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Commercial Item Subcontractor - CAP concerns


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We are a 3rd tier subcontractor with a FFP PO to supply a commercial item under a defense prime contract; we asserted commerciality, to which our customer agreed. We have a handful of milestone payments. We utilized part of our tooling costs to build a mock assembly of a sub component. The cost of the mock assembly is not insignificant but it’s less than 1% of the total PO value. There is no line item for, or mention of this mock assembly in our proposal, the specification, or the resulting PO. FAR  52.245-1 was not included in the final commercial item PO, but it would have been flowed-down if the contractor found the end item to be non-commercial. The PO is still active and performance ongoing. An internal team would like to scrap the mock assembly and utilize components for an unrelated, non-Government experimental/R&D effort. I’m concerned with this idea. Can we simply scrap the material and use at our discretion? Are there no risks to the potential future IP developments made using this material? Am I wrong to be concerned?

Thanks in advance!

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There should not be a problem, based on how you present the matter -- and yet, you are concerned?  What is the basis for your concern?

8 hours ago, Klara CM said:

We utilized part of our tooling costs to build a mock assembly of a sub component.

What is this "tooling costs" of which you speak?  Does your contract speak to tooling costs?

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Thanks @ji20874 for the response - my very simple response is I don't understand how this would be okay. I know I'm missing some key knowledge or understanding that makes this non-problematic -- I need the lightbulb moment. 

Our contract does not speak to tooling costs and there is not a specific milestone payment for tooling. There is nothing in the commercial contract terms which would transfer the title to anything over than the identified end items. I'm struggling to understand how Contractor Acquired Property is determined. 52.245-1 Government Property: "Contractor-acquired property means property acquired, fabricated, or otherwise provided by the Contractor for performing a contract, and to which the Government has title." 48 CFR § 45.402 - Title to contractor-acquired property: “(a) Title vests in the Government for all property acquired or fabricated by the contractor in accordance with the financing provisions or other specific requirements for passage of title in the contract. Under fixed-price type contracts, in the absence of financing provisions or other specific requirements for passage of title in the contract, the contractor retains title to all property acquired by the contractor for use on the contract, except for property identified as a deliverable end item. If a deliverable item is to be retained by the contractor for use after inspection and acceptance by the Government, it shall be made accountable to the contract through a contract modification listing the item as Government-furnished property.”  I don't understand what the "financing provisions" are - do they need to be specific to special tooling, is the term "financing provisions" defined elsewhere?

(1) Are the simple milestone payments (PO acceptance, LLTM order, Drawing Deliverable, Test Reports, Hardware) "financing provisions"? If so, does the "financing" need to be specifically tied to the fabrication of the mock assembly?

(2) And, likely going too far down the rabbit hole, if the outcome changes on the CID and it's overturned by the CO 52.245-1 and 252.225-7013 come back (flowdowns which applied to "Commercial Items" were designated with an "*"). Being a few layers removed, we don't have visibility into any conversations re: commerciality discussions of our deliverable. Concerns with 52.245-1 would be addressed once title is understood, but what about 252.227-7013 and any private developments made using the materials sourced under this contract? Is the GPR risk there? I suspect the risk is limited to the materials as-they-were at completion of mock assembly and before we began additional, private R&D. In this event we would need to maintain very clear development logs/records to demonstrate private expense. 

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1 hour ago, Klara CM said:

I don't understand how this would be okay.

Rather than talking about what you don't understand, can we talk about what you do understand?  What is the basis for your concern?

  • Are you concerned that your third-tier subcontract does not contain the clause at FAR 52.245-1, and maybe it should?
  • Are you concerned that you received a payment for special tooling?
  • Are you concerned that a higher-level contractor received a payment for special tooling?
  • Did a higher-level contractor deliver any property to you?  If so, was some portion of that property used to fabricate the tooling?
  • Does your third-tier subcontract, or any higher-level contract, mention the tooling as a deliverable?
  • Something else?

I know you might not be able to see the higher-level contracts, but you have a concern for some reason, and I am trying to explore the basis for your concern.

Based on what you wrote, I am not seeing a concern.  Your third-tier subcontract is fixed-price, does not involve Government property (or at least, does not include the Government Property clause), the tooling was not specified as a deliverable, and you didn't receive payment for the tooling.  If all of this is true, I think your colleagues are right -- you may scrap the material and use at your discretion.  If you think a higher-level contractor made a mistake in clause flow-down, or if you think the tooling constitutes Government property even though the Government Property clause is not in your subcontract, do you want to raise these questions with your second-tier subcontractor?

 

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13 hours ago, Klara CM said:

We are a 3rd tier subcontractor with a FFP PO to supply a commercial item under a defense prime contract; we asserted commerciality, to which our customer agreed. We have a handful of milestone payments. We utilized part of our tooling costs to build a mock assembly of a sub component. The cost of the mock assembly is not insignificant but it’s less than 1% of the total PO value. There is no line item for, or mention of this mock assembly in our proposal, the specification, or the resulting PO.

I agree completely with ji20874. If nothing in the P.O. says that tooling or assemblies become the property of the buyer, then tooling and assemblies are yours to do with as you please. Put FAR 52.245-1 out of your mind. You say it was not in the P.O., and I would not expect it to be in a subcontract for a commercial item without special approval.

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I agree with the above (FP, no GFP, tooling not a deliverable), with one caveat: I don't believe 52.245-1 requires special approval to go in a commercial item contract or subcontract. The prescription at 45.107(a)(1)(iii) states that it shall go in contracts awarded under part 12 where government property is furnished. The clause itself then says (at 52.245-1(b)(3)) that the contractor will insert it in subcontracts under which government property is furnished. It sounds like a straightforward application that doesn't require approval.

True, 52.245-1 is not listed in Part 12, but we've seen that there are others scattered throughout the FAR that still go in CI contracts via a separate prescription.

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14 hours ago, Klara CM said:

An internal team would like to scrap the mock assembly and utilize components for an unrelated, non-Government experimental/R&D effort. I’m concerned with this idea. Can we simply scrap the material and use at our discretion? Are there no risks to the potential future IP developments made using this material? Am I wrong to be concerned?

Intellectual property clauses such as the DFARS clauses you mention generally are focused on data rights. You did not mention any data your were concerned with relating to using the mock assembly parts and you did not indicate there were any other intellectual property rights clauses in your contract. In the event your customer seeks to add such a clause to your contract, to reduce or eliminate risk,you should negotiate to exclude any and all data related to mock assembly parts from the clause especially since the clause attempting to be negotiated was not present. However, the intellectual property area is tricky. Suggest you consult with an intellectual property attorney experienced in representing and advising contractors. 

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OK. Are you referring to 52.244-6(c)(2), which says the contractor may include other clauses as necessary? The point was simply that including 52.245-1 in a CI subcontract does not seem to require special approval. If it does, then OK, lesson learned. If it doesn't, let's not leave people with the impression it does.

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@Fara Fasat

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FAR 52.244-6... (c)(2) While not required, the Contractor may flow down to subcontracts for commercial items a minimal number of additional clauses necessary to satisfy its contractual obligations.

Maybe I should not have used the word "approval," if that's what's bothering you. Poor choice of word on my part. What a contractor or higher level sub puts into a commercial item subcontract is between the buyer and the seller. My bad.

Satisfied?

However, perhaps you'll acknowledge that the use of the word "may" in the clause seems to suggest that the government is saying that the contractor or higher tier subcontractor can add other clauses only under the specific circumstance.

As for including FAR 52.245-1 in commercial item prime contracts, see FAR 12.302, esp. paragraph (c). Is GFP a customary commercial practice?

 

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4 hours ago, Fara Fasat said:

True, 52.245-1 is not listed in Part 12, but we've seen that there are others scattered throughout the FAR that still go in CI contracts via a separate prescription.

Like what? I watch this pretty closely and the prescription at FAR 45.107(a)(1)(iii) is the only one that I know of that conflicts with the "Notwithstanding..." at FAR 12.301(d).

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Vern - it's not a matter of me being "satisfied." People come here for advice and to learn. If you say something needs special approval, they will accept it. As you well know, much time on this forum is spent in correcting inaccuracies. As for 12.302(c), that addresses tailoring. Nobody is talking about tailoring here. 52.245-1 is already prescribed for CI contracts at 45.107(a)(1)(iii). If a CO inserts it, he or she is not tailoring in violation of 12.302 and does not need a waiver to include it.

Don - yes there are. Here are a couple:

52.216-31, Time-And-Materials/Labor-Hour Proposal Requirements -- Commercial Item Acquisition. Nowhere in Part 12 or 52.212-5. The title itself says it applies to CI solicitations.

52.232-31, Invitation to Propose Financing Terms. Nowhere in Part 12 or 52.212-5. Yet it only applies to CI solicitations.

The BAA and TAA certificates (52.225-2, 50.225-4, and 52.225-6). The clauses themselves are listed in 52.212-5, but the certificates are not. The prescriptions for the certificates say they go in solicitations that include the clauses, so I would say you have to include them in any CI solicitation that has the BAA or TAA clauses, despite not being listed in Part 12.

And what do you make of 52.212-4(r), which goes in all CI contracts? This lists 7 laws that a contractor must comply with.  None of the clauses associated with those laws are listed in Part 12. Why just those 7, and why not just list the clauses in Part 12? To make it worse, a couple of them are on the 12.503 list of laws inapplicable to CI contracts, and a couple are not. Even better, the prescriptions for a couple say that they go in contracts other than for commercial items. Putting aside those inconsistencies, I suppose you could say that you don't need a clause to make a contractor comply with a law, you just need to name the law. Yet everything else is implemented with clauses. Otherwise, why not just scrap them all and have one clause that says the contractor must comply with all laws applicable to government acquisitions?

If I were to make a list of the clauses that a contractor had to comply with in a CI contract, I would include the clauses associated with those laws. Maybe they're not in Part 12, but they should be on your compliance checklist.

 

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1 hour ago, Fara Fasat said:

52.216-31, Time-And-Materials/Labor-Hour Proposal Requirements -- Commercial Item Acquisition. Nowhere in Part 12 or 52.212-5. The title itself says it applies to CI solicitations.

52.232-31, Invitation to Propose Financing Terms. Nowhere in Part 12 or 52.212-5. Yet it only applies to CI solicitations.

Forgot about those. Thanks.

 

1 hour ago, Fara Fasat said:

The BAA and TAA certificates (52.225-2, 50.225-4, and 52.225-6). The clauses themselves are listed in 52.212-5, but the certificates are not. The prescriptions for the certificates say they go in solicitations that include the clauses, so I would say you have to include them in any CI solicitation that has the BAA or TAA clauses, despite not being listed in Part 12.

These certificates are contained in FAR 52.212-3. There's no need to include them separately. 

 

1 hour ago, Fara Fasat said:

And what do you make of 52.212-4(r), which goes in all CI contracts?

That is weird. The Section 809 Panel questioned what was up with that in their report. From Vol. I, p. 34:

Quote

Of the 122 statutes that may be applicable to procurements of commercial products and services, eight are prescribed in FAR 52.212‐4, Contract Terms and Conditions – Commercial Item (January 2017), paragraph (r), Compliance with Laws Unique to Government Contracts. In FASA, Congress exempted certain laws from the requirement for a contract clause when procuring commercial items, but did not exempt commercial items from the requirement to comply with the statute, for example, 49 U.S.C. 40118, Fly American Requirements. It is unclear how exempting commercial contracts from a clause, but not the underlying statute, might relieve the burden of compliance on contractors selling commercial items.

 

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2 hours ago, Fara Fasat said:

Vern - it's not a matter of me being "satisfied." People come here for advice and to learn. If you say something needs special approval, they will accept it. As you well know, much time on this forum is spent in correcting inaccuracies. As for 12.302(c), that addresses tailoring. Nobody is talking about tailoring here. 52.245-1 is already prescribed for CI contracts at 45.107(a)(1)(iii). If a CO inserts it, he or she is not tailoring in violation of 12.302 and does not need a waiver to include it.

@Fara FasatThanks, Fara. Got the message. I'll be more careful in the future.

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Thanks Vern and Don.

Regarding the BAA and TAA certs - I overlooked 52.212-3. I actually keep a separate document with those in it but didn't go back and check it. There are so many bread crumbs to follow when dealing with the FAR that it's easy to forget some, and I did. Here's another thing about 212-3 that's a pain, but what can you do -- the reps and certs in it do not have clause numbers, just the name and text. I added the clause numbers to my reference document to help keep track of what and where.

And 212-4(r) - what a mess. Besides the contradictions I pointed out above, there's this: one of the laws listed is 18 U.S.C. 431 relating to officials not to benefit. Basically it says that contracts may not be awarded to members of Congress. I can find no associated clause, or even a section of the FAR that addresses it. And I'm not sure there's anything for a contractor to comply with. It looks like the only people affected are the awarding officer and the member of Congress. So why is it even in 212-4(r)?

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A huge thanks to all of you for your feedback - it is sincerely appreciated. I have put 52.245-1 out of my mind. When our customer (2nd tier subcontractor) approved our CID and issued a FAR Part 12 PO for the hardware, 52.245-1 was no longer included in our contract. Key takeaway as a subcontractor - stick to to terms as they are written, referenced, included in the agreement. Thank you again! 

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4 minutes ago, Fara Fasat said:

Glad it helped, although these discussions do often go off on tangents. 🤷‍♂️

I'm still genuinely interested in what a contractor is supposed to comply with in 18 USC 431. Anyone know?

Don’t sign on as a sub to or joint venture with a member of Congress. 

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On 4/29/2021 at 2:44 PM, Fara Fasat said:

I'm still genuinely interested in what a contractor is supposed to comply with in 18 USC 431. Anyone know?

Fara, there was a clause, FAR 52.203-1 Officials Not to Benefit, which was deleted at 60 Fed. Reg. 37773 July 21, 1995, as follows:

“FAR Case 94–802 originated because Section 6004 of Public Law 103–355 amended 41 U.S.C. 22 by repealing the requirement that ‘‘every contract or agreement’’ shall express the condition that certain officials shall not benefit from the award of that contract or agreement. The Government has expressed that condition in the form of FAR clause 52.203–1. Since there is no longer a statutory requirement to include such a clause in Government contracts, the clause has been deleted. In addition, in response to a public comment, the statements of policy found at FAR 3.102 through 3.102–2 have been deleted. The criminal provisions found at 18 U.S.C. 431 and 432 remain in effect.”

My draft contractor obligation to comply is an entity internal process/control as follows:

Our entity shall not submit a bid to the government for award of a contract or enter into a government contract in the event a member or delegate to Congress, or a resident commissioner is an official of our entity or has controlling interest in our entity, unless the U.S. Dept of Justice exempts such a bid or contract from 18 U.S.C. 431.

   

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On 5/1/2021 at 7:39 PM, Fara Fasat said:

Interesting. They got rid of it 25 years ago, and yet it resurfaces only in commercial item contracts.

41 U.S.C. 3307(e)(2)(B) requires a list to implement provisions of law to be included in contracts for the acquisition of end items that are commercial products. I believe 52.212-4 (r) is one of those.

There was an emphasis on commercial items in the Federal Acquisition Streamlining Act of 1994.

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