(c)(1) The offer of nonconforming material to the Government
should be the exception, and contractors should be discouraged from
submitting requests for waivers/deviations (hereinafter sometimes
referred to as waivers) in all cases where the contractor is at fault
in producing the nonconforming supplies. Contracting officers should
emphasize to the contractor that the latter is responsible for the
control of product quality and for offering to the Government for
acceptance only that material which conforms to contractual
requirements. When evaluation of technical requirements indicates a
specification change is required or would be beneficial to the
Government, contracting officers shall take action through appropriate
channels with the activity responsible for technical requirements to
change the requirements in question, rather than waive them. Caution
and good judgment must be exercised by the total Government team
involved in the waiver evaluation process to ensure that technical
requirements are not degraded during any attempt to assist the
contractor in solving its problems with schedule compliance or with
fulfilling the valid technical requirements contained in the contract.
See subparagraph (f)(90), below.
(90) See definitions at 46.101 and DFARS 246.407(1). The
contracting element shall control all contractor requests for waivers
and deviations by maintaining a register and recording the following
information: type of waiver or deviation (critical, major, or minor);
brief description of the requested waiver/deviation; contract number;
contractor's name; item identification (NSN and noun nomenclature);
specification/technical data; date the request was received;
center/service element(s) in the evaluation loop; date resolved;
action taken; consideration obtained; specification change made; and
any pertinent or commodity-oriented data desired. The data shall be
used to report in accordance with the Management Information System
Glossary (RCS DLA(M)26(C)MIN). Unless the specification clearly
defines major and minor characteristics, all test characteristic
nonconformances submitted as waiver requests shall be classified as
major nonconformances and processed as such. When several minor
nonconformances are submitted for a single item, a determination will
be made as to whether the cumulative effect is a major nonconformance.
(91) The contracting officer shall ascertain whether the
contractor's request for waiver was forwarded through the ACO and
includes the ACO's recommendations for approval or disapproval. The
contracting officer must have the ACO's comments and recommendations,
in order to evaluate properly a request for waiver. Conversely, the
ACO must be fully apprised of the request for waiver to ensure that
the contractor has taken action to correct and prevent recurrence of
the conditions causing the nonconformance. Therefore, requests for
waiver submitted directly to the contracting officer shall be returned
to the contractor for resubmission through the ACO, except in those
situations where time is an essential element. In such cases, the
ACO's recommendations will be obtained by the most expeditious means
available. The contracting officer shall refer the request for waiver
to the quality and supply elements of the Center, or the CBU, for
evaluation and recommendations. In addition to those criteria listed
at FAR 46.407(c)(1), the following factors shall be considered in
making a decision to accept or reject the waiver request:
(A) Suitability of the item for use 'as is,' or the
practicability and cost of rework or repair. For a major
nonconformance, this determination must be made by the activity
responsible for technical requirements and obtained in writing.
(B) Previous request(s) for waiver(s) from the same
contractor.
(C) Previous request(s) of the same nonconforming
characteristics from the same contractor and/or other contractors.
(D) The supply status of the item and the effect that
disapproval of the request for waiver/deviation will have on the
delivery schedule.
(92) The contracting officer shall submit each accept decision on
critical and major nonconformances for approval by the chief of the
contracting office. The contractor will not be notified until the
chief of the contracting office has made the decision to approve or
disapprove the waiver request.
(d) Contracting officers shall make a conscious decision on each
DLA contract whether CAO authority to accept minor nonconformances
will be withheld. Contracts to new contractors, contracts for new or
significantly-changed items or sensitive items (i.e., those with very
high visibility), or those cases where previous experience with a
contractor warrants that all minor nonconformances be submitted to
the contracting office shall receive high consideration. If CAO
authority is withheld, the letter of delegation sent to the CAO will
clearly indicate such. All contractor requests for waiver of minor
nonconformances forwarded to the contracting office shall require
approval by the chief of the contracting office.
(d)(90) Contracting officers need to recognize that situations may
occur where contractors have a single line producing items which may
be supplied as spare parts procured under DLA contracts or further
processed by the manufacturer and incorporated into major systems or
subsystems procured by the military services. In many of these
instances, Material Review Board (MRB) activity is authorized for use
in the military service contracts. If CAO authority for approval of
minor nonconformances is withheld on DLA contracts in these
situations, the Centers and CAOs should work together to resolve any
issues concerning how to handle material which may have been subjected
to previous MRB activity in the in-process area.
(e) All nonconformance information for decisions on waiver
requests made by the Center and any waiver or MRB intelligence
provided by the CAO, when authority has not been withheld by the
contracting office, shall be included in the contractor's performance
record.
(f)(90) No waivers or deviations from design requirements are to
be permitted without a commitment to verify the validity of the
technical data for the item (e.g., the military or federal
specification, engineering drawings, etc.) with the appropriate
engineering support activity, and to change any such requirement found
to be erroneous, outdated, or unduly restrictive, prior to any future
procurements of the item. The only exception authorized is to satisfy
requisitions under 'readiness' situations and then for direct shipment
only (i.e., Direct Vendor Delivery), not for stock. The Lea d
Standardization Activity (LSA) will be furnished copies of all
approved waivers and deviations from military or federal
specifications. The LSA will assure that the specification is revised
to reflect the product changes allowed by the waiver/deviation. Minor
waivers/deviations resulting from errors in manufacturing or from a
contractor's inability to meet valid technical requirements are to be
granted only under exceptional circumstances, when such waivers are in
the best interests of the Government (e.g., when backorders warrant
urgent delivery), and never on a repetitive basis. Major/critical
nonconformance waiver requests for the sole benefit of the contractor
shall not be granted. (This waiver paragraph does not apply to
off-specification fuel that can be blended at the depot to be made
acceptable.)
(91) The hardware centers, and DSCP's medical and clothing and
textile commodities, are strongly encouraged to use the calculation
provided below as a baseline, or starting point, in determining the
adequacy of the contractor's offer of consideration for those rare
instances in which waivers or deviations are granted and memorialized
via contract modification. These costs are taken from the DLA-DORO
Report, Cost of Nonconforming Supplies Update (1994). At the time the
study was originally conducted several years ago, the overall DLA
average cost associated with a product quality deficiency report, or
PQDR, amounted to $501 in administrative costs plus 3.55 percent of
the contract value for holding costs. Today, the DLA average
administrative cost is $868; holding cost percentages have been
separately established by Center, as follows (DSCP Subsistence and
DESC are not included):
DSCC =5.64% (or 0.0564)
DSCC (DESC) =8.13% (or 0.0813)
DSCR =5.14% (or 0.0514)
DSCP (Former DISC) =12.81% (or 0.1281)
DSCP (C&T) =0.07% (or 0.0007)
DSCP (Med) =1.47% (0.0147)
(i) Calculation: Amount of consideration = $868 + [H x
proposed contract value].
Where - $868 represents the total administrative costs to the
Government; H represents the Center average holding cost proportion of
the overall contract cost, expressed as a decimal, rather than as a
percentage.
Step One: Multiply H for the individual Center by the contract
dollar amount of the supplies covered by the waiver or deviation. This
is the total holding (variable) cost component for nonconforming
supplies.
Step Two: Add $868 (the fixed, or administrative, cost to the
Government of dealing with nonconformances) to the result of step one.
This is the total amount of consideration which should be used as a
guide in determining the adequacy of the contractor's final offer of
compensation for the waiver or deviation.
(ii) It is important to note that, if the contracting
officer chooses to use this guidance, but is unable to obtain
agreement with the contractor on a reasonable (vice a token)
consideration amount, the Government is not obligated to accept a
lesser amount merely for the sake of reaching that agreement and
restoring the contractor to a 'conforming' or satisfactory status. In
such situations (and assuming the proper notification has been made in
writing to the contractor), it may be preferable to leave the contract
in a nonconforming status than to modify it for an insignificant
amount, or at no cost to the contractor. Either course of action,
modifying the contract or refusing to restore the contractor to a
satisfactory status in the event of its failure to make a good-faith
offer of adequate consideration, will still preserve the Government's
right to maintain a record of the deficiency, and to consider future
business with the contractor in light of this poor performance.
Concern about the possibility of failure to reach agreement with the
contractor should, therefore, not affect the contracting officer's
decision to use this means of determining the adequacy of the
contractor's offer.
(92) [Subparagraphs (f)(92) through (f)(95) do not apply to
contracts containing express warranty provisions.] Nothing in this
section shall be construed to require the contractor to make
restitution to the Government for patent nonconformances discovered
after Government inspection and acceptance in accordance with FAR
clause 52.246-2, Inspection of Supplies - Fixed Price, or any other
standard inspection clause. Nevertheless, in each instance of a
contractor-caused, post-acceptance nonconformance, the contracting
office that defective product or service, and request repair or
replacement. This does not prohibit local procedures which allow for
the quality element to discuss quality and technical issues with
contractors in the investigation of contractor-caused defective
material prior to transmittal of the case to the contracting officer
for formal notification to the contractor. After the formal
notification, the contractor must decide how to respond to the
request. This response (to which the contracting officer must agree
as being in the best interest of the Government) may take the form of
an offer of monetary restitution (including offset against other
contracts), in lieu of repair or replacement in kind.
(93) If the contractor fails to respond to the notice of
nonconformance, follow-up letters should be sent, as necessary. If the
contractor also refuses to acknowledge the follow-ups, the contracting
officer has other options, including assigning the contractor to
the Contractor Alert List or ensuring that a preaward survey is
performed on the contractor prior to award of any future contract.
(Furthermore, whether or not the Government is provided
consideration, the fact of that poor performance should still be
considered in best-value decisions.)
(94) When workload constraints preclude following up on every
initial post-acceptance nonconformance notification, priority should
be placed where: the nonconformance is major or critical; the number
or dollar amount of the items potentially affected is high; and/or the
contractor has a history of tendering defective supplies to the
Government.
(95) The contracting officer cannot 'hold out' for a specific
amount of money when the contractor volunteers a refund or contractual
offset in lieu of repair or replacement. He or she may, though,
determine whether the amount offered is a realistic alternative to the
other ways in which the contractor could rectify the problem. If the
refund amount is less than the contract price of the nonconforming
items for which it is offered, it may or may not be characterized as a
full voluntary refund, because it may only be a partial mitigation of
damages. That is, it may not represent the full value of the
Government's loss. On the other hand, where the contractor decides
that repair is the appropriate form of recoupment, and such repair is
less expensive to the contractor than replacement or monetary
reimbursement of the full contractual price of the defective items,
the Government may nevertheless have been fully compensated for the
value of its loss. The contracting officer must determine whether the
method of recompense provided is full mitigation for loss; that
determination will affect the reporting of the recoupment. See
subparagraph (96)(iv), below:
(96) At any time, the Centers should be able to ascertain the
number and dollar value of all reported contractor-caused item
nonconformances and their disposition. The Agency overall should be
provided information on dollar totals associated with these
nonconformances and with the corrective actions taken. Therefore,
beginning with the third quarter of FY 95, all contracting activities
exclusive of DESC shall compile and report to J-335 on a quarterly
basis, no later than 30 days after the end of a fiscal quarter, and
cumulatively. Additionally, up to eleven previous quarters should also
be reported. That is, there should eventually be twelve separate
quarterly records (three complete fiscal years' worth of data) and one
overall total reported in this fashion; the earliest quarter should
drop off with each new reporting cycle. If there are remaining
unresolved nonconformances from such a 'retired' quarter, they should
be written off, unless they are the subject of litigation, or a
resolution is imminent. The totals requested below should be provided
for all reported contractor-caused nonconformances able to be
identified by contract by fiscal quarter in which notice of the
nonconformance is received by the contracting officer (via PQDR or
other means), rather than by contract year. Aggregated totals for
collections will be maintained by quarter according to the date the
nonconformance is received by the contracting officer, regardless of
the date of receipt of the reimbursement. For example, if the
contracting officer receives a PQDR for resolution in the second
quarter of FY95 on a 1992 contract, the record of the nonconformance
will be established in FY95, second quarter. If collections against
that nonconformance are received in installments, the first one in
the third quarter of that fiscal year and the next in FY 96, these
reimbursements will both be reported against the FY 95 second quarter
total. Obviously, in order to do this, the contract identity of the
records comprising the total of the nonconformances for any quarter
will have to be maintained at the Center; collections will need to be
'credited' against the appropriate complaint. However, only totals
need be reported to J-335, as indicated below. A sample report is
provided at 90.14.
(i) For the immediately preceding fiscal quarter, up to
eleven previous fiscal quarters, and cumulatively, of the total number
of validated complaints for which the Government should seek
recompense (i.e., nonvoluntary and voluntary recoupments), except for
items covered by warranty or fraudulently-tendered items covered under
the Counterfeit Material/Unauthorized Product Substitution ( CM/UPS)
program, the contracting activity should report:
(A) total dollar value [see (iv), below];
(B) total dollars demanded/requested;
(C) total dollars recouped.
(ii) For the immediately preceding fiscal quarter, up to
eleven previous fiscal quarters, and cumulatively, of the total number
of defects discovered after acceptance that are covered by express
warranty, the contracting activity should report:
(A) total dollar value [see (iv), below];
(B) total dollar demanded;
(C) total dollars recouped.
(iii) For the immediately preceding fiscal quarter, up to
eleven previous fiscal quarters, and cumulatively, of the total
dollars recouped, categories (i) and (ii), the contracting activity
should report:
(A) total dollars - monetary reimbursement (including, where used,
contract offsets; this may also include repairs to defective items
that have been retained by the Government, to the extent these can be
quantified. See (f)(95), above, and (IV), below):
(B) total dollars - replacements.
(iv) In order to establish a record of nonconformance against
which a voluntary or nonvoluntary recoupment can be applied, the
contracting officer must make an initial evaluation of the extent of
the Government's loss. In so doing, he/she will likely use the
contract price of the defective items as the amount of that loss.
However, this may or may not ultimately be determined the correct
amount to be collected from a nonconforming contractor. If, either as
a result of independent research or in response to a contractor's
offer of consideration for less than the contract price, the
contracting officer finds that the Government's loss would be satisfied
by a lesser amount than originally indicated, the contracting officer
should revise the total for nonconformance and the total
requested/demanded ((A) and (B) in (i) and (ii), above) downward to
what he/she considers a realistic and appropriate amount. On the other
hand, total dollars recouped ((C) in (i) and (ii), above) must
exactly reflect what has been collected 'in cash or in kind.' If the
amount the contractor offers is less than the contract price but is
considered adequate restitution for the nonconformance, the total for
the nonconformance and the amount demanded/requested should be
identical to the amount received. If the contractor's offer is less
than the contract price and the contracting officer does not consider
it adequate compensation for the Government's loss, the total for the
nonconformance and the total demanded/requested, whether or not these
are revised downward from the original record, should not be made
equivalent to the contractor's inadequate recompense.
(90) No part of section 46.407 pertains to the deliberate intent
on the part of the contractor to provide off-specification product, or
otherwise to make a fraudulent tender to the Government. When quality
assurance or other personnel discover evidence indicating that the
contractor deliberately failed to honor its contractual undertaking,
all cognizant parties, including the administrative contracting
officer, should confer with PLFA Fraud counsel in accordance with DLAR
5500.10, Combating Fraud in DLA Operations. In line with this policy,
recoveries for fraud should continue to be reported as collections by
the Office of General Counsel; however, they should not be included in
the recoupment reporting scheme set forth in (f)(96), above.
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