######## Chapter 2

**2 - [Procurement Planning & Organization]{.underline}**

2.1 [Organization of Procurement Functions]{.underline} (5/96)

2.1.1 [Scope of Responsibility]{.underline} (5/96)

2.1.2 [Autonomy]{.underline} (5/96)

2.2 [Long Term Planning]{.underline} (5/96)

2.2.1 [Contract Period of Performance Limitation]{.underline} (6/03)

2.2.2 [Multi-Year vs. Multiple-Year Contracting]{.underline} (7/02)

2.3 [Annual Planning]{.underline} (5/96)

2.3.1 [Sources and Contents]{.underline} (5/96)

2.3.2 [Independent Grantee Cost Estimate]{.underline} (4/05)

2.4 [Source Selection Plan]{.underline} (5/96)

2.4.1 [File Documentation]{.underline} (5/96)

2.4.2 [Full and Open Competition]{.underline} (5/96)

2.4.2.1 [Full and Open Competition Principle]{.underline} (5/96)

2.4.2.2 [Restraints on Competition]{.underline} (5/96)

2.4.2.2.1 [Brand Names]{.underline} (6/03)

> 2.4.2.2.2 [Written Standards of Conduct and Conflicts of Interest:
> Personal and Organizational]{.underline} (6/03)

2.4.2.2.3 [Geographic Restrictions]{.underline} (6/03)

2.4.2.2.4 [Pre-qualification]{.underline} (5/98)

2.4.3 [Fixed Price v. Cost Reimbursement]{.underline} (5/98)

2.4.3.1 [Fixed Price Contracts]{.underline} (4/05)

2.4.3.2 [Cost Reimbursement Contracts]{.underline} (6/03)

2.4.3.3 [Time and Materials Contracts]{.underline} (5/98)

2.4.3.4 [Labor Hour Contacts]{.underline} (5/98)

2.4.3.5 [Cost Plus Percentage of Cost Contracts]{.underline} (6/03)

2.4.4 [Payments]{.underline} (5/98)

2.4.4.1 [Payment of the Price]{.underline} (5/98)

2.4.4.2 [Advance Payments]{.underline} (6/03)

2.4.4.3 [Progress Payments]{.underline} (4/05)

2.4.4.4 [Withholding and Final Payment]{.underline} (5/98)

> 2.4.5 [Indefinite Delivery Contracts]{.underline} (10/99)

2.4.5.1 [Definite-quantity Contracts]{.underline} (10/99)

2.4.5.2 [Requirements Contracts]{.underline} (6/03)

2.4.5.3 [Indefinite-quantity Contracts]{.underline} (6/03)

**2.1 ORGANIZATION OF PROCUREMENT FUNCTION**

**2.1.1 [Scope of Responsibility]{.underline}**

+-----------------------------------------------------------------------+
| ##### REQUIREMENT                                                     |
+-----------------------------------------------------------------------+
| FTA Circular 4220.1E, paragraph 5a -- *Grantee Self-Certification,*   |
| states that FTA intends to rely on grantees\' \[annual\] \"self       |
| certifications\" that their procurement system meets FTA requirements |
| to support the required finding \[by FTA\] that a grantee has the     |
| technical capacity to comply with Federal procurement requirements.   |
|                                                                       |
| FTA Circular 4220.1E, paragraph 7b *-- Contract Administration        |
| System,* requires grantees to maintain a contract administration      |
| system that ensures that contractors perform in accordance with the   |
| terms, conditions, and specifications of their contracts or purchase  |
| orders.                                                               |
+-----------------------------------------------------------------------+

**DEFINITIONS**

[Centralize]{.underline} ‑ To concentrate procurement actions and
decisions in one person or group within an organization.

[Contracting Officer]{.underline} ‑ A procuring official who has
delegated authority, usually including authority to sign contracts and
amendments on behalf of the procuring agency for one or more specific
contracts.

[Contracting Officer\'s Technical Representative (COTR)]{.underline} ‑ A
representative of the procuring agency who has more limited authority
than the contracting officer, usually including providing technical
direction to the contractor.

**DISCUSSION**

**As a Contracting Officer you are responsible both for your contract's
cost‑effectiveness and its compliance with Federal and state
requirements. It is easier to fulfill these responsibilities if most of
the decisions and contractual actions concerning procurement are focused
in one or more individuals who are familiar with procurement
requirements and procedures. These actions begin with planning and
solicitation of offers, include communication with offerors and
contractors, and continue through contract acceptance and warranty
enforcement. Except in very small organizations, the contracting
responsibilities will often reside with different individuals than the
individuals who would best understand the functional and performance
requirements of the goods or services. These latter persons are your
internal customers.**

**Purpose**

You and the leadership of your organization need to clearly understand
the scope of the procurement function and organize responsibilities to
accomplish several objectives:

-   to obtain the best buy for your agency which requires an evaluation
    of all the service quality, safety, cost, schedule, and other
    objectives of the agency\'s operating functions;

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-   to comply with Federal, state, local, and agency procurement
    requirements;

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-   to ensure an understanding of the precise authority of you and your
    agency team members in dealing with suppliers who, while partners in
    many respects, have some interests that conflict sharply with your
    agency\'s; and

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-   to control through finite, professional boundaries, the possibility
    of corruption or unethical practices.

These objectives require the clear definition and assignment of
procurement responsibilities. A specific aspect of that assignment, the
need for autonomy, is discussed in more detail in the following section
of the Manual.

**Best Practices**

[Identification of Need]{.underline} ‑ The initial identification of
need is one aspect of the procurement cycle that is generally the sole
responsibility of your internal customers (i.e., program or technical
personnel for whom you are procuring goods or services). However, you
may be in a position to facilitate the consolidation of procurements of
different internal customers with the same need.

[Procurement Planning]{.underline} -- Preparation of procurement
planning, on the other hand, should be exclusively a procurement
function. If your agency has not conducted formal planning, this process
is a way to establish the need for a separate procurement function and
demonstrate its value to the organization. Specific suggestions for
useful planning activities are discussed below under long range and
annual planning cycles.

[Preparation of Specifications]{.underline} -- Preparing specifications
or statements of work is usually a customer function. Generally,
customers have the greatest understanding of functional and performance
requirements; however, the procurement function should play at least an
advisory role in order to avoid exclusionary specifications and to
encourage free and open competition.

[Solicitation of Offers]{.underline} -- The solicitation of offers
(including invitation for bids and request for proposals) is usually the
first important public action the agency takes, and it should clearly be
the responsibility at this point of the procurement staff. Customer team
members are often helpful in compiling lists of potential offerors, and
should participate in the procurement process, but communications with
offerors and the official action of soliciting offers is a procurement
function.

[Communications]{.underline} -- If communication with offerors is
decentralized, one offeror may obtain more information about the
agency\'s preferences or evaluation process than the others. It is a
general practice (except at the smallest agencies) to restrict
communication with offerors to only procurement personnel so that no
offeror could gain an advantage or apparent advantage over another.

[Evaluation of Offers]{.underline} -- Procurement personnel will usually
request and rely upon their technical customers to evaluate the
technical merits of proposals and assess the offeror's ability to
perform the contract successfully. The Procurement Officer must oversee
the technical evaluation to ensure it is consistent with the evaluation
criteria published in the RFP and that the contract file is adequately
documented to reflect the relative strengths, deficiencies, weaknesses
and risks of the various proposals. It is important that the technical
evaluation provide a clear narrative of the proposals' relative merits
and not merely a numerical rating of the proposals. To maintain the
overall integrity of the procurement, the procurement function normally
must at least approve the selection and (if it does not have sufficient
authority) will often present the recommendation to the final authority.

[Administration]{.underline} -- You should play a continuing role in the
administration of the contracts, particularly in changes and disputes.
Acceptance of goods and services and payment approvals always require
your review. In simpler or routine situations, a receiving report or
COTR acceptance can be matched to your original purchase order to ensure
proper control.

[Centralization / Decentralization]{.underline} -- Many organizations
find it more efficient to permit customer groups, particularly those
with a large number of similar, small procurements, to perform some of
the functions normally performed by the procurement office (e.g.,
solicitation and evaluation of offers up to a specific dollar amount).
However, in these cases, procurement personnel can provide a valuable
oversight role, providing forms, procedures, and technical assistance.
Although decentralized procurement can reduce the administrative cost of
the procurement and be more responsive to a customers\' needs, if it is
uncontrolled, it could eventually result in situations involving
non‑compliance, unwise contracting, or unethical practices. It is a best
practice to ensure that no employee undertakes any of the procurement
functions without clear authority and guidelines.

**2.1.2 [Autonomy]{.underline}**

**DISCUSSION**

**Autonomy of the procurement function, or its independence from
internal customers, is important to carrying out procurement
responsibilities without undue influence by the customers and users of
the goods and services procured. While the degree of autonomy and
organizational reporting relationships will vary with the size of the
organization and its policies, autonomy enables procurement personnel to
give unbiased consideration to procurement principles and requirements,
as well as to the schedule, budget, functional and other requirements of
the internal customers.**

**Purpose**

A debate has raged for years between those who are process oriented
(procurement officials and compliance departments such as legal,
internal audit, or grants) and those who are program oriented
(maintenance managers, engineers, project managers).

-   Should the procurement functions described in the previous section
    be controlled by the program functions? After all, it is the program
    office whose needs are to be met, and, in most accounting systems,
    the program to whose budget the purchase will be charged.

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-   Should the procurement official be entirely autonomous and evaluate
    the needs of the program (e.g., for immediate services) against the
    legal or procedural requirements of the funding source (e.g., FTA
    Circular 4220.1E if Federal funds)?

Some degree of autonomy of the procurement function is necessary
organizationally and functionally so that procurement personnel will be
free from undue influence or pressure in the award and administration of
contracts. The obvious solution to the conflict between \"process\" and
\"program\" is to have a team in which each member recognizes the
strengths and capabilities of the other team members and appreciates the
role each side brings to the contract table. This

sounds easy to accomplish but, in most practical situations, is very
difficult to achieve. [^1] Failure to achieve unity and teamwork within
the agency in the awarding and administration of public contracts
creates frequent opportunities for a contractor to take advantage of a
contentious staff relationship to its financial advantage (and the
agency\'s financial disadvantage). Achieving proper balance between
groups requires delicate balancing of personalities and corporate
objectives, a strong executive, and a well‑trained staff. It must also
be recognized that there is no textbook answer that will work in every
situation and in every agency.

In addition to balancing the roles of program and process interests in
making procurement decisions, the payment of your agency\'s funds to
contractors generally requires three independent concurring actions. The
requirement for independent concurring actions is sometimes called
\"internal control,\" as it is a method for the agency to control the
propriety of its actions internally, rather than requiring external
reviews and control. While best practices differ, all authorities
recognize a fundamental need for a system of checks and balances in the
overall procurement process. In an organization with no checks and
balances, if an individual perceived a need for a staff car, that person
could draft the specifications for the car, prepare the solicitation
document, order the car, approve the contract, inspect the preparation
of the car, administer the contract, accept the car after delivery, sign
the agency check to pay the dealer, and use the car in a manner the
person deemed appropriate. It should be obvious that an organization and
procurement process such as this would not be credible and would be
subject to great abuse, actual or perceived. As a result, most public
and private agencies divide those functions among, at least, three
distinct elements within its organization.

-   The [requiring activity]{.underline} is represented by the program
    manager who is responsible for determining the requirement,
    preparing the specifications and, then, acting as the technical
    representative or advisor to the contracting officer during contract
    performance.

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-   The [procurement activity]{.underline} is represented by the
    contracting officer who is responsible for ensuring specifications
    are not restrictive, preparing the solicitation document in
    accordance with the law and rules and regulations of the agency and
    the FTA, soliciting the requirement, and awarding the contract in
    accordance with the solicitation. Contract administration functions
    are usually shared with the requiring activity and involve such
    functions as approving payment, accepting the goods or services
    bought, and closing out the contract.

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-   The [payment activity]{.underline} is represented by a third party
    (the finance department) who ensures that all approvals are obtained
    and that the payment is within the dollar amount of the contract.
    Often, the accounts payable function in finance either physically or
    electronically matches three documents issued by three different
    employees (the purchase order, receiving report, and approved
    invoice) before releasing funds.

The procurement and payment activities are \"process\" functions
ensuring that the goods are bought and paid for in accordance with the
terms of the contract. The \"program\" activity is to determine what is
needed and that it is obtained within the time required and budget
allocated.

**Best Practices**

[Degree of Autonomy]{.underline} ‑ From a narrow procurement
perspective, the procurement activity would enjoy the highest degree of
autonomy where it reports directly to the governing policy board of your
organization. Most transit organizations have too much direct operating
responsibility to permit this degree of autonomy. Three solutions are:

-   Procurement and contracting can report to a chief executive.

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-   Most typically, the procurement department reports to an
    administrative or financial function that is independent of the
    primary internal customers (facility equipment and operating
    functions).

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-   Some degree of autonomy can be preserved even within an operating or
    implementation function if procurement is separated from the program
    delivery sub-groups.

In medium and large systems, if the contracting function is not
separated from the program office, there is an inadequate system of
checks and balances on the procurement process. Overall, procurement
personnel should have enough autonomy or checks and balances to achieve
a quality product at a fair and reasonable price without real or
apparent conflicts of interest in the solicitation, evaluation or award.

**2.2 LONG TERM PLANNING**

**DISCUSSION**

**Long-term procurement planning (i.e., planning more than one year in
advance) is one option to be considered by large transit systems and by
systems planning a major transit investment, complex capital project, or
a substantial number of operating contracts that will span several
years. Systems without current major capital projects may find that
annual planning is adequate.**

**Purpose**

Procurement plans covering several years may be an improvement over
partitioning or consolidation in major projects as a way to facilitate
the most cost‑effective project management and delivery. The plans can
identify major changes in procurement work load, and can obviate any
tendency to rush procurement decisions or activities in ways that result
in waste (e.g., through failure to consolidate major procurements) or
risk non‑compliance (e.g., through inadequate notice and non‑competitive
awards).

[Plan Contents]{.underline} ‑ A long-term procurement plan would
identify the major procurements projected over the next two to five
years. The multi‑year element of the Transportation Improvement Program
(TIP) is a good starting point for identifying future capital projects
and their corresponding procurement requirements. Typically, the
procurement plan includes any fixed guideway projects, revenue rolling
stock replacements or fleet expansions, and major construction projects.
In the case of fixed guideway and other construction projects, where
multiple procurements may be involved, the plan would identify the
initial strategy for packaging the design, construction, and equipment.
Consideration would also be given to turnkey procurements and to long
term projects that are not public works. The latter would include major
software systems, fleet overhaul and ADA operational service.

[Major Projects]{.underline} ‑ Often major design/construction and rail
vehicle procurements are planned seven to ten years *in advance of
needed completion* because several interdependent contracts may have to
be awarded in order to accomplish the project. The time intervals
typically required to accomplish these contract awards might include:

-   One year advance planning before Request for Proposals (RFP) for the
    engineering services;

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-   Four months from RFP to award of the engineering services;

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-   Two years to prepare technical specifications;

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-   Three months from completion of specifications to system RFP;

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-   Six months from system RFP to award; and

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-   Three years for system construction.

The planning and design processes can change this schedule
significantly, and few procurements require this length of time. When
major projects are undertaken, a comprehensive procurement plan that
outlines these major projects along with the rest of your procurement
workload will be extremely helpful. Bus procurements and major
electronic/data systems generally require at least three years of
advance planning.

**2.2.1 [Contract Period of Performance Limitation]{.underline}**

+-----------------------------------------------------------------------+
| # REQUIREMENT                                                         |
+-----------------------------------------------------------------------+
| 49 USC § 5326(b) limits the procurement of rolling stock and          |
| replacement parts to no more than five years' requirements under a    |
| single contract, even though delivery may take place beyond five      |
| years from the date of the initial contract.                          |
|                                                                       |
| FTA Circular 4220.1E, paragraph 7.m, addresses the five-year contract |
| term limitation for rolling stock and replacement parts. It also      |
| requires that contract terms for all other types of contracts be      |
| based on sound business judgment.                                     |
|                                                                       |
| FTA Circular 4220.1E, paragraph 8 -- *Competition*, requires all      |
| procurement transactions to be conducted in a manner providing for    |
| full and open competition.                                            |
|                                                                       |
| FTA Circular 4220.1E, paragraph 7i -- *Written Record of Procurement  |
| History*, requires grantees to maintain records detailing the history |
| of a procurement.                                                     |
+-----------------------------------------------------------------------+

# 

# DISCUSSION

**On May 29, 2002, the FTA Administrator issued *Dear Colleague Letter*
C-08-02 rescinding FTA's long-standing five-year contract term
limitation for all contracts except those for rolling stock and
replacement parts. The limitation on rolling stock and replacement parts
remains in effect since the limitation is a statutory requirement and
not an FTA policy.** [^2] **The new FTA policy is now expressed in FTA
Circular 4220.1E, paragraph 7.m -- *Contract Term Limitation*.**

**Prior to this letter, FTA Circular 4220.1D, paragraph 7.m - *Contract
Period of Performance Limitation*, had limited the period of performance
of DOT-assisted supply and service contracts to five years, inclusive of
options, without prior FTA approval.**[^3] **As a result of this
rescission of the contract term limitation, grantees will no longer be
required to obtain prior FTA approval for contract terms longer than
five years.**[^4] **The rescission of the five-year term limit applies
not only to new contract awards, but to existing contracts as well.**

**Grantee procurements will continue to be reviewed by FTA for
compliance with the "full**

**and open competition" principle stated in FTA Circular 4220.1E
paragraph 8a, and grantees will continue to be responsible for
conducting their procurements in accordance with sound business
practices. Grantees are expected to be judicious in establishing and
extending their contract terms.**

## 

## Best Practices

Although FTA no longer requires prior approval for contract terms longer
than five years, grantees remain responsible for conducting their
procurement transactions in accordance with the "full and open
competition" principle expressed in FTA Circular 4220.1E, paragraph 8a.
As with any procurement action, grantees should ensure that their
procurement files adequately document their decision making process.
This record should include the rationale for the contract period of
performance.

[Period of Performance Criteria]{.underline} -- Periodic re-competition
of contracts preserves competition and keeps prices competitive. Without
periodic competition the incumbent will not have the pressures of a
competitive market to keep prices reasonable or an incentive to maintain
satisfactory performance. There are, however, criteria that the grantee
can employ when deciding upon the term of a contract. Some of these
criteria are suggested below.

[Revenue Contracts]{.underline} -- It is FTA policy to afford all
persons an equal opportunity to access FTA-funded assets. FTA also
encourages its recipients to maximize non-farebox revenues. This can be
done through contractual or other appropriate arrangements, which
involve the use of FTA-funded assets without interfering with its
transit use. FTA had previously invoked a five-year term limit as one
way to balance these potentially conflicting policies. It is important
for grantees to document their revenue contract files with an *economic
analysis* that demonstrates how these dual objectives were accomplished.
If the contract opportunities allow for free and open competition, then
the Grantee's procurement policies will address FTA's equal opportunity
policy. Where however, there is a limit to the number of firms who will
be awarded contracts, then the grantee should include an *economic
analysis* in the contract file to justify the contract term. The
*economic analysis* should explain why the specific period of
performance was necessary for the recovery of the contractor's
investment and a reasonable economic return. In performing this
analysis, grantees may wish to conduct a market survey to obtain
information and recommendations from prospective offerors to determine
what the typical up-front investment will be and what kind of contract
period would be required for the offerors to recover that investment and
realize a reasonable economic return on that investment. Grantees should
document their files with this information, showing the conclusions
reached with respect to the contract period of performance finally
selected.

[Supplies]{.underline} -- Typically the contract period of performance
for supplies will be dictated by the grantee's foreseeable needs and
such factors as economic quantity breaks, warehousing space, shelf life,
technology concerns, etc. When the grantee perceives that there may be
an opportunity to increase competition through a larger purchase, the
grantee may wish to conduct a *market survey* of potential suppliers to
determine if they would make an offer under a different contracting
scenario. For example, it may be that they were discouraged from bidding
because the up-front investment (non-recurring costs of tooling, etc.)
would be prohibitive over a relatively short contract period/limited
quantity buy. However, if the period were extended and the quantity
increased, these potential suppliers might be induced to participate.
This is in effect what one large transit agency has done successfully.
[^5] Thus, the shortest contract period/ minimum quantity buy may not
necessarily be the optimum decision. Grantees will need to exercise some
diligence in determining if longer/larger contracts might be in their
best interests. If they decide to do that, they should document their
files showing the benefits obtained from the longer contract periods.

When deciding the best period of performance for on-going services
contracts, grantees need to consider the up-front investment by
potential offerors for specialized personnel training and other
non-recurring start-up costs (e.g., relocation) that must be recovered
over the life of the contract. Once again, grantees should consider a
pre-solicitation industry outreach to discuss with individuals in the
industry what they may see as up-front investments that must be
recovered from the profits anticipated by the contract. These
discussions should reveal what the industry needs in terms of a contract
life in order to submit competitive prices against the incumbent. These
facts need to be documented in your contract files as you reach an
agency decision on the proper period of performance of the services
contract.

**2.2.2 [Multi-Year vs. Multiple Year Contracting]{.underline}**

**DISCUSSION**

**Grantees are authorized to procure rolling stock or other supplies and
services by a number of methods. These include buying on an annual or on
an as-needed basis, and also on a multi-year or multiple-year basis. The
distinction between the multi-year and multiple year methods is as
follows:**

**[Multi-Year Contracting]{.underline} - multi-year contracting is a
method by which the grantee procures its needs for the entire life of
the contract, even though funding for the entire contract is not
available at the time of contract award. The contract requires the
contractor to deliver the entire requirements of the contract. Option
provisions are unnecessary. Because the grantee does not have sufficient
funds for the entire contract at the outset of the contract, it will be
necessary to recognize in the contract that the grantee may have to
cancel the contract at some point if additional funds are not
forthcoming. Grantees *may have to include cancellation costs* in the
contract in the form of an advance agreement for any program year or
portion thereof canceled by the grantee (but cancellation costs are not
required to be included if the contractor will accept a contract without
them). Additional information on multi-year contracting, while not
binding on grantees, is discussed in the *Federal Acquisition
Regulation* (FAR), Subpart 17.1 - *Multi-Year Contracting*.**

**[Multiple Year Contracting]{.underline} - multiple year contracting is
a method by which the grantee awards a contract for a base period of one
or more years, with option provisions for future years\' requirements.
The base period of the contract is a firm and fully funded requirement.
Beyond the base period, the grantee uses option provisions, which may be
exercised unilaterally at the discretion of the grantee as additional
funding becomes available. There is no need for the inclusion of
cancellation payments since the exercise of the options is totally
within the discretion of the grantee.**

**Additional information on multiple year contracting, while not binding
on grantees, is discussed in the *Federal Acquisition Regulation* (FAR),
Subpart 17.2 - *Options*.**

**[Term of Contracts]{.underline} -- As noted above in Section 2.2.1 --
*Contract Period of Performance Limitation,* 49 USC § 5326(b) limits the
procurement of rolling stock and replacement parts to no more than five
years under a single contract, even though delivery may take place
beyond five years from the date of the initial contract.**

**2.3 ANNUAL PLANNING**

**2.3.1 [Sources and Contents]{.underline}**

**DISCUSSION**

**Every transit organization can carry out annual planning; large
systems may maintain multi‑step planning processes with substantive
documents that are carried forward from year to year. Small systems may
prepare the plan simply through preparation of a list of known
procurements at the beginning of a planning cycle (i.e., in budget
preparation or in the mandated planning process).**

**Purpose**

A basic purpose for maintaining formal plans regarding procurements well
in advance of issuing the solicitations is to enable more deliberate and
coordinated decision‑making in moving forward with the procurements and
related activities. In addition, procurement planning is the best
opportunity to identify potential consolidation of procurements (e.g.,
several internal customers purchasing furniture or personal computers in
the same time‑frame). Larger agencies may find that procurement
consolidation yields substantial savings. More specifically, an advance
procurement plan is a good way for the agency to document its compliance
with paragraph 7(d) of Circular 4220.1E which states, \"Grantee
procedures shall provide for review of proposed

procurements to avoid purchase of unnecessary or duplicative items.
Consideration should be given to consolidating or breaking out
procurements to obtain a more economical purchase.\"

The advance procurement plan also proves useful in responding to
procurement challenges. It provides an early record of decisions that
were made for business purposes before the receipt of offers and without
the possibility of competitive bias. Contracting officials should
recognize that the plan is fluid and that their customers\' needs will
change, but even this change can be more orderly if the base plan has
been documented. A change is simply accomplished through a plan update,
rather than being passed around by word of mouth or memorandum, which
tends to result in confusion and indecision.

**Best Practices**

[Sources for Plans]{.underline} ‑ The preparation of an advance
procurement plan can begin with data already prepared for service and
financial planning purposes. Both state and local Transportation
Improvement Programs list major Federally-funded projects for all modes
of transportation. While the preparation of the plans is the
responsibility of the local Metropolitan Planning Organization and the
state, most transit agencies are involved in assisting with development
of the transit element of the plans, which lists their projects
separately. An internal capital budget is another source, which may have
more detailed or up‑to‑date information on planned capital procurements.

Although projects funded with operating funds are often smaller and the
operating budget does not usually offer as much specificity, contracting
officials may be able to identify many planned procurements from the
operating budget as well. Historical usage is another valuable source
for the plan, particularly when compared to the operating budget.

Another method available to assist with preparation of the plan is to
conduct a survey of internal customers. They may provide more detail on
the budgeted projects and may be able to identify projects that are not
differentiated in the budget. An annual survey of the major customers
will encourage the customers themselves to plan their needs for goods
and services.

Annual procurements, which account for a great deal of activity, such as
parts, fuel, and other supplies, can be projected at most agencies based
on historical need and agency‑wide plans and projects.

[Plan Contents]{.underline} ‑ In addition to the identity of each
procurement, plans normally identify the customer contact(s) (at medium
and large agencies), time requirements, and funding sources. Tentative
start dates, publication dates, opening dates and award dates are
usually based on the type and size of the procurement contemplated. Time
should be allowed for:

-   preparation of a source selection plan (if not already complete or
    in progress), where appropriate;

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-   preparation of specifications;

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-   assembly of the solicitation of offers;

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-   publication period and time for preparation of offers, including
    pre‑bid/proposal conference, where appropriate;

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-   receipt and evaluation of offers; and

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-   required reviews and approval actions.

Complex projects will require more time for preparing specifications.
Negotiated procurements will require more time after receipt of offers.
If governing board approval is required, and the governing board meets
on a fixed schedule, time would be added for this step. In all major
procurements and cases where negotiated procurement is utilized, the
planning process can evolve into a source selection plan for each
procurement.

In the case of procurement of complex systems, such as rail transit
systems or advanced rail vehicles, an advanced procurement plan concept
includes planning, not only for the prototype development, testing, and
acceptance of the system, but also the life cycle support of the system,
which includes training of maintenance personnel, maintenance
infrastructure, such as electronic design diagrams and parts catalogs,
long term availability of parts, and technical support.

**2.3.2 [Independent Grantee Cost Estimate]{.underline}**

  -----------------------------------------------------------------------
  **REQUIREMENT**

  FTA Circular 4220.1E, Paragraph 10 provides that grantees must perform
  a cost or price analysis in connection with every procurement action,
  including contract modifications. The method and degree of analysis is
  dependent on the facts surrounding the particular procurement
  situation, but as a starting point, grantees must make independent
  estimates before receiving bids or proposals.
  -----------------------------------------------------------------------

**DISCUSSION**

**A logical element of your annual procurement plan is a cost estimate
for each major procurement. It is normally cost effective to have an
independent cost estimate that also satisfies the Federal requirement
and to have such an estimate at some time before receiving bids or
proposals. You may obtain such estimates from published competitive
prices, results of competitive procurements, or estimates by in‑house or
outside estimators.**

**BPPM Appendix B.20 -- *Independent Cost Estimate Form*, provides a
format and guidance for grantee in-house estimators that should be
helpful. This form was developed by one transit agency to assist its
user organizations with the development of independent cost estimates
and statements of work.**

**Purpose**

The following are purposes of establishing a cost estimate using a
method independent from the prospective offerors in advance of the
offer:

-   it ensures a clear basis for the grantee\'s determination that the
    benefits of the procurement warrant its cost;

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-   it provides essential procurement and financial planning information
    (see \"Advance Procurement Plan,\" above); and

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-   it provides a basis for price analysis, which may assist in
    obviating the need for a more burdensome cost analysis.

Although it may seem self‑evident that the agency has at least
implicitly prepared a cost estimate in deciding to proceed with a
procurement, many projects can change in scope without clear
communication among the people responsible. For example, a management
information system for parts inventory control may seem cost‑effective,
but may grow during discussions to include unanticipated electronic
imaging, scanning of repair manual diagrams, unanticipated distributed
processing devices, and multi‑user programming. An independent cost
estimate prepared when the agency first undertook the project could
alert all involved that the project had grown beyond the scope
originally intended. A deliberate decision to reduce the scope or revise
the cost estimate can be made at each step of the project\'s
development.

The cost estimate is essential information for procurement planning. It
gives the contracting official some indication of the complexity of the
project and the degree of investment that offerors will want to make in
the procurement process, thus allowing planning of procurement time and
personnel. It is also the basis for determining which procurement
procedures apply to the project. If the cost estimate exceeds \$100,000,
for example, a competitive solicitation is normally required. (State or
local requirements may be stricter.) Similarly, certification and
bonding requirements imposed by Federal regulations are triggered based
on the value of the contract. (See \"Methods of Procurement\" FTA
Circular 4220.1E, § 9; \"Bonding Requirements," § 11; \"Buy America\"
Master Agreement § 14 (a); \"Debarment and Suspension\" Master Agreement
§ 3 b.) However, the application of these and most other requirements
depends not on the cost estimate, but on the contract amount.

A final purpose of the independent cost estimate is for price analysis.
Either a cost or price analysis is required for every contract and every
change order so that the essential objective of a reasonable price is
assured. The adequacy of the price or cost analysis is a critical
responsibility of the contracting official. In many contract awards the
bids alone may be adequate to assure a reasonable price. However, in all
negotiated procurements, most contract changes, sealed bids where price
competition was not sufficient, and non-competitive awards, further
analysis is required. An independent cost estimate prepared before
receipt of offers is invaluable in these circumstances. The estimate
alone may, if prepared with sufficient detail and reliability in the
contracting official\'s judgment, be sufficient to determine whether the
price is reasonable. It will at least supplement other pricing data in
making the determination. Because cost analysis can be time consuming,
expensive, and raise disputes, the availability of an independent
pre‑bid estimate, which allows for price analysis and obviates cost
analysis, is worth material pre‑bid effort.

In these circumstances, it is essential that the grantee's cost estimate
be developed independently from the offerors' pricing submissions. If a
bus purchase is being prepared, for example, the prospective offerors
should not be relied upon for the independent cost estimate, except in
the form of prior bids submitted with adequate competition.

Any price analysis or data collection performed after receipt of the
offers, in addition to consuming valuable time during the limited
validity of the offers, will not be as probative as data collected
before the receipt of the offers. An independent cost estimate prepared
before the receipt of the offers does not raise the question of whether
the particular data and analysis was consciously or unconsciously
intended to justify the award.

**Best Practices**

[Construction]{.underline} ‑ In some cases, cost estimates may be
difficult to obtain or may lie outside the competence of agency
personnel. In the case of construction projects, a design firm may
already be under contract and may perform this service. In some cases,
the agency\'s in‑house personnel who have participated in design or past
construction efforts may be the most professional and reliable cost
estimators.

[Supplies and Equipment]{.underline} ‑ Equipment estimates can often be
prepared from published price lists or from past competitive
procurements updated with inflation factors. Grantees may find relevant
pricing data by contacting other agencies that obtained competitive bids
for the same equipment or supplies. In the case of specialized
equipment, care must be taken that the source of the estimates is not
disproportionately obtained from one supplier.

[Services]{.underline} ‑ Professional services often range widely in
both price and quality, and are often being acquired precisely because
the agency personnel are unfamiliar with the subject matter. Therefore,
your in‑house personnel may not be qualified to estimate the cost of a
major professional service contract. In these cases, it may be worth
obtaining a professional cost estimate by a firm not interested in the
final procurement. Other grantees are a valuable source of cost
estimating information if they have undertaken similar projects. The
contracting official should obtain and, when appropriate, update the
independent cost estimate in the manner best suited to the circumstances
of the particular procurement. Because reasonable price is a key
objective of every procurement, and is also a critical Federal interest
in Federally funded procurements, an independent cost estimate should be
prepared for every action before offers are received.

**2.4 SOURCE SELECTION PLAN**

**2.4.1 [File Documentation]{.underline}**

+-----------------------------------------------------------------------+
| **REQUIREMENT**                                                       |
+-----------------------------------------------------------------------+
| FTA Circular 4220.1E, Paragraph 7.i - *Written Record of Procurement  |
| History* requires grantees to maintain records detailing the history  |
| of a procurement. As a minimum, these records shall include:          |
|                                                                       |
| -   The rationale for the method of procurement;                      |
|                                                                       |
| ```{=html}                                                            |
| <!-- -->                                                              |
| ```                                                                   |
| -   Selection of contract type;                                       |
|                                                                       |
| ```{=html}                                                            |
| <!-- -->                                                              |
| ```                                                                   |
| -   Reasons for contractor selection or rejection; and                |
|                                                                       |
| ```{=html}                                                            |
| <!-- -->                                                              |
| ```                                                                   |
| -   The basis for the contract price.                                 |
+-----------------------------------------------------------------------+

**DISCUSSION**

**A properly documented procurement file provides an audit trail from
the initiation of the acquisition process to the beginning of the
contract. The file provides the complete background, including the basis
for the decisions at each step in the acquisition process. A
well-documented file speaks for itself, without need of interpretation
from the contract administrator. A well-documented file also supports
actions taken, provides information for reviews and investigations, and
furnishes essential facts in the event of litigation or legislative
inquiries.**

**Purpose**

Documents recording the key steps in each procurement are important for
a number of reasons, including the following:

-   You are taking legally and financially significant actions on behalf
    of your agency and the public. Information relating to these actions
    needs to be readily retrievable in the event that contract personnel
    are personally unavailable or their memory is not precise enough to
    assist the agency in moving forward with the administration of its
    program. You may routinely expect your colleagues to take actions
    based on the file.

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-   The key steps in a procurement, including those listed under
    \"Requirement,\" above, are frequently material elements in
    financial (e.g., payment or withholding) determinations or legal
    disputes. Written documentation will have great value to your agency
    under those circumstances.

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-   The agency's process may be reviewed, audited, and/or may be the
    subject of in‑depth investigation. This documentation is the history
    of the public procurement. Many hours of reconstructing events and
    decisions, stretching memories, and evaluating scenarios can be
    saved with a concise file that factually answers the questions
    typically raised.

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-   Finally, you reduce the likelihood of additional supervision or
    burdensome restrictions being placed on your agency or your
    procurement process with concise documentation of the decisions you
    are making.

Many procurement reviews, while finding few problems with the underlying
decisions or procurement results, may reach negative conclusions and
make unwanted recommendations simply because well considered decisions
were not well documented. Noting briefly why you did what you did may
help you and your agency, as well as satisfy the requirements of the
"Third Party Contracting Requirements" Circular.

**Best Practices**

Where appropriate, the procurement documentation file should contain:

-   Purchase request, acquisition planning information, and other
    pre-solicitation documents;

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-   Evidence of availability of funds;

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-   Rationale for the method of procurement (negotiations, formal
    advertising);

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-   List of sources solicited;

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-   Independent cost estimate;

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-   Statement of work/scope of services;

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-   Copies of published notices of proposed contract action;

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-   Copy of the solicitation, all addenda, and all amendments;

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-   Liquidated damages determination;

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-   An abstract of each offer or quote;

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-   Contractor\'s contingent fee representation and other certifications
    and representations;

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-   Source selection documentation;

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-   Contracting Officer\'s determination of contractor responsiveness
    and responsibility;

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-   Cost or pricing data;

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-   Determination that price is fair and reasonable including an
    analysis of the cost and price data, required internal approvals for
    award;

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-   Notice of award;

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-   Notice to unsuccessful bidders or offerors and record of any
    debriefing;

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-   Record of any protest;

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-   Bid, Performance, Payment, or other bond documents, and notices to
    sureties;

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-   Required insurance documents, if any; and

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-   Notice to proceed.

Purchase order forms (electronic or manual) and standard files for small
purchases can be designed to make the recording of most of the relevant
data for small purchases automatic. Bid and proposal files, particularly
if you use sealed bids under \$100,000 can also be standardized to
facilitate recording the appropriate data. For larger procurements,
there are often memoranda or correspondence that, if assembled in the
file, address many of the key issues.

The procurement file and the contract administration file can be
coordinated by standard practice, so that nothing between bid opening
(or proposal receipt) and notice of award is omitted.

**2.4.2 [Full and Open Competition]{.underline}**

1.  **[Full and Open Competition Principle]{.underline}**

+-----------------------------------------------------------------------+
| **REQUIREMENT**                                                       |
+-----------------------------------------------------------------------+
| FTA Circular 4220.1E, Paragraph 8.a requires all procurements to be   |
| conducted in a manner providing full and open competition. This       |
| requirement finds its way into Paragraph 9.h of the Circular which    |
| limits the use of noncompetitive contract awards to those situations  |
| when the award of a contract is infeasible under small purchase       |
| procedures, sealed bids, or competitive proposals and at least one of |
| several specifically named circumstances are present. Thus, contracts |
| with a value of more than \$100,000 shall be awarded by sealed bid or |
| competitive negotiation unless there is an explicit exception.        |
|                                                                       |
| FTA Circular 4220.1E, Paragraph 8.a considers the following practices |
| to be restrictive of competition:                                     |
|                                                                       |
| -   Unreasonable requirements placed on firms in order for them to    |
|     qualify to do business;                                           |
|                                                                       |
| ```{=html}                                                            |
| <!-- -->                                                              |
| ```                                                                   |
| -   Unnecessary experience and excessive bonding requirements;        |
|                                                                       |
| ```{=html}                                                            |
| <!-- -->                                                              |
| ```                                                                   |
| -   Noncompetitive pricing practices between firms or between         |
|     affiliated companies;                                             |
|                                                                       |
| ```{=html}                                                            |
| <!-- -->                                                              |
| ```                                                                   |
| -   Noncompetitive awards to any person or firm on retainer           |
|     contracts;                                                        |
|                                                                       |
| ```{=html}                                                            |
| <!-- -->                                                              |
| ```                                                                   |
| -   Restrictive use of brand names;                                   |
|                                                                       |
| ```{=html}                                                            |
| <!-- -->                                                              |
| ```                                                                   |
| -   Any arbitrary action in the procurement process; and              |
|                                                                       |
| -   Geographic preferences. [^6]                                      |
+-----------------------------------------------------------------------+

**DEFINITIONS**

[Competition]{.underline} ‑ The process by which two or more vendors
attempt to secure the business of a third party by the most favorable
price, quality, and service.

[Exclusionary]{.underline} ‑ Tending to limit competition for reasons
other than business or bona fide policy goals, such as price, quality,
and service.

**DISCUSSION**

**Full and open competition is the guiding principle of procurement
requirements and practices. You constantly seek to permit and encourage
meaningful interest and offers from all entities. Your practices should
be selective or rule out offerors only for business reasons (cost,
quality, and delivery). Because it is often easier not to accommodate a
potential new offeror, and easier to deal with fewer entities, you must
vigilantly cultivate ways to increase competition at reasonable
expense.**

**Purpose**

The principle of full and open competition has one primary and two
secondary purposes. The primary purpose is to obtain the best quality
and service at minimum cost. In other words, to get the best buy. The
secondary purposes are to guard against favoritism and profiteering at
public expense, and to provide equal opportunities to participate in
public business to every potential offeror.

[Best Buy]{.underline} ‑ The primary purpose of free and open
competition is to obtain for your customers (and the passengers, funding
partners, and local community or other vested interest) the optimum
combination of cost with goods and services. The most cost‑effective
procurement, the greatest value, and the best buy are all related terms.
The premise is that suppliers competing with each other will make
efforts to optimize the price and quality for you, even though it
minimizes their profit percentage.

A countervailing view is that having to compete increases the cost of
the goods and services. Some offerors will state, \"If I can have a sole
source contract, I can hold the cost down for you.\" This is a
short‑term perspective that is destructive in the long run. Even if a
lower price can be obtained in isolated circumstances, the odds are that
in most cases you can obtain a better buy through open competition. As
in all procurement practices, you can also benefit in the long run from
establishing a highly consistent expectation on the part of your
suppliers; they will compete more cost‑effectively and with less
difficulty, if they are confident that free and open competition is your
consistent practice. To succeed, you should diligently root out the
tendency to pursue false, short-term economies of limiting competition
in favor of free and open competition.

A provocative assertion is that, \"A unique characteristic of good
public purchasing is the underlying principle that more importance is
ultimately attached to the ways and means of obtaining prices than to
prices themselves.\" [^7] Whether this is true or whether the best buy
is more important than the means of procurement, it is certainly true
that you may be the voice in your transit system for protecting
procurement principles, particularly the principle of free and open
competition, against the occasional short‑sighted views of your
customers.

[Favoritism and Profiteering]{.underline} ‑ The concern that suppliers
or public agents may profit unjustly at public expense through poor
procurement practices is a constant theme in the history of government
procurement. While eliminating unjust gains does serve to achieve the
best price, the acute concern that suppliers or pubic officials may
exploit public procurements for their own gain at public expense is of
great significance and plays a major role in the public\'s overall
confidence in a transit operating entity.

[Offerors\' Opportunity]{.underline} ‑ Scrupulously fair treatment of
all offerors will foster the most satisfactory relations with the
offerors in the long run. Similarly, a firm expectation of free and open
competition is generally valued by the supplier community. However,
there can be circumstances where a supplier\'s right to participate is
at odds with the procuring agency\'s interest in the best buy. Examine
the case of failure of a delivery agency or the postal service to
deliver a proposal document. Although missing the proposal deadline was
not the fault of the proposer, its right to participate in public
business does not prevail over the procuring agency\'s interest in
proceeding with public business. Indeed, in some jurisdictions, a
disappointed bidder has no standing to enforce the competitive
procurement laws. However, to the extent Federal precedents apply to
your procurement, your offerors have an implied contract of fair‑dealing
during the procurement process. [^8] So while your primary goal is the
best buy, and an offeror may have no vested right to participate nor
vested profit interest in the possibility of participating, the

offeror does have a right to fair dealing during the solicitation and
selection process. To the

extent that it is not inconsistent with the best buy, you will want to
treat all potential offerors as fairly as possible.

**Best Practices**

The following are illustrative of practices you can undertake to advance
competition.

[Partner Information]{.underline} ‑ You can undertake outreach programs
with your supplier partners by preparing brochures that give background
information about your agency and contain assistance in the most
practical ways to identify opportunities to do business with your
agency.

[Partner Treatment]{.underline} ‑ You can establish an ethic in your
organization of treating suppliers as partners in the delivery of
transit service. Everything from the telephone manner of agency staff to
the consideration shown in arranging conferences and presentations can
contribute to an increase in competition.

[Advertisement]{.underline} ‑ A traditional practice to increase
competition, and still one of the most meaningful, is widespread
advertising to the extent practical. Developing economical means to
widen access to your procurement advertisements, such as use of the
internet and private bid room services, is an area worthy of continual
review and effort.

**2.4.2.2 [Restraints on Competition]{.underline}**

**2.4.2.2.1 [Brand Names]{.underline}**

+-----------------------------------------------------------------------+
| **REQUIREMENT**                                                       |
+-----------------------------------------------------------------------+
| FTA Circular 4220.1E Paragraph 8.a. requires:                         |
|                                                                       |
| > \"All procurement transactions will be conducted in a manner        |
| > providing full and open competition. Some of the situations         |
| > considered to be restrictive of competition include, but are not    |
| > limited to\...Specifying only a 'brand name' product instead of     |
| > allowing 'an equal' product to be offered without listing its       |
| > salient characteristics."                                           |
|                                                                       |
| Paragraph 8.c. requires:                                              |
|                                                                       |
| > \"\...All solicitations shall:                                      |
| >                                                                     |
| > \(1\) Incorporate a clear and accurate description of the technical |
| > requirements for the material, product, or service to be procured.  |
| > Such description shall not, in competitive procurements, contain    |
| > features that unduly restrict competition\....                      |
| >                                                                     |
| > \...When it is impractical or uneconomical to make a clear and      |
| > accurate description of the technical requirements, a 'brand name   |
| > or equal' description may be used as a                              |
| >                                                                     |
| > means to define the performance or other salient characteristics of |
| > a procurement. The specific features of the named brand which must  |
| > be met by offerors shall be clearly stated."                        |
+-----------------------------------------------------------------------+

**DEFINITIONS**

[Approved Equal]{.underline} ‑ An item or service which has been
approved by the procuring agency as equal to the brand name item
originally specified.

[Salient Characteristics]{.underline} - Those qualities of an item that
are essential to ensure that the intended use of the item can be
satisfactorily realized. The term is mainly used in connection with a
brand-name-or-equal description, which should set forth those salient
physical, functional, or other characteristics of the referenced product
that an equal product must have in order to meet the Authority\'s needs.

[Brand Name]{.underline} ‑ A name of a product or service that is
limited to the product or service produced or controlled by one private
entity or by a closed group of private entities. Brand names may include
trademarks, manufacturer names, or model names or numbers that are
associated with only one manufacturer.

[Design Specifications]{.underline} ‑ Specifications based on the design
of a product or service. Typical design specifications may include
dimensions, materials used, commonly and competitively available
components, and non‑proprietary methods of manufacturing.

[Performance Specifications]{.underline} ‑ Specifications based on the
function and performance of a product or service under specified
conditions, preferably conditions that can be reproduced for testing
purposes. Performance specifications may include useful life,
reliability in terms of average intervals between failure, and capacity.

**DISCUSSION**

**Brand names (e.g. \"Motorola Metrocom,\" \"Webasto Heater\") are among
the most restrictive types of specification. Design and performance
specifications are the preferred alternatives. However, in some cases
using sealed bids, you may not be able to ensure you will receive an
acceptable product without mentioning a brand name. (In negotiated
procurements this is less often necessary because a performance or
design specification can be used and the proposed brands can be reviewed
during negotiations.) If you must use a brand name in your
specification, you can still allow bidders to substitute an equal
product with a different brand name. You may reserve the right to
determine whether a particular brand or model is equal to the one you
specified. If you use a brand name and allow equal brands, you must also
specify the salient characteristics of the specified brand that will be
among the criteria used in determining whether a suggested substitute is
equal to the specified brand or not.**

**If a grantee believes that a specific brand name must be used in a
specification and that it cannot accept any alternative product; i.e.,
it cannot allow a vendor to propose "an equal" product, the grantee must
process this as a sole source (non-competitive) procurement action
through the proper approving officials within the grantee's organization
prior to release of the solicitation.**

**Purpose**

The restriction on brand names serves the central purpose of maximizing
free and open competition to obtain the best buy. If you specify a brand
name with no opportunity for substitution, the original supplier of the
brand name has an effective monopoly. This results in exorbitant prices
and cessation of innovation and product development. In complex
equipment and construction contracts where a large number of components
are specified, the use of brand names can be even more restrictive than
in procurement of individual units because the proliferation of brand
names discourages the prime contractor from considering substitutes
which might contribute to a more cost‑effective end product. Therefore,
in the long run, you will get the best buy if you avoid the use of brand
names as much as possible.

In procuring complex systems, however, such as rolling stock and
electronic systems, where reliability or other performance standards are
mission critical to your transit service, you and your customers may not
be able to specify a component in terms of design or performance and
still ensure that your lowest responsive and responsible bidder will
offer you a satisfactory component. In these cases, some price and
quality competition can be preserved by allowing the substitution of
equal items with other brand names. If you are the one who will
determine which brand names are equal to the one specified, then you
have not sacrificed any control over the quality of the product. This
competition by substitution is facilitated by listing the salient
characteristics, such as you would use if you used a design or
performance specification, (e.g., \"10‑year life under varying voltage
conditions of transit bus electrical systems\"), so that bidders will be
able to judge which brands may be equal to the specified brand.

**Best Practices**

[Design and Performance Specifications]{.underline} ‑ You can work with
your customers to see if brand names can be removed from the
specification by substituting design or performance specifications. Like
many of the qualities of fully open and competitive procurement
practices, this is an effort that may seem over‑zealous under the time
pressure of a specific procurement, but you can constantly seek to
remove restrictions and improve the competitiveness of your procurement
processes so that you generally achieve the best buy. If adequate design
and performance specifications cannot be prepared, listing several
acceptable brand names is far better than specifying just one.

\"[Or Approved Equal]{.underline}\" ‑ Whenever brand names are used,
there are several ways you can clarify beyond a doubt that the brand
name is used merely as a specification and not as a statement of a
preference for the specific product specified. One way is to include a
phrase such as \"or equal,\" \"or approved equal,\" or \"similar in
design, construction and performance\" with the brand name. Many
standard equipment and construction documents also contain a clause in
the general

provisions that states that even if the phrase \"or approved equal\" is
inadvertently omitted, it is implied after any brand name. If you
specify \"or equal,\" you shall clearly set forth those minimum
essential characteristics and standards to which the material, product
or service must conform if it is to satisfy its intended use. [^9]

Some of the onus of restriction is lifted for a large volume of transit
procurements by the "Third Party Contracting Requirements" Circular\'s
sanction for noncompetitive procurement of associated capital
maintenance items from the original equipment manufacturer. The Circular
states:

> *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 at least one of the
> following circumstances applies: (e) the item is an associated capital
> maintenance item as defined in 49 U.S.C. § 5307(a)(1) that is procured
> directly from the original manufacturer or supplier of the item to be
> replaced.* [^10]

The Circular requires, however, that \"the grantee must first certify in
writing to FTA; (a) that such manufacturer or supplier is the only
source for such item; and (b) that the price of such item is no higher
than the price paid for such item by like customers.\" [^11]

[Approval Process]{.underline} ‑ If you have listed enough salient
characteristics and the brand name is an insignificant factor in the
overall procurement, you may simplify the procurement by not requiring
approval. The contractor would then have the right to substitute a
product. The ultimate determination of whether the substitute was equal
to the brand specified, if contested, would be through the dispute
resolution process culminating in the courts.

The better practice, however, is to provide an approval process,
preferably prior to bid opening, so that bidders, in finalizing their
bids will be confident about their right to substitute a brand they
consider to be more cost‑effective than the one specified. This will
also give you confidence about the product or service you will receive.
(Brand names may be used in competitive negotiation for complex systems,
but the approval process need only require approval prior to award
rather than at proposal submission. Approval of equal brands is usually
simply a part of the discussions or negotiations.) You will want to
avoid requiring bidders to wait until after award to obtain approval,
because a disapproval at that time may place a bidder (now contractor)
in financial jeopardy and may prompt litigation.

If you want to require pre‑bid approval, the solicitation can specify a
time and format for requesting approval of equal brands. Typically, this
is the same time and format used for requesting other changes in the
specifications.

Approve requests for substitution whenever you determine that the
offered product is equal in all material respects to the products
referenced. Offers need not be rejected because of minor differences in
design, construction, or features, which do not affect the suitability
of the product for its intended use.

Determinations typically identify, or incorporate by reference,
identification of the specific products, which the contractor is to
furnish. Such identification can include any brand name, make or model
number, and descriptive material. You may want to issue your
determination, particularly any approval, to all bidders by addendum or
as your procedures provide. (In some competitive negotiations where
early and open discussion of creative integration of substitute brands
is important, issuance of approvals to competing proposers is considered
to constitute leveling the playing field, which would discourage open
negotiations. You can consider keeping design innovations confidential
but issuing approval of equal brand names to all proposers.) As with
other substantive addenda to a solicitation, consider extending the bid
period if the approvals are issued shortly before the scheduled bid
opening, to allow all bidders to take advantage of the information prior
to the bid opening.

Even if you have a pre‑bid approval process, a contractor can normally
request additional approvals after award. Consider clarifying in your
solicitation that the contractor who waits until after award proceeds at
its own risk.

2.4.2.2.2 [Written Standards of Conduct and Conflicts of Interest:
Personal and Organizational]{.underline}

**[Written Standards of Conduct]{.underline}**

+-----------------------------------------------------------------------+
| **REQUIREMENT**                                                       |
+-----------------------------------------------------------------------+
| 49 CFR § 18.36(b)(3) establishes for the Department of Transportation |
| the government-wide requirement that state and local government grant |
| recipients must have written standards of                             |
|                                                                       |
| conduct for procurement personnel.                                    |
|                                                                       |
| Grantees and sub-grantees will maintain a written code of standards   |
| of conduct governing the performance of their employees engaged in    |
| the award and administration of contracts. No employee, officer or    |
| agent of the grantee or sub-grantee shall participate in selection,   |
| or in the award or administration of a contract supported by\         |
| Federal funds if a conflict of interest, real or apparent, would be   |
| involved. Such a                                                      |
|                                                                       |
| conflict would arise when: (I) The employee, officer or agent, (ii)   |
| Any member of his\                                                    |
| immediate family, (iii) His or her partner, or (iv) An organization   |
| which employs, or is about to employ, any of the above, has a         |
| financial or other interest in the firm selected for award. The       |
| grantee\'s or sub-grantee\'s officers, employees or agents will       |
| neither solicit nor accept gratuities, favors or anything of monetary |
| value from contractors, potential contractors, or parties to          |
| sub-agreements. Grantee and sub-grantees may set minimum rules where  |
| the financial interest is not substantial or the gift is an           |
| unsolicited\                                                          |
| item of nominal intrinsic value. To the extent permitted by State or  |
| local law or regulations, such standards or conduct will provide for  |
| penalties, sanctions, or other disciplinary actions for violations of |
| such standards by the grantee\'s and sub-grantee\'s officers,         |
| employees, or agents, or by contractors or their agents. The awarding |
| agency may in regulation provide additional prohibitions relative to  |
| real, apparent, or potential conflicts of interest.                   |
|                                                                       |
| 49 C.F.R. Sec. 19.42 imposes the same requirement for institutions of |
| higher education, hospitals and other non-profit organizations.       |
|                                                                       |
| > The recipient shall maintain written standards of conduct governing |
| > the performance of its employees engaged in the award and           |
| > administration of contracts. No employee, officer, or agent shall   |
| > participate in the selection, award, or administration of a         |
| > contract supported by Federal funds if a real or apparent conflict  |
| > of interest would be involved.                                      |
| >                                                                     |
| > Such a conflict would arise when the employee, officer, or agent,   |
| > any member of his or her immediate family, his or her partner, or   |
| > an organization which employs or is about to employ any of the      |
| > parties indicated herein, has a financial or other interest in the  |
| > firm selected for an award. The officers, employees, and agents of  |
| > the recipient shall neither solicit nor accept gratuities, favors,  |
| > or anything of monetary value from contractors, or parties to       |
| > sub-agreements. However, recipients may set standards for           |
| > situations in which the financial interest is not substantial or    |
| > the gift is an unsolicited item of nominal value. The standards of  |
| > conduct shall provide for disciplinary actions to be applied for    |
| > violations of such standards by officers, employees, or agents of   |
| > the recipient.                                                      |
|                                                                       |
| Paragraph 7.c of FTA Circular 4220.1E implements this requirement for |
| FTA grant recipients:                                                 |
|                                                                       |
| > Grantees shall maintain a written code of standards of conduct      |
| > governing the performance of their employees engaged in the award   |
| > and administration of contracts. No employee, officer, agent,       |
| > immediate family member, or Board member of the grantee shall       |
| > participate in the selection, award, or administration of a         |
| > contract supported by FTA funds if a conflict of interest, real or  |
| > apparent would be involved.\                                        |
| > \                                                                   |
| > Such a conflict would arise when any of the following has a         |
| > financial or other interest in the firm selected for award:         |
| >                                                                     |
| > 1\. The employee, officer, agent, or Board member,                  |
| >                                                                     |
| > 2\. Any member of his/her immediate family,                         |
| >                                                                     |
| > 3\. His or her partner, or                                          |
| >                                                                     |
| > 4\. An organization that employs, or is about to employ, any of the |
| > above.                                                              |
| >                                                                     |
| > The grantee\'s officers, employees, agents, or Board members will   |
| > neither solicit not accept gifts, gratuities, favors, or anything   |
| > of monetary value from contractors, potential contractors, or       |
| > parties to sub-agreements. Grantees may set minimum rules where the |
| > financial interest is not substantial or the gift is an unsolicited |
| > item of nominal intrinsic value. To the extent permitted by state   |
| > or local law or regulations, such standards of conduct will provide |
| > for penalties, sanctions, or other disciplinary action for          |
| > violation of such standards by the grantee\'s officers, employees,  |
| > or agents, or by contractors or their agents.                       |
+-----------------------------------------------------------------------+

[Conflicts of Interest: Personal and Organizational]{.underline}

+-----------------------------------------------------------------------+
| REQUIREMENTS                                                          |
+-----------------------------------------------------------------------+
| As an ethics requirement, Section 3(a) of the FTA Master Agreement    |
| requires the written standards of conduct to encompass both personal  |
| and organizational conflicts of interest and defines them as follows: |
|                                                                       |
| > 1\. [Personal Conflicts of Interest]{.underline}. The Recipient\'s  |
| > code or standards of conduct shall prohibit the Recipient\'s        |
| > employees, officers, board members, or agents from participating in |
| > the selection, award, or administration of a third party contract   |
| > or\                                                                 |
| > sub-agreement supported by Federal funds if a real or apparent      |
| > conflict of interest would be involved. Such a conflict would arise |
| > when any of the following parties                                   |
|                                                                       |
| has a financial or other interest in the entity selected for award:   |
| (a) an employee, officer, board member, or agent; (b) any member of   |
| his or her immediate family; (c) his or her partner; or (d) an        |
| organization that employs, or intends to employ, any of the above.    |
|                                                                       |
| > 2\. [Organizational Conflicts of Interest]{.underline}. The         |
| > Recipient\'s code or standards of conduct must include procedures   |
| > for identifying and preventing real and apparent organizational     |
| > conflicts of interest. An organizational conflict of interest       |
| > exists when the nature of the work to be performed under a proposed |
| > third party contract\                                               |
| > or sub-agreement may, without some restrictions on future           |
| > activities, result in an unfair competitive advantage to the third  |
| > party contractor or sub-recipient or impair its objectivity in      |
| > performing the contract work.                                       |
|                                                                       |
| 49 CFR § 18.36(c)(v) and 49 CFR § 19.43 prohibit organizational       |
| conflicts of interest as restrictive of competition. Section 19.43    |
| further states as follows:                                            |
|                                                                       |
| > All procurement transactions shall be conducted in a manner to      |
| > provide, to the maximum extent practical, open and free             |
| > competition. The recipient \[\[Page 167\]\] shall be alert to       |
| > organizational conflicts of interest as well as noncompetitive      |
| > practices among contractors that may restrict or eliminate          |
| > competition or otherwise restrain trade. In order to ensure         |
| > objective contractor performance and eliminate unfair competitive   |
| > advantage, contractors that develop or draft specifications,        |
| > requirements, statements of work, invitations for bids and/or       |
| > requests for proposals shall be excluded from competing for such    |
| > procurements. Awards shall be made to the bidder or offeror whose   |
| > bid or offer is responsive to the solicitation and is most          |
| > advantageous to the recipient, price, quality and other factors     |
| > considered. Solicitations shall clearly set forth all requirements  |
| > that the bidder or offeror shall fulfill in order for the bid or    |
| > offer to be evaluated by the recipient. Any and all bids or offers  |
| > may be rejected when it is in the recipient\'s interest to do so.   |
|                                                                       |
| 40 CFR § 1506.5(c) concerns the engagement of a consultant for the    |
| preparation of an environmental impact statement. It states the       |
| following:                                                            |
|                                                                       |
| > Environmental impact statements. Except as provided in Secs. 1506.2 |
| > and 1506.3 any environmental impact statement prepared pursuant to  |
| > the requirements of NEPA shall be prepared directly by or by a      |
| > contractor selected by the lead agency or where appropriate under   |
| > Sec. 1501.6(b), a cooperating agency. It is the intent of these     |
| > regulations that the contractor be chosen solely by the lead        |
| > agency, or by the lead agency in cooperation with cooperating       |
| > agencies, or where appropriate by a\                                |
| > cooperating agency to avoid any conflict of interest. Contractors   |
| > shall execute a disclosure statement prepared by the lead agency,   |
| > or where appropriate the cooperating                                |
| >                                                                     |
| > agency, specifying that they have no financial or other interest in |
| > the outcome of the\                                                 |
| > project. If the document is prepared by contract, the responsible   |
| > Federal official shall furnish guidance and participate in the      |
| > preparation and shall independently evaluate the statement prior to |
| > its approval and take responsibility for its scope and contents.    |
| > Nothing in this section is intended to prohibit any agency from     |
| > requesting any person to submit information to it or to prohibit    |
| > any person from submitting information to any agency.               |
+-----------------------------------------------------------------------+

**DISCUSSION**

# A. Why Conflicts of Interest Pose a Problem

Every citizen is entitled to have confidence in the integrity of
government. Therefore, when using public funds for the purchase of goods
or services, each FTA grantee must prevent its personnel from taking any
action that might result in \-- or even create the appearance of \-- a
personal or organizational conflict of interest. Avoiding conflicts of
interest, through the implementation of written standards of conduct,
benefits the grantee in many ways and leads to a more efficient and
credible organization, while failure to deal with conflicts may not only
adversely impact the project itself but may also jeopardize the
grantee's ability to receive or retain federal funds. [^12]

# 

# B. Responsibility of Grantee

The grantee is responsible for avoiding both personal and organizational
conflicts of interest. Thus, grantees should be vigilant in preventing
and mitigating possible conflicts**.**

# 

# C. Standards of Conduct

Each grantee must have written standards of conduct governing the
performance of its personnel involved in the selection, award and/or
administration of contracts. [^13] The standards must prohibit the
grantee\'s or sub-grantee\'s officers, employees or agents from
soliciting or accepting gratuities, favors or things of monetary value
from contractors, potential contractors, or parties to sub-agreements.
The standards may contain minimum rules where the financial interest is
not substantial or the gift is an unsolicited item of nominal intrinsic
value. To the extent permitted by State or local law or regulations, the
standards should provide for penalties, sanctions, or other disciplinary
actions for violations of such standards by the grantee\'s and
sub-grantee\'s officers, employees, or agents, or by contractors or
their agents. These written standards must prohibit *personal* and
*organizational* conflicts of interest*, real* and *apparent*.

# D. Personal Conflicts of Interest

*Personal Conflict of Interest*: A personal conflict of interest arises
when one of the grantee's employees (including contractor employees),
officers, board members, or agents (including outside consultants)
involved in the selection, award or administration of a third party
contract or sub-agreement [^14] supported by Federal funds \-- or a
member of his or her immediate family, partner, or outside employer or
prospective employer \-- has a financial interest in the entity

selected, or competing, for the contract. [^15] A personal conflict of
interest also arises where any grantee employee, officer, board member,
or agent solicits or accepts gifts, gratuities, favors, or anything of
monetary value from a contractor, potential contractor, or party to a
sub-agreement. [^16] In addition, a personal conflict of interest arises
where any such person uses his position, or non-public information
gained during his work for the grantee, for personal gain, including
gain inuring to an immediate family member, partner, or current or
potential employer. These scenarios can result in potential
organizational conflicts for employers, or personal conflicts of
interest for the individual.

# 

# E. Organizational Conflicts of Interest

*Organizational Conflict of Interest*: An organizational conflict of
interest occurs where - because of other activities, financial
interests, relationships, or contracts - a contractor is unable, or
potentially unable, to render impartial assistance or advice to the
grantee; the contractor's objectivity in performing the contract work is
or might be impaired; or a contractor has an unfair competitive
advantage. [^17] Organizational conflicts of interest can cause two
distinct problems: *bias* and *unfair competitive advantage.* [^18]

*Bias* arises when a contractor is placed in a situation where it may
have an incentive to distort its advice or decisions. Whenever the
grantee is awarding a contract that involves the rendering of

advice, the grantee must consider whether there exists the potential for
a conflict of interest on the part of the contractor rendering the
advice. [^19]

*Unfair competitive advantage* occurs when one contractor has
information not available to other contractors in the normal course of
business. For example, an unfair competitive advantage would occur when
a contractor developing specifications or work statements has access to
information that the grantee has paid the contractor to develop, or
information which the grantee has furnished to the contractor for its
work, when that information has not been made available to the public.
Because this information enhances the contractor's competitive position
in the procurement process, it represents an unfair competitive
advantage over the other offerors. One solution to this problem is to
fully disclose all information to all prospective offerors for a
reasonable period of time prior to the grantee's receipt of proposals
for the follow-on work. Another example where an unfair competitive
advantage might arise is where a contractor is allowed to write
specifications or statements of work around its own or an affiliate's
corporate strengths or products and then compete for a contract based on
those specifications. The grantee can prevent such an unfair advantage
by placing reasonable restrictions or even a prohibition on the
contractor's involvement in the subsequent procurement. If an individual
employee has

access to inside information, a possible solution would be to wall off
that employee, so he cannot give his employer an unfair competitive
advantage. Grantees should exercise care that specifications do not
provide an unfair competitive advantage to any party. Grantees should
also be alert to affiliations among contractors that might give one
contractor an unfair competitive advantage over others.

Note: A competitive advantage is not always *unfair.* A contractor may
have a *fair* competitive advantage by virtue of its prior experience,
its expertise, its more efficient operations, etc. Occasionally an
incumbent contractor may have what appears to be an insurmountable
competitive advantage by virtue of its previous work for the grantee. An
advantage of this type may not necessarily be *unfair.*

# 

# F. The "Appearance of Conflict" Standard

As stated above, FTA rules prohibit conflicts of interest \-- both real
and apparent. This rule applies to both personal and organizational
conflicts of interest. Thus, each grantee's written code of conduct must
prohibit real and apparent conflicts, not just actual conflicts of
interest. The\
grantee should utilize the "reasonableness" standard to determine
whether an "apparent" conflict of interest exists: *Would a reasonable
person with all the material facts believe there appears to be a
conflict?*

# G. Environmental Consultants

The Council on Environmental Quality (CEQ) has enacted regulations that
address the use of consultants in the environmental process. [^20] These
regulations are intended to prevent contractors who are hired to study
alternatives and potential environmental impacts of proposed projects
from presenting and profiting from biased recommendations.

The CEQ regulation at 40 CFR Section 1506.5 "prohibits a person or
entity from entering into a contract with a federal agency to prepare an
environmental impact statement (EIS) when that party has at that time
and during the life of the contract pecuniary or other interests in the
outcomes of the proposal. Thus, a firm which has an agreement to prepare
an EIS for a construction project cannot, at the same time, have an
agreement to perform the construction, nor could it be the owner of the
construction site." See "Guidance Regarding NEPA Regulations," 48 Fed.
Reg. 34263 (July 18, 1983). FTA recognized this principle in the bid
protest case of JMA v. LACMTA, MTA RFP #PS-4310-0964 (2001), holding as
follows: "FTA understands the CEQ regulations to prohibit an EIS
contractor from being awarded a contract that includes work dependent
upon the completion of the EIS and issuance of a ROD."

CEQ rules do not prohibit a consultant responsible for preparing an EIS
from submitting a proposal on work connected with the project after the
completion of the EIS. Indeed, in guidance offered by the CEQ, the
Council expressed concern that "some agencies have been interpreting the
conflicts provision in an overly burdensome manner." See "Guidance
Regarding NEPA Regulations," 48 Fed. Reg. 34263 (July 18, 1983). The
Council explained that, "\[i\]n some instances, multidisciplinary firms
are being excluded from environmental impact statement preparation
contracts because of links to a parent company which has design and/or
construction capabilities. Some qualified contractors are not bidding on
environmental impact statement contracts because of fears that their
firm may be excluded from future design or construction contracts....
The result of these misunderstandings has been reduced competition in
bidding for

EIS preparation contracts, unnecessary delays in selecting a contractor
and preparing the EIS, and confusion and resentment about the
requirement." Thus, the Council does not prohibit an EIS contractor from
bidding on work connected with the project after the contractor has
completed all performance required for the EIS, but it does prohibit
situations where the contractor has an interest in the outcome of the
EIS "at that time or during the life of" the EIS contract.

# H. Insisting on Impartiality

Each grantee is entitled to impartial advice from its consultants, based
solely on what is best for the transit system and the community, and not
for the benefit of persons with conflicting financial or other
interests. For additional protection, the grantee not only should
enforce its own written standards of conduct but insist, perhaps through
the use of certifications, that each of its employees, board members,
officers, or other agents (as well as contractor personnel) observe any
relevant code of professional responsibility governing his or her
conduct, such as the codes governing the conduct of lawyers, engineers,
architects, planners, and accountants. Among other things, this
requirement would demonstrate to the grantee's employees and contractors
the importance placed by the grantee on avoiding conflicts of interest.

**I. Grantee Decision to Proceed in Spite of Conflict of Interest.**

Finally, when a grantee has done all that reasonably can be done to
avoid, neutralize, or mitigate a real or apparent conflict of interest,
and if it is in the grantee's best interest to proceed with the contract
despite the conflict, the grantee needs to document its decision.
Documentation should include what steps were taken or considered, and
justification for the conclusion reached, before proceeding with the
contract. [^21]

## Best Practices

Every Agency employee involved in the award or administration of
contracts must be given a copy of the Agency\'s (or State\'s) written
standards of conduct, and they should be required to sign a statement
that they are familiar with and will abide by these standards. [^22]
These statements should be signed as a condition of employment. It would
be well to review and sign them again annually as part of the
employee\'s annual performance evaluation as a means of reinforcing the
importance of ethical conduct by the Agency\'s employees.

In some Agencies, the General Manager has issued a memorandum to all
employees summarizing the most sensitive issues dealing with ethical
conduct and emphasizing the importance of avoiding even the appearance
of conflicts of interest. One public Agency has inserted such a
memorandum into its Procurement Manual, together with the standards of
conduct. [^23]

One area of particular sensitivity concerns \"outside employment.\"
Employees must understand what kinds of activities or outside employment
(actual or prospective) are inconsistent with their Agency
responsibilities; e.g., furnishing advice or services to a firm which is
bidding on or planning to bid on a contract with the Agency, or which is
doing business presently with the Agency. One strategy employed by firms
bidding on contracts is to offer employment to critical procurement or
technical personnel working on the procurement (if the firm is selected
for award). This kind of situation creates a financial conflict of
interest for those employees to whom offers have been made. Employees
need to be forewarned of these and similar tactics which they may
encounter in the course of their Agency work. The Agency may want to
conduct training sessions for all Agency personnel doing sensitive work
in the acquisition of Agency equipment or services.

Many public Agencies have adopted disclosure statement requirements for
certain positions. These disclosure statements require that employees
occupying designated positions within the Agency disclose their
investments in businesses which engage in certain activities related to
the business of the Agency. Reportable interests might include companies
engaged in manufacturing rail transit rolling stock and related
components, transit equipment suppliers, construction companies engaged
in transit systems, etc.

The FTA Circular requires penalties, sanctions, or other disciplinary
action for violation of the standards of conduct by the grantee\'s
employees or by contractors. The lack of explicit penalties in
grantees\' procurement policies and procedures is a recurring
observation made in the FTA Procurement System Reviews. Grantees need to
adopt explicit written penalties for their employees and contractors who
violate their standards of conduct.

# 

# Procedural Suggestions

The following is an outline of the steps that each grantee should
consider taking before and during the procurement process and during
project administration. Conflicts also can occur even before the
pre-contracting phase begins, so grantees should *always* be vigilant to
the possibility of a conflict.

**A. *THE PRE-CONTRACTING PHASE***

**1. Prepare Written Codes of Standards of Conduct.** FTA requires that
each of its grantees maintain a written code of standards of conduct
applicable to its employees (including contractor employees), officers,
board members, and agents (including outside consultants) involved in
the selection, award or administration of contracts. Each grantee should
consult with its counsel, as well as its procurement personnel, as to
whether its code of conduct complies with FTA's requirements as set
forth in Section 3 of FTA's Master Agreement, Paragraphs 7(c) and
8(a)(5) of FTA Circular 4220.1E, Third Party Contracting Requirements,
and 49 CFR § 18.36 and Part 19, as applicable. Moreover, the grantee
should provide a copy of its code of conduct to each of its employees,
board members, officers, and other agents.

**2. Require Financial Disclosure Statements and/or Non-Conflict
Certifications.** When determining how to deal with potential conflicts
of interest, a grantee may choose "proactive" measures, "reactive"
measures, or a combination approach. "Proactive" measures are designed
to identify and prevent potential conflicts *prospectively*. For
example, a grantee interested in employing proactive measures should
consider requiring each of its employees (and others potentially
involved in the procurement process) to file an annual disclosure
statement concerning his or her financial and employment status and that
of immediate family members (to the extent state and local law permit
such a financial disclosure requirement). [^24] With this information on
file, the grantee can "proactively" determine, ahead of time, whether
any of its employees (etc.) have interests in any of the potential or
actual contractors on a particular project. The grantee, for example,
can run a search on the parents, subsidiaries, and affiliates of bidders
and contractors, as well as on any companies listed on employee
disclosure statements, and get a broad picture of any potential
conflicts. If a conflict is discovered, the grantee can \-- again,
"proactively" \-- wall off any employee who may have a potential
conflict from a particular project, thus avoiding the need for later
action.

In some cases a grantee may require its contracting personnel (officers,
board members, agents, etc., as applicable) to submit a "non-conflict"
certification on a project-by-project basis, before that person
commences work on the selection, award or administration of a contract.
Such\
certification would state that neither the employee (etc.) nor any
member of his or her immediate family has a financial or employment
interest in any of the relevant bidders or contractors for the
procurement in question. If the employee identifies a real or apparent
conflict of interest, then the grantee can take action to mitigate it.
This is a different, somewhat "reactive," approach than requiring annual
financial disclosure statements.

There are pros and cons to both approaches. With annual financial
disclosure statements, the grantee attempts to identify and mitigate
conflicts as early as possible in the procurement process; but in order
for this approach to be effective, the grantee's reviewer must both
review the disclosure statements and perform relevant research as well
as be aware of the various corporate interconnections. An advantage of a
project-specific disclosure statement is that it serves as a regular
reminder to employees of the importance of conflict avoidance, and thus
may prevent some conflicts of interest from arising in the first place.
Realistically, however, requiring disclosure statements on a
project-by-project basis generally is too onerous for the grantees that
handle many procurements every year. Moreover, this somewhat "reactive"
approach puts a serious burden on the individual employee (etc.) to
"self-certify" that he has no conflict on a particular project, with the
understanding that the grantee will hold him accountable for the
veracity of that certification. It is also possible that an individual
employee, unaware of the ownership or other links between prospective
bidders or contractors and the financial interests he holds, may
unknowingly self-certify that no conflict exists.

The two approaches, however, are not mutually exclusive, and the best
approach may be a combination of proactive and reactive tools.
Ultimately, each grantee must determine for itself the preferable
approach, considering the costs involved in administering its program
and any other matter the grantee deems pertinent to the decision. As
indicated above, any program requiring certifications or disclosure
statements from employees also should apply those requirements to the
other categories of individuals listed in FTA Circular 4220.1E,
specifically, officers, board members, and agents, including consultants
and contractors involved in the selection, award or administration of
contracts. Finally, the grantee should ask its counsel to review the
form of its financial disclosure statements or non-conflict
certifications for compliance with local, state, and federal law before
they are issued.

**3. Obtain Certifications of Compliance with Professional Codes of
Conduct.** The grantee should consider requiring each of its employees,
board members, officers, and agents to identify in writing any code of
professional responsibility governing his or her conduct, and to certify
that to the best of his or her ability he or she will comply with that
code whenever conducting business on behalf of the grantee. To be
effective, such a requirement must be coupled with a mechanism for
reporting violations to the appropriate enforcement entity.

**4. Prepare Written Procedures for Addressing Personal and
Organizational Conflicts of Interest.** The grantees' written procedures
should establish not only a means of identifying conflicts but also a
predictable method of resolving them. For example, once a personal
conflict has been identified, mitigating measures may include creation
of blind trusts, recusal or other limits on scope of participation,
procedures to allow the employee back inside the information bubble if
the conflict ends (e.g., the company that the employee owns stock in
does not win the contract), etc. The written procedures may address:

a\. Responsibility for identifying potential conflicts;

b\. Range of alternative actions;

c\. Typical situations and the indicated response, for example:

i\. Situations that may warrant advance restrictions:

> \- A contract for procurement evaluation services;
>
> \- A contract for advice on competing approaches;
>
> \- A contract for technical review and project oversight services; or

ii. Situations that may warrant other conflict-mitigation measures, or
    even a possible waiver, rather than a prohibition against a
    contractor's participation in the project:

> \- Complex design of integrated elements of a structure, piece of
> equipment, or system; or
>
> \- Successive development/design phases of innovative equipment or
> systems.

d.  Participation of qualified personnel in the resolution of conflicts;
    and

e\. Review and approval of conflict resolutions.

The grantee should seek the assistance of counsel in preparing written
procedures for resolving conflicts of interest.

**B. *THE PROPOSAL STAGE***

**1. Define the Project to Avoid Potential Conflicts.** Grantees should
anticipate potential conflicts and structure procurements accordingly.
For example, the grantee should not allow a company that prepares the
specifications for procurement to supply the products as well. Also, the
grantee should be careful to structure the project so as to avoid
conflicts among contractors and subcontractors. For example, on a large
project, the grantee could avoid possible *bias* by procuring one
contractor to perform the needed evaluation independently, and then
initiating a\
new procurement to obtain any system that may be required and excluding
the first contractor from that second competition. [^25]

**2. Consider Advance Restrictions.** When the grantee awards separate
contracts on related procurements, it might consider placing notice of
an advance restriction in the solicitation where a conflict may arise.
It is far better to identify a potential conflict involving two
contracts in the first solicitation than to award the first contract and
then address the conflict when awarding the second contract. Prime
contractors should be required to inform prospective subcontractors (and
to give evidence that they have done so) that the subcontractors also
could be subject to the restrictions in future contracting. This way,
each bidder (prime and subcontractors) for the first contract will be
aware of the situation and can make its own choice about which contract
to pursue. When an advance restriction is desired, consider including:

-   An explanation of the conflict or potential conflict;

-   The nature of the proposed restriction upon future contractor
    activities; and

-   The terms of any proposed clause and whether those terms are
    negotiable, depending on the nature of the acquisition.

**3. For Environmental Impact Statement Contracts, Comply with CEQ
Regulations.** Regulations promulgated by the Council on Environmental
Quality require each contractor who develops an environmental impact
statement to sign a disclosure statement (prepared by the grantee)
certifying that it has no financial or other interests in the outcome of
the proposed project. [^26] This requirement is intended to prevent
contractors who are hired to study alternatives and potential
environmental impacts of proposed projects from presenting and profiting
from biased recommendations. Pursuant to the regulations, grantees must
require the submission of a disclosure statement in RFPs for consulting
services so that such conflicts can be identified early in the
contracting process. The grantee also must comply with 40 CFR § 1506.5
and "Guidance Regarding NEPA Regulations," 48 Fed. Reg. 34263 (July 18,
1983), explained above in Section G of the Discussion.

**4. Consult With Legal Counsel.** Before defining the scope of any
project or publishing any document describing the project, such as a
statement of work, the grantee should ask its counsel to review the
project and any descriptive documentation for compliance with conflicts
rules.

**C. *THE SELECTION AND AWARD PHASE***

**1. Review Disclosure Statements (if required by the grantee) for
Potential Conflicts with Bidders.** If the grantee requires its
procurement staff to submit annual financial disclosure statements or
project-specific disclosure statements, the grantee should review the
information on such statements for potential conflicts before any
procurement staff begins work on the selection process. If the
employee's work on the project would cause a real or apparent conflict,
then the grantee should reassign his or her duties on the project to
another employee.

**2. Obtain No-Conflict Certifications from contract personnel (if
required by the grantee).** If the grantee requires its contract
personnel who will participate in the administration of a contract to
submit no-conflict certifications, then the grantee should furnish
information on the likely bidders to the contractor. Each contractor
employee who will be assigned to work on the procurement should submit
his or her certification to the grantee's reviewing official before the
selection process begins. If a contractor employee fails to submit the
required no-conflict certification, then the grantee should direct the
contractor to reassign that employee's duties to another employee who
has complied with the certification requirement.

D.  ***THE ADMINISTRATION PHASE***

**1. Monitor Contract Staff/Contractor Compliance with Conflicts
Rules.** During the administration phase of a project, the grantee
should require each of its employees (etc.) involved in the project to
report any changes in his or her financial holdings or other interests
that might cause a conflict of interest. Similarly, the grantee should
require the contractor to report any changes in the company's financial
holdings, newly developed contractual or other relationships, or those
of its parents, subsidiaries, and affiliates. In this way, the grantee
can monitor the situation and address personal or organizational
conflicts that might arise during the administration phase of the
project.

**2. Obtain Certifications from Contractor Personnel Governed by
Professional Codes of Responsibility.** Before a contractor begins work
on a project, the grantee should consider requesting a written statement
from any contractor personnel working on the project whose conduct is
governed by a professional code of responsibility, in each case
identifying any relevant code and certifying that he or she will comply
with its rules on all grantee-related work.

**E. *THROUGHOUT THE ENTIRE PROCESS***

**1. Consult with Legal Counsel.** Grantee procurement and technical
personnel are encouraged to work closely \-- and proactively \-- with
their legal counsel throughout the procurement process to review all
situations that appear to have the potential for a conflict of interest.
Counsel can help in any number of ways, including reviewing written
materials for compliance with conflicts of interest rules, preparing
restrictive contracting clauses suitable for the particular situation,
and helping to restructure the project to avoid conflict situations.
Counsel may also suggest that involvement by FTA Regional Counsel would
be appropriate and solicit Regional Counsel's advice when necessary.

**2. Mitigate Conflicts.** As potential conflicts arise during the
procurement process, the grantee must take steps to avoid the conflict
or, if that is not possible, mitigate its effects. For example, where a
grantee's board is responsible for awarding contracts, a board member
with an interest in a project bidder should disclose his interest and
recuse himself from the selection process. As another example, where an
employee has an interest in a project bidder, the grantee could create a
"fire-wall" preventing the employee from providing the bidder with any
information gained during his employment with the grantee that would
give the bidder an unfair competitive advantage. As always, the grantee
should consult with counsel in formulating an appropriate approach to
any conflict situation.

**2.4.2.2.3 [Geographic Restrictions]{.underline}**

+-----------------------------------------------------------------------+
| **REQUIREMENT**                                                       |
+-----------------------------------------------------------------------+
| Paragraph 15.h of the Master Agreement states:                        |
|                                                                       |
| > h\. [Geographic Restrictions]{.underline}. The recipient agrees to  |
| > refrain from using State or local geographic preference, except     |
| > those expressly mandated or encouraged by Federal\                  |
| > statute, such as those set forth in Subsection 15.i of this Master  |
| > Agreement below, or as permitted by FTA.                            |
| >                                                                     |
| > i\. [Architectural, Engineering, Design, or Related                 |
| > Services]{.underline}. \...Provided a sufficient number of          |
| > qualified firms are eligible to compete for the third-party         |
| > contract, geographic location may be a selection criterion\....     |
|                                                                       |
| Paragraph 8.b of FTA Circular 4220.1E states:                         |
|                                                                       |
| > b\. [Prohibition Against Geographic Preferences]{.underline}.       |
| > Grantees shall conduct procurements in a manner that prohibits the  |
| > use of statutory or administratively imposed in-State or local      |
| > geographical preferences in the evaluation of bids or proposals,    |
| > except in those cases where applicable Federal statutes expressly   |
| > mandate or encourage geographic preference. This does not preempt   |
| > State licensing laws. However, geographic location may be a         |
| > selection criterion in procurements for architectural and           |
| > engineering (A&E) services provided its application leaves an       |
| > appropriate number of qualified firms, given the nature and size of |
| > the project, to compete for the contract.                           |
+-----------------------------------------------------------------------+

**DISCUSSION**

**The prohibition against geographic preferences as stated in FTA
Circular 4220.1E is based upon 49 CFR Part 18.36 (c) (2). The only
exception noted to this prohibition is in the procurement of
architectural and engineering (A&E) services, where knowledge of local
conditions and building codes is a relevant factor in the quality of the
A&E services. One public Agency, in its procurement procedures manual
for A&E contracts, recognizes the importance of the A&E\'s knowledge of
local conditions, and requires that A&E proposals be evaluated in terms
of their:**

***Knowledge of the locality of the project, provided that application
of this criterion leaves an appropriate number of qualified firms, given
the nature and size of the project**.* [^27]

**This Agency has stated its policy in terms which are focused on the
one generally accepted reason for allowing geographical preferences - an
A&E firm\'s demonstrated knowledge of local conditions, which is a
factor affecting the quality of the final product. This same Agency
prohibits geographic restrictions, except for those permitted by FTA for
A&E services, not only for its own procurements but for those of its
contractors as well.**[^28]

**Some grantees have used very localized geographical restrictions in
their solicitations for parts or services which must be furnished on a
short lead-time basis; e.g., within one or two hours of the request. A
much better approach, and one that is not prohibited by the FTA
Circular, would be to require an ability by the contractor to respond
within the time frame needed**, **and not to stipulate a geographical
restriction in the solicitation. The reason is that many parts suppliers
maintain a staff which is capable of quick response even though they are
not in the immediate city or county of the grantee.**

**Grantee procurement officials are sometimes confronted with pressure
from their Board members to place contracts with local firms, and it is
necessary for the grantees to include explicit statements in their
procurement policies and procedures that geographical restrictions are
prohibited except for A&E procurements, citing the FTA prohibitions in
FTA Circular 4220.1E, paragraph 8.b.**

**2.4.2.2.4 [Prequalification]{.underline}**

+-----------------------------------------------------------------------+
| **REQUIREMENT**                                                       |
+-----------------------------------------------------------------------+
| Paragraph 8.d of FTA Circular 4220.1E states:                         |
|                                                                       |
| > d\. [Prequalification Criteria]{.underline}. Grantees shall ensure  |
| > that all lists of prequalified persons, firms, or products that are |
| > used in acquiring goods and services are current and include enough |
| > qualified sources to ensure maximum full and open competition.      |
| > Also, grantees shall not preclude potential bidders from qualifying |
| > during the solicitation period, which is from issuance of the       |
| > solicitation to its closing date.                                   |
+-----------------------------------------------------------------------+

**DISCUSSION**

**Prequalification of bidders and products has been used in several
circumstances, such as when an Agency is procuring critical equipment
with exacting performance requirements, or critical services which are
needed on a quick-reaction basis. A qualified products list (QPL) is a
listing of products which have been tested and found to have satisfied
all of the specified requirements. The products on the list may be
supplied by any responsible vendor bidding on the procurement. The
qualified bidders list (QBL) is a listing of bidders who are
manufacturing more complex items, such as buses, requiring sophisticated
manufacturing and quality control procedures. These bidders must be
reviewed carefully to determine if their internal controls and
procedures will produce satisfactory end products. These
pre-qualification procedures may also be appropriate for companies who
wish to bid on procurements for furnishing critical services, such as
quick reaction services for repairs, etc. Only those bidders on the
qualified bidders list may supply the products or services specified.
The Federal government has used this practice for critical military
equipment, such as jet engine turbine blades, or for critical
quick-reaction services such as ship repairs. Transit Agencies using
this procedure of establishing a qualified products list**

**(QPL) often cite a rationale of: \"For reasons of efficiency, economy,
compatibility, or maintenance reliability, there is a need for
standardization as to various supplies, materials, and equipment.\"**
[^29]

**Best Practices**

**[Documenting your decision to establish a QPL or QBL]{.underline} -**
Care must be taken to ensure that prequalification procedures are not
used to restrict full and open competition. Toward this goal Federal
Agencies are required to justify in writing the necessity for
establishing a prequalification requirement. [^30] Some transit Agencies
have also chosen to follow this practice of documenting the reasons why
a particular part or service is being placed on a qualified products
list (QPL) or a qualified bidders list (QBL), although they are not
required to do so by FTA. [^31]

**[Qualifying during solicitation period]{.underline}** - Some Transit
agencies have two different policies as to bids offering products which
have not been qualified prior to the solicitation. When using
non-Federal funds, the Agency will not allow bidders to offer
non-qualified products in response to a solicitation\--bidders must
obtain certification of their product before, and independently of, any
solicitation for that item. *When using grant funds, however, grantees
must allow vendors an opportunity to qualify their products during the
solicitation period* (FTA Circular 4220.1E, Paragraph 8.d). A grantee
would not be expected, however, to delay a proposed award (extend the
solicitation period) in order to afford a vendor the opportunity to
demonstrate that its product meets the standards in the specification.
The Federal procurement rules do not require Federal Agencies to delay
awards, and the standards applicable to these Agencies should be
appropriate for grantees as well. [^32]

**2.4.3 [Fixed Price v. Cost Reimbursement]{.underline}**

+-----------------------------------------------------------------------+
| **REQUIREMENT**                                                       |
+-----------------------------------------------------------------------+
| Paragraph 9.c of FTA Circular 4220.1E authorizes procurement by the   |
| Sealed Bid/Invitation For Bids (IFB) method when certain conditions   |
| are present. Among those listed is the condition that:                |
|                                                                       |
| > \(c\) The procurement lends itself to a firm fixed price contract   |
| > and the selection of the successful bidder can be made principally  |
| > on the basis of price.                                              |
|                                                                       |
| Paragraph 9.d authorizes procurement by the Competitive               |
| Proposal/Request for Proposals (RFP) method and either a fixed price  |
| or cost reimbursement type contract may be awarded.                   |
|                                                                       |
| Paragraph 7.i requires that grantees document their reasons for       |
| selecting the contract type as a part of the written record of        |
| procurement history.                                                  |
|                                                                       |
| Paragraph 10.e prohibits the cost plus a percentage of cost method of |
| contracting.                                                          |
+-----------------------------------------------------------------------+

**DISCUSSION**

**The selection of contract type is probably the single most important
decision that the procurement specialist will make in the acquisition
process. A properly selected contract type will work in the interests of
the buying Agency to provide a product or service which meets the
Agency\'s needs at a reasonable price without undue risks to the
contractor and without excessive contract administration costs and
contractor claims. A contract poorly suited to the complexity of the
requirement, and the degree of specificity of the specifications or
statement of work, can cause a disastrous situation for both the
contractor and the Agency. When Agencies have complex requirements, and
performance uncertainties make it difficult to predict the costs of
performance in advance, some type of flexibly-priced contract should be
considered. Where the length of contract performance extends over a long
period of time, some type of economic price adjustment terms may be
necessary. As requirements are repetitively acquired, and a history is
established, the Agency should be able to more clearly define the
requirement, and contractors should be able to assume greater risks of
performance at fixed prices. Grantees have a very wide latitude in
structuring a contract type which affords the best incentive to the
contractor for delivering the particular product or service being
acquired*. ***

**There are two broad categories of contract types: fixed-price
contracts and cost-reimbursement contracts. Within these two families of
contract types there are a number of subtypes offering differing degrees
of incentives. At the extremes are the firm-fixed-price contract, in
which the contractor has complete responsibility for the costs of
performance and the resulting profit or loss, and the
cost-plus-fixed-fee contract, in which the contractor has virtually no
risk for performance costs and the fee (profit) is fixed. Between these
two extremes are the various incentive-type contracts where the degree
of cost risk and profit incentive can be tailored to meet almost any
specific program situation.**

**All fixed-price contract types impose upon the contractor an
obligation to deliver the product specified in the contract, and he is
not entitled to payment of the stipulated price unless he delivers the
product and it meets the specifications called out in the contract. On
cost-reimbursement contracts the contractor is obligated only to give
its \"best efforts\" in order to be paid the costs of performance. The
fee, however, is earned for complete performance of the contract, and if
less than full performance is made, the buying Agency**

**is entitled to a reduction of the fixed fee based on the percentage of
completion of the work.)**

**2.4.3.1 [Fixed Price Contracts]{.underline}**

**DISCUSSION**

**A firm-fixed price contract establishes a single price, or a series of
line item or unit prices, that are not subject to any adjustment on the
basis of the contractor\'s cost experience in performing the contract.
The contractor takes full responsibility for the cost and profit
outcome, and thus the contractor has maximum incentive to control costs
and complete the contract on schedule. This contract type represents the
least administrative burden upon the contracting parties; e.g., it is
not necessary for the buyer to monitor contractor costs or to perform
contract closeout audits. In some cases, however, there may be a need
for audits if, for example, change orders have been issued on a
cost-reimbursable basis.**

**Firm-fixed-price contracts are appropriate for acquiring commercial
items, or for supplies or services which can be clearly defined with
either performance/functional specifications or design specifications,**
**and where performance uncertainties do not impose unreasonably high
risks upon the contractor.** [^33] **This aspect of performance risk is
important to judge realistically, for if contractors are put into
positions of undue risk and the worst case happens, the buying Agency
can look forward to excessive claims, possible litigation, a
poor-quality product where the contractor has \"cut corners\" to save
money, and in some cases, the bankruptcy of the contractor or refusal to
complete the contract. High-risk performance situations will also result
in contractors building costly contingencies into their prices for risks
that may never occur, resulting in higher than necessary prices and
excessive profits on that contract.**

**[Fixed Price Contracts With Economic Price Adjustment]{.underline} -
Fixed-price contracts may provide for price adjustments (upward or
downward) when specified contingencies occur. These contracts are
typically used when there is serious doubt about the stability of
selected costs or prices over an extended period of contract
performance. For example, a five-year fixed-price contract may present
an unusually high cost risk to a contractor for certain commodity prices
or labor costs, and the parties may agree to use an economic price
adjustment clause. Price adjustments may be based on published indices,
actual cost experiences of the contractor for certain materials or
labor, or increases or decreases in published prices for specific items.
The contract will define the circumstances under which the economic
price adjustment will be made and the means whereby it will be
calculated. Using economic price adjustment clauses is an excellent way
to deal with high-risk situations and avoid having to price the initial
contract on the basis of contingencies that may never occur. This
technique may also be necessary to get contractors to accept fixed-price
contracts that have a lengthy performance period.** [^34]

## Best Practices

You may want to refer to the *Federal Acquisition Regulations* (FAR),
Subpart 16.203 -*Fixed-price contracts with economic price adjustment*,
and the related contract clause language in FAR 52.216-2,3,4. These FAR
provisions and contract clauses are not required to be followed by FTA
grantees but they may prove helpful in structuring contract language for
specific contingencies. The FAR may be accessed online at
<http://www.arnet.gov/far/>.

**[Steel Price Escalation Clauses]{.underline}** -- Following are two
examples of steel price escalation clauses used by transit agencies. The
first clause (Sound Transit) uses a one-time price adjustment. The
second clause (New York City Transit) allows for multiple price
adjustments.

[One-Time Price Adjustment]{.underline} - Following is an example of an
economic price adjustment contract clause used by Sound Transit one
transit agency to provide for one steel price increase during the period
of the contract. Note that this clause:

1.  Bases the price adjustment on the steel supplier's invoices to the
    Contractor from the time the bid was prepared to the time the steel
    was ordered after the Notice to Proceed.

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1.  Requires that the Producer Price Index (PPI) support the price
    increase as invoiced by the steel supplier. This is an important
    safeguard in establishing the reasonableness of the supplier's
    higher price by comparing it to the industry norm.

2.  Limits the increase to the lesser of the percentage increase in the
    invoiced price vs. the PPI.

3.  Requires adequate documentation from the Contractor, and the
    agency's right to review the Contractor's bid preparation documents
    and supplier invoices.

4.  Does not contain a maximum percentage by which the contract price
    may be adjusted for steel price increases. Under normal
    circumstances you should include a maximum limit on the percentage
    increase you will allow but the inclusion here of the lesser of the
    supplier's increase vs. the PPI provides a certain degree of price
    protection to the agency. [^35]

5.  The clause provides for downward price adjustments as well as
    increases.

# 

# SP-9.10 STEEL PRICE ESCALATION

A.  A price adjustment clause is included in this Contract to provide
    additional compensation to the Contractor or a credit to Sound
    Transit for fluctuations in steel prices. This price adjustment is
    dependent upon either: an increase or decrease in the price of steel
    used in the production of products utilized on this project or an
    increase or decrease in the ratio of the Bureau of Labor Statistics
    -- Producer Price Index listed below. Payment or credit for steel
    price adjustments will be evaluated under the following conditions.
    Payment or credit will be made under the Contract Pay item:
    Provisional Sum -- Steel Price Escalation.

B. The conditions of this provision are as follows:

1.  This provision shall only apply to material cost changes that occur
    between the date of bid opening and the date of certified invoice.
    The Contractor is expected to order materials promptly upon Notice
    to Proceed (or upon shop drawing approval) and take possession of
    materials as quickly as reasonably possible. [^36]

2.  A price adjustment to provide additional compensation to Contractor
    will be considered and paid only where the price increase in steel
    is due to market conditions beyond the control of Contractor and its
    suppliers or vendors. No adjustment is allowed under this provision
    for increases due to any other cause or peril (including, but not
    limited to, strike, weather, vendor backlog, delay in fabrication,
    etc.). If a price adjustment is sought under this provision,
    Contractor shall certify to Sound Transit that the price increase
    was due solely to market conditions beyond its control or that of
    its suppliers and that Contractor exercised its best efforts to
    mitigate any price increase. Sound Transit reserves the right to
    verify the accuracy of such certification as a condition of payment.

3.  This price adjustment clause only applies to structural steel,
    reinforcing steel, rail, steel excavation support elements, and
    overhead catenary structure poles. To be considered, the category of
    material must have a total dollar value of \$25,000 or greater.

4.  The Contractor shall submit within 5 days of Notice of Award, the
    fabricator's or supplier's material price quotes for the items
    listed above that meet the requirements of Article 9.10B.3. The
    Contractor must certify that they are the actual quoted prices
    incorporated into the Contractor's bid amount submitted to Sound
    Transit for the represented pay item. Sound Transit has the right to
    inspect Contractor's bid preparation documents to verify the
    accuracy of such certification. Assuming such certification is
    accurate, these certified quotes will constitute the baseline steel
    material price. The quote must clearly identify the pay item(s) by
    number and description, describe the weights of the steel material,
    how the steel material will be utilized in the final project, and a
    breakdown of all costs including material, labor, equipment,
    overhead, and profit. This steel price escalation provision shall
    only apply to the steel component of the material quote. It shall
    not apply to any other materials used in the fabrication of an item
    supplied to the Contractor.

5.  For the items listed above that meet the requirements of Article
    9.10B.3, the increase or decrease in the steel materials unit cost
    must be in excess of 5 percent of the original quoted prices or the
    PPI as described below, for a price adjustment to the Contractor to
    be allowed.

6.  If there is an increase or decrease in steel materials cost in
    excess of 5 percent from the original quoted unit prices (or the PPI
    as described in Article 9.10F below), Sound Transit will evaluate
    and determine an increased or decreased payment(s) under this
    Contract as follows:

C. The adjustment will be determined by computing the mathematical
difference between the unit price that is 5 percent above (or below for
decreases in price) the base unit price (bid quote) and the actual
invoice unit price of the steel component. The final dollar value will
be determined by multiplying this adjustment by the represented quantity
of steel.

D. The Contractor shall submit to Sound Transit certified invoices as
soon as steel material is purchased. The invoices shall be listed in
chronological order and contain a tabulation of quantity, the order
date, the date shipped from the steel manufacturer, and the price per
unit weight (reflecting all deductions for quantity shipments) with a
breakdown as stipulated in Article 9.10B.4 above. Freight charges shall
be listed separately and are not included in this price adjustment.
These invoices shall be subject to audit verification.

E. Sound Transit will verify the increased or decreased percentage
between certified original quote and the actual invoice payment.

F. This change shall be supported by the U.S. Department of Labor --
Bureau of Labor Statistics index entitled "Producers Price Index" (PPI).
The values contained in the PPI are subject to revision 4 months after
original publication. The price adjustment for steel shall be a function
of the percentage of change of the price index for "Carbon Steel Scrap"
Series ID WPU101211. Do not use seasonally adjusted indices. This index
is available on the internet at:
<http://data.bls.gov/labjava/outside.jsp?survey=wp>.

G. The Producers Price Index (PPI) listed above must meet increase or
decrease by at least 5 percent over the same time period for Article
9.10C. to be valid.

H. For price increases, if the invoiced price increased, expressed as a
percentage, exceeds the PPI increase, expressed as a percentage, for the
same period, the adjustment will be based on the PPI percent increase;
if the invoiced price increase, expressed as a percentage, is less than
the PPI increase, expressed as a percentage, for the same period, the
adjustment will be based on the invoiced price increase.

I. For price decreases, if the value of the invoiced price decrease
expressed as a percentage is greater than the calculated value of the
PPI decrease, expressed as a percentage, for the same period, the
adjustment will be based on the value of the invoiced percent decrease.
If the value of the invoiced price decrease, expressed as a percentage,
is less than the value of the PPI decrease expressed as a percentage for
the same period, the adjustment will be based on the PPI percent
decrease.

J.  If the PPI controls in determining the price adjustment, Sound
    Transit will review the PPI 4 months after initial publication to
    ensure that the data have not been revised. Final payments will be
    adjusted accordingly.

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J.  Adjustment Formulas:

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```
1.  If Invoice Price Controls:

    a.  Price Increase:

> \(1\) Factor = (PC/PB) -- 1.05)
>
> If Factor is equal to or less than 0.0, no adjustment will be made.
>
> If Factor is greater than 0.0, continue: PA = Factor\*Q\*PB

b.  Price Decrease:

> \(1\) Factor = (PC/PB -- 0.95)
>
> If Factor is equal to or greater than 0.0, no adjustment is made.
>
> If Factor is greater than 0.0, continue: PA = Factor\*Q\*PB
>
> Where: PA = Steel manufacturing price adjustment, in lump sum dollars
>
> PB = Fabricator / supplier quoted price in bid (converted to dollars
> per pound)
>
> PC = Current certified invoice price (converted to dollars per pound)
>
> Q = Quantity of manufactured steel, in pounds

1.  If PPI Controls:

```{=html}
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```
a.  Price Increase:

> \(1\) Factor = (IC/IB) -- 1.05)
>
> If Factor is equal to or less than 0.0, no adjustment is made.
>
> If Factor is greater than 0.0, continue: PA = Factor\*Q\*PB

a.  Price Decrease:

> \(1\) Factor = (IC/IB -- 0.95)
>
> If Factor is equal to or greater than 0.0, no adjustment is made.
>
> If Factor is greater than 0.0, continue: PA = Factor\*Q\*PB
>
> Where: PA = Steel manufacturing price adjustment, in lump sum dollars
>
> PB = Fabricator / supplier quoted price in bid (converted to dollars
> per pound)
>
> IB = BLS PPI index at the time of bid
>
> IC = BLS PPI index at the time material is purchased from mill
>
> (invoice date; after final US DOL BLS adjustments)
>
> Q = Quantity of manufactured steel, in pounds

[Multiple Price Adjustments]{.underline} - Following is an example of an
economic price adjustment clause developed by New York City Transit for
solicitations. This provision allows for multiple price adjustments
during the period of the contract. Note that this clause refers to the
"Scrap Steel" index, but any index could be used depending on the
material being procured.

### SOLICITATION PROVISION

[PRICE ADJUSTMENT CLAUSE FOR ITEMS CONTAINING STEEL]{.underline}

> To All Prospective Bidders:
>
> New York City Transit (NYCT) is soliciting this item(s) utilizing a
> price adjustment clause. The clause set forth below is included in
> this solicitation because of the steel content of the item being
> procured and the dollar amount of the item. For illustrative purposes,
> an example of this formula is provided below to assist you in the
> preparation of your bid.

-   In order to apply the adjustment formula, NYCT will utilize the
    pre-determined percentage steel content of the item's unit price as
    set forth by NYCT in the Bid Quotation Sheets. This percentage shall
    remain fixed for the duration of the contract.

-   The unit price(s) that NYCT will pay for the item(s) during the
    first six months of the contract shall be the unit price quoted in
    the bid by the successful bidder.

-   Thereafter, the unit price may be adjusted, either up or down, every
    six months after award, reflecting the change in the Scrap Steel
    index set forth in the American Metals Market.

-   The adjustment will be in the form of a percentage and shall be
    determined by NYCT by comparing the Scrap Steel index on the day of
    bid opening to the index in effect on each six-month anniversary of
    the contract award date for the duration of the contract.

-   This adjustment percentage shall be applied to the portion of the
    unit price that represents the steel content of each item as
    predetermined by NYCT to arrive at the adjustment amount.

-   The adjustment amount is then applied to the original unit price set
    forth in the successful bidder\'s bid to arrive at the new unit
    price for the following six months.

-   No price adjustment shall be instituted unless the new price results
    in a percentage change of at least five (5) percent (increase or
    decrease) of the original unit price quoted by the successful
    bidder.

-   The unit price reverts back to the original unit price quoted if the
    price adjustment calculation at each successive six month interval
    results in a percentage change that is not at least five (5) percent
    (increase or decrease) of the original unit price quoted by the
    successful bidder.

-   Prices for release orders will be the price established for the six
    month time frame within which the release(s) is dated, regardless of
    delivery date.

-   If, for any reason, the index being utilized under this contract is
    discontinued for any reason, NYCT will select a new index to be
    applied.

> [EXAMPLE A]{.underline}:
>
> A. Successful Bidder\'s Unit Price: \$5.00
>
> B. % Of Item Containing Steel: 50%
>
> C. Portion of the Item\'s Price subject to a price adjustment: \$2.50
>
> D. Scrap Steel index on day of bid opening: 150
>
> E. Scrap Steel index at the six-month anniversary date of the bid
> opening: 180
>
> F. Percent change calculation: (E - D) ÷ D = percentage change.
>
> For example: (180 - 150) ÷ 150 = .20
>
> G. F X C: \$2.50 x .20 = \$0.50
>
> H. New Unit Price for next six months: A + G = \$5.50
>
> [EXAMPLE B]{.underline}:
>
> A. Successful Bidder\'s Unit Price: \$12.00
>
> B. % Of Item Containing Steel: 100%
>
> C. Portion of the Item\'s Price subject to a price adjustment: \$12.00
>
> D. Scrap Steel index on day of bid opening: 75
>
> E. Scrap Steel index at the six-month anniversary date of the bid
> opening: 30
>
> F. Percent change calculation:(E - D) ÷ D = percentage change.
>
> For example: (30 - 75) ÷ 75 = - 0.60
>
> G. F X C: \$12.00 x -0.60 = -\$7.20
>
> H. New Unit Price for next six months: A + G = \$4.80
>
> [EXAMPLE C]{.underline}:
>
> A. Successful Bidder\'s Unit Price: \$24.00
>
> B. % Of Item Containing Steel: 75%
>
> C. Portion of the Item\'s Price subject to a price adjustment: \$18.00
>
> D. Scrap Steel index on day of bid opening: 162
>
> E. Scrap Steel index at the six-month anniversary date of the bid
> opening: 194
>
> F. Percent change calculation:(E - D) ÷ D = percentage change.
>
> For example: (194-162) ÷ 162 = .1975
>
> G. F X C: \$18.00 x .1975 = \$3.555
>
> H. New Unit Price for next six months: A + G = \$27.555

**2.4.3.2 [Cost Reimbursement Contracts]{.underline}**

+-----------------------------------------------------------------------+
| #### **REQUIREMENT**                                                  |
+-----------------------------------------------------------------------+
| Paragraph 10.d of FTA Circular 4220.1E requires that Federal cost     |
| principles (described in FAR Part 31) be used to determine the        |
| allowability of costs incurred on third party cost-reimbursement      |
| contracts financed with Federal funds. However, grantees may          |
| reference their own cost principles if they comply with Federal cost  |
| principles.                                                           |
|                                                                       |
| Paragraph 10.e of FTA Circular 4220.1E prohibits the                  |
| cost-plus-a-percentage of cost method of contracting.                 |
+-----------------------------------------------------------------------+

### 

### DISCUSSION

**The cost-reimbursement contract is one that provides for payment of
allowable incurred costs, to the extent prescribed in the contract.
These contracts establish an estimate of total cost for the purpose of
obligating funds and establishing a ceiling on expenditures that the
contractor may not exceed without the approval of the contracting
officer. Cost-reimbursement contracts are suitable for use when the
uncertainties of performance do not permit costs to be estimated with
sufficient accuracy to use a fixed-price contract.**

**[Completion vs. Term Form]{.underline}- Two forms of cost-type
contracts are available for describing the contractor\'s responsibility:
the completion form and the term form. The *completion form* describes
the scope of work by specifying an end product or definite goal. This
form requires the contractor to complete the work and deliver the end
item as a condition for payment of the entire fee. If the contractor
fails to complete the contract, the buying Agency is entitled to a
reduction in the amount of the fee. This would mean that if the
contractor expended all the estimated cost and the work was not
complete, and the Agency decided not to add more funds (estimated cost)
to the contract, the contractor would not be entitled to full payment of
the original fixed fee. The term form of contract describes the work in
general terms and obligates the contractor to devote a specified level
of effort for a stated time period. The fixed fee is payable at the
expiration of the stated time period if the contractor has indeed
furnished the specified level of effort. Extension of the time period is
a new acquisition involving new cost and fee agreements (unless the
original time period expires and there remains a level of effort to be
provided, in which case the Agency may have the right to extend the
period of performance so as to use the remaining level of effort).**

**[Federal Cost Principles]{.underline}** - **FTA Circular 4220.1E
Paragraph 10.d requires grantees to use Federal Cost Principles to
determine allowable costs under cost-type contracts. 49 CFR 18.22,
*Allowable Costs,* defines the Federal Cost Principles for various types
of contractors. Contracts with commercial concerns are required to use
FAR Part 31 Cost Principles, or grantees may use their own cost
principles if they are consistent with FAR Part 31.**

**[Allowable Cost and Payment Clause]{.underline} -- Cost-type contracts
will need to include a clause or clauses addressing several important
issues regarding the payment of allowable costs. The clause used in
Federal contracts would be useful as a guide concerning the issues that
need to be addressed.** [^37] **The matters covered by the FAR clause,
and that should be defined in a grantee's contract (though the FAR
clause itself is not required), would include:**

a.  **The frequency of contractor billings for costs incurred;**

b.  **The reference to subpart 31.2 of the FAR for determining
    allowability of costs;**

c.  **Whether the contractor must have actually paid for the supplies or
    services used in contract performance before it submits an invoice,
    or whether the contractor may invoice for costs incurred but not yet
    paid;**

d.  **The provisional billing rates to be used during contract
    performance for indirect costs prior to establishment of final
    audited rates;**

e.  **The procedure to be followed in submitting cost proposals for
    establishing final indirect cost rates for the contract;**

f.  **The requirement that final costs (direct and indirect) be audited
    before final payment;**

g.  **The Contractor's assignment to the grantee of any refunds, rebates
    or credits accruing to the Contractor that are allocable to costs
    for which the contractor has been paid;**

h.  **A release discharging the grantee from any future claims arising
    out of the contract.**

**[Fixed Fee]{.underline} -- It is important that the contract contain a
clear statement as to how the contractor will be paid the fixed fee
called for in the contract (i.e., how the fee is earned). The Federal
clause states that the contractor is to be paid the fixed fee "for
performing this contract."** [^38] **Grantee CPFF contracts should be
clear in defining the contractor's performance responsibility for
earning the fee. For example, if it is a completion form contract, then
the contractor must complete the statement of work and deliver all
required documents. If, however, it is a term form contract, the
contractor must furnish the required level of effort called for in the
contract during the period of performance in order to earn the full fee.
It should be noted that a cost-type contract, while it is a "best
efforts" contract in terms of entitlement to payment of allowable costs,
does in fact require actual performance for entitlement to payment of
the full fixed fee. Anything less than complete performance entitles the
grantee to a credit in the fee based on the percent of actual completion
of the work called for in the contract. In this regard a CPFF contract
operates very much like a fixed price contract in requiring complete
performance by the contractor for full payment of the fixed fee. An
example of a payment of fixed fee clause used by a Federal agency that
illustrates this principle of entitlement to fee for performance is that
of NASA, which reads: "The fixed fee shall be paid in monthly
installments based upon the percentage of completion of work as
determined by the Contracting Officer." Grantees are encouraged to
incorporate a *Payment of Fixed Fee* clause in their contracts that
clearly states the contractor's responsibility to perform the contract
in order to be paid the fee. The clause should also state how the fee
will be paid on a monthly/incremental basis (e.g., based on a percentage
of completion of work as determined by the Contracting Officer). It is
also suggested that the grantee consider a *fee withholding provision*
that provides for a certain percentage of the fee to be withheld until
the contractor completes and delivers all documentation called for in
the contract. Once again grantees may want to review the Federal clause
for guidance.** [^39]

**[Advance Agreements]{.underline} -- Certain types of costs may be
allowable according to the cost principles, and yet present difficulties
in determining after-the-fact what is reasonable for the particular
circumstances of any given contract.** [^40] **It is advisable to
anticipate these areas of potential conflict and negotiate advance
agreements before the costs are incurred (this may be before or during
the contract but should always be before incurrence of the costs
involved). The types of costs that tend to be problematic, and for which
advance agreements would be particularly helpful, would include:**

a.  **Pre-contract costs;**

b.  **Royalties and other costs for use of patents;**

c.  **Compensation for personal services, including location allowances,
    hardship pay, off-site pay, and incentive pay;**

d.  **Time charged directly to the contract by corporate officers and
    senior management personnel who normally charge their time to
    indirect cost accounts;**

e.  **Compensation for professional consultants (e.g., legal, accounting
    and engineering);**

f.  **Travel and personnel relocation costs;**

g.  **Severance pay to employees on support services contracts;**

h.  **Training and education costs;**

i.  **General and administrative costs (e.g., corporate, division or
    branch allocations) attributable to the general management,
    supervision and conduct of the contractor's business as a whole).
    These costs are especially important in construction, job-site, and
    architect-engineer contracts.**

**[Approval of Subcontractors]{.underline} -- There will probably be
situations when a grantee may wish to require their prime contractors on
CPFF contracts to submit subcontracts for the grantee's consent prior to
award of the subcontract by the prime. Grantees will want to exercise
due diligence in the management and administration of CPFF contracts
where the grantee bears much of the risk of poor performance, including
cost overruns, for both the prime contractor and the prime's
subcontractors. For guidance in this area of grantee review and consent
to subcontracts, see the BPPM Section 9.4 - *Approval of
Subcontractors*.**

**[Adequacy of Contractor\'s Accounting System]{.underline} - It is
important to determine the adequacy of the contractor\'s accounting
system for cost-type contracts before awarding such a contract.** [^41]
**Care must be taken to assure that the accounting system can properly
identify contract costs by segregating them from the costs of other jobs
in the accounting records. Likewise it is important that the system of
allocating indirect costs to jobs/contracts produces a distribution of
costs which is fair and reasonable.**

**2.4.3.3 [Time and Materials Contracts]{.underline}**

+-----------------------------------------------------------------------+
| **REQUIREMENT**                                                       |
+-----------------------------------------------------------------------+
| Paragraph 7.j of FTA Circular 4220.1E states:                         |
|                                                                       |
| > j\. [Use of Time and Materials Contracts.]{.underline} Grantees     |
| > will use time and materials contracts only:                         |
| >                                                                     |
| > 1\. After a determination that no other type of contract is         |
| > suitable; and                                                       |
| >                                                                     |
| > 2\. If the contract specifies a ceiling price that the contractor   |
| > shall not exceed except at its own risk.                            |
+-----------------------------------------------------------------------+

**DISCUSSION**

**Time-and-Materials (T&M) contracts may be used for acquiring supplies
or services. These contracts provide for the payment of labor costs on
the basis of fixed hourly billing rates which are specified in the
contract. These hourly billing rates would include wages, indirect
costs, general and administrative expense, and profit. There is a
fixed-price element to the T&M contract - the fixed hourly billing
rates. But these contracts also operate as cost-type contracts in the
sense that labor hours to be worked, and paid for, are flexible.
Materials are billed at cost, unless the contractor usually sells
materials of the type needed on the contract in the normal course of his
business. In that case the payment provision can provide for the payment
of materials on the basis of established catalog or list prices in
effect when the material is furnished. These contracts also may provide
for the reimbursement of material handling costs, which are indirect
costs, such as procurement, inspection, storage, payment, etc. These
indirect costs are billed as a percentage of material costs incurred
(similar to the billing of overhead costs as a percentage of direct
labor). Such material handling costs must be segregated in a separate
indirect cost pool by the contractor\'s accounting system and must not
be included in the indirect costs included as part of the fixed hourly
billing rate for direct labor. It would always be prudent to obtain a
pre-award audit of the contractor\'s accounting system to determine the
adequacy of the system to properly segregate material handling costs
from other overhead costs being billed with the fixed hourly rates for
labor.**

**[Use Only When No Other Type Will Work]{.underline}** - ***The FTA
Circular requires that you make a determination, before using this type
of contract, that no other type of contract is suitable*. The reason why
this type of contract is the least preferable of all allowable types is
that it creates a disincentive for the contractor to complete the
contract in a timely manner. Since each labor hour expended carries with
it a profit (and a predetermined overhead charge) built into the fixed
hourly rate, the contractor is motivated to work as many hours as
possible. There is no incentive to complete the contract quickly, and
thus minimize total costs to the buyer. (In a CPFF contract the fee is
fixed in dollar terms at the outset of the contract, allowing the
contractor to earn the fee whenever the work is complete, thus providing
some incentive to finish the contract as quickly as possible.)**

**[Subcontracts]{.underline} - If your T&M contract will involve
subcontracts for large dollar items or services, you will need to
evaluate whether the contractor\'s material handling costs should be
charged to these large dollar subcontracts as an indirect cost (as an
overhead type of charge), because to do so may result in an inequitable
allocation of these indirect costs to your contract. This is because the
large dollar value subcontract will absorb a far greater proportion of
the indirect cost pool than it should, based on a reasonable assessment
of the material handling costs actually generated by the subcontract
versus those generated by all other materials procured by the contractor
for other customers. When this situation arises you will want to
negotiate an advance agreement with the contractor as to the charging of
material handling costs. It may be more equitable to pay for the cost of
subcontract administration on a direct charge basis; i.e., the labor
cost for the subcontract administrator charged directly. Or you may want
to negotiate a reduced indirect material handling cost rate to be
charged to the subcontract (which represents a more equitable allocation
of the material handling costs actually generated by the subcontract).**

**[Ceiling Price]{.underline} - You will need to specify the Agency\'s
maximum obligation (ceiling price) in the contract; i.e., the limitation
of the Agency\'s financial obligation which the total funds allotted to
the contract will allow. The contractor may not exceed this funding
limitation without your written authorization in the form of a contract
modification adding more funds.**

**[Proper Agency Surveillance]{.underline} - This type of contract
requires a high degree of Agency surveillance during performance in
order to provide reasonable assurance that efficient methods and cost
controls are used by the contractor.**

**[Avoid Cost Plus Percentage of Cost Arrangements]{.underline} - As
discussed below under CPPC contracts, care must be taken not to
structure an agreement which compensates the contractor at a
*predetermined percentage (for overhead or profit) of actual costs
incurred.* If you break out the overhead and profit from the labor rate
and call for them to be billed as separate rates based on actual labor
costs incurred, you will have an illegal cost-plus-percentage-of-cost
situation. Overhead and profit must be recovered as a part of the fixed
hourly billing rate for labor, as discussed above. You may allow the
contractor to bill material handling costs as an indirect cost rate
applied to actual material costs, provided the contractor segregates
material handling costs in the accounting system. You should conduct a
contract cost close-out audit of the material handling cost pool and
adjust the rates billed to those actually incurred (as you would do for
an overhead rate on a cost-reimbursement contract). However, where the
actual material handling costs are not large,**

**Agencies may elect to close out the T&M contract without a final cost
audit of the material handling cost pool.**

**2.4.3.4 [Labor Hour Contracts]{.underline}**

**DISCUSSION**

**Labor hour contracts are a variation of the time and materials
contract, differing only in that materials are not supplied by the
contractor. You should use this type of contract only when no other
would be suitable, and you need to document your determination if you
choose to use this type of contract.**

**2.4.3.5 [Cost Plus Percentage of Cost Contracts (CPPC)]{.underline}**

**DISCUSSION**

**FTA Circular 4220.1E clearly prohibits the use of this contracting
method. CPPC contracts are prohibited by statute and FTA may not grant
waivers for grantees to use this method of contracting.** [^42]
**Grantees must not only avoid using this type of contract themselves,
they must also insert clauses in their cost-type contracts that prohibit
their prime contractors from using CPPC subcontracts. Care must be taken
to avoid any kind of agreement whereby the contractor\'s fee would be
increased automatically with increases in a particular cost element.
Generally, any contractual arrangement whereby the contractor is assured
of greater profits by incurring additional costs will be held illegal.
The obvious problem with this form of contract is that profits increase
in proportion to dollars spent, thus providing a positive incentive to
inefficiency. *To fall within the definition of CPPC, the agreement must
provide that the contractor\'s compensation, or some portion of it, will
be computed as a percentage of some of the costs of performance.* So for
example, it is not permissible to pay for overhead (indirect) costs by
establishing a predetermined percentage in advance and stipulating that
overhead expense will be reimbursed as a stated percentage of some other
cost such as direct labor. The problem with this arrangement is that
such compensation may be greater than the contractor\'s actual and final
overhead expenses, which means the payment becomes additional profit. In
the same way, a time-and-materials contract which called for payment of
overhead and profit at predetermined percentages of 15% and 10% of cost
incurred was held to be illegal.** [^43]

**This is not to prohibit *provisional overhead rates* which are audited
and adjusted to actuals at the end of the contract, nor does it prohibit
provisional or interim fee payments based on costs being incurred,
because the total fee is fixed at the inception of the contract and will
not increase with increases in actual costs. It is also permissible to
pay a material handling charge as a percentage of material costs
incurred if the contractor has a separate material**

**handling cost pool. This indirect cost pool should be audited after
contract completion, and the billed rates should be adjusted to actuals
based on the audit.**

**Another way of avoiding the problem is to include overhead and profit
in fixed rates for labor. This is done in time-and-materials and labor
hour contracts where contractors are paid one rate for each hour of
labor performed. This type of arrangement is not illegal, but it still
tends to operate as a disincentive to control cost (more hours worked
equals more profits), and for this reason should be avoided whenever
other contracting options exist.**

**2.4.4 [Payments]{.underline}**

Payment is the buyer\'s most important contractual obligation. Payments
are the principal source of funds during contract performance allowing
the contractor to continue working. Delays in payments can have a
serious effect on the contractor\'s ability to continue performance.
When less than full payment is made of a contractor\'s invoice, the
terms *\"withholding\"* and *\"setoff\"* are

commonly used to describe the refusal to make full payment. The term
*\"final payment\"* usually implies that both parties to the contract
have fulfilled all of their responsibilities.

There are two major types of contract payments: (1) payments for
completed items of work (including *partial payments*), and (2)
*progress payments* based on costs incurred or upon a percentage of
completion of the work. Another type of payment, which is used only
under extraordinary circumstances, is payment in advance of doing the
work (*advance payments*).

**2.4.4.1 [Payment of the Price]{.underline}**

Payment of the contract price is due upon completion of the work and
submission of the contractor\'s invoice. When the contract authorizes
delivery or performance in increments, payment of a portion of the
contract price may be made before the contract is completed. Such
payments are referred to as *partial payments*. Partial payments are not
considered to be a financing technique but they can be an important
means of providing funds for performance, and they should be used
whenever the contract can be structured in terms of incremental stages
or deliveries and there are appropriate acceptance criteria for the
supplies, services or completed subsystems of a larger system. In other
words, when the Agency can safely inspect, test and accept these units
and make a \"final\" payment for those items delivered, without having
to worry about their functioning as part of a larger system, then
partial payments should be established in the contract.

**2.4.4.2 [Advance Payments]{.underline}**

+-----------------------------------------------------------------------+
| **REQUIREMENT**                                                       |
+-----------------------------------------------------------------------+
| FTA Circular 4220.1E, Paragraph 12.a, "Advance Payments," states:     |
|                                                                       |
| > "FTA does not authorize and will not participate in funding         |
| > payments to a contractor prior to the incurrence of costs by the    |
| > contractor unless prior written concurrence is obtained from FTA.   |
| > There is no prohibition on a grant recipient's use of local funds   |
| > for advance payments. However, advance payments made with local     |
| > funds before a grant has been awarded, or before the issuance of a  |
| > letter of no prejudice or other pre-award authority, are ineligible |
| > for reimbursement."                                                 |
+-----------------------------------------------------------------------+

**DISCUSSION**

**Advance payments are actually a method of financing and not a method
of paying for work completed or items delivered. They are made prior to
a contractor's incurrence of costs in order to enable the contractor to
perform the contract. The Federal Government places severe restrictions
on its own use of advance payments (FAR coverage may be found at FAR
Subpart 32.4). As indicated below in the paragraph "Exceptions to the
Prior Approval requirement," when advance payments are generally
accepted industry practice, FTA does not require prior approval.**

**The FTA Circular requires FTA approval before grantees may use this
form of financing on third-party contracts. However, the Circular
clearly restricts the advance payment prohibition to those contracts
where the grantee is using FTA funds for the advance payment. If the
advance payments are being made with non-FTA funds, then FTA has no
involvement in the decision and need not approve of it. Grantees are
free to use local funds to finance their contractors in this manner if
they deem it appropriate. The Circular also covers the situation where a
grantee may wish to use local funds for advance payments before a grant
has been awarded or before FTA has issued a letter of no prejudice to
the grantee. In these cases FTA will not reimburse the grantee later for
such payments.**

**[Exceptions to the Prior Approval Requirement]{.underline}-- The FTA
requirement for prior approval of advance payments does not apply to
transactions where it is "generally accepted industry practice" to pay
in advance. In these situations, grantees may make advance payments
without prior FTA approval. These situations would include (but not
necessarily be restricted to) the following types of transactions:**

1.  **Rent**

2.  **Tuition**

3.  **Insurance premiums**

4.  **Subscriptions to publications**

5.  **Software licenses**

6.  **Construction mobilization costs**

7.  **Public utility connections**

## Best Practices

New York City Transit (NYCT) completed a major procurement for rail cars
in which there were two payment schedules in the Request for Proposals
(RFP). The first was a payment schedule containing milestone payments
totaling 20% of the price of cars paid prior to the acceptance of the
first test trains. A second or \"Alternate\" payment schedule had
milestone payments of 42% of the price of cars paid prior to the
acceptance of the first test trains. Contractors were required to submit
proposals based on both payment scenarios, as well as any alternative
payment plan they wished to propose. NYCT requested that the Federal
Transit Administration (FTA) provide written concurrence to make
advanced payments up to approximately 45% of the price of the cars if
there was appropriate consideration for greater payments made up front.
In addition,\
NYCT required that an Advanced Payment Bond or Letter of Credit be
provided in the full amount of the price of cars paid prior to the
acceptance of the first test trains. FTA provided their written
concurrence to NYCT\'s request.

In order to evaluate the proposals received from the contractors, NYCT
performed a Net Present Value analysis of the 20%, 42% and other
contractor alternatives in order to quantify the value of the different
payment schedules. The analysis took into account the cost of money and
all aspects\
of the timing of invoicing, starting with receipt of the invoice through
the time for actual payment. The Net Present Value analysis showed that
appropriate consideration was given in the winning proposal and NYCT
accepted it. An Advanced Payment Bond or Letter of Credit was required
to protect all payments for cars prior to acceptance of the test
trains.\
\
This case shows a very conservative approach as to what is defined as an
Advance Payment. The Advance Payment is considered to be the amount paid
to the contractor for cars until the first trains are accepted by NYCT.
The contractor is required to design, build and test the first 18 cars,
which means that the contractor is incurring substantial costs during
this period. These costs include engineering and design hours,
supervision, ordering materials, set-up of the production line, etc. The
contract has a mobilization payment of 3% upon award of the contract and
approval of the Advance Payment Bond or Letter of Credit. Thereafter,
the contract has milestone (or completion-type progress payments) for
various submissions of designs, approvals of designs, starting of tests,
completion of tests, etc. A more liberal approach would define the
mobilization cost of 3% to be considered an Advance Payment and the rest
of the payments to be considered progress payments.

**2.4.4.3 [Progress Payments]{.underline}**

+-----------------------------------------------------------------------+
| **REQUIREMENT**                                                       |
+-----------------------------------------------------------------------+
| Paragraph 12.b of FTA Circular 4220.1E states:                        |
|                                                                       |
| > b\. Progress Payments. Grantees may use progress payments provided  |
| > the following requirements are followed: [^44]                      |
| >                                                                     |
| > 1\. Progress payments are only made to the contractor for costs     |
| > incurred in the performance of the contract. [^45]                  |
| >                                                                     |
| > 2\. The grantee must obtain adequate security for progress          |
| > payments. Adequate security may include taking title, letter of     |
| > credit or equivalent means to protect the grantee's interest in the |
| > progress payment. [^46]                                             |
+-----------------------------------------------------------------------+

# DISCUSSION

**Progress payments are a means of financing contractors that are
performing *fixed-price* contracts (a) under unusual circumstances where
a contractor cannot get private financing at a reasonable cost, or (b)
where the commercial practice for the item being procured is for the
buyer to provide financing (e.g., rolling stock procurements).** [^47]
**There are two major types of progress payments: those based on costs
and those based on a percentage of completion of work. Both types are
considered contract-financing methods (see FAR 32.102). Progress
payments may be appropriate if:**

-   **The contractor will not be able to bill for the first-delivery of
    products, or other performance milestones, for a substantial time
    after work begins. In Federal contracting practice, the usual
    contract duration for using progress payments is four months or more
    for small businesses and six months or more for others, and**

```{=html}
<!-- -->
```
-   **The contractor\'s expenditures prior to delivery of the first
    items will have a significant impact on the contractor\'s working
    capital.** [^48]

***Progress payments* are to be distinguished from *partial payments*.
*Partial payments* are payments made, as authorized by the contract,
upon delivery and acceptance of one or more complete units (or one or
more distinct items of service) in accordance with the contract
specifications, even though other quantities remain to be delivered.
Note that *partial payments are for completed units*, whereas *progress
payments are for uncompleted work-in-progress. ***

**Because the grantee is making payments for uncompleted, non-functional
units, FTA requires that adequate security be obtained from the
contractor protecting the grantee's (and FTA's) investment in case the
contractor fails to complete the deliverable units. The form of security
is to be determined by the grantee based on what is in the best
interests of the grantee in the particular circumstances. (See footnote
above re *adequate security*.)**

**[Progress Payments Based on Percentage of Completion]{.underline} -
The Federal Government authorizes progress payments on its contracts
based on a percentage or stage of completion of the work. This type of
progress payment is standard for construction contracts for all Federal
agencies.** [^49] **49 CFR Part 18.21(d) allows grantees and subgrantees
to use the percentage of completion method to pay their construction
contractors, which is consistent with the regulations for Federal
contracts. *However, grantees may not use the percentage of ***

***completion method for non-construction contracts. For those
contracts, progress payments based on costs incurred must be used.***
[^50]

**[Contract Clause]{.underline} -- Grantees should refer to the FAR
clause at FAR 52.232-16 for guidance on the specific issues that need to
be addressed in the progress payments clause and ensure that their
agency's clause adequately covers the important issues, including:**

-   **[Computation of amounts]{.underline} -- percentage of total costs,
    definition of "costs" to be included in the calculation (i.e., only
    those actually paid by the contractor, incurred but not paid,
    etc.).**

-   **[Liquidation]{.underline} -- the method of linking value received
    to payments made.**

-   **[Reduction or suspension of payments]{.underline} -- the
    circumstances under which the grantee may reduce or suspend progress
    payments.**

-   **[Title]{.underline} -- this provision should define the property
    considered allocable to the contract (parts, materials, special
    tooling, special test equipment, drawings and technical data, etc.)
    and the party that retains title to the property/work-in-process for
    which the progress payments are made.**

-   **[Risk of loss]{.underline} -- the contract should be clear as to
    which party assumes the risk of loss to contract property and
    work-in-progress before final acceptance of the units. *In the
    Federal clause, the contractor assumes the risk of loss even though
    title to all property acquired under the contract vests in the
    Government. ***

-   **[Progress payments to subcontractors]{.underline} -- this
    provision needs to define the circumstances under which the prime
    contractor must make progress payments to fixed-price
    subcontractors, and the subcontract terms to be included (covering
    the same issues as the prime contract's progress payment clause).**

-   **[Adequate accounting system/reports]{.underline} -- the contract
    must require an adequate job-order accounting system to be
    maintained that properly accounts for the costs of the job even
    though the contract is fixed-price. This provision should also give
    the grantee the right to require certain reports or other data in
    support of the contractor's invoices.**

-   **[Access to records]{.underline} - this provision must give the
    grantee the right to conduct audits of costs claimed in progress
    payment invoices.**

    **2.4.4.4 [Withholding and Final Payment]{.underline}**

    **DISCUSSION**

**A number of contract provisions expressly authorize the withholding of
payments. See, for example, the Davis-Bacon Act Clause** [^51] **or the
Contract Work Hours and Safety Standards Act Clause.** [^52] **The
standard Federal government clause for the payment of fixed fee on CPFF
contracts calls for a 15% withholding of the fixed fee until the
contractor submits a certified final indirect cost rate proposal and
otherwise complies with the final deliverable documentation requirements
of the contract (e.g., delivery of the final report concerning
inventions made under the contract).**

**[Limitation on Withholding]{.underline} - In the event you decide to
withhold payments on a contract, you must take care that the amount of
money withheld bears a reasonable relationship to the unsatisfactory
work; in other words, the amount withheld must represent a reasonable
estimate of the contractor\'s potential liability.** [^53] **Moreover,
the amount withheld must not be so great that it impairs the
contractor\'s ability to perform.** [^54] **You may also wish to
consider a clause limiting the amount of payments that may be withheld
in total under all clauses of the contract, as is the practice on
Federal contracts.** [^55]

**[Final Payment]{.underline} - Final payment is made to the contractor
when it has satisfied all of the deliverable requirements called for by
all provisions of the contract, including all of the required
documentation. Final payment signifies that the performance obligations
of both parties to the contract have been satisfied. Before making a
final payment, therefore, you should obtain a signed release from the
contractor releasing the Agency from any further claims by the
contractor. You should also ensure that the program office has signed a
receiving and inspection report certifying that all deliverable items
have been received, inspected, and accepted as being in conformance with
the contract specifications.**

**[Retainage on Construction Contracts]{.underline} - For a discussion
of retainage on Construction Contracts, see BPPM, section 10.1,
paragraph entitled "Retainage and the Problems of Contractors who Quit
Work."**

**2.4.5 [Indefinite Delivery Contracts]{.underline}**

# 

# When the exact times or the exact quantities of future deliveries are not known at the time of contract award, or when the shelf life of the product needed is short, grantees may wish to consider some form of indefinite delivery (ID) contract. Indefinite delivery contracts offer a number of advantages that will be discussed below with each type of ID contract. As a general rule, however, ID contracts permit the grantee to maintain inventories at minimum levels and provide flexibility with respect to shipments to various user locations. It also facilitates decentralized ordering by users at different locations.

# 

# There are three types of indefinite delivery contracts:

1.  Definite-quantity contracts,

2.  Requirements contracts, and

3.  Indefinite quantity (IQ) contracts (commodities)/Task order
    contracts (services).

**2.4.5.1 [Definite-quantity Contracts]{.underline}**

A *definite-quantity contract* is one which provides for delivery of a
definite quantity of specific supplies or services during a time period
which is fixed, with deliveries or performance to be scheduled at
designated locations at the time each order is placed under the
contract. This type of contract is appropriate when the grantee knows in
advance how many total items it will need during the contract period but
is uncertain as to the exact time or the exact amount of its needed
deliveries to any given location. The supplies or services called for by
this type of contract must be regularly available from the supplier or
available after a short lead time. For guidance as to ordering
quantities above the quantity stated in the contract, see section
2.4.5.3 below, paragraph entitled *Orders above the stated maximum*.

**2.4.5.2 [Requirements Contracts]{.underline}**

A *requirements contract* is one in which the grantee commits to place
all of its requirements for a particular item or service with a
particular contractor during a specified contract period, with
deliveries or performance to be scheduled at the time each order is
placed under the contract. This type of contract is used when quantities
and/or the times of needed deliveries are uncertain. It permits
flexibility to the grantee in both quantities and delivery schedules. It
may also shorten the delivery time of a product that has a longer
production lead time because the contractor knows that the grantee will
obtain all of its requirements under its contract and in this situation
contractors may be willing to maintain some level of inventory. A
*requirements contract* also allows for the ordering of supplies or
services *after requirements become known.* It differs from the
*indefinite quantity contract* in that it promises the contractor that
all of the grantee's requirements for the particular item will be
procured from the contractor, whereas the *indefinite quantity contract*
makes no promise of this nature and may in fact be one of several
(multiple) contracts awarded for the same item or service. The
*requirements contract* may produce better prices for the grantee in
that the contractor is assured from the beginning that all supplies or
services of the type called for will be procured from the contractor
during a stated period of time. The disadvantage to the grantee is that
it will be committed to order all of the designated supplies at the
contracted price even if it later learns that the supplies can be
ordered elsewhere more cheaply.

[Estimated total quantity]{.underline} -- When this type of contract is
used, grantees should state a realistic estimated total quantity in the
solicitation and in the resulting contract. This estimate is not a
guarantee by the grantee that it will buy the estimated quantity, but is
a good faith estimate of what the requirements are likely to be. The
estimate should be based on records of previous requirements as well as
the most current information available.

[Maximum and minimum quantities]{.underline} -- The contract should
protect the contractor by stating a maximum limit of the contractor's
obligation to deliver. This maximum limit may be expressed for the
entire contract, as well as for each individual order and for any
particular period of time within the contract period of performance.
Minimum order amounts may also be expressed for each order placed and
for the contract as a whole. Minimum order amounts, however, are not
required for this type of contract because the grantee's commitment to
buy its requirements from the contractor represents the legal
consideration necessary to make the contract binding. For guidance as to
ordering quantities above the maximum amount stated in the contract, see
section 2.4.5.3 below, paragraph entitled *Orders above the stated
maximum*. It should be noted that the minimum and maximum quantities in
a *requirements contract* are for the contractor's protection and do not
necessarily limit the grantee's procurement authority to order more
units (since the grantee has contracted to award *all of its
requirements* to the contractor). Thus the grantee's authority to add
units to a requirements contract without re-competition is founded on
its initial promise to award all of its requirements to the successful
contractor and such additions would not constitute an impermissible
increase in scope (as would be the case with an *indefinite-quantity
contract* when the grantee seeks to add units above the stated maximum
-- see below).

**2.4.5.3 [Indefinite-quantity Contracts]{.underline}**

An *indefinite-quantity contract* is one that provides for an indefinite
quantity of supplies or services, within limits that are stated in the
contract, to be provided during a time period that is fixed in the
contract. Deliveries of the supplies or performance of the services are
scheduled by placing orders with the contractor. This type of contract
may be appropriate when the grantee cannot predetermine, above a
specified minimum, the precise quantity of supplies or services that
will be required during the contract period, and it is inadvisable for
the grantee to commit itself for more than a minimum quantity.
*Indefinite-quantity* contracts offer several advantages:

1.  minimum inventory levels of supplies can be maintained,

2.  shipments can be direct to users in various locations,

3.  they permit flexibility in both quantities and delivery scheduling,

4.  supplies or services can be ordered after requirements become known,
    and

5.  the grantee's obligation is limited to the minimum quantity
    specified in the contract.

[Minimum and maximum quantities]{.underline} -- To ensure that the
contract is binding, a minimum number of units must be stated in the
contract, and it must be more than a nominal quantity. There must also
be a stated maximum of units that may be ordered. Indefinite-quantity
contracts should never be "open ended," where no maximum quantity is
stated. This practice has led to serious problems when agencies attempt
to "piggy-back" the open ended contracts of other agencies by ordering
quantities that were never included in the original competitive process.
(See section 6.3.3\--*Joint Procurements of Rolling Stock and
"Piggybacking."* The contract may also state maximum or minimum
quantities that may be ordered under each task or delivery order and the
maximum that may be ordered during a specified period of time within the
contract's period of performance.

[Orders above the stated maximum]{.underline} -- If it becomes necessary
to order quantities above the maximum stated in the contract, (which
would be the number of units included in the original competitive
process), such orders should generally not be processed as "change
orders," ("change orders" must be within the scope of the original
competition), but should be processed as "new procurements." These new
procurements may either be competed or, if circumstances warrant,
processed as "noncompetitive procurements" in accordance with the
grantee's internal approval process for noncompetitive ("sole source")
procurements. *Grantees should anticipate the possibility of needing
additional quantities when they compete the contract award initially
and, if necessary, include option provisions for additional quantities
in the original competitive bidding. In this way if additional
quantities are needed they may be procured under the original contract
without having to justify them as a "sole source" add-on.*

[Multiple Award/Task Order contracts]{.underline} -- Grantees may wish
to consider making multiple contract awards for the same or similar
supplies or services under a single competitive solicitation. This may
be appropriate in order to ensure the quality or timeliness of
deliveries by not limiting the grantee to a single supplier who may not
perform according to the grantee's expectations or needs or who may not
be able to meet peak delivery requirements. In this event, another
supplier is immediately available to assure that needs will be met.

The Federal Acquisition Regulations (FAR), Subpart 16.504 --
*Indefinite-Quantity Contracts,* addresses the issue of multiple awards
in 16.504(c). The FAR expresses a preference for making multiple awards
of indefinite-quantity contracts under a single solicitation for the
same or similar supplies or services if (i) a recurring need for the
supplies or services is anticipated, and (ii) the agency cannot
predetermine its needs above a specified minimum, and (iii) when it
would be inadvisable for the agency to commit itself for more than a
minimum quantity. The FAR envisions the award of multiple *task order
contracts* in which individual task orders would be issued following
competitive solicitations to the original awardees.

If multiple awards are made, grantees must advise prospective bidders of
the procedures that will be used in issuing orders to the contractors
selected for award, including the criteria that will be used to provide
the selected contractors with a fair opportunity to be considered for
each order issued. The criteria may include such items as past
performance on earlier tasks or orders issued under the contract,
quality of deliverables, timeliness of deliveries, and other factors
considered relevant by the grantee. It is important that price or cost
be one of the selection factors considered for each order awarded. If
the original contract did not establish the price for the supply or
service, the grantee will have to solicit cost or price proposals for
each order.

The FAR does provide for exceptions to the requirement that all awardees
be provided a fair opportunity for each order awarded. These would
include situations where --

a.  The agency's needs for the supplies or services are so urgent that
    providing a fair opportunity would result in unacceptable delays;

b.  Only one awardee is capable of providing the supplies or services
    because they are unique or highly specialized;

c.  The order must be placed on a sole-source basis in the interest of
    economy and efficiency as a logical follow-on to an order already
    issued under the contract, provided that all awardees were given a
    fair opportunity to be considered for the original order; and

d.  It is necessary to place an order to satisfy a minimum guarantee.

Multiple awards will not be advisable when:

a.  state law prohibits,

b.  more favorable terms will be provided if a single award is made,

c.  the cost of administering multiple contracts outweighs any potential
    benefits from

making multiple awards, and

d.  tasks likely to be ordered are so integrally related that only a
    single contractor can

reasonably perform the work.

[^1]: \- For formal assistance in implementing a team process see
    Howard, Jennifer M. and Miller, Lawrence M., *Team Management:
    Creating Systems and Skills for a Team-Based Organization* (The
    Miller Consulting Group, Inc., 1994) or Leinberger Robin et al, *The
    Art of Business Process Management: A guidebook*, (KPMG Peat
    Marwick, LLP, 1993).

[^2]: \- The limitation is expressed in terms of buying no more than
    five years' requirements even though delivery may occur beyond five
    years from the date of the contract.

[^3]: -This limitation did not apply to construction contracts or to
    leases of real property for the life of the transit asset to be
    constructed on such property.

[^4]: \- FTA *Dear Colleague Letter* C-08-02 dated May 29, 2002.

[^5]: \- Contact Mr. John Trotta, Vice President,
    Purchasing/Warehousing, Chicago Transit Authority, at (312)
    222-6113.

[^6]: \- Geographic preference is permitted in certain narrow
    situations, including principally where part of a legal licensing
    requirement and for architects and engineers; FTA Circular 4220.1E §
    8.b.

[^7]: \- The Council of State Governments, National Association of State
    Purchasing Officials, Law Enforcement Assistance Administration, and
    Peat Marwick Mitchell & Co., *State and Local Government Purchasing*
    (1975)\
    p. 6.2.

[^8]: \- United States v. John C. Grimberg Co., 702 F.2d 1362, 1367
    (Fed. Cir. 1983) (in banc).

[^9]: \- FTA Circular 4220.1E § 8.c.(1).

[^10]: \- FTA Circular 4220.1E § 9.h.(1).

[^11]: \- *Id.*

[^12]: \- FTA Master Agreement, Sections 3(a) and 3(a)(1); 49 CFR §
    18.36(3); FTA Circular 4220.1E Paragraph 7(c). In addition, many
    state and local jurisdictions have laws and regulations, which
    address both the conduct of public employees and the relationship
    between public entities and private businesses. These vary in
    nature, and may impose both civil and criminal sanctions on
    violators.

[^13]: \- See FTA Master Agreement Section 3(a)(1).

[^14]: \- This interpretation applies to both subcontractors and general
    contractors providing procurement-related services to a grantee.

[^15]: \- A personal conflict also arises where a person whose financial
    interests are attributed to the employee has a conflict -- either
    because that person is an employee, prospective employee, officer,
    director, or agent of a contractor or competing entity, or because
    that person has a financial interest in the contractor or competing
    entity. The financial interests of the following are attributed to
    an employee: a member of the employee's immediate family, his
    partner, or his outside employer or prospective employer. FTA
    Circular 4220.1E Paragraph 7(c).

[^16]: \- [See]{.underline} FTA Circular 4220.1E Paragraph 7(c); 18 CFR
    § 18.36(3)(iv); FTA Master Agreement, Section 3(a). However,
    "\[t\]he Recipient may set minimum rules where the financial
    interest is not substantial, or the gift is an unsolicited item of
    nominal intrinsic value." FTA Master Agreement, Section 3(a); see
    also FTA Circular 4220.1E Paragraph 7(c); 18 CFR § 18.36(3)(iv).
    These are known as "de minimus" gifts, and do not result in either a
    real or apparent conflict of interest. For FTA and other Federal
    employees, the level is set at \$20 per occasion, with a maximum of
    \$50 per calendar year from the same source (including affiliates).
    In many cases, however, the best response to a gift offered is a
    simple, "Thank you, but no thank you." Section 3(a) of the FTA
    Master Agreement requires that grantees include in the standards of
    conduct penalties, sanctions, or other disciplinary actions for
    violations of the code, to the extent permitted by state or local
    law.

[^17]: \- [See]{.underline} FTA Circular 4220.1E Paragraph 8(a)(5). The
    Federal Acquisition Regulations also provide a helpful definition of
    organizational conflict of interest: "Organizational conflict of
    interest means that because of other activities or relationships
    with other persons, a person is unable or potentially unable to
    render impartial assistance or advice to the Government, or the
    person's objectivity in performing the contract work is or might be
    otherwise impaired, or a person has an unfair competitive
    advantage." 48 CFR § 9.501.

[^18]: \- Generally, an organizational conflict arises because a person
    or entity has or appears to have loyalties to, or a financial
    interest in, two organizations that may have competing or differing
    interests from each other \-- one of them being the grantee. For
    example, an organizational conflict would arise if an employee or a
    consultant serves as a member of a public or quasi-public body with
    regulatory authority over a project or has a stake in its outcome.
    This arises most often where architects sit on design review or
    zoning boards.

[^19]: ^19^ - Federal transit law requires grantees to award contracts
    through a process of full and open competition. Organizational
    conflicts of interest that give any party an unfair competitive
    advantage impede full and open competition, and thus are considered
    "restrictive of competition" under Paragraph 8(a)(5) of FTA Circular
    4220.1E.

[^20]: \- Mergers and acquisitions have had a strong effect on contracts
    in the environmental area, thus warranting a separate discussion of
    this topic.

[^21]: \- This is consistent with the approach used in Federal
    contracting as set forth in FAR 9.504(e), where a contract can be
    awarded in spite of a conflict when the contracting officer
    determines that it is in the best interest of the Government to do
    so.

[^22]: \- Recommendation of the ABA Model Procurement Code, §
    R12-202.01.

[^23]: \- BART Procurement Manual, Attachment B.

[^24]: \- Each grantee also should consult with its counsel before
    requiring annual financial disclosure statements to confirm that the
    requirement complies with any labor agreements applicable to the
    grantee.

[^25]: \- In large undertakings, this may involve multiple, related
    consulting, planning, design, technical oversight or technical
    evaluation contracts. Grantees can work with persons experienced in
    the field to decide how to segment the procurements and what
    restrictions to impose.

[^26]: \- 40 CFR § 1506.5. Note that if a contractor has a financial
    interest in the outcome of the proposed project, the contractor
    should inform the grantee of its interest. Under appropriate
    circumstances, the grantee may choose to waive the conflict of
    interest after careful consideration (see Discussion Section I).

[^27]: \- Los Angeles County Metropolitan Transportation Authority.
    Procurement Manual Section 908(e).

[^28]: \- Ibid., Section 2314.

[^29]: \- Ibid., Section 407.5. Also San Francisco Bay Area Rapid
    Transit District (BART). Procurement Manual, Section II-7.

[^30]: \- FAR 9.202.

[^31]: \- Los Angeles County Metropolitan Transportation Authority.
    Procurement Manual, Section 407.5 (1)(a).

[^32]: \- FAR, Section 9.202 (e).

[^33]: \- Many state laws require construction contracts to be awarded
    at a firm fixed price.

[^34]: \- It is important that the grantee's project budget reflect an
    allowance for any potential increase in volatile commodity prices
    (e.g., steel).

[^35]: \- The FAR price escalation clauses in FAR 52.216-2,3,4 include a
    maximum aggregate price increase of 10 percent; however, the FAR
    also gives the Contracting Officer latitude to increase this maximum
    percent if circumstances warrant.

[^36]: \- When using a steel escalation article only the cost of
    material is escalated or deescalated and no other costs such as
    labor or machinery.

[^37]: FAR 52.216.-7 -- *Allowable Cost and Payment*.

[^38]: FAR 52.216-8 -- *Fixed Fee*.

[^39]: FAR 52.216-8 -- *Fixed Fee*.

[^40]: Advance agreements cannot provide for the allowability of costs
    that the cost principles have determined to be unallowable (e.g.,
    interest).

[^41]: \- If a cost type subcontract is to be awarded by the prime, the
    subcontractor's accounting system must also be adequate.

[^42]: \- 10 U.S.C. 2306(a) and 41 U.S.C. 254(b).

[^43]: \- 46 Comp. Gen. 612 (B-159713) (1967).

[^44]: FTA has redrafted the paragraph related to progress payments to
    account for the practical reality that taking title to work in
    progress may not be desirable in some cases.

[^45]: Progress payments in construction contracts may be made on a
    percentage of completion method in accordance with 49 CFR 18.21(d).
    This payment method may not be used in non-construction contracts.

[^46]: "Adequate security" should reflect the practical realities of
    different procurement scenarios and factual circumstances. For
    example, adequate security may consist of taking title to work in
    progress in a rolling stock procurement, receiving a draft document
    in a consulting contract, or receiving some portion of recurring
    services under a services contract. Grantees should always consider
    the costs associated with this security (e.g., bonds or letters of
    credit must be purchased in the commercial marketplace) and the
    impact those costs have on the contract price, as well as the
    consequences of incomplete performance as they consider what
    constitutes adequate security for a given procurement.

[^47]: \- The term *progress payments* does not apply to cost-type
    contracts, and is to be distinguished from *advance payments,* which
    are payments made before work begins (see BPPM section 4.4.4.2).

[^48]: \- Both of the conditions noted are almost always present on
    construction projects.

[^49]: \- FAR Clause 52.232-5 *Payments Under Fixed-Price Construction
    Contracts.*

[^50]: \- 49 CFR 18.21(d) authorizes the percentage of completion method
    for construction contracts only.

[^51]: \- Appendix A.1, Clause 16.

[^52]: \- Appendix A.1, Clause 17.

[^53]: \- Norair Eng\'g Corp., GSBCA 3539, 75-1 BCA, paragraph 11,062.

[^54]: \- Bailey v. Secretary of Labor, 810 F. Supp. 261 (D. Alaska
    1993).

[^55]: \- FAR Clause 52.232-9.