the base line item quantity. The

discretion to determine option quantities will now reside with the

grantee.

F. Bid Protest Procedures. FTA will continue to review protests

alleging that a grantee failed to have written bid protest procedures

or to follow them. Grantee protest decisions must be in writing;

protests to FTA must be in writing and submitted within five working

days of the date the protester knew or should have known of the

violation. All other information which describes the process FTA will

follow in reviewing bid protests has been removed for reissuance, as

appropriate, in the ``Third Party Procurement Manual.''

G. Payment Provisions. Although FTA received only two comments

concerning the provisions addressing advance and progress payments, FTA

has decided to make the following changes. Under Circular 4220.1C,

advance payments may now be used if prior written concurrence-is

received from FTA. Progress payments may also be used as long as the

grantee obtains title to the property being constructed or acquired or

an equivalent security equal in value to the progress payment amount.

The use of progress payments is at the grantee's discretion.

H. Small Purchase Threshold. FTA did not propose raising the small

purchase dollar threshold because we were aware at the time that the

Office of Management and Budget (OMB) was considering such a change. In

the interim, the common grant rules have been changed to increase the

threshold. The Circular has been revised accordingly, and grantees may

raise their small purchase threshold to $100,000 if they wish.

I. General Services Administration (GSA) Federal Supply Schedule

(FSS). Although the proposal did not contain any provision regarding

the use of the FSS in procuring goods, FTA recipients have repeatedly

requested permission to use it. FTA supports this request and notes

that as soon as GSA has established the requisite procedures, eligible

grantees will be able to use them.

J. Operating Assistance. FTA had proposed to continue to require

recipients of operating assistance to apply the Circular to all

operating procurements. All but one commenter opposed the proposal. Due

to the complexity of the legal and policy issues surrounding this

particular requirement, no change has been made. FTA does intend,

however, to continue to study the issue to determine what, if any,

changes can be made consistent with the principles of Federalism and

the National Performance Review.

K. Commercial Services. FTA proposed a specific provision

applicable to the purchase of ``commercial services'' for the provision

of transit, maintenance, or management services. Commenters responding

to this proposal were uniformly opposed. One commenter, for example,

wrote that ``[t]he essential `make or buy' question--that is inherent

to any sound procurement process--by definition applies to both goods

and services.''

We agree with the commenters; a separate provision on the

procurement of ``commercial services'' is inappropriate and

unnecessary, since such procurements are covered by section 8 of

Circular 4220.1C entitled ``Competition,'' which requires that ``all

procurement transactions . . . be conducted in a manner providing full

and open competition.''

L. Attachment A. FTA proposed to identify and list all of the

statutes and regulations that address third party contracting issues.

Instead of adopting this proposal, however, FTA decided that recipients

should be referred to the ``Master Agreement,'' which contains a

comprehensive list of the requirements applicable to the FTA program,

including procurement. Unlike the Circulars, the ``Master Agreement''

is updated annually. Moreover, as mentioned above, FTA is developing a

``Third Party Procurement Manual'' which will give FTA recipients

detailed guidance on the applicability of various statutes and

regulations addressing third party contracting matters.

M. The Use of the Metric System. In our proposal, FTA ``encouraged

[grantees] to begin using the metric system of measurement * * * at the

earliest possible date in their procurements and other business

activities.'' Although grantees would be merely encouraged to use the

metric system, the commenters were adamantly opposed. Given FTA's

decision to focus on contracting requirements, this provision is not

included in Circular 4220.1C. FTA notes, however, that 49 U.S.C.

sections 205a et seq., E.O. 12770, ``Metric Usage in Federal Government

Programs,'' 15 U.S.C. section 205a, and the ``Master Agreement''

require the use of the metric system by 1997. FTA recipients should

note, however, that the use of the metric system is not required in

every instance; 49 CFR 19.44(a)(3)(v) exempts its use when not

``practicable and economically feasible.''

N. Architectural and Engineering Contracts. Although FTA has

reworded the provisions concerning the requirements for architectural

and engineering contracts, the basic requirements have not been

changed.

-Issued: October 10, 1995.

Gordon J. Linton,

Administrator.

[FR Doc. 95-25407 Filed 10-12-95; 8:45am]

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