Free Motion for Summary Judgment - District Court of Federal Claims - federal

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Economic Price Adjustment in the Domestic Bulk Programs

I s su_~e -

Should the present two-step method of interim and final price adjustment (EPAs or escalators} for do,nestle bulk fuel contracts be changed to a one-step price adjustment based on current market price indications a~ published in trade journals? Or should the two-step method be modified to reduce bidder uncertainty with the present system? The current system of price adjustment has been used since 19830 ~l offerors of product to DFSC are required to accept ~ale~ Drice avera~ of~__~,ad~ustment ba~ed o " as published by ~tm~nl n~ ~n~9~ in the ~arketin~"'"Monthl"y (F~d).. B~cause ~he~ data is not published until the t~pd~b~l~ng the month for which the ~ta effective~ interim billings are paid ~sed on the mov~ent of an interim escalator. ~he ~nte~im esc~latoP ~s based on ~s published ~n tnade ,i~unnal~ at th~ end ~'~f~e m~nth orior ~= ~n~l adjustment5 ~n the b~ll~n~s ape ~de accordin~ ~ifference5 between the intePim and ~ (f~nal) escalators ~n the ~ is ~ub~, When ~rket o~es ~ary o~tl~ fro~ ~onth to month~ as they h~e over the l~s~ ~wo ~na] b~!~no adjustments can be~~'. ~ t~o-~ep billing p~oc~ss js~nj~~cum~, and has ~esult~d in a number of ~r cm~l~ ove~ the past 3 years (see Tab A), In the words of one contractor, pricing uncertainty

Background

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There are qJne crt~ by ~hJch proposed escalation systms can be Judged, 1) product; ~) geography; ~) tim~n~i 4)~; 7) ~sis in actual ~le~l 8) ~rk~; and 9)~. The P~-~ased sy~tm and the alternative trade journal-~sed systms are evaluated bel~ according to the criteria. The curren~ased ~ystm is preferable by three criterJa~ ~e ~n~ rnnfrar~n~ tn~l~en~ ~les ~5~s~ and marke~ ~ Three other c~teria, s~city~ ti~g, and favor the ~itch to trade journa~. By the criteria of ~roduct, geogr~phy~ ~nd c~onal~ty~ there is no clear preference between the ~lternate systems. Product - OFSC~oduqt prices should escala~ ~th ~ ~ similar c~erctal ~uels. Both the~and trade publications puOl~sh pric~s o~ the similar c~erc~al products -mo~s~ jet ~erosene~ d~esel ~uels~ residual fuels - which are used for bulk price escalation of JP-4~ JP-5, ~nd DFM r~de ~n~l~m ~hl~h ~n~re ~h~le neither t ~htha-type jet fuel (Jet B o~, ~calator~~ r~ent the ~ltern~te use-v~lue of ~e ~.4 blend~n~ ~~, A~ila~ p~inc~ple ~s Used In the construction prices an~ e~c~lato~s fo~ ~vy Special Fuel Oil, ~re~erence b~sed on th~s criteria ~ none

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Geograph~- [~,~.2£D._d~t prices_s/IcL~LIJ:L~calate wi.th prices of ¯ .i~al area where th~ouiPeme~s ~e Lg_~,c..~____~data is ~ublish'edon bo~h a ~ and~-~gionzl (multistate} basis, Trade publication prices ~re ~ublished ~ost large citie_s in the United States, Preference~ none. ~ - DFSC prices should escalate concurrently w~th commercial prices, not with a lead or lags_ This reduces the possibility that contractors will build a contingency pre~nium into their prices. Pt~'i prices are available on a monthly basis, while trade journal prices are published on a daily or weekly basis fo~ ~ost fuels. Given that actual market prices change almost continuously, it is preferable for escalators to change more frequently than on a monthly basis. Preference: trade ~o~_~.urnals, with weekly or daily price adjustment. ~ Timeliness - Escalator prices should be available to DF$C and the contractors on or irmnedlatelyfollowing their respective effective dates. PHM prices are published during the third month following the month of effectiveness. Trade journal prices become available within a day to a week following their effective dates. The long lag on P~ availability is the reason why an interim billing system is used which employs trade journals. Preferencel tra~nals. Co~.,onal~ty- Proposed escalators should be acceptable to both DFSC and the contractors fop use as references, The ~syst~ has b~en used successfully In d~estic bulk for three years. DFSC has been successful in obtaining c~onality ~sed on trade journals in ground fuels procurments and in overseas bulk progr~s. Preference: none, ]ndeoendent of Contractors - Both the PHH and trade journals are independent of control by OFSC contractors, Given their informal method of conductingmarket surveys, ira. de publication prices may be influencedby the moves of larqe,..~narket ~J~..may be OF$C~"~- Although this has not been general problem in ground fuels procurement~ where ~rade journals are routinely used for price emcalatlon~ there been situations where questions have been raised regardin~ independence of the contractor's control. Since th~s ~y be more serious probl~ in the bulk progn~, where DFSC contractors may be large market players~ any proposed trade publication escalation syst~ would require careful revi~ of the susceptibility to ~nipulation by prospective contractors, ~asi.S in Actual Sales - The PMH is based on a mandatory OOE survey of actual sales by refiners and gas plant operators. This survey is subject to DOE audit, although actual audits are rarely performed, Trade journal prices are generally based on seller quotations rather than actual sales because the latter 'are ~ot gener~l)y available to informal, private canvasser~. These price series are not auditable, Hc~wvertrade Journal prices are closely reflective of ~ctual sal as these price

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series are closely correlated with P~ prices over time, particularly if prices are adjusted on a weekly basis (see graphs at Tab B). Contractor complaints about the performance of trade journal escalators have been received in the ground fuels program. Although nearly all of these complaints are unfounded~ several co~nplaints have been justified and have required substitutionof a replacement econoraic price adjustment reference. ~ecause trade journal data is a less direct measure of actual market sales, co~nplaints concerning trade journals are more difficult to analyze and defend. Preference: P~. ~rk~ Risk.- DFSC contract prices are susceptible to market risk if they escalate on indices which do not correlate well with actual sales prices. Pt~ prices are actual sales price averages. Although they generally track ~ales data quite well, trade journals are more variable in quality, and occasionally are replaced in those programs in which they are used due to poor performance in reflecting market condition~. In' ground fuel procur~ents, a poorly performing escalator can be readily replaced with a substitute fro~ another publication for most fuels in most locations. This would be true for bulk mogas and diesel requirements a~ well. However, only one trade journal has published jet kerosene prices for the last several years (Pl.att'~...Oi...!~ram). While these jet fuel series closely" correlate with actual sales~ ther~ yet, no substitute publication available should thin--data series be discontinued should it fail to~'%'o't~inue track the market. or to This pot~l problem affects both JP-4 and Jr-5 escalation in C~U~il ~ric.~o~i~n_~v~c~s recently begun to publish ~et fdel prices, ourthe ~iabiiity of t~is source will not be establi.sh~d until 12 months of historical data have been accumulated. This will occur by April ~98B in several localities. Preference: ~. Another aspect of market ris~ with trade journals concerns the relative spe~d with which their prices reflect actual market price changes. ~Iven that the journals generally survey seller quotations, or ~postings°, s~e asymmetrical behavior may be expected. ~eller~ tend to raise POS.t.~..~ actual prices are ~iming, and to resist lowering postings ~~ ~alling. Sellers may also i o~er prices by grant~n~ hidden discoun~ff of stable posting~. Thus, one would expect that the use of trade journal prices for escalation would co~t OF$C money t~rough relative "price stickiness" during periods of declining prices. An an~lys~..s o~ alternative bulk~ ~c~ of this..~otenttal p~ ~n fh~ be~e ~s over ~(wh~ch ~nclud~d a major ~~is ~sume~hat the choice of escalation ¯ ystem had no effect on the level of the initiaI offer prices. Ov~rp~ent due to lagged declines in postings were offset bv underpa~ents due ~o lagged increase~ when p~Jce~ were adjusted weekly. S~e ev~den;e o~ d~nside stickiness ~s found in the ~nalysis of twice-monthly and monthly ¢h~nge~. In these cases~ over payments would have exceeded under pa~ents and would have resulted ~n greater expense to the government. Weekly price changes di~ not suffer fp~ this probl~, in general.

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s~o

~o'ntracto~s ~ sy~"~"em

and~'mple~for DF~C to a~.. is clearly simpler than the

The trade ~ system.

The issue of simplicity is important when the problem of bid preparation is considered, Do~nestic bulk offerors must submit best-and-final prices which are effective for the month prior to receipt of best-and-final offers. This raises two problems: price timing and~nargin uncertainty, In the first case, so~e offerorsmay bid based on current prices rather than prior-month prices (See study at Tab D), If current prices are lower than prior-month prices (as in July 1986)I the offeror's bid will l o~er than if it were properly prepared. If market and bid prices are much l~er~ a mistake-in-bid ~y eventually be clal~ed by the offeror, On the other hand~ if current prices are higher than the prior-month prices (as in January i~7) o~feror's bid price ~y be higher than it otherwise would It ~y be so high that it is not in line for a~rd, In fact, price reasonableness o~ offers ~y bec~e a serious issue current prices are higher than prior~onth prices~ because bid prices will be c~pared to prior~onth ~rket ranges. If such offers are a~rded, the government will be paying higher prices than if a simplified one-step escalation syst~ is used, s~escalatlon ~sed on trade journals wo~Id current pric~ rathRrt~an pri6~onth p~ices to be bid an~ ~alua~ed, and would ~atl~ ~educ~ thim p,~eparation probl~. The current method of escalation introduces another eler~ent of uncertainty into the bid preparation process, At the time receipt of best-and-final offers, the offer price and the relationship (n~rgin} between the interim escalator offer price is fixed, H~ever . e offer price and the final escalator~~n and r~ains so for s~e two months foll~ing~eip~est-and-~inals, While the ~se value of the interim escalator is khan, the relationship between the base values of the interim and ~inal escalators is subject to statistical uncertainty. Because the margin between the o~fer price and the ~se final reference (P~) determines the actual ~rgin (and, thus~ the actual price) ~or final billing purposes, of~erors who are risk-averse ~y build a contingency pr~ium into their offer price to protect thyselves a~inst uncertainty about the ultimate level of their margin. To the extent that offerors perceive this as a probl~, the prices that the government pays for fuel will be higher than under a one-step escalation syst~ ~sed on trade journals. Recent experience and contractor c~ent suggest that both ~he margin probl~ and the bid preparation probl~are real and significant, Another way of reducing the problem of bid preparation would be to have offerors bid with prices effective with the most recent P~available. Offerors on the recent East and Gulf procurement would have made their bids (in January 1987) effective

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October 1986 rather than December 1986 as was done during that procurement. This ~ould have had the effect of eliminating margin uncertainty. The process would still have been susceptible to the generally upward n~arket price movement over that period. In this case, however, at least one cempanywas able to agree to a price reduction (when requested by DFSC-P}, after the December PHM bec~ne available, in part a~ a result of ~rgi~ certain~y with Oec~ber pricing. 0n the prevlou~ Inla~d and We~t procur~ent, one c~pany reduced it~ offered volume when the June ~ became available prior to time of award~ and actual June pric~ levels were found to have been ~ t~an this c~pany assumed when it prepared it~ bid. In this cas~ th~ latest ~at the time of ~eceipt of be~t and final o~fers contained April prices. Under a modified bid process, ofleror~ wo~;Id have made their bemt ~nd final pric~ ~ffective in Aprii rather than in June. Several individual~ and contra~tor~ have suggested that DFS~ modify its current ~yst~ in this ~nner. The experience with th~ recent bulk procur~ents and with an analogous ~ituation several years ago in an overseas procu~ent suggest that this i~ a feasible i~prov~ent on the current e~calation system. Decision 0~ions. Haintain current two-step method of domestic bulk price escala on, ti Pr._._9.o- This system is alreadyin use and contractors are fatniliar with it. There is no market risk to continuation of its use. 0F5C prices are adjusted ~ccording to the movefnent of actual monthly sales price averages. Con - This system is complex and a~y cum~~e, T-~ere are 12 monthly e~ca~ons plu~ 12 monthly corrections. The problems associated with bid preparation p~obably result in ~~x~ens~to the U,S. Government, There will continue to be contractor co~plaints about the size of final pa~ent adjustments, This sySt~, by escalating on monthly averages, fails to re~lect Jntr~onthly prJc~ mou~ents, Modify the current two-step escalation method so that offerors can establish their bid prices as effective with the month of the mostrecent PHM____~. Pr__~o - This system has the same advantages as Option I, and removes margin uncertainty from the offerors" bid preparation problem. Co_._.~n - This system has the ~..~di~dvantaq_e~s as Option L, and forces the offeror to focus on a point two months further into the past when formulating the bid prices, thus possibly making the process even more susceptible to m~rket price movement over the intervening period between the most recent PH~ and the d~te of best and final offers,

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Change to twice-monthly escalation using trade journals escalating with prices effective on the Ist and 15th of the month. ~ Pr~o - This system is administratively simpler than the current system (~ith ~4 "final-only" escalations). There is no need for ~ billinq....ad]ustments. There is less need for contractors to build contingency premiums into their offer prices due to m~rgin uncertainty, Co.__~n - There is market risk associatedwith the move away from escalationon actual ~ales~ particularly with respect to je_.~.t ker.~ne, Twice-monthly price changes do not track actual sales as well as ~eekly changes, so offerors.maY.still add contingency p~ei~1~s~u ~heip p~ic~, There wi|l .....,,~=,'y~= ~v~ral contractor co~p|a~nts each year about the Bhort-term p~rfor~nce of these escalators, p~tion IV Change to weekly escalation using trade journals. Pro - This system can be administered as easily as thR identicalmystem cu~.~.~ntlv .¢~M in ~roundfuels. Tl~e~?_~_i~_.o.o Oee~ for flnal......billinq ad~us~e~-ts. The bid preparation proble(ns would be virtually eliminated, Weekly price changes track actual sales better than monthly or twice-monthly price changes, because they better reflect the continuous nature of price movements in the marketplace. Thus there is even less need for contractors to build in contingency premiums as offer prices can be updated to the time of receipt of best-and-final offers, Co~n - There is~ associated with the move away from escalation on actual sales, particularly with respect to Jet ~erosene, There would be.5_5~ price escalations oer year~ ~ I~ II~ and lll,~There will laints ~ach year concerning the short term performance of these escalator~.

~

Staf.f Recommendations: Option II is favored by all of the interested directorates (DFSC-C, -G, -P, and -~). Should the implementation Option II fail to alleviate the bidding difficulties, the issue J ...... can be revisited. I n event th ~not ~ppear to be truly viable befor~ mi~-~9BB ~ the

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UNITED STATES COURT OF FEDERAL CLAIMS 2 LA GLOPdA OIL AND GAS COMPANY, : 3 4 v. Plaintiff, : : No. 02-465C : (JudgeFlewitt)

5 THE UNITED STATES, 6 7 Defendant. :

: PagesI - 59

9 10 11 12 I3 14 15 16 17 18 I9 20 21 Reported by: Marian E. Cummings, Notary Pubtic 22 Job No.: 156783 Deposition of LawrenceErvin Ft. Belvoir, Virginia Monday,December1, 2003

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t 2 3 4 5 6 Ervin, held the offices of: 7 Depositionof Lawrence 8 9 10 Defense Energy Support Center 11 8725 John J. Kingman Road 12 Ft. Belvoir, Virginia 22060-62 7 t 13 14 15 Pursuant to notice, before MarianE. Cummings, a of 16 Notary Public of the Commonwealth Virginia. 17 18 19 20 2I 22 December 1,2003 12:01 p.m.

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APPEARANCES:

Mayer, Brown, Rowe & Maw For the Plaintiff 5 6 7 1909K Street, Northwest Washington, D.C. 20006-1101 (202) 2153-3208

8 BY:J. Keith Burt, Esq. 9 I0 I I United States Department Justice of I2 For the Defendant 13 14 15 16 Room4050 1100L Street, Northwest Washington, D.C. 20530 (202)6 ! 6-231 William L. Otsen, Esq.

17 BY: Steve Gillingham, Esq. 18 19 20 21 22

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1 Defense Energy Support Center 2 For the Defendant 3 4 5 6 Suite 1565 8725 John J. Kingman Road Ft. Belvoir, Virginia 22060 (703) 767-5009

7 BY: HowardKaufer, Esq.

9 I0 Defense Supply Center 11 Richmond,Virginia 12 (804) 279-1423

13 BY: Donald Tracy, Esq. 14 15 16 I7 18 19 20 21 22

3O

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l 2

CONTENTS

ERVIN 3 EXAMINATIONOF LAWRENCE MR. BURT 6

PAGE

EXHIBITS ERVIN DEPOSITIONEXHIBITS: lO PAGE:

0qone)

I2

14 t5

19 2O 21 22

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1 2 3

PROCEEDINGS Thereupon, LAWRENCEERVIN

4 the Witness, called for examinationby counsel for 5 the Plaintiff, and, after havingbeenswornby the 6 notary, wasexamined testified as follows: and 7 8 9 10 11 12 Q A Q A EXAMINATION COUNSELFOR THE PLAINTIFF BY BY MR. BUKT: Would state your namefor the record. you LawrenceCalvin Ervin. Mr.Ervin, whatis your current position? I'mthe chief of the marketresearchoffice at

13 the DECS, 14 Q And how long approximately have you held that

15 position? 16 17 A Eight plus years. Q Andgenerally what are the responsibilities of

18 that position? 19 20 A Well, overseeing an effort to-- we do interscreen, analyses of support of the procurement

21 operations center, do support for price negotiation work 22 in the pricing workdonein contracting divisions.

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There's a certain amount&affiliate workwe do for contingency folks. Weactually manage strategic petroleum the program the extent we're involvedwith the -- help to the budget folks whoworkfor the comptrollerwith their out year budgetprojections, price ofoi! in the future, forecasting,that sort of stuff. I think that I -probablyeverything wedo falls within that general description.

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1 A The responses is often oral. And the 2 document,it gets generated, providedto the person who kind of rely heavily on the contract files 3 askedit. We 4 to be the repositoryoft.hat since it's, youknow, sort 5 of proprietary information. 6 Q The contract files meaning~n office other

7 than yoursor is that a contract file in youroffice? 8 9 A No, we don't maintain contract files. Q So ~vhen you provide somemarket analysis to

10 the bulk fuels groupin connectionwith their and I 1 procurement whenthat analysis is in writing do you 12 keep a copyof what you give to the bulk fuels group? 13 A Well, I think the short answerto that is no

14 and maybesomethingmomentarily. Again, it wouldrely 15 heavily on the contract file. 16 Q All right. Let's turn to page 6 of

15 17 Plaintiff's Exhibit 2, request number reads, "All 18 documentsrelating to DESC's decision to use the PMM 19 indexes,Platts, or OPIS a basis for adjusting prices as 20 21 in its price adjustment clauses." A Recollection was that'87 study which I

22 believe you'vebeenprovidedand a prior '84 study.

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I

Q Can you generally describe those studies for

2 me? 3 A '84, '87 ~ was involved in producing and we

4 looked at comparing PMM versus Platts and OPISand the 5 issue oFSC escalating on a different time frame and the 6 documents looked at various things whichare nice to 7 havein an escalator. Theytrack -- the '87 study wound 8 up recommending making an adjustment to the PMM based 9 status quo at the time. I0 The'84 study whichI did not prepare, my

11 understanding recolleclion is that it's mainly,it and 12 deals mostly with the movefrom the ELSto PMM which was 13 priorto I985. 14 15 Q Wheredid you fred those studies? AWell, I didn't, I don't think 1 foundthe

16 first one, 17 I8 Q Okay. A The '84 one, and'87 1 had basically on my

I9 shelf. 20 21 Q Mr. Ervin, I believe that in approximately

1995 DESC switched from using Platts to using PMM an as

22 escalatorto usingPlaits; is that correct?

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A Sometimebackin there, yeah. 2 Q Do you know whether there was any sort of any 3 studies or analysis of reports prepared by your office 4 in connection with that change from using the PMM to 5 using Platls? 6 A Well, there wasn't because I was sitting in a

7 roomwhenthe decision happenedand it was madein 8 response to somepressure from headquarters to do things 9 differently. So the analysis is basedon, basically is 10 the analysis in the '87 study. Some people whohave I 1 read the '87 studies that they would drawdifferent 12 conclusions than whatwas presented at the end of the 13 study, certainly a close call. Analysis wouldhave 14 supported that as well so it's really the '87 study 15 whichis the basis for that move.That and some I6 pressure from headquarters to, you know,be doing things 17 differently anddoing things different in a visible 18 fashion to hopefully over the course oftime produce 19 substantial cost savings to the taxpayer.

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DEFENSE

LOGISTICS

AGENCY

DEFENSE FUEL SUPPLY CENTER CAMERON STATION ALEXANDRIA, VIRGINIA 22304-61160

~'~°

DFSC-PPR SUBJECT: Kequest for Class Deviation and PermanentCoverage in DLAR

TO:

AQPLL

1. As you requested, enclosed is a revised Memorandum the Director of the DAR for Councilwhichaddresses the one public comment received in response to the Economic Price Adjustment coveragepublishedin the 28 February1995edition of the Federal Kegister. 2. We appreciate yourprompt attention to this request. Thepoint of contact for this office is KerryPilz, extension45500,for any questionsyou mayhave.

Or~ginel Signed By. End L. H. CARPENTER Captain, SC, USN Director, Contracting and Production

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MEMORTUNDUM THE DIRECTOR OF THE DAK COUNCIL FOR

I.

PROBLEM:

Byletters dated 8 January 1992and 1 May 1992, the Director of DefenseProcurement approvedthe DefenseFuel SupplyCenter's ('DlzSC)economic price adjustment(]SPA)clauses part of the regulatory relief task force review.These clauses, or variations, are in effect today. DFSC wishesto revise the clause used in its domesticbulk fuels programs.None the three of economic-price adjustmenttypes currently encompassed the FAR appropriate for many by are of the competitive procurementsof commercialproducts undertaken by DFSC other DLA ~d contracting offices. Theuse of an EPA reference basedon an individual contractor's established price or cost of materials is impracticalfor procurements underwhichindefinite quantity contracts will be issued. Unique referencesfor eachofferor, engender EPA relative price variations duringthe delivery period, making impossible determine mostfavorable offer it to the at time of award.This creates a significant price risk for the Government undermines and the competitiveprocess. Giventhe needfor a common reference, a reference that moreclosely EPA follows marketprices for the end item reduces price risk for both the Government the and contractor. Suchreferences are also morein cortformance with commercial practice. H. RECOMMENDATION: Aclass deviation, lasting longer than three years, shouldbe incorporatedinto the DLAR. This deviation expandsthe use of EPAs based on established prices to encompass industry-wide and geographicalJybased market price references and expandsthe use o~EPAs based on indexes to encompass indexesfor commercial productsor services whichare identical to or similar to the end products to be providedunder the contract. Theappropriate coveragein DLAR 16.203 at shouldread: 16.203-1 Description (a)(90) Adjustment based on established prices. Established prices mayreflect industry-wide and/or geographicallybased marketprice fluctuations for commodity groups, specific supplies or services, or contract enditems. (c)(90) Adjustmentsbased on cost indexes of labor or material. These price.adjustments also be basedon increases or decreasesin indexesfor commodity groups, specific supplies or services, or contractend items. 16.203-3 Limitations (90) A fixed price contract with economic price adjustmentmayalso be used to provide for price adjustments authorizedin this section. 16.204-4 Contract clauses.

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(90} When cbntractingofficer determinesthat an existing EPA the clause is not appropriate, the contractingof'fiber mcr~develop and use anotherEPA clause in accordance with 16.2031(a}(90)or (c,)('90). Established prices in such clausesneednot be verifiable usingthe criteria in 48 CFR (FAR} 15.804-3. Established prices and cost indexes need not reflect chan~es the in costs or estabIishedprices, of a specific contractor.The establishedprice or cost index may be derived fromsales prices in the marke~olace, quotes, or assessmentsas reportedor made availablein a consistent manner a pubh'cation,electronic database,or other form, by an in independent trade association, Governmental body, or other third par~yindependent the of contractor. Morethan one established price or cost index maybe combined a formulafor in economic price adjustmentpurposesin the absenceof an appropriate single price or cost index. DISCUSSION: A. Prior to FARS 94-24, DFSC's DEV current system of price adjustment for bulk petroleum had been used since 1987. All offerors of product to DFSC required to accept a method were of price adjustmentbased on actual monthly sales price averagesas publishedby the Department of Energy in the Petroleum MarketingManthty ~PMM). Because the PMM is not published data until the third month following month which the for data is effective, interimbillings are paid basedon the movement an interim escalator. Theinterim escalator is basedon prices published of in trade journals at the endof the month prior to delivery. Final adjustments the billings are in madeaccordingto differences betweenthe interim and PMM (final) escalators wherf/the PMM published. When marketprices vary greatly from month month,the final billing adjustments to can be substantial. In I992, the DefenseManagement R.eview,as part of a reviewof all agency clauses, approvedthe use of the PMM-based clauses. Our authority to use the PMM EPA was reconfirmedby the Director of DefenseProcurement 1993. in B. Therevised bulk fuels clause substitutes industrypublie.ations, a morecurrent EPA basis, for the prior PMM methodology. provides a number advantages. First, it eliminates the This of needfor doublecalculations of price adjustments, significant savingsto the government. a Second, because the time lag between of interimandfinal billing, contractorslikely build in a price cushion. It is probable that the Government wouldsave money with contractors no longer having to include a cushionto cover themfor price adjustments. Third, the newEPA method more is similar to the wayadjustments donecommercially that commercial are in publications are widely acceptedby industry. Finally, the newmethod will be much simpler for all parties to use. The DFSC Office of MarketResearchand Analysis has studied the proposedEPA provisions and foundthemto be reliable bases for price adjustments.Thepublications are already used for EPA purposes in other DFSC programs. C. DFSC used the industry marketprice conceptsince the early 1980'sand has found it to has be a reliable method price adjustment.It is unnecessary reviewthe deviationevery three of to years as with mostclass deviations. Therefore,werequest that the deviation be made permanent and be included in the DLAR. D. Additional DFARS 201.402(3) Requirements.

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1. This class deviation request has been reviewedand approvedby the DFSC Office of Counsel. 2. This class deviation corresponds mostclosely with the deviation de~a~.itionof BAR

1.40I(c).
3. This is the first requestfor this class deviationto be published the DLAR. in 4. This class deviation waspublishedin the Federal Register on 28 February1995. It offered the public 60 days in whichto comment the proposed DLAR on language. Onepublic comment received on 2 May1995, after the expiration of the public comment was period. DFSC, however, addressesthe letter received fromTheNationalSecurity Industrial Associationas follows. TheNationalSecurity Industrial Associationis concerned that the EPA references chosenby the contractingofficer mightnot reflect actual market prices and therefore, the price availableto the contractor. They stated, "Such situation couldunfairly shiRthe risk of price uncertaintyto the a contractor." DFSC responds that the commentor seemsconcerned about implementingthe market price concept, not the concept itself. BecauseDFSC sucessfully used the marketprice EPA concept since the early 1980's, wedo not believe that any concernis warranted. None DFSC's of contractors have filed comments regarding the proposal. In any event, DFSC's clauses EPA containprovisionsfor revising market price indicators, if the contractingofficer finds a reference has beendiscontinued, if it substantially andconsistentlyfails to reflect market or conditions.If these conditionsoccur, the parties may agree uponan appropriatesubstitute for the inadequate indicator. If the parties fail to reachagreement, supplier can utilize the provisionscontained the in the DISPUTES clause of the contract. DFSC makesevery effort to utilize market price indicators that consistently reflect actual marketconditions. TheNationalSecurity Industrial Association recognizesthe benefit of such behaviorby agreeingin its letter with the Government's statement in the FederalRegister: "a referencethat moreclosely followsmarketprices for the end item reduces price risk for both the Government the contractor." Accordingly,the comment and does not warrant revising the proposedDLAR coverage.

IV. COLLATERALS: A. The proposed class deviation and DLAR coverage do not imposeany paperworkburdens or informal collection requirements. Thusthe Paperwork Reduction does not apply. Act B. Theproposedclass deviation and DLAR coverageis not expectedto have a significant impacton a substantial number small entities within the meaning the Regulatory of of Flexibility Act, 5 U.S.C.601et seq. since the elimination interimbilling will greatly simplify of

40

Case 1:02-cv-00465-ECH

Document 66-3

Filed 03/31/2006

Page 21 of 21

administrative procedures requiredof contractors.Aregulatoryflexa"oility analysis, therefore, is not required.