Expired September 30, 1999

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PIC 98-14

Procurement Information Circular


September 14, 1998

REFORM OF AFFIRMATIVE ACTION IN FEDERAL PROCUREMENT

PURPOSE: To provide information on the new FAR regulations on the reform of affirmative action in federal procurement.

BACKGROUND: On June 30, 1998, FAC 97-06 was published in the Federal Register as an interim rule. This FAC provides for the Department of Commerce (DOC) benchmarks that determine which procurement mechanisms Federal agencies may use for small disadvantaged business (SDB). The mechanism allowed by FAC 97-06 is a 0 percent-10 percent price evaluation adjustment to aid SDBs (DOC has determined that 10 percent is the percentage for FY 1999). This FAC is effective for all solicitations issued on or after October 1, 1998.

A second FAC, 97-07, was issued as an interim rule on July 1, 1998. It provides for two more SDB procurement mechanisms--a source selection evaluation factor or subfactor and subcontracting incentives (including award fee). This FAC is effective for all solicitations issued on or after January 1, 1999.

To better understand the FAR changes, a review of how and why they were developed is presented. A summary of the two FACs follows the background discussion.

EFFECTIVE DATE: This PIC is effective as dated and automatically expires on September 30, 1999, unless superseded or canceled.

HEADQUARTERS CONTACT: Christopher T. Jedrey, Code HK, (202) 358-0483, e-mail: cjedrey@hq.nasa.gov.

R. Scott Thompson

Director, Contract Management Division

Enclosure


Federal Acquisition Regulations (FAR)

Federal Acquisition Circulars (FAC) 97-06 and 97-07


On June 30, 1998, FAC 97-06 was published in the Federal Register as an interim rule. This FAC provides for the Department of Commerce (DOC) benchmarks that determine which procurement mechanisms Federal agencies may use for small disadvantaged business (SDB). The mechanism allowed by FAC 97-06 is a 0 percent-10 percent price evaluation adjustment to aid SDBs (DOC has determined that 10 percent is the percentage for FY 1999). This FAC is effective for all solicitations issued on or after October 1, 1998. A second FAC, 97-07, was issued as an interim rule on July 1, 1998. It provides for two more SDB procurement mechanisms --a source selection evaluation factor or subfactor and subcontracting incentives (including award fee). This FAC is effective for all solicitations issued on or after January 1, 1999.

To better understand the FAR changes, a review of how and why they were developed would be helpful. A background section has been prepared to provide this insight. A summary of the two FACs follows the background discussion.

The FACs are clear and to the point on most issues. However, some questions may arise and help is available. Call or e-mail Chris Jedrey at (202) 358-0483 (cjedrey@hq.nasa.gov) for assistance should it be necessary.

Background. The Supreme Court, in its June 1995 decision in the case of Adarand Constructors, Inc. v. Pena, stated that Federal programs which make race or ethnicity a factor in decision making are subject to a standard of "strict scrutiny." Under this standard, such programs (1) must serve a compelling Government interest and (2) must be narrowly tailored to further that interest. In rendering its decision, however, the Supreme Court did not find any specific Federal agency program or any statute authorizing such program to be unconstitutional - nor did the Court indicate that programs involving racial classifications could never satisfy strict scrutiny.

In May 1996, the Department of Justice (DOJ) published in the Federal Register (61 FR 26042 - 26063, May 23, 1996) for public comment a proposal for the reform of affirmative action in Federal procurement, designed to ensure compliance with the "strict scrutiny" standard. (DOJ's response to the over 1,000 comments received on the proposal was published May 1997 (62 FR 25648 - 25653, May 9, 1997)). The DOJ concept contains essentially four elements. They are:

(1) Benchmarks - The Department of Commerce, in consultation with GSA and SBA, will establish "benchmarks" for each 2-digit SIC Major Group. These benchmarks will represent the level of minority contracting one would reasonably expect to find in an industry absent discrimination or its effects and will provide the basis for comparison with actual minority participation in contracting in these industries. The purpose of comparing the actual utilization of minority firms against the benchmark is to determine when the effects of discrimination have been overcome and minority-owned firms can compete equally without the use of race-conscious programs. The benchmarks will be reviewed and adjusted periodically based on Department of Commerce data.

(2) Mechanisms for Increasing Minority Opportunity - Mechanisms to increase minority opportunities include: a price evaluation adjustment for SDBs; a non-price SDB participation evaluation credit; and monetary SDB subcontracting incentives (such as award fee and an incentive type similar to that found in FAR 52.219-10). The price evaluation adjustment involves adjusting upward by a specific percentage factor the bids/offers from other than SDBs (with certain exceptions). This adjustment is used for evaluation purposes. The non-price evaluation credit is somewhat similar to the practice frequently used in NASA acquisitions. The extent of proposed participation by SDBs in the performance of the contract - including teaming arrangements, joint ventures, and subcontracting - will be evaluated.

DOJ believes the use of these mechanisms would be sufficient to remedy persistent and substantial under utilization of SDB concerns in particular industries resulting from past or present discrimination. For this reason, the use of SDB set-asides is not included as an authorized mechanism. If, however, later reviews reflect continued "persistent and substantial under utilization" of SDBs in a given industry, then the use of SDB set-asides may be authorized.

(3) Interaction Between Benchmarks and Mechanisms -- Where the use of available tools, such as race-neutral outreach activities, result in minority participation below the benchmark in any given industry (i.e., 2-digit SIC Major Group), the Department of Commerce will authorize Federal procuring agencies to use prescribed mechanisms in acquisitions in that industry. Where minority participation is above the industry benchmark, the Department of Commerce may authorize the reduction or elimination of mechanisms after analyzing the projected effect of such action. (For example, would reduction or elimination of the mechanism likely result in minority participation again falling below the industry benchmark?) The Department of Commerce will publish, on an annual basis, by SIC Major Group the affirmative action mechanisms authorized and their effective dates for new solicitations for the coming year.

(4) SDB Eligibility and Certification - While a firm's representation as an SDB will be acceptable for statistical purposes, in order to receive a benefit under one of the mechanisms listed above, a firm will have to be certified as an SDB. Each firm seeking such certification will have to obtain, from an outside source approved by SBA, a certificate of "ownership and control." A firm must then receive a certification, based on SBA guidelines, that the individual(s) who owns and controls the concern is(are) socially and economically disadvantaged. (Members of certain groups will be presumed to be socially and economically disadvantaged, but such presumption is rebuttable.) SBA will maintain a listing of eligible SDBs.

Implementation by Federal Agencies. The following actions have been completed to implement the approach outlined above: (1) establishment of industry benchmarks by the Department of Commerce and determination of the specific mechanisms (i.e., price evaluation adjustment factors, non-price evaluation credits, and monetary incentives) authorized for use by industry category (63 FR 35714 dated June 30, 1998); (2) publication of two FAR interim rules (FACs 97-06 and 97-07 on June 30 and July 1, 1998, respectively) implementing the approach; and (3) publication of an SBA final rule containing SDB certification guidelines and procedures (63 FR 35726 and 63 FR 35767 dated June 30, 1998). Below is a summary of the two FACs referred to above.

SUMMARY OF FAC 97-06--PPRICE EVALUATION ADJUSTMENT

Effective October 1, 1998

This rule provides coverage pertaining to the use of one procurement mechanism benefiting SDBs, namely a price evaluation adjustment.

Subpart 19.2 has been revised to recognize DOC's responsibility to determine the benchmarks which are used to identify the Major SIC Groups (2 digit) for which SDB procurement mechanisms are applicable. DOC also determines the applicable factors (percentages) to be used in the price evaluation adjustment.

New FAR sections 19.304 and 19.305 have been added. FAR 19.304 provides instruction on verifying that SDBs have been certified by SBA and also provides a website (http://www.sba.gov) for that purpose (SBA certifications generally last 3 years). FAR 19.305 provides information on actions relating to the protest of an SDB's status.

Subpart 19.11 provides guidance on use of the price evaluation adjustment for SDBs. FAR 19.1102 states that this price adjustment mechanism shall be used in full and open procurements, when authorized by the DOC in a Major SIC group, but not small business set-asides, 8(a) set-asides or simplified acquisitions. In full and open competitions the DOC factor (percentage) is required to be applied to all non-SDB offers with certain exceptions listed in FAR 19.1103.

The SIC Major Groups and applicable percentage (it is 10 percent for FY 1999) was issued to the Centers on August 13, 1998. The SIC Major Group table of eligible industries for SDB procurement mechanisms is as follows.


Industries Eligible for SDB Procurement Mechanisms in Fiscal Year 1999

SIC

Description of SIC Major Group

10

Metal mining

12

Coal mining

13

Oil and gas extraction

14

Extraction of non-metallic minerals, except fuels

15

Building construction - General Contractors (ONLY when the place of performance is in the following states: AL, AR, IL, IN, KY, LA, MI, MS, NJ, NY, OH, OK, PA, TN, TX, and WI)

16

Heavy Construction, other than Buildings - Contractors (ONLY when the place of performance is in the following states: AL, AR, KY, LA, MS, OK, TN, and TX)

17

Construction - Special Trade Contractors (ONLY when the place of performance is in the following states: CT, IA, KS, MA, ME, MN, MO, NE, NH, ND, RI, SD, and VT)

22

Textile mill products

23

Apparel and other finished products made from fabrics

24

Lumber and wood products, except furniture

25

Furniture and fixtures

26

Paper and allied products

27

Printing, publishing, and allied industries

28

Chemicals and allied products

29

Petroleum refining and related industries

30

Rubber and miscellaneous plastics products

31

Leather and leather products

34

Fabricated metal products

36

Electronic and other electrical equipment and components, except computers

37

Transportation equipment

38

Measuring, analyzing, and controlling instruments; photographic, medical and optical goods; watches and clocks

39

Miscellaneous manufacturing industries

41

Local and suburban transit and interurban highway passenger transportation

42

Motor freight transportation and warehousing

44

Water transportation

46

Pipelines, except natural gas

47

Transportation services

48

Communications

49

Electric, gas, and sanitary services

50

Wholesale trade-durable goods

51

Wholesale trade-nondurable goods

52

Building materials, hardware, garden supply, and mobile home dealers


Industries Eligible for SDB Procurement Mechanisms in Fiscal Year 1999-Continued

53

General merchandise stores

54

Food stores

55

Automotive dealers and gasoline service stations

56

Apparel and accessory stores

57

Home furniture, furnishings, and equipment stores

58

Eating and drinking places

59

Miscellaneous retail

60

Depository institutions

61

Nondepository adjustment institutions

62

Security and commodity brokers, dealers, exchanges, and services

63

Insurance carriers

64

Insurance agents, brokers, and services

65

Real estate

67

Holding and other investment offices

70

Hotels, rooming houses, camps, and other lodging places

73

Business services

75

Automotive repair, services, and parking

76

Miscellaneous repair services

80

Health services

82

Educational services

87

Engineering, accounting, research, management, and related services

89

Miscellaneous services

It should be noted that FAR 15.503(a)(2) has been modified to include a requirement for preaward notices when a SDB receives a benefit based on its disadvantaged business status and is the apparent successful offeror.

SUMMARY OF FAC 97-07-OTHER SDB MECHANISMS

Effective January 1, 1999

This FAC provides for two mechanisms to benefit SDBs. First, a source selection evaluation factor or subfactor for planned SDB participation (19.1202) and secondly, monetary subcontracting incentives (19.1203). Additionally, the FAR will require that past performance of offerors in complying with targets for SDB participation and subcontracting plan goals be evaluated whenever past performance is evaluated (15.305(a)(2)(v)).

FAR 19.1202 fully describes the SDB evaluation factor or subfactor. It should be noted that an SDB offeror (who is proposing to be the prime contractor) may not receive both the price evaluation adjustment and credit in the evaluation factor or subfactor. Only one of these two mechanisms may be used and the offeror must decide. The contract clause at 52.219-23 provides for a waiver of the price evaluation adjustment. This mechanism is used in competitive negotiated acquisitions in a DOC authorized Major SIC group (see FY 1999 Authorized SDB Procurement Mechanisms Chart) expected to exceed $500,000 ($1,000,000 for construction). There are limited exceptions that are cited at FAR 19.1202-2(b).

FAR 19.1203 allows the contracting officer to provide for monetary incentives to encourage increased SDB subcontracting opportunities in the SIC Major Groups as determined by DOC (see FY 1999 Authorized SDB Procurement Mechanisms Chart). A contract clause at 52.219-26 has been added to provide for a monetary incentive (authorized percent between 0 and 10 percent), when a prime contractor's actual SDB subcontracting dollars exceed the target dollars. Note that this incentive clause is separate and distinct from the establishment, monitoring and enforcement of the subcontracting plan. In lieu of this incentive clause , the contracting officer may include an award fee provision.

SBA REGULATORY CHANGES OF INTEREST

SBA has modified its regulations at 13 C.F.R. as a result of the DOJ approach. The changes to SBA's regulations appear to have an effect on the SBA's Business Development Program. SBA, in its discretion, when the benchmarks limitations established by the DOC are exceeded, may: 1) stop accepting applications for 8(a) certification from concerns whose primary industry classification falls within that Major SIC Group (13 C.F.R 124.108(f)); 2) accelerate an 8(a) participants graduation within that SIC Major Group (13 C.F.R. 124.302(d)); 3) revise the business plans of participants (13 C.F.R. 124.403(d)); and 4) elect NOT to accept a requirement into the 8(a) Program (13 C.F.R. 124.504(d)).

The SBA regulations also provide guidance on what they will consider to be a SDB joint venture. The regulations at 13 C.F.R. 1002(f) provide specific requirements for what they will allow as an SDB joint venture. A few of these are:

  1. Must have a certified SDB (or have application pending) as a participant in the joint venture.
  2. Joint venture is only formed for a single, specific business venture.
  3. The SDB participant must be the managing venturer.

Other exclusions from the affiliation rules are in 13 C.F.R. 121.103(f).