DLA Acquisition Regulation; Type of Contracts

DEPARTMENT OF DEFENSE

Defense Logistics Agency

48 CFR Part 5416

DLA Acquisition Regulation; Type of Contracts

AGENCY: Defense Logistics Agency, DoD.

ACTION: Proposed rule and request for comments.

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SUMMARY: The Defense Logistics Agency proposes to add coverage by

adding a new part to 48 CFR Chapter 54, the Defense Logistics

Acquisition Regulation (DLAR) Part 5416. The proposed coverage affects

regulations on the use of solicitation provisions and contract clauses

for Economic Price Adjustments (EPA). Comments are hereby requested on

the proposed rule. The proposed DLAR coverage expands

[[Page 10827]] the use of EPA based on established prices to encompass

industry-wide and geographically based market price references, expands

the use of EPA based on indexes to encompass indexes for commercial

products or services which are identical or similar to the end products

to be provided under the contract, and authorizes the development and

use, subject to established agency review and approval procedures, of

clauses using EPA references described above. The proposed coverage is

being published because it is expected to have an effect beyond the

internal operating procedures of DLA and to provide an opportunity for

public participation and comment.

DATES: Comments on the proposed DLAR rule must be submitted in writing

to the address shown below on or before May 1, 1995, to be considered

in the formulation of the final rules.

ADDRESSES: Interested parties should submit written comments to Defense

Logistics Agency, Directorate of Procurement, Contract Policy Team

(AQPLL), Ms. Melody Reardon, Cameron Station, Alexandria, Virginia

22304-6100 FAX: (703) 274-0310.

FOR FURTHER INFORMATION CONTACT:

Melody Reardon, Defense Logistics Agency, AQPLL, (703) 274-6431.

SUPPLEMENTARY INFORMATION:

A. Background

The Defense Fuel Supply Center, a major contracting activity of

DLA, has historically utilized a method of price adjustment in the bulk

petroleum area using price indexes for the same or similar end products

(most recently, actual monthly sales price averages published by the

Department of Energy in the Petroleum Marketing Monthly) and using

market price assessments for commercial products published in industry

trade journals. For the past few years, these EPA clauses have either

been approved by the Director, Defense Procurement, or authorized under

individual deviations granted by the Executive Director, Procurement,

DLA. Deviations were requested because the types of EPA references used

in these clause are not specifically recognized under the three general

types of EPA references at FAR 16.203. Currently, FAR 16.203-1(a) and

its related coverage and clauses, recognize EPA references based on

established market or catalog prices of the individual contractor only.

The proposed DLAR coverage will expand this to include industry-wide

and geographically specific market price assessments and authorize the

development and use of clauses on that basis. FAR 16.203-1(c) and its

related coverage recognize EPA references based only on indexes for

labor or materials. The proposed DLAR coverage would expand this to

include indexes for the same or similar commercial end products and

authorize the development and use of clauses on that basis.

None of the three EPA types currently encompassed by the FAR are

appropriate for many of the competitive procurements of commercial

products undertaken by DFSC and other DLA contracting offices. The use

of an EPA reference based on an individual contractor's established

price or cost of materials is impractical for procurements under which

indefinite quantity contracts will be issued. Unique EPA references for

each offeror engender relative price variations during the delivery

period, making it impossible to determine the most favorable offer at

time of award. This creates a significant price risk for the Government

and undermines the competitive process. Use of an index based on raw

material cost ignores the effect of market conditions which affect

producer margins. This creates a price risk for the Government in

periods where margins are contracting and for the contractors in

periods where the margins are expanding. Such fluctuations can be

significant in petroleum markets. Given the need for a common EPA

reference, a reference that more closely follows market prices for the

end item reduces price risk for both the Government and the contractor.

Such references are also more in conformance with commercial practice.

B. Regulatory Flexibility Act

The proposed change is not expected to have significant economic

impact on a substantial number of small entities within the meaning of

the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. The primary user

of the new DLAR coverage will be the Defense Fuel Supply Center, which

has been utilizing these types of EPA references since the early 1980s.

The proposed rule will therefore not represent a change for small

entities doing business with the DFSC. Flexibility is also limited by

the need to establish a common EPA reference for competing offerors, as

discussed above. Given this need, establishing the reference based on

the same or similar end products as being provided under the contract,

as opposed to labor or material costs, minimizes the price risk

experienced by small entities. An initial regulatory flexibility

analysis has not been performed. Comments are invited from small

businesses and other interested parties. Comments will also be

considered concerning the effect of the proposed rule on small entities

in accordance with section 612 of the Act. Such comments must be

submitted separately and cite this case in correspondence.

C. Paperwork Reduction Act

The proposed rules do not impose any reporting or record keeping

requirements which require the approval of OMB under 44 U.S.C. 3501, et

seq.

List of Subjects in 48 CFR Part 5416

Government procurement.

Therefore, it is proposed that 48 CFR Chapter 54, as proposed in

the Federal Register (59 FR 21954, April 28, 1994) be amended by adding

part 5416 to read as follows:

PART 5416--TYPES OF CONTRACTS

Subpart 5416.2--Fixed Price Contracts

5416.203 Fixed-Price Contracts with Economic Price Adjustment

5416.203-1 Description

5416.203-3 Limitations

5416.203-4 Contract Clauses

Authority: 5 U.S.C. 301, 10 U.S.C. 2202, 48 CFR Part 1, subpart

1.3 and 48 CFR Part 201, subpart 201.3.

Subpart 5416.2--Fixed Price Contracts

5416.203 Fixed Price Contracts with Economic Price Adjustment

5416.203-1 Description.

(a)(S-90) Adjustments based on established prices. Established

prices may reflect industry-wide and/or geographically based market

price fluctuations for commodity groups, specific supplies or services,

or contract end items.

(c)(S-90) Adjustments based on cost indexes of labor or materials.

These price adjustments may also be based on increases or decreases in

indexes for commodity groups specific supplies or services, or contract

end items.

5416.203-3 Limitations.

(S-90) A fixed price contract with economic price adjustment may

also be used to provide for price adjustments authorized in this

section.

5416.203-4 Contract clauses.

(S-90) When the contracting officer determines that an existing EPA

clause is not appropriate, the contracting officer may develop and use

another EPA clause in accordance with 5416.203-1 (a)(S-90) or (c)(S-

90). Established prices in such clauses need not be verifiable using

the criteria in 48 CFR (FAR) 15.804-3. Established prices

[[Page 10828]] and cost indexes need not reflect changes in the costs

or established prices of a specific contractor. The established price

or cost index may be derived from sales prices in the marketplace,

quotes, or assessments as reported or made available in a consistent

manner in a publication, electronic database, or other form, by an

independent trade association, Governmental body, or other third party

independent of the contractor. More than one established price or cost

index may be combined in a formula for economic price adjustment

purposes in the absence of an appropriate single price or cost index.

Dated: February 15, 1995.

Margaret J. Janes,

Assistant Executive Director (Procurement Policy).

[FR Doc. 95-4574 Filed 2-27-95; 8:45 am]

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