**Procuring Goods and Services Using Community**

**Access Program Grant Funds**[^1]

Prepared for the Health Resources and Services Administration

*by:*

Feldesman, Tucker, Leifer, Fidell & Bank LLP

*with the assistance of:*

Powell, Goldstein, Frazer & Murphy LLP

July 27, 2001

**I. INTRODUCTION AND EXECUTIVE SUMMARY**

The Community Access Program ("CAP") affords public and non-profit
health care providers an opportunity to establish and support improved
integrated health care delivery systems serving the uninsured and
underinsured within their communities. As a result of the program,
providers across the country are developing much needed infrastructure
to improve the quality and efficiency of primary and specialty health
care services and expand access to these services through ambitious
plans that typically involve additional services in areas such as case
management, outreach and the integration of information systems. In
almost every instance, CAP consortia are entering into sizeable and
long-term contracts for goods and services that will allow them to
accomplish their goals under the program.

This issue brief outlines the federal requirements that must be observed
when a CAP consortium procures goods or services for its use which are
paid for with CAP grant funds. In particular, Section II of this issue
brief discusses the general, administrative and contractual requirements
set forth in Office of Management and Budget Circulars A-110 and A-102,
which are applicable to non-profit organizations and to State and local
governments, respectively, when procuring goods and services with
federal grant funds. Additional requirements, discussed in Section II-D,
apply when procurements are expected to exceed \$100,000.

Section III of the issue brief looks beyond the specific requirements of
the federal procurement standards and discusses terms and conditions
that, as a matter of good practice, ought to be included in any contract
for goods and services. This Section focuses on elements that generally
make up a "sound and complete" contract, as is required under the
applicable federal procurement standards.

In recognition of the many CAP consortia that feature an electronic
exchange of information among their members, this issue brief concludes
in Section IV with a discussion of some of the special considerations
that are relevant to the procurement of information system hardware and
software. Issues addressed in this Section include bids and proposals,
warranties, indemnification, customizations, software licensing
agreements and maintenance agreements.

**II. FEDERAL PROCUREMENT STANDARDS**

The federal government has established certain requirements that grant
recipients must adhere to when procuring goods or services paid for with
federal grant funds. These requirements apply when the cost of the item
or service procured is treated as a direct cost of the grant award,
*e.g.*, consultant contracts, equipment purchases.[^2] The requirements
are published by the Office of Management and Budget ("OMB") in Circular
A-110 for non-profit organizations and in Circular A-102 for State and
local governments. The Department of Health and Human Services ("DHHS")
has implemented these circulars in regulations codified at 45 C.F.R.
Part 74 (nonprofit organizations) and at 45 C.F.R. Part 92 (State and
local governments). These regulations contain the minimum administrative
and procedural standards that grantees must follow when procuring goods
and services with federal grant funds, and mandate that all procurement
contracts contain certain clauses. Additional requirements apply when
the procurement is expected to exceed \$100,000 in value.

The following is an outline of the basic federal procurement
requirements. CAP grantees are advised to consult the Part 74 or Part 92
regulations, as appropriate, for information concerning specific
procurement issues.

**A. General Requirements**

Grantees must comply with the following requirements for all
procurements paid for with federal grant funds:

> 1\. The procurement must be conducted in a manner to provide, to the
> maximum extent practical, open and free competition. Part 92,
> applicable to State and local governments, sets forth some of the
> situations considered to be restrictive of competition:
>
> \(i\) Placing unreasonable requirements on firms in order for them to
> qualify

to do business;

> \(ii\) Requiring unnecessary experience and excessive bonding;
>
> \(iii\) Noncompetitive pricing practices between firms or between
> affiliated companies;
>
> \(iv\) Noncompetitive awards to consultants that are on retainer
> contracts;
>
> \(v\) Organizational conflicts of interest;
>
> \(vi\) Specifying only a "brand name" product instead of allowing "an
> equal" product to be offered and describing the performance of other
> relevant requirements of the procurement; and
>
> \(vii\) Any arbitrary action in the procurement process.
>
> In contrast, Part 74, which is applicable to non-profit organizations,
> does not provide examples of situations that are considered
> restrictive of competition. Nevertheless, non-profit organizations
> should follow this guidance because these situations are often cited
> to define what is not "open and free competition," a requirements for
> procurements under Part 74.
>
> 2\. Awards must be made to the bidder or offeror whose bid or offer is
> responsive to the solicitation and is most advantageous to the grant
> recipient, price, quality and other factors considered.
>
> 3\. Solicitations must clearly set forth all requirements that the
> bidder or offeror must fulfill in order for the bid or offer to be
> evaluated by the grant recipient.
>
> 4\. Contractors that develop or draft grant applications, or contract
> specifications, requirements, statements of work, invitations for bids
> and/or requests for proposals, cannot compete for those procurements.
>
> 5\. Some form of cost or price analysis must be made and documented in
> the procurement files in connection with *every* procurement action.
> (Price analysis may include comparison of prices submitted, market
> prices, and similar indicia, together with discounts. Cost analysis
> means the review of each element of cost in terms of reasonableness,
> allocability, and allowability under federal cost standards.)
>
> 6 The grant recipient may reject any and all bids or offers when it is
> in the recipient's best interests to do so.
>
> 7\. Recipients are expected to be alert to organizational conflicts of
> interest and noncompetitive practices among contractors that may
> restrain trade.

**B. Administrative Requirements**

The procurement standards require grantees to have certain policies and
administrative procedures in place for all procurements. These include:

1\. *Written* procurement procedures that, at a minimum, provide for:

> a\. avoiding the purchase of unnecessary or duplicative items;
>
> b\. where appropriate, an analysis of lease and purchase alternatives
> to determine which would be most economical and practical for the
> recipient and the federal government;
>
> c\. solicitations for goods and services that contain:
>
> \(1\) a clear and accurate description of the requirements for the
> material, products or service to be procured which, with respect to
> competitive procurement, may not unduly restrict competition;
>
> \(2\) requirements that the bidder/offeror must fulfill and all other
> factors to be used in evaluating bids or proposals;
>
> \(3\) whenever practical, a description of technical requirements in
> terms of functions to be performed or performance required, including
> the range of acceptable characteristics or minimum acceptable
> standards;
>
> \(4\) the specific features of "brand name or equal" descriptions that
> bidders are required to meet when such items are included in the
> solicitation;
>
> \(5\) acceptance, to the extent feasible, of products and services
> dimensioned in the metric system of measurement;
>
> \(6\) preference, to the extent practicable and economically feasible,
> for products and services that protect the environment, conserve
> natural resources, and are energy efficient.
>
> d\. as to State and local governments only, written procurement
> procedures must also provide for obtaining more economical purchases
> through the consolidation or breaking out of purchases.
>
> 2\. Recipients are expected to make "positive efforts" to utilize
> small businesses, minority-owned firms, and women's business
> enterprises, whenever possible. Recipients are required to take *all*
> of the following steps toward this goal:
>
> a\. ensure that small businesses, minority-owned firms, and women's
> business enterprises are used "to the fullest extent practicable;"
>
> b\. make information on forthcoming opportunities available and
> arrange time frames for purchases and contracts to encourage and
> facilitate participation by small businesses, minority-owned firms,
> and women's business enterprises;
>
> c\. consider in the contracting process whether firms competing for
> larger contracts intend to subcontract with small businesses,
> minority-owned firms, and women's business enterprises;
>
> d\. encourage contracting with consortiums of small businesses,
> minority-owned firms, and women's business enterprises when a contract
> is too large for one of these firms to handle individually; and
>
> e\. use the services and assistance, as appropriate, of the Small
> Business Administration and the Minority Business Development Agency
> in the solicitation and utilization of small businesses,
> minority-owned firms, and women's business enterprises.
>
> 3\. Recipients must use the type of procuring instrument (*e.g.*,
> fixed price or cost reimbursable contracts, purchase orders, incentive
> contracts) appropriate to the particular procurement and for promoting
> the best interests of the project involved. "[Cost-plus" contracts may
> not be used]{.underline}. The federal cost principles (*i.e.*, OMB
> Circular A-87 or OMB Circular A-122) govern what costs are allowable
> under cost-type contracts.
>
> 4\. Contracts may be made only with responsible contractors who
> possess the potential ability to perform successfully under the terms
> and conditions of the proposed procurement. This requires
> consideration of contractor integrity, record of past performance,
> financial and technical resources or accessibility to other necessary
> resources. Contracts cannot be made with contractors suspended or
> debarred from participating in federal contracts or awards.
>
> 5\. Grant recipients must make available to the DHHS awarding agency,
> upon request, for pre-award review procurement documents such as
> requests for proposals ("RFP"), independent cost estimates, *etc*., if
> the recipient's procurement procedures fail to comply with the federal
> procurement standards.
>
> 6\. Recipients must maintain a system of contract administration that
> ensures contractor conformance with the terms, conditions, and
> specifications of the contract. Recipients must evaluate contractor
> performance and document, where appropriate, whether contractors have
> met the terms and conditions of the contract.
>
> 7\. Recipients must maintain "written standards of conduct" governing
> employees engaged in the award or administration of contracts. An
> organization's standards of conduct must have the following features:
>
> a\. employees, officers, or agents may not participate in the
> selection, award, or administration of a contract if a real or
> apparent conflict of interest exists, *e.g.*, the individual or any
> member of their immediate family, his or her partner, or any
> organization that employs or is about to employ any of the foregoing
> has a financial or other interest in the firm selected for the award.
> However, the recipient may set standards for situations in which the
> financial interest is not substantial.
>
> b\. officers, employees, and agents of the recipient may not solicit
> or accept gratuities, favors, or anything of monetary value from
> contractors or subcontractors. However, a recipient can set standards
> permitting acceptance of unsolicited items of nominal value.
>
> c\. the written standards of conduct must provide for disciplinary
> actions for violations of the standards. Part 92 further provides that
> the awarding agency may provide additional prohibitions relative to
> real, apparent, or potential conflicts of interest.
>
> 8\. Part 92 additionally requires recipients that are State and local
> governments to maintain records sufficient to detail the significant
> history of a procurement, including, but not limited to, documenting
> the rationale for the method of procurement, selection of contract
> type, contractor selection or rejection, and the basis for the
> contract price. Because such documentation is a good procurement
> practice, non-profit organizations should follow this guidance for
> procurements over the simplified acquisition threshold and for any
> contract awarded without open and free competition.

**C. Contract Provisions**

All contracts and subcontracts for the procurement of goods and services
must contain the following provisions:

> 1\. Provisions that define a "sound and complete" contract.

2\. Provisions requiring compliance with federal anti-discrimination
statutes.

> 3\. Certain provisions required by law (37 C.F.R. Part 401) protecting
> the federal government's rights to patents or inventions if the
> contract is for the performance of experimental, developmental or
> research work.[^3]
>
> 4\. With respect to contracts and subcontracts entered into by State
> and local governments only (*i.e.*, entities subject to 45 C.F.R. Part
> 92), additional provisions are required:
>
> a\. a provision that gives the recipient, DHHS, the General Accounting
> Office, or any of their duly authorized representatives, access to any
> books, documents, papers, and records of the contractor which are
> directly pertinent to a specific program for the purpose of making
> audits, examinations, excerpts and transcriptions. Non-profit
> organizations must include such provisions only if the contract or
> subcontract exceeds the small purchase threshold. *See* discussion in
> Sections II-D & E, below.
>
> b\. with respect to all contracts in excess of \$10,000, a provision
> authorizing termination for cause and for convenience by the State or
> local government, including the manner by which it will be effected
> and the basis for settlement.
>
> c\. notice of awarding agency requirements and regulations pertaining
> to reporting and to copyrights and rights in data.
>
> d\. a provision that requires retention of all records for three years
> after final payments are made and all other pending matters are
> closed.
>
> e\. a provision setting forth mandatory standards and policies
> relating to energy efficiency which are contained in the state energy
> conservation plan issued in compliance with the Energy Policy and
> Conservation Act.

**D. Small Purchase Procedures**

Small purchase procedures are those relatively simple and informal
procurement methods for securing services, supplies or other property
that do not cost more than the simplified acquisition threshold. The
"small purchase threshold" is set by statute, 41 U.S.C. § 403(11), and
may increase from time to time. It is currently set at \$100,000. If
small purchase procedures are used, price and rate quotations shall be
obtained from an adequate number of qualified sources.

**E. Requirements for Contracts in Excess of \$100,000**

There are additional requirements for procurement contracts that are
expected to exceed the "small purchase threshold." For such contracts,
*all* of the following *additional requirements* apply as well:

1\. Procurement records and files must, at a minimum, include:

> a\. the basis for the contractor's selection;
>
> b\. a justification for lack of competition when competitive bids or
> offers are not obtained;
>
> c\. the basis for the cost or price of the award;
>
> d\. a grant recipient must, *if requested* by DHHS, provide
> procurement documents such as requests for proposals, invitations for
> bids and independent cost estimates for DHHS pre-award review if:
>
> \(1\) the procurement will be awarded without competition or only one
> bid or offer is received in response to a solicitation;
>
> \(2\) the procurement specifies a "brand name" product;
>
> \(3\) the proposed award is to be made to other than the apparent low
> bidder under a sealed bid procurement process;
>
> \(4\) a contract modification increases the amount of the contract by
> more than \$100,000.
>
> 2\. Procurement contracts that exceed \$100,000 must, in addition to
> the requirements noted above, contain the following:
>
> a\. provisions or conditions that allow for administrative,
> contractual, or legal remedies in instances in which a contractor
> violates the contract terms and provide for such remedial actions as
> may be appropriate;
>
> b\. suitable provisions for terminating the contract, including the
> manner by which termination shall be effected and the basis for
> settlement;
>
> c\. provisions describing the conditions under which the contract may
> be terminated for default as well as conditions where the contract may
> be terminated because of circumstances beyond the control of the
> contractor;
>
> d\. all negotiated contracts must include provisions giving the
> recipient, DHHS, the General Accounting Office, or any of their duly
> authorized representatives, access to any books, documents, papers,
> and records of the contractor which are directly pertinent to a
> specific program for the purpose of making audits, examinations,
> excerpts and transcriptions. Note that, with respect to State and
> local governments, this requirements is applicable to all contracts,
> regardless of the contract amount;
>
> e\. provisions insuring compliance with the Clean Air Act and the
> Federal Water Pollution Control Act;
>
> f\. provisions insuring compliance with the Byrd Amendment's
> restrictions on lobbying (*see* 45 C.F.R. § 93);
>
> g\. provisions requiring certification prior to the award that a
> contractor is not suspended or debarred from participating in federal
> awards.
>
> **F. Non-Competitive, Sole-Source Awards**

Part 92, applicable to State and local governments, specifically
addresses procurement by *noncompetitive proposals*. Procurement by
noncompetitive proposals is procurement through solicitation of a
proposal from only one source, or after solicitation of a number of
sources, competition is determined inadequate.

> 1\. Procurement by noncompetitive proposals may be used only when the
> award of a contract is infeasible under small purchase procedures,
> sealed bids or competitive proposals and one of the following
> circumstances applies:
>
> a\. The item is available only from a single source;
>
> b\. The public exigency or emergency for the requirement will not
> permit a delay resulting from competitive solicitation;
>
> c\. The awarding agency authorizes noncompetitive proposals; or
>
> d\. After solicitation of a number of sources, competition is
> determined inadequate.
>
> 2\. Recipients should be prepared to submit the proposed
> non-competitive procurement to DHHS for pre-award review upon request
> by DHHS.

There is no comparable provision in Part 74 governing procurement by
recipients that are non-profit organizations. Nevertheless, because the
above requirements are often considered fundamental parts of a sound
procurement system, non-profit organizations should consider adopting
them in their own procurement procedures.

**III. CONTRACT TERMS AND CONDITIONS**

There are certain features that are common to cogent and enforceable
contractual arrangements which, as a matter of good practice, CAP
grantees should include in procurement contracts. Moreover, as noted
above, the federal procurement standards require contract provisions
that define "a sound and complete" contract. The elements of a good
contract are outlined below.

**1. Description of Services and/or Products.** This is the most
important element of any contract, and the part which CAP grantee
personnel are typically best equipped to address. Who knows more about
precisely what service or product the consortium wants to purchase than
the consortium itself?

In developing the description of services (the "Scope of Work"), it is
critical to provide as much detail as possible under the circumstances.
There will, or course, be situations in which the CAP consortium will
prefer to retain flexibility, for example, by generally authorizing
performance while indicating that a detailed task order will be issued
to the vendor prior to the vendor proceeding with any specific activity.
In most instances, however, the consortium knows in advance what it
expects from the vendor. Putting these expectations on paper, in detail,
is an important means to avoid disputes and potential lawsuits. The more
complete and accurate an expression of the parties' expectations -- a
true reflection of their "meeting of the minds" -- the less likely there
will be confusion later as to whether or not performance was
satisfactory. The following topics should, as relevant, be addressed in
the Scope of Work:

> a\. **Description of Deliverables.** If the contract calls for the
> development of reports or manuals, what topics are to be covered?
> Approximately what length? For what kind of audience? Must drafts be
> submitted to the CAP consortium? When? Must the vendor incorporate
> consortium comments into the final product?
>
> b\. **Quantities.** Unless the contract is "fixed price" for a
> particular deliverable, quantify the number of hours or days the
> contractor is authorized to work, the units of service or products to
> be delivered, estimated pages, *etc.*
>
> c\. **Deadlines.** Set specific deadlines and require timely delivery.
> Be prepared to monitor and enforce them!
>
> d\. **Key Persons.** If there are key persons that the grantee expects
> to work on the contract, they should be identified by name
> (preferably) or at least by function. The contract should specify that
> prior approval of the grantee is required for the vendor to replace or
> reduce the time committed to the contract by a key person, with
> failure to obtain such approval being a ground to terminate the
> contract.
>
> e\. **Minimum Qualifications.** If the vendor must have a particular
> skill, educational degree, license or permit, the contract should
> describe the required qualification(s).

**2. Insurance.** If a particular type of insurance coverage (*e.g.*,
malpractice, automobile) is required for the CAP-funded project, the
contract should specify the coverage (including coverage amount). It
also is advisable to require the vendor to provide evidence of coverage
in order to verify the coverage. For cost-type contracts, CAP recipients
should consult the applicable Federal government cost principles
(*i.e.*, OMB Circular A-87 or OMB Circular

A-122) to determine if the cost of the insurance coverage is an
allowable cost.

**3. Payment Ceiling.** Consultant and other contracts for services
should specify a ceiling on how much the CAP grantee will pay for the
service, unless the contract is for a fixed price, and require the CAP
grantee's written prior approval before the vendor may exceed the
ceiling.

**4. Budgets and Budget Revisions.** If the vendor's proposal included a
proposed budget, the budget (after negotiation and agreement of the CAP
program) should be incorporated in the contract. Further, the contract
should require the CAP grantee's prior written approval for any changes
in the budget, particularly any changes that would increase the cost of
the contract.

**5. Method and Timing of Payment.** The contract should specify whether
the vendor will be paid an advance and, if so, the amount.

The contract also should specify how often the vendor will be paid and
the documentation required for payment (*e.g.*, proof of satisfactory
progress on the work, invoices for expenses to be reimbursed, *etc.*).
If the contract includes a budget, payment should be conditioned upon a
demonstra­tion that the amounts billed are within the budget and, if
relevant, allowable in terms of other restrictions that may apply,
*e.g.,* federal cost principles, hourly rates, *etc.* If "time is of the
essence," CAP grantees might consider tying payment in full to the
percentage of the activity which is completed on time. Penalties might
be imposed for any delay. In addition, the federal government does not
allow grantees to draw down funds in advance of actual cash need and
therefore expects grantees in contract dealings to minimize advance
payments.

Finally, most CAP grantees' ability to pay a vendor for services will be
contingent on the receipt of funds awarded under their CAP grant.
Accordingly, it is advisable to insert the following provision into
procurement contracts:

> Continuation of this contract and payment hereunder is contingent upon
> the availability of funds awarded to \[CAP grant recipient\] by the
> Department of Health and Human Services. \[CAP grant recipient\] will
> promptly notify contractor if DHHS suspends or terminates payment.

**6. Recordkeeping and Retention.** The contract should specify any
records that the CAP grant recipient wants the vendor to keep. Depending
on the type of contract, these may include contemporaneous time records
or records of expenses charged to the contract.

It is important to keep in mind that federal regulations (45 C.F.R. §
74.53; 45 C.F.R.

§ 92.43) require grant recipients to retain financial records,
supporting documents, statistical records, and all other records
pertinent to the grant award for a period of three years from the final
expenditure report. If an audit, claim, litigation, or a financial
management review is started before the end of the three year period,
the records must be kept until the litigation, claim, or audit findings
have been resolved. Accordingly, CAP grantees must insure that
procurement contracts require vendors and their subcontractors to keep
records related to their work for at least three years from receipt of
final payment.

**7. Access to Records.** CAP grantees should consider whether a
particular procurement is the kind of arrangement under which it wants
the ability to inspect the vendor's records pertaining to the contract.
If so, the contract should include a provision allowing the CAP
grantee's representatives access to the pertinent records upon
reasonable notice and at reasonable times. As noted above, the
procurement standards state that all contracts entered into by State and
local government and all contracts in excess of \$100,000 for non-profit
organizations must have a provision allowing representatives of the
recipient, DHHS and GAO access to the contractor's records.

**8. Reporting.** Progress reports may be useful means of ensuring that
the vendor is performing satisfactorily. They can provide an early
warning signal that the contractor is not performing as expected,
allowing the parties time to agree on corrective action or signaling to
the grantee that termination may be warranted before more time and money
are expended. If progress reports are required, the contract should
specify how and when they must be submitted.

**9. Confidential and Proprietary Information.** If the vendor will have
access to personal information about patients or employees of the
grantee, the contract should include a provision requiring the vendor to
protect that information from unauthorized disclosure. Keep in mind that
the privacy standards required under the Health Insurance Portability
and Accountability Act of 1996 ("HIPAA") require health care providers
to include privacy protection provisions in contracts with "business
associates," *i.e.*, vendors providing services to or for the benefit of
the provider. *See* CAP Issue Brief dated March 1, 2001, for more
information on the federal privacy standards.

In addition, if the vendor will have access to proprietary information
of the CAP grantee, *e.g.*, business plans, marketing surveys, computer
programs, *etc.*, the contract should include provisions prohibiting the
vendor from releasing such information to third parties without the
grantee's prior written approval and requiring the vendor to return it
to the grantee upon termination or non-renewal of the contract.

**10. Copyrights.** If the vendor will produce or contribute to
copyrightable material (*e.g.*, practice manuals, treatment protocols,
computer programs) under the contract, it is very important to specify
which of the parties will own the copyright and any rights that the
other party may have to the material, *i.e.*, the right to use,
reproduce, or authorize others to use it and any royalties to be paid
for those rights. Note that while federal grant regulations permit
grantees to copyright any work that is subject to copyright and was
developed under a CAP grant award, DHHS retains a royalty-free,
nonexclusive and irrevocable right to reproduce, publish, or otherwise
use the work for federal purposes and to authorize others to do so.
*See* 45 C.F.R.

§ 74.36; 45 C.F.R. § 92.34.

**11. Suspension and Termination.** The federal procurement standards
outlining remedies for the vendor's breach of the contract vary
according to the type of grantee and do not in all instances require
procurement contracts to provide for appropriate remedies in the event
of breach. It is good practice, however, to have such provisions in all
procurement contracts because of the protection they afford to the
grantee. Suspension and termination are the most common remedies for
nonperformance. "Suspension" (or a "stop work" order) is the temporary
withdrawal of a vendor's authority to proceed under the contract during
the contract period; "termination" is the permanent withdrawal of such
authority.

Suspension can be an effective remedy in an emergency situation (*e.g.*,
the vendor is sixty days behind on a six-month contract in which "time
is of the essence"). A grantee may reserve the right, in its sole
discretion, to suspend the contract *immediately* (without prior notice)
to give it time to determine whether to permit the vendor to take
corrective action or to terminate the contract. It is crucial that the
contract explicitly give the grantee complete discretion to suspend
immediately in order to avoid disputes over whether the suspension was
appropriate or not.

Obviously, termination is appropriate when there is no hope that the
vendor's breach can be corrected to the grantee's or consortium's
satisfaction. There are several approaches to termination clauses. One
allows either party to terminate for any or no reason "on \_\_\_\_\_\_\_
days' prior notice" to the other party. While this approach may provide
an easy "out" for a grantee, a grantee must consider whether it can
afford to allow the vendor to walk away midstream.

A second approach permits either party to terminate the contract "for
cause." Typically, this includes a list of circumstances that constitute
"cause" and a written notice by a party of the existence of such a
circumstance. The contract may or may not provide the alleged breaching
party with a period of time to correct its performance before the
contract may be terminated.

A third approach (typically included along with the first or second)
permits the parties to terminate "for convenience," when both parties
agree that there is nothing to be gained by proceeding with the
contract. As discussed above, Part 92, applicable to State and local
government recipients (including any agency or instrumentality of a
local government), requires that all contracts in excess of \$10,000
include a provision authorizing termination for cause and for
convenience by the State or local government, including the manner by
which it will be effected and the basis for settlement.

Finally, as noted above, CAP grantees should be sure to include a
provision allowing automatic suspension or termination if the CAP
grantee's grant is suspended or terminated.

**12. Indemnification.** It is advisable to include a comprehensive
indemnification provision stating that the vendor will defend and hold
the grantee harmless for any and all claims or losses, including
attorneys fees and expenses, incurred by the grantee and/or any third
party, arising out of the vendor's failure to perform, negligent
performance, or violation of any of its obligations under the contract.
Note that the vendor may insist that a parallel provision be included in
the contract requiring the grantee to indemnify the vendor for claims or
losses caused by the CAP grantee.

**13. Contract Term.** The contract term, *i.e.*, the period of time
during which the contract remains in effect, should be explicitly
stated. Extensions should be permitted only upon mutual written consent
of the parties.

**14. Governing Law.** If the grantee and the vendor are located in
different states, it is important to specify which state's law governs
the legal interpretation of the contract, and where it will be enforced.
Typically, it is preferable to provide that the grantee's state law
governs and, of equal importance, that disputes between the parties
regarding the contract may be brought only in that state. If nothing
else, local law and procedure will be more familiar to the grantee's
counsel. Since the vendor has a similar interest in having the law of
its home state apply and in ensuring that all disputes are handled close
to the vendor's "home" (venue), the choice of law provision may require
some negotiation (and ultimately the parties may not be able to agree on
a venue provision). It also is advisable to include a "boilerplate"
provision in the contract making it subject to all applicable federal
statutes and regulations.

**15. Assignment.** Typically, purchasers expect that the vendor
selected to perform a contract will, in fact, be the party that will
perform the contract's terms and obligations and not an unknown third
party. For this reason, it is advisable to include a provision stating
that the contract cannot be assigned, *i.e.*, transferred to another
party, without the grantee's prior written consent. It also may be
advisable to prohibit subcontracting without prior approval or, at a
minimum, to require the vendor to disclose the identity of any
subcontractor. If subcontracting is permitted, keep in mind that the
federal procurement standards require that certain provisions be
included in procurement contracts. Therefore, the grantee's contract
with a vendor should specify that the vendor include those provisions in
any subcontracts.

**16. Entire Agreement (Integration Clause).** The contract should state
that the terms of the written document constitute the entire agreement
between the parties and that no prior agreements or verbal
communications have effect, *i.e.*, that all of the terms of the
agreement have been integrated into one written document. This can avoid
allegations that there were side agreements between the parties that
modify the terms of the written contract. Similarly, the contract should
provide that no amendment to the contract is valid unless it is in
writing and signed by both parties. Finally, the contract also should
state whether any or all of its provisions will remain in effect if one
or more is found by a court to be invalid ("severability").

**IV. SPECIAL CONSIDERATIONS RELEVANT TO PROCURING**

**INFORMATION SYSTEMS TECHNOLOGY**

Many CAP consortia have proposed to fulfill the CAP program's purpose of
developing or strengthening integrated systems of care for the uninsured
and underinsured by acquiring new and/or upgrading existing information
systems ("IS") technology.[^4] Procurement of IS technology is a complex
undertaking made more so in the CAP context by the need to serve
multiple health care providers of varying size, structure, and purpose.
Because of this complexity, CAP consortia are urged to involve their own
legal counsel, as well as information technology experts and financial
advisors, *at the outset* of the procurement process. Early involvement
will help ensure contractual terms favorable to the consortium and
compliance with all applicable federal grant-related requirements.
Identification of the critical issues at an early stage should also
substantially reduce the time (and related expense) spent in
negotiations and significantly minimize the potential risk of liability
to the consortium and its members.

**A. General Considerations Relevant to the Procurement of IS
Technology**

In addition to the procurement standards and recommendations discussed
above, CAP grantees that seek to purchase IS equipment or services
should consider the following:

**1. Bids and Proposals**

-   If procuring a "package" of IS equipment and services, a grantee
    holds significantly greater leverage in negotiating with potential
    contractors than if procuring equipment and services separately.
    Make the most of this leverage and negotiate aggressively to obtain
    favorable pricing, warranty, remedy and termination terms.

-   Consider, as a negotiating strategy, including in the RFP or bid
    solicitation not only the pertinent technical/functional
    requirements but also favorable legal terms and requirements. If
    certain terms are included in the vendor's proposal or bid, the
    vendor cannot later claim them to be "non-negotiable."

**2. Long-term Interests**

-   Treat your IS arrangements as long-term "marriages." The duration of
    the term of any IS contracts should match the consortium's
    expectations regarding how long it intends to use the IS
    equipment/services.

-   Provide for adequate protection in the event that the vendor goes
    out of business or is acquired by a competitor. Grantees should be
    wary of "without cause" termination clauses that could give vendors
    an easy out, potentially leaving a CAP grantee and consortium
    without any operational information or support and without a legal
    remedy.

**3. Warranties**

Standard vendor agreements typically state that the IS software or other
equipment is provided "AS IS" and disclaim any and all express or
implied warranties.

-   At a minimum, ensure inclusion of a warranty that states that the
    software or other equipment will conform to the specifications
    provided.

-   Obtain copies of all manufacturer warranties or, at a minimum,
    ascertain the warranty period for each component of hardware from
    the manufacturer.

-   Consider a maintenance agreement offered by the manufacturer,
    carefully taking into account the annual cost and scope of coverage.
    These agreements can be expensive, but they are advisable.

**4. Customization**

Purchasers often hire vendors to install and customize more or less "off
the shelf" IS technology to match the purchaser's particular needs.
Grantees looking to purchase customized systems should be sure to:

-   Include a detailed statement of work in the contract that sets
    forth, with specificity, the duties of the vendor and a
    corresponding time schedule to protect the consortium against
    unanticipated problems and delays.

-   Negotiate a favorable warranty. For procurements involving
    significant software or hardware customizations, the vendor should
    affirmatively and explicitly warrant that the customization is fit
    for the purposes agreed to by the parties in the specifications. All
    warranties should begin after the customization has been completed
    and all relevant products/systems have been operational on the
    purchaser's site for a reasonable test period (*i.e.*, the "go live"
    date).

-   Reserve sufficient rights of recourse (*e.g.*, the right to withhold
    payment) against the vendor if important milestones are not
    achieved.

**5. Indemnification**

-   Protect the financial interests of the consortium. At a minimum, a
    vendors should agree to indemnify and hold the purchaser harmless
    from any claims for infringement of copyright or other intellectual
    property-related claims (which can result in multi-million dollar
    damage awards) that may arise if the vendor does not own the rights
    or have valid licenses to use the software. This indemnification
    should be expressly excluded from any limitation of liability
    provision included in the vendor's contract.

-   Require evidence of vendor insurance and carefully review the
    policies to ensure that copyright infringement claims are covered.

-   If purchasing billing software, include an indemnity provision
    whereby the software provider agrees to indemnify the grantee and
    members of the consortium, if applicable, for violations of federal
    law (*i.e.*, the submission of false claims) caused by the software.

**6. Remedies**

-   Ensure that the contract provides for reasonable and adequate
    remedies in the event that the vendor breaches the agreement or the
    equipment fails to perform as promised.

-   If purchasing an integrated "package" of equipment and services
    requiring multiple agreements, incorporate into each agreement a
    provision that allows the grantee to terminate all of the agreements
    and obtain an appropriate refund for the entire "package."

**7. Security Interest**

CAP grantees may be required to grant the vendor a security interest in
the equipment if the vendor is to be paid in installments or through a
financing arrangement. As indicated above, the federal government
retains a reversionary interest, *i.e.*, the right to direct the
transfer or disposition of property acquired with federal grant funds if
the property is no longer required or used for the grant-supported
project. *See* 45 C.F.R. § 74.34; 45 C.F.R. § 92.32.

-   Incorporate a provision into the procurement agreement that
    explicitly recognizes the reversionary interest of the federal
    government, *i.e.*, make the agreement (and any rights of the
    vendor) subject to the government's reversionary interest so that it
    takes precedence over the vendor's interest. In most cases, the
    government will agree to subordinate its interest to the interest of
    a lender if requested to do so.

-   Watch for, and do not agree to, requirements that give the vendor a
    security interest in any assets other than the purchased equipment.

**B. Considerations Relevant to Software Licensing Agreements**

The purchase of software involves the purchase of the right, referred to
as a "license," to use the software under the terms and conditions set
forth in the software license agreement. Because the vendor retains
significant control over the utility of the software package, both
through the terms of the license agreement and through issuing
corrections and upgrades, certain features of licensing agreements
require particular attention.

**1. Scope of License**

-   Ensure that the licensed software will meet all of the consortium's
    current and foreseeable future needs by carefully negotiating a
    sufficiently broad "grant of license" clause. Grantees should also
    ensure that provisions regarding the designated sites/facilities
    where the software will be installed and used are adequately defined
    and consistent with the consortium's intended use of the software.
    If the consortium foresees the possible expansion of the software to
    additional sites, it should attempt to negotiate a discount or cap
    on future license fees.

-   Ensure that the definition of the software includes basic
    enhancements, and/or updates of the licensed software, including
    updates required by changes in the law. Grantees will also want the
    definition of licensed software to include: (a) documentation or
    specifications containing representations of the software's
    abilities; (b) error corrections (for a reasonable period of time);
    and (c) if possible, major enhancements (*i.e.*, new or updated
    versions) of the software.

**2. Remedies**

-   Consider a provision that allows the grantee, in the event of a
    breach by the vendor, to purchase or lease (at a reasonable price)
    the correct and updated version of the "source code" or "object
    code" (which is essentially the "key" to being able to use and
    repair the software) should the vendor cease conducting business or
    if the source code is withdrawn. A common method for implementing
    this provision is for the vendor and purchaser to enter into an
    escrow agreement that would give the purchaser access to the source
    code if certain triggering events occur. With the source code, a
    purchaser should be able to contract with a third party for
    maintenance and support services.

**C. Considerations Relevant to Maintenance and Support Agreements**

Frequently, vendors have a monopoly on maintenance and support services
for their products. Accordingly, maintenance and support provisions
should be negotiated *contemporaneously* with the license and/or
hardware agreements when a purchaser enjoys its greatest bargaining
power. In addition, the following issues should be considered when
evaluating and negotiating the terms of maintenance and support
agreements:

-   **Support Commitment.** Does the agreements contain provisions
    addressing time frames for vendor response, on-call support
    services, correction procedures/protocols, assurance of
    qualified/certified maintenance personnel, and limitations and/or a
    cap on a vendor's travel expenses?

-   **Covered Errors vs. Non-Covered Errors.** Grantees and members of
    the consortium, as applicable, should carefully review maintenance
    and support agreements. Are all costs for correcting covered errors
    the responsibility of the vendor? What is the process for
    determining whether an error is covered or non-covered? Is there a
    fair, and preferably informal, dispute resolution mechanism for
    quickly resolving disputes related to such determinations?

-   **Price Increases.** If maintenance and support fees are increased
    to unreasonable levels, a purchaser may face serious financial risk
    if suitable replacement services can not be obtained from a third
    party. Does the agreement cap or otherwise the amount that
    maintenance and support fees can be increased each year?

**VII. CONCLUSION**

The procurement of goods and services and, in particular, IS technology,
can be an extremely complex undertaking. CAP consortia can significantly
reduce unnecessary risks by conducting sound procurements in a manner
consistent with the federal procurement requirements and by negotiating
customized IS agreements with a focus on protecting the long‑term
interests of the consortium.

[^1]: ^1^ This document has been prepared for HRSA by the law firms
    listed above. The U.S. Department of Health and Human Services has
    not verified the accuracy of data or analysis presented in the
    document. The opinions expressed in this document are the views of
    the authors and do not necessarily reflect the official position of
    the Health Resources and Services Administration or the Department
    of Health and Human Services. This document is designed to provide
    accurate and authoritative information in regard to the subject
    matter covered. It is issued with the understanding that the authors
    are not engaged in rendering legal or other professional services.
    If legal advice or other expert assistance is required, the services
    of a competent professional person should be sought.

[^2]: In some instances, CAP grants are awarded to the CAP consortium as
    an entity. In others, the grant is made to a member of the
    consortium. The federal procurement standards apply to the entity
    that is the direct recipient or sub-recipient of a grant award and
    that is using grant funds to purchase goods or services. The terms
    "grantee," "recipient," and "purchaser" are used interchangeably
    throughout to refer to that entity.

[^3]: A discussion of mandatory contract provisions not relevant to CAP
    grants, *e.g.*, construction contracts, is omitted from this issue
    brief.

[^4]: First round CAP grantees could not procure MIS systems without the
    approval of the CAP grant office. That restriction is not contained
    in second round grants. This discussion assumes that all required
    approvals have been obtained.