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July 6, 2009 - ASCE Comments - on mandatory 10% withholding rate

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Civilian Agency Acquisition Council
Defense Acquisition Regulations Council

Notice of Proposed Rulemaking
FAR Case 2008-015
Docket 2009-0015, Sequence 1
74 Fed. Reg. 20666 (May 5, 2009)
COMMENTS OF THE AMERICAN SOCIETY OF CIVIL ENGINEERS∗

July 6, 2009 

I. Introduction

The Civilian Agency Acquisition Council (CAAC) and the Defense Acquisition Regulations Council (DARC) propose FAR Case 2008-015 to amend the Federal Acquisition Regulation (FAR)1 to revise the withholding-of-payment requirements under FAR part 52.232-10, 74 Fed. Reg. 20,666 (May 5, 2009). The amendment would repeal the mandatory 10 percent withholding rate in current law and set the amount of the withheld payment “at the level [between nothing and 10 percent] necessary to protect the [g]overnment’s interests.” Id.

As an initial matter, the American Society of Civil Engineers (ASCE) opposes the use of any fee withholding requirement for engineering contracts. Such a practice places a heavy burden on the cash flow of small businesses, which constitute the majority of engineering firms. In addition, the use of the qualifications-based selection (QBS) process mandated by the Brooks Architect-Engineers Act of 1972, as amended, protects the government’s interests because it ensures that the government already is contracting with the most-qualified offeror, making the withholding of any portion of the engineer’s fee unnecessary.

In the alternative, ASCE presents its qualified support for a modified withholding rule, with the appropriate amendments recommended below.

II. Background

Under current law, a federal contracting officer must withhold 10 percent of the negotiated fee paid to architects and engineers each month to ensure the government’s interests in completing the work are protected. Payment in full must be made in each month that the contracting officer “determines that [contractor] performance has been satisfactory.” Payments under Fixed-Price Architect-Engineer Contracts, 48 C.F.R. part 52.232-10 (b). Full payment also is required “whenever the [c]ontracting [o]fficer determines that the work is substantially complete and that the amount retained is in excess of the amount adequate for the protection of the [g]overnment.” Id.

In other words, the contracting officer either (1) must pay the entire fee due to an architect or engineer each month that the officer is satisfied that the contractor has carried out the contract acceptably or (2) must withhold 10 percent of the fee. If a decision is made to hold back a share of the fee due to alleged unsatisfactory progress on the contract, the amount must be exactly 10 percent, no more, no less; the contracting officer has no discretion to increase or decrease the sum withheld. The retained amount is apparently intended to prod the contractor into completing the contract. The withholding is not a fine or penalty to be forfeited to the government and all monies due ultimately must be paid in full under normal circumstances. 

The government has regulated the withholding of fees from other types of contractors in addition to architects and engineers, most notably in construction contracts, which are subject to more liberal terms. There, an agency may withhold any amount up to 10 percent “until satisfactory progress is achieved” in the judgment of the contracting officer. Id. at 52.232-5.

Congress has not explicitly authorized the Executive agencies to retain a portion of fees due to architects and engineers (or to any other contractors). The provision was adopted by the General Service Administration under its general regulatory powers in the Federal Property and Administrative Services Act, 40 U.S.C. § 120 (c).

In their May 5 plan, the CAAC and DARC proposed to tailor the architecturalengineering fee withholding to the practice under 48 C.F.R. part 52.232-5 for construction contracts and allow contracting officers to decide independently whether and how much of the fee to retain under a fixed-price architecture-engineering design contract. The amount that may be withheld is to be no more than 10 percent of the total due. 74 Fed. Reg. at 20,666. If a contracting officer decides to withhold part of the fee, the amount is to be based on the contractor’s “performance record.” Id.

III. ASCE Comments

A. ASCE supports the intent of the NPRM to replace the mandatory 10 percent withholding with a discretionary amount up to a maximum of 10 percent.

ASCE supports the repeal of the federal regulation that requires federal contracting officers to withhold payment of 10 percent of the total design fee for fixedprice architectural and engineering contracts. The mandatory withholding arbitrarily restricts the cash flow for small and large engineering firms alike with little benefit to the government. In some cases, the withholding is in addition to any bonding requirements. For small engineering firms—the bulk of the industry—with very small profit margins and tight cash flows, having 10 percent of the fee held back for months or years creates an unnecessary burden on a firm and produces a strong deterrent for small businesses to seek federal contracts.

The rule controlling payments for architectural and engineering contracts subjects architectural and engineering firms to discriminatory fee-withholding requirements. This is unnecessary; on all design work completed by an engineer, the finished work is invoiced to the client monthly. The engineer typically needs to coordinate with the client on the progress of the contract, thus rendering the need for withholding moot. Indeed, if an engineer does not complete the work, there are severe professional consequences attached, including the real possibility of losing a valuable client.

The federal regulation governing payments for fixed-price construction contracts—contracts awarded to a low bidder—requires the contracting officer to pay the contractor in full as long as the agency believes that “satisfactory progress” is being made on the work. In other words, that rule gives the contracting officer the discretion to withhold a maximum of 10 percent of a contract fee only in cases where the agency concludes in its judgment that the contractor is not making “satisfactory progress” in the completion of the contract. The burden of proof remains on the government to justify withholding a portion of a construction contractor’s fee in each case. Under the rule at 48 C.F.R. 52.232-10, however, the amount of the withholding is mandatory, thereby discriminating against a contractor hired under a qualifications-based process that is superior to one based solely on price in protecting the public interest.

ASCE agrees, however, that greater flexibility needs to be introduced into the withholding system. Indeed, even before the adoption of the FAR, the Office of Management and Budget attempted to do just that by standardizing the practice of fee withholding across the government. See Office of Procurement Policy, Proposed Policy Letter, 47 Fed. Reg. 51,643 (Nov. 16, 1982) (“Determinations regarding the use of retainage and the specific levels to be withheld should be made on the basis of prevailing industry practice, the potential for not obtaining expected performance, prior experience with the contractor, price concessions, and other valid considerations. The level of retainage ordinarily should not exceed ten percent of the amount billed by a contractor in accordance with the contract terms and may be adjusted as contracts approach completion to recognize better than expected performance, the ability to rely on alternative safeguards, and other factors. Upon completion of all contract requirements, retained amounts shall be paid promptly.”) The same logic holds true today.

Essentially, then, we believe that the government’s reasoning behind the use of fee retention, first announced more than 20 years ago, ought to apply to engineering contracts:

Retainage2 should not be used as a substitute for good contract management, and contracting officers should not withhold funds without cause. Determinations regarding the use of retainage and the specific levels to be withheld shall be made by the contracting officers on a case-by-case basis.

* * * * * *

The level of retainage withheld shall not exceed 10 percent of the amount billed by the contractor in accordance with the terms of the contract and may be adjusted as the contract approaches completion to recognize better-thanexpected performance, the ability to rely on alternative safeguards, and other factors. Upon completion of all contract requirements, retained amounts shall be paid promptly.

50 Fed. Reg. 7200 (Feb. 21, 1985) (emphases added).

The amended regulation should include a requirement that the agency shall pay any excess amount withheld once the contract is substantially complete. The present rule allows these payments, but they should be mandatory.

B. The CAAC and DARC should amend the proposed regulation (1) to establish a separate negotiated fee withholding system for individual task orders under indefinite delivery-indefinite quantity (ID-IQ) contracts and (2) to establish a rule for determining what “acceptance” is.

Under current law, the 10 percent withholding has been applied equally to all fixed-price contracts, including ID-IQ contracts. In the latter, the agencies routinely withhold 10 percent of each month’s fee, even in the absence of a contract deliverable. Often, too, the agency refuses full payment for the entire length of an ID-IQ contract, causing some fees incurred on the earliest task orders to be withheld for up to five years.

The CAAC and DARC should revise the rule to clarify that the amount of the withholding should be negotiated for each ID-IQ task order, not the entire contract, at the time the contract is awarded and should apply only when there is a project deliverable. No fee should be withheld in months in which the contractor may not be required to provide a specific deliverable under the milestones established in the request for proposals (RFP). In the case of an ID-IQ contract, the fee withholding should be applied to each task order, not to the entire five-year duration of the contract.

Finally, another provision of the current law often works a hardship on engineering firms. Under 48 C.F.R. 52.232-10(c), payment in full may be made “[u]pon satisfactory completion by the contractor and acceptance by the contracting officer” of the engineering design or other work product. Many engineering contractors awarded ID-IQ contracts complain, however, that the contracting officer frequently withholds fees for months at a time after submission because the design work or other product has not been formally accepted. Therefore, the CAAC and DARC should establish in the rule a clear determination of what constitutes “acceptance” of a deliverable under each ID-IQ task order and require the contracting officer to accept or reject the final product of each task order within a reasonable period after submission to the agency—perhaps 60 or 90 days—but in no case for a period longer than one year.

C. Past performance on previous contracts should be taken into consideration when negotiating whether a portion of the fee is to be withheld.

Past performance assesses an offeror’s capability of performing a contract. It generally consists of three elements: a firm’s history in performing similar contracts; qualitative judgments about the relevance of the firm’s experience; and a qualitative judgment about how well it performed. Federal law mandates the use of past performance in the evaluation of an offeror’s response to an RFP. 41 U.S.C. § 253(c)(1)(A); 48 C.F.R. part 15.304(c)(2).

Past performance (together with other technical evaluation factors—price among them) may be of equal value in an agency’s decision to award a contract or it may weigh more or less heavily in the evaluation process. How much or how little to rely on past performance is entirely at the agency’s discretion. For example, the Department of the Interior identified past performance as the most important of the criteria for awarding a contract for audiovisual production and services. “The evaluation factors, in order of importance, were past performance (worth 40 out of 100 total available points); samples of work (30 points); personnel (20 points); and comprehensive plan (10 points).” In Re Northern Light Productions, 2009 WL 1519898, 1 (Comp. Gen.).

A poor evaluation under the past performance criterion can result in an offeror’s being disqualified from a contract.3 Conversely, a strong evaluation of an offeror’s past performance may not overcome poor evaluations among other evaluation factors. See, e.g., In Re Stateside Associates Inc., 2009 WL 1607076, 5 (Comp. Gen.).

The CAAC-DARC regulation should be amended to clarify that past performance on similar engineering contracts is among the factors to be evaluated when negotiating the withholding amount.

D. The CAAC and DARC should apply the withholding rule consistently to all A/E contracts, not just those for design work.

The CAAC and DARC proposal states that the new withholding standard applies only to contracts for “all design work done by the [c]ontractor under the ‘Statement of Architect-Engineer Services.’” 74 Fed. Reg. at 20,667.

The amended rule should not apply exclusively to design contracts. If the government deems fee withholding absolutely essential, then the rule should be revised to allow discretionary withholding for every type of contract covered by the procedures established under the Brooks Architect-Engineers Act of 1972, 40 U.S.C. §§ 1101-1104.

The Brooks A/E Act applies to the awarding of professional services beyond architectural and engineering design work. It clearly defines an array of services that must be obtained by federal agencies using the Act’s qualifications-based selection (QBS) procedures. It states:

“Architectural and engineering services.--The term ‘architectural and engineering services’ means--

“(A) professional services of an architectural or engineering nature, as defined by state law, if applicable, that are required to be performed or approved by a person licensed, registered, or certified to provide the services described in this paragraph;

“(B) professional services of an architectural or engineering nature performed by contract that are associated with research, planning, development, design, construction, alteration, or repair of real property; and

“(C) other professional services of an architectural or engineering nature, or incidental services, which members of the architectural and engineering professions (and individuals in their employ) may logically or justifiably perform, including studies, investigations, surveying and mapping, tests, evaluations, consultations, comprehensive planning, program management, conceptual designs, plans and specifications, value engineering, construction phase services, soils engineering, drawing reviews, preparation of operating and maintenance manuals, and other related services.”

Id. at 1102(2).

Each of the services obtained by the government under a contract covered by 48 C.F.R. 52.232-10, as amended, and enumerated in 40 U.S.C. § 1102(2)(A)-(C) should be governed by the withholding regulation.

Respectfully submitted,

THE AMERICAN SOCIETY OF CIVIL ENGINEERS