In order to implement section 4203 of the ClingerCohen Act of 1996, DoD, GSA, and NASA published an advanced notice of proposed rule (ANPR) in the Federal Register at 68 FR 4874, January 30, 2003. The ANPR listed provisions that may be inapplicable to the acquisition of COTS items, and requested public comment. (A prior ANPR had been issued under FAR Case 96308.) The Councils published a proposed rule at 69 FR 2448, January 15, 2004. The comment period closed on March 15, 2004. The Councils received comments from 56 respondents, of which 3 were duplicates. The comments were thoroughly examined by the FAR Acquisition Law Team, Civilian Agency Acquisition Council (CAAC), and Defense Acquisition Regulations Council (DARC).

B. Definition of COTS.

The Councils received several comments on the definition of COTS.

1. Include services/IT in the definition. One respondent suggested that the definition of COTS item should delete the words ``of supply'' from the definition. The respondent states that this is not part of the statutory definition. Further, three respondents commented that definition of COTS should specifically include services. Another respondent suggested additional language in the definition of COTS to address software and other information technology products.

Response: The statute defines ``COTS item'' as an item that ``Is a commercial item as described in section 4(12)(A).'' ``Commercial item'' is defined at 41 U.S.C. 403(12). Paragraph (A) of that definition reads as follows:
``Any item, other than real property, that is of a type customarily used by the general public or by nongovernmental purposes, and that (i) Has been sold, leased, or licensed to the general public; or (ii) Has been offered for sale, lease or license to the general public.''

Paragraphs (F) and (G) of the definition deal with commercial services. These paragraphs were not referenced in the statutory definition of a COTS item. Services are therefore necessarily excluded from the definition. To make the definition clearer, the reference to the definition of commercial item has been revised to point to the first paragraph of the definition of commercial item.

The Councils have clarified that the words ``of supply'' include [[Page 2714]]
``construction material''. Although the definition of ``construction materials'' states that they are ``supplies'', FAR Part 25
distinguishes between Buy American ActSupplies (FAR Subpart 25.1) and Buy American ActConstruction materials (FAR Subpart 25.2). Therefore, this clarification is beneficial. The OFPP memorandum, dated February 14, 2008, specifically mentions waiver of the component test at 41 U.S.C. 10a (supply) and 10b (construction.)

Since the only laws waived are the component test of the Buy American Act and the recycled material estimate and certification, and no laws relating to FAR Part 27 have been waived, it is unnecessary to specifically mention information technology (IT) or software in the definition of COTS item.

2. ``Without modification''. One respondent considers the phrase ``without modification'' to be too restrictive. Some COTS products may require some type of modification to suit the intended use of the product.

Response: The phrase ``without modification'' is required by statute. However, the Councils have added ``under a contract or subcontract at any tier'' to clarify that whether an item is a COTS item is determined at the point of sale to the next higher tier subcontractor. This is consistent with the DoD definition of ``COTS item'' as applied to the waiver of specialty metals restrictions when acquiring COTS items. If a COTS item is accepted by the next high tier without modification, then any waiver applicable to COTS items is applicable to this item at the time of acceptance, even if it is subsequently modified. Although this distinction is not necessary in this particular rule, because both laws being waived apply only at the level of the prime contract, it is beneficial to keep this definition clear and consistent, in case a law is waived in the future that applies at the subcontract level. This intent to address COTS items at the subcontract level is demonstrated in section 804 of the National Defense Authorization Act for Fiscal Year 2008 (Pub. L. 110181), which states in paragraph (b) (10 U.S.C. 2533b(h)) that ``This section does not apply to contracts or subcontracts for the acquisition of commercially available offtheshelf items, as defined in section 35(c) of the Office of Federal Procurement Policy Act (41 U.S.C.

431(c))[hellip]''.

3. ``Sold in substantial quantities.'' One respondent requests that this should be clarified, that it is not necessary that the contractor itself sells substantial quantities. Multiple vendors may sell the item in substantial quantities in the commercial marketplace.

Response: This definition is statutory. There is nothing in the definition that implies that it is the contractor that must sell the item in substantial quantities in the commercial marketplace. The way the definition reads, the substantial quantities test does apply to the item, as suggested by the respondent.

4. Incorporate definition of COTS into FAR 52.2021, Definitions. One respondent recommended that the definition of COTS item should be incorporated into FAR 52.2021, Definitions, because the proposed rule added a cross reference in FAR 52.2446 to the definition of COTS item at FAR 52.2021.

Response: This comment was correct at the time, but has been overtaken by events. First, the final rule does not make the proposed change to FAR 52.2446. In addition, the clause at FAR 52.2021 was rewritten under another case, so that it no longer contains a list of definitions. Rather, it refers to where definitions can be found and provides guidance as to which definitions apply, when a term is defined in more than one place.

5. Subset of commercial items. The proposed rule included in the definition of COTS item the statement that COTS items are a subset of commercial items. Although no public comments were received on this issue, the Councils decided that it is redundant to state that COTS items are a subset of commercial items when the definition itself requires that COTS items meet the definition of the first paragraph of the definition of commercial item. This information that COTS items are a subset of commercial items is now provided at FAR 12.505, rather than in the definition.

C. Implementation of COTS in FAR Part 12.

The draft final rule modifies FAR Subparts 12.1, 12.3, and 12.5 as proposed, to address COTS items, and adds the section 12.505. However, because only 2 laws are being waived, section 12.505 has been modified to include only those 2 laws, while stating that all laws waived for contracts or subcontracts for the acquisition of commercial items are also waived for COTS (because it is a subset). This more clearly identifies the differences that apply to COTS items.

The rule does not make any change to FAR 12.504, based on the recommendation of SBA. An extraneous proposal to delete 15 U.S.C. 644(d), not directly related to this case, has been removed. SBA states that, although FASA attempted to eliminate labor surplus areas for purposes of subcontracting, the drafters of FASA missed the reference to subcontracting in 15(d) of the Small Business Act. Therefore, until this error is corrected, it is better to leave it on the list of laws that are inapplicable to subcontracts for the acquisition of COTS items.

D. Determination by OFPP.

After considering the analysis and recommendations as to laws that should be waived for the acquisition of COTS items, the Administrator for the Office of Federal Procurement Policy, made a determination on February 14, 2008, of the laws applicable and laws inapplicable to the acquisition of COTS items.

1. Laws Waived. The Administrator of OFPP exercised the authority to wholly or partially waive the following laws:

a. Buy American Act. A partial waiver of the Buy American Act (BAA)(41 U.S.C. 10a and 10b), limited to the Act's domestic components test was granted.

b. Estimate of Percentage of Recovered Material Act. The Estimate of Percentage of Recovered Material Act (42 U.S.C. 6962(c)(3)(A)) was waived in its entirety.

2. Waiver still under consideration. A partial waiver of the following law is under consideration and a determination and findings will be made on this law at a later date:

Rights in Technical Data (41 U.S.C. 418a and 10 U.S.C. 2520), specifically waiver of

3. Laws already inapplicable or modified for the acquisition of commercial items. No further modification was made to any of the following laws, which have already been determined inapplicable or modified for the acquisition of commercial items:

a. WalshHealey, 41 U.S.C. 43.

b. Contingent Fees, 41 U.S.C. 254(a) and 10 U.S.C. 2306(b).

c. Minimum response time, 41 U.S.C. 416(a) (3) and (6).

d. Drug Free Workplace, 41 U.S.C. 701.

e. Limitation on the use of appropriated funds, 31 U.S.C. 1354(a).

f. Contract Work Hours and Safety Standards Act, 40 U.S.C. 3701.

g. AntiKickback Act of 1986, 41 U.S.C. 57 (a) and (b), and 58.

h. Truth in Negotiations Act, 41 U.S.C. 254(d) and 10 U.S.C. 2306a. [[Page 2715]]

i. Cost Accounting Standards, 41 U.S.C. 422.

4. Law not subject to waiver.

Limitation on appropriated funds to influence certain Federal contracting and financial transactions (31 U.S.C. 1352).

5. Laws that will not be waived because it is not in the best interest of the Government. A determination was made that the following laws will not be waived for the acquisition of COTS because it is not in the best interest of the Government:

a. Trade Agreements Act (19 U.S.C. 2501 and 19 U.S.C. 2512);

b. Restrictions on Advance Payments (31 U.S.C. 3324).

c. Employment Reports for Veterans (38 U.S.C. 4212(d)(l)).

d. Validation of Proprietary Data Restrictions (41 U.S.C. 253d and 10 U.S.C. 2321).

e. Prohibition on Limiting Subcontractor Direct Sales (41 U.S.C. 253g and 10 U.S.C. 2402).

f. Cargo Preference, 10 U.S.C. 2631(a) and 46 U.S.C. 1241(b).

g. Affirmative Action for Workers with Disabilities, 29 U.S.C. 793.

h. Equal opportunity for Special Disabled Veterans, 38 U.S.C. 4212.

i. Examination of records by the Comptroller General, 41 U.S.C. 254d(c) and 10 U.S.C. 2313(c).

j. Fly American Act, 49 U.S.C. 40118 (but see 12.503). E. Discussion and analysis of laws considered for waiver.

1. Laws Waived.

a. Buy American Act (41 U.S.C. 10a and 10b), component test. Ten respondents specifically endorse waiver of the application of the Buy American Act (BAA) to COTS and 4 respondents endorse the waiver as part of a broad endorsement of the waivers in general, without specific identification or comment. Two respondents oppose the waiver of the BAA as a whole.

Some respondents state that the BAA makes it increasingly difficult for U.S. companies to compete for Federal business. These laws are out of place in the contemporary international market for commercial items. Companies must source products globally in order to be competitive in the worldwide marketplace. Therefore, companies must choose between being competitive in the global market and being competitive in the Government market. The BAA usually does not influence COTS
manufacturers because revenue derived from Government sales is typically a very small percentage of overall revenue for COTS.

Some respondents are concerned that the Governmentunique requirement to track where components are being manufactured imposes a severe administrative burden, especially on small business. It requires contractors to establish and maintain costly and labor intensive management systems. Tracking the place of manufacture and component value is not necessary for the general origin labeling requirements applicable generally in the U.S. commercial market place. BAA compliance is a major procurement requirement that adds complexity and cost to the delivery of goods to the Government. The increased cost of ensuring compliance with the BAA keeps some firms out of the market completely and affects the price of products sold to the Government.

Another issue for respondents is that application of the regulations relating to the BAA is very complex and difficult. The certification requirements potentially expose manufacturers to civil false claims and other legal sanctions, even when they have taken extraordinary steps to comply with the BAA.

Some respondents contend that Congress mandates the elimination, where possible, of barriers to the Government's ability to procure commercial items.

Federal agencies contend that it is difficult and causes delay to try to obtain casebycase waivers of the BAA.

On the other hand, two respondents were concerned that a permanent waiver of the BAA should not be granted without reciprocity. These respondents believed that the Government needs these provisions to stay in general effect so that possibility of waiver will provide incentive to encourage other countries to provide reciprocal access. Agencies can waive the BAA on a casebycase basis or for a class of items when it is in the public interest to do so.

Response: The Councils concur with the respondents on the especially burdensome nature of the component test. Today's markets are globally integrated with foreign components often indistinguishable from domestic components. Manufacturers' component purchasing decisions are based on factors such as cost, quality, availability, and maintaining the state of the art, not the country of origin, making it much more difficult in today's market for a manufacturer to guarantee the source of its components over the term of a contract. It is even more difficult for a dealer to determine and guarantee the source of the components included in products on the shelf. The difficulty in tracking the country of origin of components is a disincentive for firms to become defense contractors, limiting the ability of the Government to purchase products already in the commercial distribution systems. In today's globally integrated market, it is expensive for manufacturers to distinguish between foreign and domestic components. Requiring them to do so results in increased costs of procurements and impedes the ability to obtain the latest advances in commercial technology.

The rationale provided against waiver of the BAA as a whole is resolved by waiving only the component test of the BAA. The component test of the BAA has already been waived for all acquisitions subject to the World Trade Organization Government Procurement Agreement (WTO GPA). By waiving only the component test of the BAA for COTS items, but still requiring manufacture in the United States, the Government can preserve an incentive to encourage other countries to provide reciprocal access, while reducing the significant administrative burden on contractors and the associated increased cost to the Government.

A determination was made that a waiver of the components test would allow a COTS item to be treated as a domestic end product if it is manufactured in the U.S., without tracking the origin of the components. Waiving only the component test of the BAA for COTS items and still requiring the end product to be manufactured in the U.S., reduces significantly the administrative burden on contractors and the associated cost to the Government. The U.S. Trade Representative's Office was consulted and did not oppose the partial waiver of the BAA. The component test of the BAA was waived because it is in the best interest of the U.S. to do so.

The draft final rule modifies FAR Part 25 and associated clauses to implement waiver of the component test of the BAA:

Conforming changes are also required for

b. Certification and Estimate of Percentage of Recovered Material (42 U.S.C. 6962 (c)(3)(A)). There were no specific comments supporting waiver of the Estimate of Percentage of Recovered Materials. However, ten respondents supported waiver as part of broad general support for the proposed rule. One respondent specifically opposed to waiver of 42 U.S.C. 6962(c)(3)(A), Estimate of Percentage of Recovered Material, because the respondent feels that it may preclude contractors from having to indicate on their products the percent of recycled materials contained therein. Information on the recovered material content is necessary in order for agencies to carry out the intent of the Resource Conservation and Recovery Act (RCRA) and Executive order (E.O.) 13101.

Response: Both the Environmental Protection Agency (EPA) and the Office of the Federal Environmental Executive (OFEE) agree that requiring preaward certification from offerors and a written estimate of percentage of recovered materials from the contractor after contract completion are unnecessary requirements for COTS. These requirements are a paperwork exercise and are not consistent with buying COTS items from the commercial market place. The recycled content statement on the product packaging serves as the certification and the estimate. The Chief Acquisition Officer and Senior Procurement Executive at EPA and the OFEE were not opposed to waiving the requirement for certification and estimation for COTS items. This does not waive any of the other RCRA requirements. The Government will still acquire competitively, in a costeffective manner, products that meet reasonable performance requirements and that are composed of the highest percentage of recovered materials practicable.

A determination was made that waiver of this law is in the best interest of the Government because the law's requirements are not consistent with the acquisition of COTS items in the commercial marketplace.

The only necessary changes to implement this waiver are

i. Modification of the clause prescription at FAR 23.406 to exclude application to COTS items (as proposed); and

ii. Modification of FAR 52.2125(b)(25)(i) and (ii), to indicate that FAR 52.2239 is not applicable to the acquisition of COTS items.

2. Waiver still under consideration.

Rights in Technical Data (41 U.S.C. Sec. 418a and 10 U.S.C. Sec. 2320).

Ten respondents supported waiver as part of broad general support for the proposed rule (Respondents No. 9, 11, 19, 20, 26, 28, 32, 34, 38, and 40). No respondents opposed the waiver. However, the Councils did not reach consensus on this waiver. The Department of the Treasury opposed waiver of this provision. The proposed waiver of the data rights statutes is based on the premise that, because COTS items are developed at private expense, there would be no Government rights in technical data associated therewith. The Councils do not agree entirely with this premise. For example, FAR 52.22714 provides for unlimited rights in form, fit and function data; and in manuals and training materials necessary for installation, operation, maintenance, and repair; regardless of whether such data is developed at Government expense. The fact that items delivered under a contract are COTS does not diminish the Government's need to operate and repair them, and form, fit, and function data could be critical if a COTS item is integrated into a Government system and must subsequently be replaced.

The Councils agree that the relevant statutes do not focus only on data related to technologies developed exclusively at the Government's expense they also cover development in whole or in part at private expense, including commercial item technologies (this is especially clear in the DoD statute, 10 U.S.C. 2320). Further, it is not accurate to conclude that the possibility of Government funding for (elements of) COTS technologies is always ``irrelevant.'' The statutory schemes have numerous elements that are designed to protect important rights and proprietary interests of contractors (and subcontractors), especially in cases of privately developed or commercial technologies.

For example, the Government is prohibited from requiring contractors to provide the Government with detailed design data, and from requiring the contractors to relinquish proprietary rights in data related to proprietary or commercial technologies, as a condition of contract award (see 418a(a), and 2320(a)(2)(F)). Additionally, the DoD scheme specifically and expressly addresses the rights in data related to technologies developed in whole or in part at private expense (2320(a)(2)(B) & (C)), and the civilian statutes requires the regulations to address these funding scenarios (418a(c)(1)). Both statutory schemes also recognize the special requirements under the Small Business Innovation Research (SBIR) program, which allow the small business to treat even 100 percent Governmentfunded technologies as proprietary for certain periods.

Similarly, the schemes identify and protect the interests of the Government in acquiring and using data for certain important purposes, such as operation and maintenance, or emergency repair and overhaul, of the item. These protections of interests, both for the contractors/ subcontractors and the Government, are equally applicable to COTS items as for other commercial items or noncommercial items (as the Department of Treasury notes).

All of these considerations demonstrate that the statutory schemes [[Page 2717]]
are designed to balance Government and private interests in all such acquisitions, and thus should not be waived in their entirety for COTS item acquisitions.

3. Laws already inapplicable or modified for the acquisition of commercial items. None of the respondents commented specifically on any of these laws that are already inapplicable or modified for the acquisition of commercial items, as identified in section C.3. of this notice.

4. Law not subject to waiver.

Limitation on appropriated funds to influence certain Federal contracting and financial transactions (31 U.S.C. 1352). After publication of the proposed rule, the Councils determined that this statute is not eligible for waiver because it provides for criminal or civil penalties.

5. Laws that will not be waived because it is not in the best interest of the Government.

a. Trade Agreements Act (TAA)(19 U.S.C. 2501 and 19 U.S.C. 2512). Many of the respondents (21) endorse waiver of the application of the trade agreements prohibitions to COTS.

On the other hand, 4 respondents (including the United States Trade Representative (USTR) and the Department of Commerce) opposed the waiver.

The proponents of waiver of the purchase restrictions of the Trade Agreements Act (TAA) contend that

i. The TAA makes it increasingly difficult for U.S. companies to compete for Federal business. These laws are out of place in the contemporary international market for commercial items. Companies must source products globally in order to be competitive in the worldwide marketplace. Therefore, companies must choose between being competitive in the global market and being competitive in the Government market. The trade agreements procurement restriction usually does not influence COTS manufacturers because revenue derived from Government sales is typically a very small percentage of overall revenue for COTS.

ii. The Governmentunique requirement to track where products are being manufactured imposes a severe administrative burden. It requires contractors to establish and maintain costly and labor intensive management systems. TAA compliance is a major procurement requirement that adds complexity and cost to the delivery of goods to the Government. The increased cost of ensuring compliance with the TAA keeps some firms out of the market completely.

iii. Application of the regulations relating to trade agreements is very complex and difficult. It is often difficult to determine ``substantial transformation'' for purposes of the TAA. The certification requirements potentially expose manufacturers to civil False Claims and other legal sanctions, even when they have taken extraordinary steps to comply with the TAA.

iv. Congress mandates the elimination, where possible, of barriers to the Government's ability to procure commercial items.

v. Barring access to the U.S. Government market has not provided the leverage to open foreign government markets that U.S. trade negotiators may have envisioned when the TAA was passed. Several commenters state that of the 145 WTO member countries, only 28 countries have signed the GPA in 25 years, 23 of the signatories being original signatories.

vi. The restrictions of the TAA are not required by any treaty of international agreement, including the GPA. The commenters believe that the U.S. is the only GPA signatory to enact such market restrictions.

vii. It is difficult and causes delay to try to obtain casebycase waivers of the trade agreements.

The opponents of waiver of the purchase restrictions of the TAA contend that

i. A permanent waiver would significantly disadvantage U.S. suppliers, especially small businesses, without providing reciprocal market access for them. China, Malaysia, and the Philippines have not joined the GPA or provided benefits in a bilateral agreement.

ii. USTR's ability to waive the TAA purchasing restriction on a casebycase basis has been a key element in its ability to negotiate reciprocal market access for U.S. suppliers in the government procurement markets of foreign countries, through bilateral FTAs, as well as accession to the GPA. In recent years, USTR has concluded new FTAs with Chile, Australia, Morocco, and more agreements are pending. A permanent waiver for COTS would severely undermine leverage that is critical to USTR's ability to negotiate such agreements.

iii. There is no need for a permanent waiver, because waivers can be granted on a casebycase basis when in the national interest.

Response: The TAA essentially outlines a process for approval of trade agreements, and the relationship of trade agreements to U.S. law. A determination was made that a waiver of the prohibition on acquisitions of products from countries that have not entered into trade agreements with the United States would put U.S. suppliers, especially small businesses, at a significant disadvantage without providing reciprocal market access for them. China, Malaysia, and the Philippines have not joined the GPA or provided benefits in a bilateral agreement. USTR's ability to waive the TAA purchasing restriction on a casebycase basis has been a key element in its ability to negotiate reciprocal market access for U.S. suppliers in the government procurement markets of foreign countries, through bilateral Free Trade Agreements (FTA), as well as consent to the GPA. In recent years, USTR has concluded new FTAs with Chile, Australia, Morocco, Bahrain, Dominican RepublicCentral America, and more agreements are pending. Therefore, a permanent waiver is not in the best interests of the Government because it would severely undermine leverage that is critical to USTR's ability to negotiate such agreements. USTR can grant waivers on a casebycase basis when in the national interest.

b. Restrictions on Advance Payments (31 U.S.C. 3324). The Councils received 10 comments that supported waiver as part of broad general support for the proposed rule and two comments specifically supporting the waiver of the restriction on advance payments, whereas one respondent specifically opposed the waiver of the restriction on advance payments.

One respondent supported waiving the restriction on the basis that it would permit the Government to follow the common business practice of ``payment due upon receipt.'' Another respondent supported waiving the restriction because it also believes that it is common business practice to make payment for IT support packages at the beginning of the term. The respondent that opposed the waiver of the statute [[Page 2718]]
was concerned that contracting officers will be faced with demands for advance payments for routine COTS purchases.

Response: In addition to permitting invoicing upon delivery to the ``point of first receipt by the Government,'' the proposed rule would also have allowed invoicing upon delivery of supplies to a post office or common carrier. Consequently, the Government might be obligated to make payment before receipt.

This statute prohibits, except in certain circumstances, payment in excess of the value of supplies or services already delivered or provided. 31 U.S.C. 3324(b) provides that an advance of public money may be made only if it is authorized by a specific appropriation or other law or as authorized by the President in some circumstances. 41 U.S.C. 255(f) and 10 U.S.C. 2307(f) provide some authority for advance payments for commercial items, but treat this as Government financing and require the Government to obtain adequate security. It was determined that a permanent waiver is not necessary because 41 U.S.C. Sec. 255(f) (as implemented by FAR 32.2, Commercial Item Purchase Financing, specifically FAR 32.2024(a)(2)) already authorizes advance payments for commercial item acquisitions, and agencies have the authority to waive, if it is in the best of the Government.

c. Employment Reports for Veterans (38 U.S.C. 4212(d)(l)). The Councils received one comment specifically in favor of waiving the statute and 10 respondents supported waiver as part of broad general support for the proposed rule. The Councils also received 2 responses specifically opposed to the waiver.

The respondents who favored waiver contended that waiving the statute only affects the submission of a report and data gathering. By waiving the statute, an administrative function would be eliminated but the intent to continue with the regulations to promote veteran employment would remain unchanged.

Respondents who objected to waiver of the statute feared that veteran programs would be impacted.

Response: This statute requires that each contractor that enters into a contract in excess of $100,000 for personal property and non personal services, including construction, provide an annual report to the Secretary of Labor that includes specific information about their contractor workforce. The report requires Federal contractors and subcontractors to ``take affirmative action'' to hire and promote qualified special disabled veterans, veterans of the Vietnamera and any veteran who served on active duty during a war or in a campaign or expedition for which a campaign badge has been authorized. Congress has taken a keen interest in the VETS 100 Report, as evidenced by Section 1354 of Public Law 105339, Veterans Employment Opportunities Act of 1998, which supports this reporting requirement. A determination was made not to waive the requirement for contractors to file employment reports because it is not in the best interest of the Government to do so.

d. Validation of Proprietary Data Restrictions (41 U.S.C. 253d and 10 U.S.C. 2321). 10 respondents supported waiver as part of broad general support for the proposed rule. No respondents opposed the waiver.

Response: This statute provides an extensive procedure for due process for a Government contractor when the Government has a suspicion that technical data the contractor is claiming to be proprietary was, in fact, produced under a Government contract and was not produced at private expense. The validation scheme is also carefully structured to balance the interest of all parties, and create a uniform mechanism to determine the appropriate allocation of rights in the data. These statutes establish procedures, rights, and legal remedies regarding the validation of the asserted proprietary restrictions. A determination was made that these statutes should be available to balance the interest of all parties involved in an acquisition, including COTS.

e. Prohibition on Limiting Subcontractor Direct Sales (41 U.S.C. 253g and 10 U.S.C. 2402). Nine respondents supported waiver as part of broad general support for the proposed rule. One respondent opposed the waiver.This respondent stated that this exemption has some potential for harming small business and the Federal Government itself.

Response: This statute was enacted as part of Pub. L. 98577, which was intended by Congress as a comprehensive solution to ``$600 toilet seats and $400 hammers.'' This provision answered the practice of major defense contractors prohibiting their subcontractors from selling directly to the Government. In the past, when the prime contractor wanted to be the source to the Government, they would charge at least a material overhead to any cost or price from the subcontractor/supplier. Waiving this Act would allow prime contractors to restrict their subcontractors from selling directly to the Government and limit opportunities for small businesses, including womenowned and minority owned businesses. A determination was made not to waive this Act so as to ensure competition is preserved for all sectors of the economy.

f. Cargo Preference, 10 U.S.C. 2631(a) and 46 U.S.C. 1241(b). The Councils did not receive any comments specifically supporting waiver of the cargo preference laws for acquisition of COTS. 10 respondents supported waiver as part of broad general support for the proposed rule. 14 respondents specifically opposed a waiver of Cargo Preference laws for COTS, including the following Government agencies:

Opponents of the waiver of Cargo Preference laws when acquiring COTS items present the following rationale:

i. The Cargo Preference laws are vital to maintaining a viable merchant marine, including both vessels and mariners.

ii. The proposed waiver is contrary to the Government's maritime policy. The Secretary of Transportation stated in March 2004 that ``cargo preference laws are essential elements of America's national maritime policy.''

iii. Many respondents state that the COTS category represents the vast preponderance of cargo that is carried for or sponsored by the U.S. Government. The MARAD Administrator states that waiver could result in the potential loss of nearly $1.2 billion in revenue to U.S. flag vessel operators and further loss to the economy through job loss. The American Maritime Congress believes that finalization of this waiver will eventually result in more than 100 U.S.flag vessels in the international trades leaving the U.S. flag, and points out further adverse impact on foreign exchange, and reduced Federal tax revenues.

iv. Weakening of the U.S. maritime industry will adversely impact our country's ability to respond to international crises. We need U.S. flag vessels to transport troops, machinery, and medical and other critical supplies throughout the world during contingencies or war.

v. The waiver will put at risk two DoD programs (the Voluntary Intermodal Sealift Agreement and the Maritime Security Program) that are essential to U.S. security interests. Through these
[[Page 2719]]
programs, DoD has immediate access to reliable commercial maritime assets at a fraction of the cost it would incur if it had to replicate those assets (Transportation Institute). Shippers cannot dedicate valuable assets to the defense and other governmental needs of the United States unless they can rely on a steady flow of cargoes.

vi. DoD needs a viable merchant marine to provide a pool of trained mariners from which DoD crews Defense reserve ships.

vii. U.S.flag commercial vessels are forced to operate in an international shipping arena that is dominated by state owned and controlled merchant fleets. They are financially disadvantaged due to higher labor costs, vessel standards, and tax disadvantages. Therefore, the U.S.flag vessels require the help of the U.S. Government to compete.

viii. Waiving the Cargo Preference laws at this time would be inequitable, because shipping companies have relied upon the present laws to take irrevocable business actions.

ix. The American Shipbuilding Association is further concerned that this waiver would adversely impact the defense shipbuilding industry, which in turn, will threaten America's ability to build a Navy and impact the national security of the United States.

x. The FAR Council already made the determination that waiver of Cargo Preference laws for all commercial subcontracts was not in the best interest of the Government. 41 U.S.C. 430 requires that provisions of law described in 41 U.S.C. 430(c) shall be included on the list of inapplicable provisions of law to subcontracts for the procurement of commercial items unless the FAR Council makes a written determination that such exemption would not be in the best interest of the Government. On May 1, 1996, the Administrator of OFPP signed a memorandum stating the policy that the waiver of Cargo preference for commercial subcontracts ``is not intended to waive compliance with the Cargo Preference Laws for ocean cargos clearly destined for eventual military or Government use.'' This memorandum was the result of extensive negotiations between representatives from the national Economic Council, OFPP, DoD, MARAD, and the maritime industry. In 2002, a formal determination was signed by all members of the FAR Council that it would be in the best interest of the Government to limit the waiver of the Cargo preference laws, in accordance with the OFPP memorandum, dated May 1, 1996, as implemented in the FAR through FAR Case 1999024.

Response: 10 U.S.C. 2631(a), Transportation of Supplies by Sea (The Cargo Preference Act of 1904), requires the use of only U.S.flag vessels for ocean transportation of supplies owned by, or destined for use by for the Army, Navy, Air Force, or Marine Corps unless those vessels are not available at fair and reasonable rates. 46 U.S.C. 1241(b), Transportation in American Vessels of Government Personnel and Certain Cargo (The Cargo Preference Act of 1954), requires that Government agencies acquiring, either within or outside the United States, supplies that may require ocean transportation shall ensure that at least 50 percent of the gross tonnage of these supplies (computed separately for dry bulk carriers, dry cargo liners, and tankers) is transported on privately owned U.S.flag commercial vessels to the extent that such vessels are available at rates that are fair and reasonable for U.S.flag commercial vessels. The Cargo Preference laws are vital to maintaining a viable merchant marine, including both vessels and mariners and are essential elements of America's national maritime policy. Therefore, a determination was made that it is not in the best interest of the Government to waive this Act.

g. Affirmative Action for Workers with Disabilities, 29 U.S.C. 793. The Councils did not receive any specific comments in favor of waiving the statute. 10 respondents supported waiver as part of broad general support for the proposed rule. The Councils received 2 responses specifically opposed to waiver, i.e.

FOR FURTHER INFORMATION CONTACT

Mr. Michael Jackson, Procurement Analyst, at (202) 2084949 for clarification of content. For information pertaining to status or publication schedules, contact the FAR Secretariat at (202) 5014755. Please cite FAC 200530, FAR case 2000305.