Sign In
  • Question

    Several questions surfaced when the comments above when the letter from the contractor was received. 1. First issue was the contractors statement that they have eliminated the cost of an IP system from its FY10 Initial Production inventory. The contractor has reduced its progress payment billing to reflect the cost allocable to the contractor asset. We have not seen any evidence in the Progress Payments submitted that the contractor has taken the action stated above in regards to reducing its progress payment billings. The contractor has not stated to our office what the cost of a system is nor made any comments in progress payments what they have done to reduce its progress payment billings. Discusions with DFAS indicate that credits are not allowed on Progress Payments. Question: Do you concur with the statement made by the contractor about the ACO's implied approval? Reviewing the FAR and DFAR clauses cited by the contractor I cannot find anything to refute their statement. 2. If the contractor is allowed to transfer the material, under DFAR 232.503-15 this does not relieve the contractor of the requirement to do the following under the requirements of FAR 32.503-15 - which is: (1) Eliminate the costs allocable to the transferred property from the costs of contract performance, and (2) Repay or credit to the Government an amount equal to the unliquidated progress payments, allocable to the transferred property. 3. The prime contract is a rated contract. Question: since the prime contract is a rated contract (DOA7) and has an ACAT II rating, does FAR and DFAR take this into consideration in regards to the contractor taking assets/inventory from a Rated contract to transfer to their own use? Is the action of the contractor transferring assets/inventory from a Rated contract to their own use allowed under the Defense Priorities Allocation System (DPAS)? 4. The contract is slated to change from Progress Payments to Performance Based Payments when the UCA is definitized. Reviewing the FAR/DFARs for PBP I cannot find any thing which gives the contractor "implied" approval for transfer of material regardless if they have an approved MMAS or not. FAR 52.232-32 (d)(5)states that the contracting offcer must first give advance approval of the action and the terms. Question: Is there something in the FAR that grants "implied" approval e. g. ACO approval of the contractors MMAS, to transfer material under the PBP clause for their own use?


    Answer

    1. The references quoted below in pertinent part are applicable to this response.

    References applicable to Questions #1 and #2

    FAR 32.503-15 -- Application of Government Title Terms
    (d) When the title to materials or other inventories is vested in the Government under the Progress Payments clause, the contractor may transfer the inventory items from the contract for its own use or other disposition only if, and on terms, approved by the contracting officer. The contractor shall --
      (1) Eliminate the costs allocable to the transferred property from the costs of contract performance, and
      (2) Repay or credit to the Government an amount equal to the unliquidated progress payments, allocable to the transferred property.

    FAR 52.232-16 -- Progress Payments
    (c) Reduction or suspension. The Contracting Officer may reduce or suspend progress payments, increase the rate of liquidation, or take a combination of these actions, after finding on substantial evidence any of the following conditions:
      (1) The Contractor failed to comply with any material requirement of this contract (which includes paragraphs (f) and (g) below).

    (d) Title
      (5) To acquire for its own use or dispose of property to which title is vested in the Government under this clause, the Contractor must obtain the Contracting Officer’s advance approval of the action and the terms. The Contractor shall
      (i) exclude the allocable costs of the property from the costs of contract performance, and
      (ii) repay to the Government any amount of unliquidated progress payments allocable to the property. Repayment may be by cash or credit memorandum.

    (g) Reports and access to records.
      (1) The Contractor shall promptly furnish reports, certificates, financial statements, and other pertinent information (including estimates to complete) reasonably requested by the Contracting Officer for the administration of this clause. Also, the Contractor shall give the Government reasonable opportunity to examine and verify the Contractor’s books, records, and accounts.

    DFARS 232.503-15 -- Application of Government title terms
    (d) An administrative contracting officer (ACO) determination that the contractor's material management and accounting system conforms to the standard at 252.242-7004(e)(7) constitutes the contracting officer approval requirement of FAR 32.503-15(d). Prior to granting blanket approval of cost transfers between contracts, the ACO should determine that—
      (i) The contractor retains records of the transfer activity that took place in the prior month;
      (ii) The contractor prepares, at least monthly, a summary of the transfer activity that took place in the prior month; and
      (iii) The summary report includes as a minimum, the total number and dollar value of transfers.

    DFARS 252.242-7004 – Material Management and Accounting System (Jul 2009) 
    [Assume that the contract contains this version of the clause versus the Apr 2011 version].

    (b) General. The Contractor shall—
    (2) Assess its MMAS and take reasonable action to comply with the MMAS standards in paragraph (e) of this clause.

    (d) Deficiencies.
    (3) When the ACO determines the MMAS deficiencies have a material impact on Government contract costs, the ACO must reduce progress payments by an appropriate percentage based on affected costs (in accordance with FAR 32.503-6) and/or disallow costs on vouchers (in accordance with FAR 42.803) until the ACO determines that-- (i) The deficiencies are corrected; or (ii) The amount of the impact is immaterial.

    (4) If the Contractor fails to make adequate progress, the ACO must take further action. The ACO may— (i) Elevate the issue to higher level management; (ii) Further reduce progress payments and/or disallow costs on vouchers; (iii) Notify the Contractor of the inadequacy of the Contractor’s cost estimating system and/or cost accounting system; and (iv) Issue cautions to contracting activities regarding the award of future contracts.

    (e) MMAS standards. The MMAS shall have adequate internal controls to ensure system and data integrity, and shall--
    (4) Provide audit trails and maintain records (manual and those in machine readable form) necessary to evaluate system logic and to verify through transaction testing that the system is operating as desired;

    (5) Establish and maintain adequate levels of record accuracy, and include reconciliation of recorded inventory quantities to physical inventory by part number on a periodic basis. A 95 percent accuracy level is desirable.

    (7) Maintain a consistent, equitable, and unbiased logic for costing of material transactions as follows:
      (i) The Contractor shall maintain and disclose written policies describing the transfer methodology and the loan/pay-back technique.
      (ii) The costing methodology may be standard or actual cost, or any of the inventory costing methods in 48 CFR 9904.411-50(b). The Contractor shall maintain consistency across all contract and customer types, and from accounting period to accounting period for initial charging and transfer charging.
      (iii) The system should transfer parts and associated costs within the same billing period. In the few instances where this may not be appropriate, the Contractor may accomplish the material transaction using a loan/pay-back technique. The “loan/ pay-back technique” means that the physical part is moved temporarily from the contract, but the cost of the part remains on the contract. The procedures for the
    loan/pay-back technique must be approved by the ACO. When the technique is used, the Contractor shall have controls to ensure— (A) Parts are paid back expeditiously; (B) Procedures and controls are in place to correct any overbilling that might occur; (C) Monthly, at a minimum, identification of the borrowing contract and the date the part was borrowed; and (D) The cost of the replacement part is charged to the borrowing contract;

    References applicable to Question #3

    FAR 52.211-15 -- Defense Priority and Allocation Requirements
    This is a rated order certified for national defense, emergency preparedness, and energy program use, and the Contractor shall follow all the requirements of the Defense Priorities and Allocations System regulation (15 CFR 700).

    CFR Title 15, Part 700 – Defense Priorities and Allocations System
    15 CFR § 700.14 – Preferential scheduling
    (a) A person must schedule operations, including the acquisition of all needed production items, in a timely manner to satisfy the delivery requirements of each rated order. Modifying production or delivery schedules is necessary only when required delivery dates for rated orders cannot otherwise be met.

    (b) DO rated orders must be given production preference over unrated orders, if necessary to meet required delivery dates, even if this requires the diversion of items being processed or ready for delivery against unrated orders. Similarly, DX rated orders must be given preference over DO rated orders and unrated orders.

    15 CFR § 700.7 – Compliance
    (a) Compliance with the provisions of this regulation and official actions is required by the Defense Production Act and the Selective Service Act and related statutes. Violators are subject to criminal penalties.

    (b) Any person who places or receives a rated order should be thoroughly familiar with, and must comply with, the provisions of this regulation.

    References applicable to Question #4

    FAR Subpart 32.10 -- Performance-Based Payments
    FAR 32.1009 -- Title.
    (a) Since the clause at 52.232-32, Performance-Based Payments, gives the Government title to the property described in paragraph (f) of the clause, the contracting officer shall ensure that the Government title is not compromised by other encumbrances. Ordinarily, the contracting officer, in the absence of reason to believe otherwise, may rely upon the contractor’s certification contained in the payment request.

    (b) If the contracting officer becomes aware of any arrangement or condition that would impair the Government’s title to the property affected by the Performance-Based Payments clause, the contracting officer shall require additional protective provisions.

    (c) The existence of any such encumbrance is a violation of the contractor’s obligations under the contract, and the contracting officer may, if necessary, suspend or reduce payments under the terms of the Performance-Based Payments clause covering failure to comply with a material requirement of the contract. In addition, if the contractor fails to disclose an existing encumbrance in the certification, the contracting officer should consult with legal counsel concerning possible violation of 31 U.S.C. 3729, the False Claims Act.

    FAR 52.232-32 -- Performance-Based Payments (Aug 2010)
    (f) Title.
      (5) In order to acquire for its own use or dispose of property to which title is vested in the Government under this clause, the Contractor shall obtain the Contracting Officer’s advance approval of the action and the terms. If approved, the basis for payment (the events or performance criteria) to which the property is related shall be deemed to be not in compliance with the terms of the contract and not payable (if the property is part of or needed for performance), and the Contractor shall refund the related performance-based payments in accordance with paragraph (d) of this clause.

    DFARS Subpart 232.10 -- Performance-Based Payments
    DFARS 232.1001 -- Policy.
    (d) The contracting officer shall use the following standard prompt payment terms for performance-based payments: The contractor entitlement date, if any, specified in the contract, or 14 days after receipt by the designated billing office of a proper request for payment, whichever is later.

    DFARS 232.1004 -- Procedure.
    (c) Instructions for multiple appropriations. If the contract contains foreign military sales requirements, the contracting officer shall provide instructions for distribution of the contract financing payments to each country’s account.

    2. Response to Question: Do you concur with the statement made by the contractor about the ACO's implied approval? [Items 1 & 2].  Based on the title provisions of the Progress Payments clause as specified in FAR 32.503-15(d) and in clause FAR 52.232-16(d)(5), it is true that the contractor may transfer the inventory items from the contract for its own use or other disposition only if, and on terms, approved by the Contracting Officer. However, pursuant to the application of these Government title terms as implemented in DFARS 232.503-15(d), it is also true that, as long as the ACO has approved the contractor’s Material Management and Accounting System (MMAS) as conforming to the standards specified in clause DFARS 252.242-7004(e)(7), then such ACO approval of the contractor’s MMAS does, in fact, constitute the express (versus implied) approval of the Contracting Officer for the transfer inventory items from the contract for the contractor’s own use or other disposition.

    3. However, notwithstanding the fact that the contractor may have an approved MMAS, any blanket approval of material transfers is still contingent upon the continued compliance of the contractor’s “approved” MMAS with the requirements as set forth in clause DFARS 252.242-7004; namely, the MMAS standards specified in paragraph (e) of this clause.  Additionally, pursuant to this clause and clause FAR 52.232-16(g), the MMAS must also provide adequate information to the ACO to determine whether the contractor is actually adjusting progress payment billing requests downward pursuant to FAR 52.232-16(d)(5) to provide for repayment to the Government any amount of unliquidated progress payments allocable to any property that is transferred from the contract for the contractor’s own use or other disposition.  If this information is not being provided to the ACO, then the contractor’s “approved” MMAS may have become deficient. 

    4. If so, then pursuant to DFARS 252.242-7004(d)(3), the ACO must reduce progress payments by an appropriate percentage based on affected costs in the MMAS deficiencies that have a material impact on Government contract costs. Incidentally, the Contracting Officer may also reduce or suspend progress payments pursuant to clause FAR 52.232-16(c) if the contractor is not complying with a material contract requirement to provide the ACO with the associated reports and access to records as required by FAR 52.232-16(g) that address the situation described in this inquiry. Furthermore, pursuant to DFARS 252.242-7004(d)(4), the ACO is required to take further action if the contractor fails to make progress toward curing any MMAS deficiencies.  While not expressly stated in this citation, we believe that such action could include withdrawal of the contractor’s MMAS approval by the ACO until contractor cures any deficiencies. Based on the above, we believe that the ACO has sufficient rights under the contract terms to enforce compliance with the material transfer requirements described above.

    5. Response to Question: Since the prime contract is a rated contract (DOA7) and has an ACAT II rating, does FAR and DFARS take this into consideration in regards to the contractor taking assets/inventory from a Rated contract to transfer to their own use? [Item 3].  The requirements for contractor compliance with the Defense Priorities and Allocations System are specified in FAR 52.211-15 which incorporates the Defense Priorities and Allocations System (DPAS) regulation (15 CFR 700) by reference.  Our review of the DPAS regulation indicates that the only requirement that addresses the transfer of assets/inventory from a Rated contract for the contractor’s own use or other disposition, and only indirectly, is stated in 15 CFR § 700.14 pertaining to preferential scheduling.  Under this section, a company in receipt of a rated order must schedule operations, including the acquisition of all needed production items (e.g., any required assets/inventory), in order to satisfy the delivery requirements of each rated order. Companies are required to reschedule unrated orders if they conflict with performance against a rated order and must reschedule “DO” rated orders if they conflict with performance against a “DX” rated order. Therefore, as long any action to transfer inventory items from the Rated contract to the contractor’s own use does not cause a slip in, or otherwise jeopardize, the delivery schedule of the Rated contract, then there would be no prohibition in the DPAS regulation on such transfers of material. However, if such action were to cause a delay in the delivery schedule of the Rated contract, then the contractor could be subject to criminal penalties under the regulation.  Finally, to the best of our knowledge, neither the FAR nor the DFARS has any provisions that take an ACAT II program rating into consideration with regard to assets/inventory transfers from a Rated contract to the contractor’s own use.
     
    6. Response to QuestionIs there something in the FAR that grants "implied" approval, e.g. ACO approval of the contractors MMAS, to transfer material under the PBP clause for their own use? [Item 4]. The FAR provisions governing title specified at FAR 32.1009, the DFARS policy specified at DFARS 232.1001(d) and procedure specified at DFARS 232.1004(c), all pertaining to the use of Performance Based Payments, are quoted above in their entirety. In contrast to DFARS 232.503-15(d) for Progress Payments, neither FAR 32.1009 nor the DFARS policy and procedure governing Performance Based Payments provide for the automatic ACO approval for the contractor to acquire for its own use or dispose of property to which title is vested in the Government, even if the contractor has an approved MMAS. Pursuant to FAR 52.232-32(f)(5), in order to acquire for its own use or dispose of property to which title is vested in the Government under that clause, the Contractor must obtain the Contracting Officer’s advance approval for each individual action and the terms when Performance Based Payments are used ― no exceptions. Therefore, there is nothing in the FAR or DFARS that grants any express or implied “automatic” ACO approval under the PBP clause authorizing the transfer of material from the contract for the contractors use.


    Open full Question Details