ANATOMY OF A MULTI-STATE COOPERATIVE IT PROCUREMENT

Richard Pennington
September 17, 2008 — 2,283 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

In 2005, Congress passed the Real ID Act of 2005. The Act prescribes uniform requirements for State-issued driver's licenses and identification cards to enable their acceptance as identification for entry to federal facilities and boarding federally-regulated commercial carriers, i.e., commercial airlines. On December 13, 2007, the Department of Homeland Security announced availability of grant funding for the States for a demonstration program, the 2008 Real ID Demonstration Grant Program.[1] The program guidance and grant application kit stated, "the Department encourages grant applications from States with a multi-state approach to Real ID identification systems implementation design and development."

In October 2005, the State of Colorado -- on behalf of the Mountain Plains StatesConsortium ("MPSC") -- issued a Request for Proposal ("RFP") for design, development and implementation of a web-based information system for the special supplemental nutrition programs for women, infants and children ("WIC"). The MPSC is comprised of the WIC programs in the states of Colorado, Utah and Wyoming. The RFP represented a multi-state approach to development of a WIC information system to support all three States.

This paper will discuss the requirements of and identify issues that can arise in a  multi-state information technology initiative that is funded with federal funds. This discussion emphasizes issues of particular relevance to information technology ("IT") system procurements for multi-state cooperative implementations.

STATE COOPERATIVE PROCUREMENTS GENERALLY

The States conduct other cooperative procurements. States generally have cooperative procurement authority, and the National Association of State Procurement Officials (NASPO) promotes the use of cooperative procurements.[2]

The Western States Contracting Alliance (WSCA) is one of the more well known cooperative procurement consortiums. WSCA consists of the purchasing directors of 15 States in the western United States. The primary purpose of WSCA is to establish a means by which participating States (and their political subdivisions) can join together in cooperative multi-state contracting in order to achieve cost-effective and efficient acquisition of quality products and services.[3]

WSCA and other state cooperative arrangements, however, tend to involve indefinite delivery contracts, normally permitting ordering of supplies by participating States and their political subdivisions. Typically, there are no minimum quantity commitments by the lead procuring State. Because the multi-state contract operates more like a basic ordering agreement, each order is treated by participating States as a separate contract governed by that State's statutes and regulations. As a consequence, States participating in WSCA contracts, for example, execute a participating addendum that incorporates terms and conditions required by that State's law.

Contracts for information technology projects are different, as is the nature of investment by the contractor. A multi-state IT contract involves mutual consideration between the contractor and the State. The contractual terms and conditions tend to be more traditional.

REQUIREMENTS FOR FEDERALLY FUNDED CONTRACTS

In a multi-state information technology project funded with federal funds, the contract defines the obligations and rights between the State and the contractor. It is important, however, to understand the source of some of the requirements in such a contract.

Grant Assurances

State procurements funded in whole or in part with federal funds require compliance with certain federal terms and conditions. Federal regulations and Office of Management and Budget (OMB) circulars define federal expectations with respect to management of grant funds. Those regulations in some cases prescribe contractual or solicitation requirements.

So, for example, the Real ID demonstration grant program requires application by the State's motor vehicle driver's license issuing authority. As part of the grant application, the State authorities are required to represent or certify their compliance with certain federal requirements. These are known as "assurances." In the case of the assurances to be submitted by State agencies on the Real ID demonstration grant program, forms (SF-424B) are prescribed for use.

The certifications are required by the governing federal laws that are applicable to grant programs and are analogous to the representations and certifications required under federal procurement. While the certifications in the grant application are required of the State, some of the certifications further require certifications by subgrantees (or subrecipients), e.g., contractors under grant programs. So, for example, the state of Colorado RFP[4] contained offeror certifications regarding lobbying,[5] debarment and suspension,[6] and drug-free work place requirements.[7]

Special Performance Requirements

In addition, the grant instructions may require specific performance requirements. In the case of the Real ID grant, for example, the grant instructions require that States comply with the National Information Exchange Model (NIEM), an XML-based information exchange framework that is designed to enable jurisdictions to automate information sharing.

Otherwise, the grant instructions include general program descriptions and objectives that the federal awarding agencies are seeking to achieve. In the case of the Real ID demonstration grant, the Department of Homeland Security specifies overall objectives with respect to development of the information system, including utilization of the limited grant dollars to achieve the maximum benefits for all States. The grant specifies specific criteria that will be used during evaluation of applications, including whether the State intends to participate in a multi-state compact or partnership, the extent to which the State will work jointly with other States to achieve the grant objectives, and how the State's proposal will expedite the design, deployment and operation of a consolidated verification system for use in implementing the Real ID program requirements. One would expect that the State's representations in the grant application may affect or be incorporated in any subsequent RFP issued after award of the grant.

Other Federal Requirements: OMB Circulars and the Common Rule

There are no federal government-wide requirements applicable only to information technology projects. The federal regulatory requirements, including OMB circulars, generally distinguish only between construction and other-than-construction projects.

OMB circulars and federal regulations contain requirements imposed on States (as grantees) that may affect solicitations. Key government-wide requirements for grants are contained in:

OMB Circular A-102, Grants and Cooperative Agreements with State and Local Governments. OMB Circular A-110, Uniform Administrative Requirements for Grants and Other Agreements with Institutions of Higher Education, Hospitals and Other Non-Profit Organizations. Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments, otherwise known as the Common Rule.

On March 12, 1987, federal grant-issuing agencies were directed to issue a grants management Common Rule to adopt government-wide terms and conditions for grants to States and local governments.[8] Individual agencies now have codified the Common Rule in their sections of the Code of Federal Regulations. The Common Rule of the Department of Homeland Security Federal Emergency Management Agency in all material respects is identical to that of the Department of Agriculture for use in its WIC program.[9]

The Common Rule and other OMB Circulars specify general grant administration requirements for the States and other grant recipients. The rules prescribe: forms for applying for grants; standards for financial administration; payment; standards for allowability of costs; requirements for prior approval of changes to the grant; property administration requirements; minimum rights in copyrights; procurement standards,[10] and minimum requirements with respect to access by the federal government to contractor records.[11]

Federal Requirements: Minimum Intellectual Property Rights

The Common Rule prescribes minimum rights in the case of copyrights:

The Federal awarding agency reserves a royalty-free, nonexclusive, and irrevocable license to reproduce, publish or otherwise use, and to authorize others to use, for Federal

Government purposes:

(a) The copyright in any work developed under a grant, subgrant, or contract under a grant or subgrant; and

(b) Any rights of copyright to which a grantee, subgrantee or a contractor purchases ownership with grant support.[12]

OMB Circular A-102, Grants and Cooperative Agreements with State and Local Governments, requires use of a standard patent rights clause when federal agencies provide support to small businesses and nonprofit organizations for research and development.[13] The policy also applies to any subcontract under an awarded grant for performance of experimental, developmental, or research work.[14] Subject to certain invention disclosure and government march-in rights where an invention is not bought to practical application, the rights in inventions are allocated as follows:

The Contractor may retain the entire right, title, and interest  throughout the world to each subject invention subject to the provisions of this clause and 35 U.S.C. 203. With respect to any subject invention in which the Contractor retains title, the Federal government shall have a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States the subject invention throughout the world.[15]

Individual Federal Agency IT Requirements

Agency regulations may have other supplemental policies. The U.S. Department of Agriculture's Federal Assistance Regulations[16] state the following with respect to minimum rights in intangible property:

(b) Copyrights - (1) Applicability. This section applies to the copyright in any original work of authorship prepared with grant support. Additionally, if ownership of a copyright or of any of the exclusive rights comprising a copyright are purchased with grant support, this section applies to the purchased copyright or rights.

(2) Basic rules. (i) USDA reserves a royalty-free, nonexclusive, and irrevocable license to exercise, and to authorize others to exercise, the rights for Federal Government purposes. Subject to this license, the owner is free to exercise, preserve, or transfer all its rights. The recipient shall ensure that no agreement is entered into for transferring the rights which would conflict with the nonexclusive license of USDA.

(ii) One way that USDA may exercise its nonexclusive license is to authorize exercise of the rights in another project or activity that receives or has received grant support from the Federal Government.

(iii) A recipient awarding a subgrant is allowed to impose subgrant terms reserving a nonexclusive license for itself, similar to the one reserved by this section for USDA, with respect to any copyright or rights subject to this section that arise under the subgrant.

Notably, this USDA regulation expressly authorizes a subrecipient to impose licensing terms in its subgrants, a common practice in information system contracts. As can be seen, though, these regulations leave considerable room for clarifying rights in intellectual property in works that may include software.

The Food and Nutrition Service (FNS), U.S. Department of Agriculture, prescribes additional requirements with respect to automated data processing systems funded by FNS. If any program activity produces patents, patent rights, processes or inventions in the course of work aided by FNS, they must be promptly and fully reported to FNS. Further, when a program activity results in copyrightable materials, FNS reserves a royalty free, nonexclusive and irrevocable right to reproduce, publish or otherwise use and to authorize others to use the work for government purposes. This policy includes copyrights on automatic data processing software.[17]

The Department of Homeland Security has not published any supplementary regulations regarding minimum rights in intellectual property and information technology implementations. One can expect the States' applications for grant funding to address their acquisition strategies with respect to rights in software acquired for multi-state use. Indirectly, the approval of those grant applications may lead to inclusion of tailored intellectual property rights terms in requests for proposals and contracts.

Agency Financial Management Guides

Agency supplemental policy guidelines relating to grant programs may signal an agency's approach (and flexibility) with respect to intellectual property rights. Both the Department of Homeland Security and the Department of Agriculture, for example, publish financial management guides for use in grant administration.[18]

The Department of Homeland Security Financial Management Guide contains no additional prescriptions with respect to intellectual property rights. By contrast, the financial management guide used by the Department of Agriculture includes specific information with respect to intellectual property rights. The Department of Agriculture uses an advanced planning document ("APD") that is required to be completed by a State awardee prior to use of funds for large information technology projects. The APD is subject to advanced approval by the Department. Further, the Department of Agriculture requires advanced approval of large RFPs and contracts for information technology systems.[19]

FNS requires State and local governments to include a clause in all contracts providing that the State or local government will have all ownership rights of any software where software modifications and associated documentation are designed, developed, or installed with federal funding. Proprietary vendor software packages and operating systems that are provided at established catalog or market prices and sold or leased to the public are not subject to these ownership provisions.[20]

Here again, there is room for clarification of intellectual property license rights in systems that involve the use of proprietary vendor software packages or systems.

Contract Types and Cost Principles

The OMB circulars include a series of cost principles that apply to the States. The federal government reimburses allowable costs of governments and institutions of higher education in connection with grant performance using the standards in the OMB circulars. The circulars include:

OMB Circular A-21, Cost Principles for Educational Institutions. OMB Circular A-87, Cost Principles for State, Local and Indian Tribal Governments. OMB Circular A-122, Cost Principles for Nonprofit Organizations.

With respect to performance by States and other government grantees, these cost principles essentially allow reimbursement of allowable and allocable costs for performance of the grant. Software development costs are an example of allowable costs.[21] The grant cost principles are analogous to federal government contracting cost principles used with commercial entities.

While grant funds may be used for allowable costs of cost-type contractors in subcontracts or contracts executed under grant programs,[22] the use of cost reimbursement contracts is unusual in State information system development projects.[23] Most information technology projects would be reimbursed as direct costs to a State grantee under the relevant cost principles. These contracts typically would be firm, fixed-price contracts. In the unusual instance when a contract with a private company is a cost reimbursement contract, the commercial contractor cost principles and procedures in the Federal Acquisition Regulation, 48 C.F.R. Part 31, generally would apply.[24]

Essentially, then, the federal regulatory structure contemplates reimbursement of State and other government awardee costs consistent with cost reimbursement principles. However, most information technology acquisitions likely would be firm, fixed-price contracts procured by the individual State or local government grantees.

The DHS Real ID demonstration grant instructions raise some issues in this regard. Approximately $70 million is available in grant funds, and the instructions suggest the likelihood of multiple awards. These grants will be discretionary grant awards,[25] and State shares may have to be adjusted based on the number of awards. Consequently, contractors will have to be alert to special RFP conditions that may condition performance on federal availability of funds. Further, contractors may encounter acquisition strategies that attempt to use other self-funded models, such as arrangements between the contractor and State entities that are based on fees for service, to fund the acquisitions. Self-funded IT system procurements may create risk for contractors from system utilization that is lower than anticipated, depending on how financing terms are written.[26] Creative financing by States may be encouraged if final award amounts are lower than system acquisition costs because multiple States receive awards from the limited amount of available grant funds.[27]

Procurement Standards and Requirements

As has been mentioned, the Common Rule prescribes specific standards for procurements of goods and services using federal grant funds. The Common Rule states:

When procuring property and services under a grant, a State will follow the same policies and procedures it uses for procurements from its non-Federal funds. The State will ensure that every purchase order or other contract includes any clauses required by Federal Statutes and executive orders and their implementing regulations. Other grantees and subgrantees will follow paragraphs (b) through (i) in this section.[28]

Under the Common Rule, then, States use their own procurement statutes and regulations. The Common Rule's procurement standards that follow in subsections (b) through (i) of the Procurement section technically apply to political subdivisions. Those standards prescribe requirements for written standards of conduct, use of value engineering in construction, policies with respect to use of time and materials contracts, a requirement to award to responsible contracts, recordkeeping, protest requirements (generally required for contracts exceeding $100,000), and policies governing procurements by sealed bids and competitive proposals.

State procurement statutes may not always be aligned with the procurement policies stated in the Common Rule. For example, the Common Rule recognizes the utility of best value procurements, where price is not the predominant factor.[29] Some States do not have statutory and regulatory structures that easily accommodate best value procurement. Colorado, though, has adopted a modified version of the Model Procurement Code and authorizes the use of competitive proposals where it is more advantageous to the State.

There can be other differences between State statutes and the Common Rule prescriptions that apply to political subdivisions. For example, the Common Rule requires that evaluation factors be disclosed in a RFP and their relative importance identified.[30] In States that do not require disclosure of relative weights of evaluation factors, the Common Rule policy may provide some support for asking for disclosure of relative weights in advance of proposal submission. While States need not disclose their comprehensive evaluation plan -- preserving the integrity of the competitive bidding process -- general information about relative importance (especially between price and technical features) will foster more responsive proposals and more effective competition. In general, where a State's practices differ from the Common Rule procurement policies, this approach may provide a reasonable basis for seeking clarification or RFP amendments before proposals are due.

Common Rule policies may provide other avenues for achieving competitive advantage in proposals. For example, the Common Rule's policies favor consideration of value engineering (in construction), but States may not include value engineering in policies or terms of RFPs. Even in an IT system procurement, a contractor may be able to gain some competitive advantage by structuring a proposal with a value engineering clause and explanation about how it might operate. If a potential change in requirements were identified during design that could reduce costs, and the States accepted the proposal, the States and contractor could share in eventual savings. Especially in multi-state IT system implementations, there may be opportunities for value engineering.

From a State perspective, practices favored in the Common Rule and other federal procurement approaches may be useful in RFPs to promote creative solutions and clarify respective expectations. Generally, though, States will follow their own procurement regulations in the solicitation, evaluation, award and execution of contracts under federal grant programs.

MULTI-STATE REQUESTS FOR PROPOSALS

The preceding discussion covered the overall federal regulatory environment in which federally funded contracts are procured. The contractual relationship between the contractor and the State awardee, however, will be defined by the RFP. In fact, unless there have been prior communications between the State and the contractor as part of the State's market research, the publication of the solicitation may be the first opportunity for a contractor to learn about the requirements. 

In the MPSC RFP, Colorado as Lead State used its model RFP format. The administrative information terms and conditions, instructions to offerors, and proposal evaluation description generally followed the Colorado rules and practices. The RFP also included a sample contract and a general description of the variances in WIC system operationsvamong the three MPSC states.

Multi-State Consortiums and Cooperative Procurement Authority

The RFP attached the Mountain Plains States Consortium Memorandum of Understanding ("MOU") signed by each of the signatory States. The MOU designated the State of Colorado as the Lead State for the release and administration of the RFP, contract negotiations, and execution of the contracts.

One of the threshold issues for States joining consortiums would be each State's ability to participate in cooperative procurements. As a State having adopted the Model Procurement Code, the State of Colorado has the authority to conduct cooperative procurements.[31] But participating States also will have to assess the adequacy of a multi-state consortium effort with respect to compliance with each State's procurement statutes. In Colorado, for example, whenever the public procurement unit or external procurement activity that is administering a cooperative purchase agreement complies with the requirements of the procurement code, Colorado is deemed also to have complied.[32]

Contractors familiar with individual State procurements will need to understand the extent to which participating States' procedures are being followed in furtherance of a multi-state procurement. This begins with notice of the solicitation. In cooperative procurements by the Western States Contracting Alliance, for example, Colorado publishes solicitation notices of procurements in which it is participating (but not leading) on its Bid Information and Distribution System ("BIDS"), a statutory requirement. After that initial publication, though, contractors must look to the lead State for information about the solicitation.

A State's participation in a cooperative procurement avoids duplicative, separate procurements. The Lead State must comply with its own laws and follow a process that satisfies minimum statutory requirements of participating States. From a contractor's perspective, though, the Lead State's processes for solicitation, evaluation, and award may be different from those in participating States with which a contractor is more familiar.

Potential Funds Availability Issues

The fundamental assumption in a multi-state procurement is that the cooperative effort achieves overall cost savings for the States. Of course, contractors usually will not have insight into the financial agreements between the States relating to a multi-state contract. Contract terms and conditions must be clearly understood, especially with respect to contingencies related to State appropriations or the availability of federal funds. For example, the WIC information system RFP included the standard Colorado contract clause on availability of funds:

Financial obligations of the State payable after the current fiscal year are contingent upon funds for that purpose being appropriated, budgeted and otherwise made available. In the event funds are not appropriated, any resulting contract will become null and void, without penalty to the State of Colorado.  

Further, the model contract attached to the RFP included a federal funds contingency clause:

Payment pursuant to this contract, if in Federal funds, whether in whole or in part, is subject to and contingent upon the continuing availability of Federal funds for the purposes hereof. In the event that said funds, or any part thereof, become unavailable, as determined by the State, the State may immediately terminate this contract or amend it accordingly without liability including liability for termination costs.

The financial relationships among multi-state parties may complicate the availability of funds for such an IT implementation effort. Individual State appropriation statutes likely would not provide insight into overall project funding. Contractors should clearly understand, and seek clarification as necessary, with respect to whether and how performance requirements under a contract are aligned with the available state and federal funds.[33]

Termination Issues

Financial management rules governing federal grants do not provide for unfettered discretion in the withdrawal of federal funding. Grant cash payments can be temporarily withheld when State grantees or subgrantees materially fail to comply with any term of an award.[34] Further, the federal awarding agency can terminate an award in whole or in part for convenience, but only with the consent of the grantee or subgrantee with respect to the effective date and the portion to be terminated. These terminations, however, are within a State's control and should not be characterized as funds availability issues.

Moreover, a State grantee can terminate upon written notice to the awarding agency.[35] Here as well, an awarding State would know in advance whether or not such a termination would occur and would control the events that would lead to the termination of the grant.

Multi-state IT projects have the potential for partial terminations if individual States revisit the wisdom of completing a project. Funding contingency clauses can blur the distinction between funds nonavailability and termination for convenience clauses (ideally that are patterned after the federal government's termination for convenience clauses[36]). Federal clauses require compensation of the contractor for costs incurred to the date of termination.

Other Potential Issues in Multi-State Solicitations and Contracts

Information system implementations are challenging, even with a single state agency. When multiple States have processes that need to be accommodated through an IT implementation, the RFP and proposals each have to address common issues more comprehensively.  

Schedule and Multi-State Participation

In the MPSC WIC Information System, a working committee (with over 25 representatives from all States) was established to support the procurement and project.

Participation by multiple states in business process analysis, design reviews, and review of deliverables can lead to unanticipated delays.

States can place reasonable limits on design/business process analysis by stating expectations with respect to numbers and lengths of design sessions and length of time for review of deliverables. The State of Colorado did in its RFP. States and contractors then can integrate those assumptions with contract provisions providing schedule and price adjustments if the expectations are not met.

In a contract with the complexity expected in multi-state implementations, in particular, some means of clarifying expected scope during the early design stage is critical. States and/or offerors should provide a contractual vehicle for adjustments in price and schedule arising from material changes in the amount or duration of design activity or reviews. The federal Government Delay of Work clause, FAR § 52.242-17,[37] might be a useful starting point for proposing a clause that addresses issues of delay by the States.

Some caution is advisable also with respect to suspension-of-work clauses, commonly included in State RFPs. The right to suspend work may be useful to States, especially when protracted discussions among the States is required. For example, unanticipated State funding issues may require reevaluation of project scope. Some suspension-of-work clauses, though, permit a State to direct suspension for an unlimited period of time without compensation. Because of the nature of work involved in IT system implementations, suspensions of work can have significant cost impact. The federal Suspension of Work clause (FAR § 52.242-15) used in firm, fixed-price service contracts might be a good starting point for such a provision. The Colorado RFP contained a Stop Work Order clause adapted from the federal provisions.

In a perfect world, a State's RFP would establish the essential framework for handling change using clauses that address schedule and suspension of work issues. In those instances where the State's model terms and conditions do not include those clauses, proposal instructions may invite offeror responses that can be appropriate places in the proposal to integrate an approach to delay. For example, RFPs for IT systems often require the contractor to describe its project management plan, which can be written to address schedule expectations and possible equitable adjustments in price and time for performance. RFP pricing sections may ask for a statement of assumptions in the prices, and that section could be used to identify reasonable contractual approaches to handling unexpected delays.

Scope and Functional Requirements

Defining the scope of expected effort within the proposed price may be the most critical issue in any information technology system implementation. Multi-state implementations differ perhaps only by degree. Both the States and contractor have an interest in assuring that each clearly understands the performance that is being proposed within the contract price.

Some care must be exercised by States in defining the mandatory versus permissive requirements of systems. Best value procurements involve a combination of mandatory, preferred, and optional functionality, creating some potential for confusion. The Common Rule discourages excessive use of mandatory requirements and requires the RFP to "set forth those minimum essential characteristics and standards to which it must conform if it is to satisfy its intended use."[38]

RFPs often permit discussion about (and States evaluate) how the proposed system exceeds minimum requirements in key areas. The clear delineation of mandatory and permissive requirements establishes a baseline for evaluating the "best value" from among competing proposals, all of which meet minimum required functionality, but some of which may be considered more advantageous from a cost and technical perspective. For this kind of an evaluation approach to work, though, an offeror needs clarity about what the minimum, mandatory requirements are.

After a contractor proposes functionality that exceeds the minimum required by the RFP, and is awarded the contract, there still is potential for events to occur during performance that might warrant adjustments in contract price, schedule, or both. The FNS Handbook, for example, lists issues commonly addressed using standard contract provisions, one of which is "out-of-scope services." While no text of that provision is included, the Federal Acquisition Regulations contain various Changes clauses that can be adapted for use by States.[39] One of the fundamental elements of these clauses is entitlement to an "equitable adjustment in the contract price, the delivery schedule, or both."

RFPs for IT system implementations usually specify a period of contract performance for discovery and clarification of requirements, often leading to final design documents approved by the State. One way for contractors to put reasonable limits around scope of effort -- where not already done in the RFP -- is to use the concept of allowances. The approach is common in construction. For key IT system cost drivers -- customized reports or web page development, for example -- assumptions can be stated regarding the number of customized requirements whose scope is not reasonably known at the time of proposal submission.

The RFP may or may not already include change provisions as part of the State's model terms and conditions. In IT system RFPs, offerors often are asked to describe their project management plans and change management approaches, both key components of effective project management. Sometimes, though, change management in IT systems is viewed as the activities occurring after the design is frozen. However, especially in multi-state procurements, effort during the business analysis and design stages can significantly exceed expectations (and forecast costs) as States and the contractor more fully investigate their processes and requirements.

These sections of proposals can be written to integrate a Changes clause that -- along with the usual State's right to direct a change -- also provides for equitable adjustments in contract terms and establishes notice procedures when the contractor believes the contract scope is being changed. These provisions also can integrate a dispute elevation mechanism for issues that cannot be resolved at the project level. In multi-state implementations, some issue elevation mechanism may be especially useful, given the number of business processes and personnel often involved.

Intellectual Property and Liability Provisions in the RFP

Colorado included its model intellectual property rights and liability provisions in the model contract attached to the RFP. Colorado's fiscal rules prescribe the use of an indemnification provision:

The Contractor shall indemnify, save, and hold harmless the State, its employees and agents, against any and all claims, damages, liability and court awards including costs, expenses and attorney fees incurred as a result of any act or omission by the Contractor, or its employees, agents, subcontractors, or assignees pursuant to the terms of this contract.[40]

Further, the model State contract included a tailored intellectual property indemnification provision that requires the contractor to provide a defense. This clause included customary exceptions to the indemnity for alteration, combination, or unanticipated use of data that caused the infringement.

With respect to intellectual property rights, paragraph no. 9 of the General Provisions of the model contract stated:

All intellectual property including without limitation databases, software, documents, research, programs and codes, as well as all, reports, studies, data, photographs, negatives or other documents, drawings or materials prepared by the Contractor in the performance of its obligations under this contract shall be the exclusive property of the State. . . . Contractor shall not use, willingly allow, or cause to have such materials used for any purpose other than the performance of the Contractor's obligations under this contract without the prior written consent of the State. . . . The State's ownership rights described herein shall include, but not be limited to, the right to copy, publish, display, transfer, prepare derivative works, or otherwise use the works.

Paragraph no. 9 further covered third-party copyright materials:

If any material is produced under this Contract and the parties hereto mutually agree that said material could be copyrighted by Contractor or a third party, then the State, and any applicable federal funding entity, shall, without additional cost, have a paidin-full, irrevocable, royalty-free, and nonexclusive license to reproduce, publish, or otherwise use, and authorize others to use, the copyrightable material for any purpose authorized by the Copyright Law of the United States as now or hereafter enacted.

Colorado is one State that will negotiate license rights and liability allocation provisions. The RFP stated: "Any objections to any term in the sample contract must be submitted with the proposal or any objection is waived." Colorado's publicly available Contract Procedures and Management Manual[41] includes a discussion of policies regarding limitation of liability and intellectual property rights that help define the limits of the State's flexibility. Clarifying language regarding these issues was incorporated in the final WIC information system contract.

THE NEGOTIATED PROCUREMENT PROCESS: ACHIEVING CLARITY

A multi-state IT system implementation involves issues (e.g., schedule, contract scope, liability allocation and IP rights) that are not unique, although complexity and risk may be greater in procurements involving multiple jurisdictions. This final section of this paper outlines a strategy for dealing with these issues in a State procurement that uses competitive sealed proposals. State procurement offices and contractors each have a role here.

Market Research: the Mutual Interests of States and Contractors

State practices differ with respect to pre-solicitation communications between procurement offices and prospective offerors. States and contractors can use the market research stage to better understand the relationships between issues like system scope, schedule, and pricing.

Contractors develop proposals based on their estimates of effort, but IT system RFPs typically provide only imperfect information about existing conditions, such as business processes and their variations -- especially when multiple States are involved. Often, much of the relevant design detail is not known until after the initial discovery period of performance. Participating States may not be able to agree completely on business process requirements of a system, and they risk acquiring a less effective final product or one that is more complex than necessary, significantly increasing out-year costs for training, operations, maintenance and support.

States have limited funds and try to achieve reasonable certainty in costs through firm, fixed pricing. Not only does the contractor encounter cost risk from inadequately defined project scope, States have risk also. They risk receiving proposals with unreasonable price contingencies added to cover unforeseeable events if there is no contractual mechanism for addressing issues like unforeseen delay and migration of project scope that materially exceeds assumptions made at the proposal stage.

There is also risk to the States from proposals that understate the cost or time for performance. When the contractor discovers the true scope of the effort, there is a natural motivation to adjust performance to stay within cost objectives or approach the customer about price adjustments. For government agencies -- who by that time have created expectations about project cost -- there is potential for disputes and adverse publicity. Clarity up-front about project scope and price achieves more reasonable expectations about the overall costs of the project.

RFPs sometimes include incomplete information because States have insufficient information initially to permit full pricing of projects. There are accepted contract approaches to dealing with these uncertainties that can be evaluated during market research. In addition to approaches discussed earlier in this paper for managing unanticipated change, contract types other than firm, fixed-price contracts could be considered. A fixed-price (with prospective price redetermination) contract type possibly could be adapted to provide for performance of business analysis and design activities at a fixed price, with redetermined price for implementation of the agreed final design within a specified ceiling price.[42] Such an approach would accommodate design preference changes, and proposals could disclose adequate pricing information to permit price redetermination that is fair to both the State and contractor.

Early, informal communications like market research meetings are useful to achieve mutual understanding of these issues, their interrelationships, and possible solutions. Market research communications can address the realism of the proposed approach and lead to prompt consideration of alternative acquisition strategies. Responses to draft RFPs can also help States develop RFPs having terms and conditions that reasonably accommodate unanticipated, significant changes that can occur during performance. But these communications must occur early, before publication of the solicitation.

Federal Procurement as a Guide

The Federal Acquisition Regulations have approaches to these issues that are designed to achieve reasonable balances in the risks being assumed by governments and contractors. While States have to comply with their specific statutory and regulatory requirements, federal approaches to allocating risk for schedule and scope issues may provide a useful frame of reference. Colorado, for example, has published model contract terms on its State Controller Web site, and many of the recommended terms are adaptations from the Federal Acquisition Regulations.[43] For States that have adopted the Model Procurement Code, the federal law is a useful guide for analyzing issues in negotiated procurements in particular.[44] For States that have not adopted the Model Procurement Code, the Common Rule describes a procurement system patterned after the federal model as well,[45] perhaps inviting reference to the federal system for solutions to specific issues relating to scope, schedule, and price clarification

Pre-Proposal Clarifications of Requirements

RFPs generally have a mechanism for submitting requests to the purchasing agent. Usually, the identity of the offeror submitting the questions is not disclosed in the subsequent publication of the State's answers to offeror questions. While there may be business reasons for not seeking clarifications -- as when a proposal approach can adequately clarify uncertainty -- this usually is the stage of the procurement to clarify:

Any ambiguity in an RFP about mandatory versus permissive requirements. Relative weights in evaluation factors, price and technical merit in particular. Where in the proposal offerors should state assumptions about scope of effort or how to treat changes that might evolve from variations discovered between States in business processes. Expectations about the time required for multi-state reviews and federal-agency grantor approvals. Funding levels or status. Expected level of State resources to support the project, including delineation of responsibility for coordinating participating States' tasks and arranging joint State meetings. Unless clearly explained in the RFP, the process for taking exception to RFP terms or proposing additional terms and conditions.

"Responsiveness" of Proposals

This paper has described various issues that should be understood in connection with proposal submission. One concern of contractors is the risk that a State may reject a proposal as "nonresponsive" if the contractor adds provisions or takes exceptions to State terms and conditions.

The Common Rule distinguishes between responsiveness in sealed bidding, and negotiated procurements where the concept of responsiveness does not apply. Under federal procurement law, the technical tests for responsiveness in sealed bidding do not apply to negotiated procurements using RFPs.[46]

Colorado rules for competitive sealed proposals similarly draw the distinction. In Colorado, for purposes of discussion, proposals are categorized as acceptable or potentially acceptable, that is, whether proposals are reasonably susceptible of being made acceptable with respect to compliance with the solicitation's requirements.[47] The concept of "potential acceptability" is inconsistent generally with strict responsiveness rules. A proposal could be considered technically unacceptable, however, and rejected if it requires substantial or major revisions or rewrites to make it susceptible of being selected for an award.[48]

One of the questions always is the extent to which clarifications of terms and conditions and exceptions taken to an RFP may be considered by a State agency as qualifying a proposal or changing the requirements in the RFP and making the proposal nonresponsive and not capable of selection. States differ in this regard.

Amenability of States to Exceptions to Terms and Conditions

In the author's experience, States discourage exceptions to RFP terms and conditions.  On the other hand, most States also realize that the RFP terms and conditions -- intellectual property rights, for example -- serve as models and may not be adequate to appropriately allocate all rights and obligations.

There is no general rule that can be stated about the amenability of States to the kinds of clarifications in proposals that this paper discusses. In general, though, a good approach is to tie proposed terms and conditions to specific topics that the RFP wants offerors to address in proposals, like project and change management. Further, offerors should be cautious about stating exceptions using qualifying or other language that conditions the proposal on the State's acceptance of the revised terms and conditions.

Colorado has tended to be progressive in this regard. Colorado's WIC information system RFP permitted offerors to propose exceptions to terms and conditions. Offerors were instructed to identify any exceptions and that failure to do so would be deemed a waiver of any right to subsequently modify the terms of performance. The executed contract included clarifying language on intellectual property rights, as well as a limitation of liability clause.

Other States have reputations for little flexibility regarding negotiation of intellectual property rights and liability allocation provisions, so there is risk that proposals taking exceptions to standard terms could be rejected. Many States consider the nature of the exceptions during the overall award evaluation. Some familiarity with the procuring State's practices is required where RFPs do not otherwise clearly explain the policy and procedures.

Discussions after Proposal Submission

State procurement statutes modeled after the Model Procurement Code -- like the State of Colorado's procurement code -- require that offerors be "accorded fair and equal treatment with respect to any opportunity for discussion and revision of proposals."[49] The process issues discussed here arise in any procurement using competitive sealed proposals. However, multistate RFPs can involve large evaluation committees, wider-ranging perspectives, and more questions and exchanges of oral and written materials during the evaluation process.

Offerors cannot assume that they will have an opportunity for discussions, however. Awards can be made after receipt of initial proposals without discussion.

States should be cautious about awarding complex IT system contracts without an opportunity for discussion. Otherwise, States can encounter post-award requests by the successful offeror for substantive negotiation of terms and conditions that should have been resolved before the final evaluation and award decision. Not only is schedule adversely affected, competitors may have valid claims of unfair treatment when they learn after award that substantive discussions did in fact occur -- but after contract award and with only one offeror, the awardee.[50] These post-award discussions call into question whether the award was based on the RFP evaluation criteria and applied to the proposal as submitted. Proper use of discussions and proposal revisions before award can reduce the likelihood of these issues arising.

Utility of Discussions

A reasonable use of discussions and proposal revisions before final evaluation achieves more clarity in the eventual contract. Further, use of this process promotes mutual understanding and provides a fairer basis for final comparison of proposals. Colorado's procurement statutes and rules governing negotiation are derived from the Model Procurement Code. Both codes permit discussions to be conducted with offerors who submit proposals determined to be reasonably susceptible of being selected for award for the purposes of clarification to assure full understanding of, and responsiveness to, the solicitation requirements and facilitate arriving at a contract that will be most advantageous to the State, taking into consideration price and other evaluation factors set forth in the RFP.[51] Colorado's implementing Procurement Rules add an additional purpose: to "promote understanding . . . of  the offerors' proposals."[52]

State procurement offices sometimes are reluctant to engage in substantive discussion about the merits of proposals and RFP requirements. Some States use only structured, oral presentations as part of the discussion/clarification process. Other State negotiation practices invite only written proposal "clarifications," although the range of responses from offerors sometimes varies from oral answers to submission of revised proposal language.

One would hope that States view discussions as useful for both parties to clarify issues such as variations in business processes, scope of design activity, schedule issues, and how those issues are handled in the context of the proposed approach and State's contract terms and conditions. It may be appropriate in a proposal cover letter for an offeror to ask the State to conduct discussions (consistent with its procurement statutes) in order to seek better, mutual understanding of the requirements and the proposed solution. But the use of discussions does raise potential issues of fairness.

Content of Discussions

There is little State law about discussions that is analogous to that in federal procurement. The federal practice and body of law on negotiations has been based largely on Federal Acquisition Regulation requirements. One commentator who has published an RFP handbook widely used by state and local procurement offices has implied that the complexity in the federallaw governing negotiations may have contributed to reluctance by States and local governments to use discussions and other negotiation tools.[53]

At its core, the Model Procurement Code (and statutes like Colorado's procurement code modeled after it) requires that offerors be accorded fair and equal treatment with respect to any opportunity for discussion and revision of proposals. Other States' statutes patterned after the Model Procurement Code accomplish similar objectives: achieving clear understanding by the State and offeror about the meaning of language in the RFP and proposal; fairness in how the discussions are conducted; and fairness in the opportunity to submit proposal revisions. Federal practices promoting fairness in negotiation may be useful as a reference for State procurement offices.[54

State statutes and practices often do not draw clear distinctions in the types of discussions. In federal practice, for example, a distinction developed between clarifications and deficiencies.[55] "Clarifications" are limited exchanges, commonly used to address aspects of proposal that may be unclear, enhance understanding, or allow reasonable interpretation of a proposal. Clarification exchanges do not permit the cure of proposal deficiencies or material omissions. In state and local practice, likewise, requests for clarifications are used to resolve minor errors and ambiguities. These often are permitted in writing, but they tend to cover areas already fairly embraced in a proposal.

In federal procurement practice, once the discussions have moved beyond the clarification stage and establishment of the competitive range,[56] the scope of discussions expands. Offerors are notified of deficiencies, aspects of a proposal that appear not to comply with minimum requirements or that represent significant weaknesses. Further, cost and pricing issues can be raised in ways that can lead to more advantageous pricing.

State rules and practices often do not adopt these distinctions. So long as offerors are being treated reasonably the same in terms of scope of these communications, though, there is no reason for States to avoid conducting substantive discussions that address not only clarifications, but pricing issues and proposal deficiencies or weaknesses as well.

A risk to the procurement is evaluation committee questions that invite written responses. The written responses might be limited in nature and represents only clarifications. But they could be material and considered proposal revisions. These kinds of communications often occur in connection with oral presentations; in fact, responses are sometimes delivered at the time scheduled for oral presentations. The format and content of the responses vary, and their effect may not be entirely clear. In a multi-state procurement involving large evaluation committees, there may be more potential for confusion (and risk) from these exchanges. In States with procurement statutes modeled after the Model Procurement Code, there is a relatively easy solution.

Equal Opportunity for Proposal Revisions and BAFOs

Sometimes, clarifications and discussions lead to requests for written responses that could be characterized as proposal revisions. In other instances, States formally request best and final offers ("BAFO"). Statutes patterned after the Model Procurement Code state that that proposal "revisions may be permitted after submissions and prior to award for the purpose of obtaining best and final offers."[57] For both States and offerors, there is risk that exchange of information may unwittingly permit one offeror to submit proposal revisions without the opportunity being extended to other offerors.

It is important that both the States and offerors have a clear understanding about the extent to which written proposal revisions are being invited. States should consider the use of best and final offers to document final proposal revisions (including price) at the conclusion of discussions. Often, these requests provide limited time for submission and make BAFO submission optional. The request letters might inform offerors that prior written responses will be considered to be part of the proposal if not otherwise addressed in the BAFO. Further, the BAFO request often limits the scope of responses -- as in asking for change page submissions -- and places the risk on the offeror that it adequately explains its proposal revisions.[58] A request for BAFOs permits all offerors in the competitive range to have an opportunity before final evaluation to integrate all previous communications in its proposal. A request for BAFO limits the risk that offerors will claim that they did not have an opportunity to revise proposals.[59]

With respect to any requests for written submissions by offerors before award, some clarity is advisable in order to avoid allegations that offerors are being treated differently in their opportunity to submit proposal revisions. State law will govern the nature of discussions and clarifications and any opportunity for proposal revisions during the negotiation process. Multistate procurements may require greater use of these techniques, though. States and contractors need to understand the underlying policies that these rules are intended to promote in order to use discussions and proposal revisions effectively.

CONCLUSION

The Real ID Demonstration Grant Program and the WIC information system multi-state procurement signal increased use of multi-state cooperation in information system development and implementation.

This paper focused on the legal issues of interest in multi-state information technology system implementations that are funded with federal funds. There obviously are numerous challenges in terms of execution and management of projects involving multiple jurisdictions.[60] Funding contingencies, project management roles and responsibilities, uncertainty involving scope of the design obligation, and details regarding the rights in intellectual property can be significantly more complex in multi-state implementations.

This paper highlighted specific issues of interest to legal counsel in evaluating RFPs and proposals that respond to these solicitations. Research of applicable federal agency policies in this regard is advisable: the Common Rule prescribes only limited requirements for intellectual property provisions, for example.

Because the federal rules largely require compliance with State procurement statutes and regulations, contractors generally will have to satisfy procurement and contracting requirements of the State grantee. But States and contractors should use the flexibility available in the procurement negotiation process to clearly define performance expectations and establish contractual procedures for managing change.

[1] http://www.ojp.usdoj.gov/odp/docs/fy08_real_id.pdf.

[2] National Association of State Procurement Officials, Strength in Numbers: An Introduction to Cooperative Procurements (February 2006), available at http://www.naspo.org.

[3] http://www.aboutwsca.org.

[4] Mountain Plains State Consortium Request for Proposal, Design, Development, and Implementation of a Web-based WIC Information System ("RFP").

[5] 31 U.S.C.A. § 1352 (1996). Each federal department has its own regulatory implementation which are substantially similar. See 7 C.F.R. Part 3018 (Department of Agriculture).

[6] E.O. 12549 (Feb. 18, 1986). See 7 C.F.R. Part 3017 (Department of Agriculture).

[7] 41. U.S.C. 701, et. seq. The Colorado requirement for contract certification appeared to exceed requirements for grants: they apply only to direct recipients of awards, and are not required to be flowed down to subgrantees. See 7 C.F.R. Part 3021 (Department of Agriculture).

[8] The original Common Rule was published at 53 Fed. Reg. 8034 (Mar. 11, 1988).

[9] Compare Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments, 44 C.F.R. Part 13 (Federal Emergency Management Agency) with 7 C.F.R. Part 3016 (Department of Agriculture).

[10] See 7 C.F.R. § 3016.36 (Procurement under Department of Agriculture grants).

[11] See 7 C.F.R. § 3015.183.

[12] 7 C.F.R. § 3016.34 (Department of Agriculture); 44 C.F.R. § 13.34 (Federal Emergency Management Agency).

[13] OMB Circular A-102, para. 3i.

[14] 37 C.F.R. § 401.2.(a).

[15] 37 C.F.R. § 401.14(b).

[16] 7 C.F.R. § 3015.175 (Department of Agriculture).

[17] 7 C.F.R. § 277.13 (f)-(g).

[18] The United States Department of Agriculture's FNS Handbook 901 is available at http://www.fns.usda.gov/apd/Handbook_901_2007/Final_FNS_Handbook_901.pdf. The Department of Homeland Security's Financial Management Guide is available at http://www.ojp.usdoj.gov/odp/docs/Financial_Management_Guide.pdf.

[19] 7 C.F.R. § 277.18.

[20] FNS Handbook 901, ¶ 6.8.1.5. See also 7 C.F.R. § 277.18 (l).

[21] DHS Guide, supra n. 18, at 36.

[22] 7 C.F.R § 3016.22 (a)(1).

[23] FNS Handbook 901, supra n. 18, at ¶ 6.7.3.

[24] 7 C.F.R. § 3016.22, Allowable Costs (Department of Agriculture); 44 C.F.R. § 13.22(b), Allowable Costs (Federal Emergency Management Agency, Department of Homeland Security).

[25] As opposed to "formula recipients" that are often used in block grants.

[26] For issues that arose in state self-funded e-procurement systems in the early 2000's, see National Electronic Commerce Coordinating Council, Funding E-Procurement Acquisition (Dec 2000), available at the Workgroup Papers link at http://www.ec3.org.

[27] See DHS Real ID Application Instructions, supra n. 1 at 5.

[28] 7 C.F.R. § 3016.36(a).

[29] See, e.g., 7 C.F.R. 3016.36(d)(3).

[30] 7 C.F.R. § 3016.36(d)(3)(i).

[31] Any public procurement unit may either participate in, sponsor, conduct, or administer a cooperative purchasing agreement for the procurement of any supplies, services, or construction with one or more public procurement units. C.R.S. § 24-110-201(1).

[32] However, "[n]o public procurement unit may enter into a cooperative purchasing agreement for the purpose of circumventing this code." C.R.S. § 24-110-207.

[33] Basic contract terms and options often are aligned with State fiscal years, for example, with no commitment of State funds beyond the current appropriation year.

[34] 7 C.F.R. § 3016.43(a)(1).

[35] 7 C.F.R. § 3016.44.

[36] Federal Acquisition Regulation ("FAR") § 52.249-2, 48 C.F.R. 52.249-2.

[37] 49 C.F.R. § 52.242-17.

[38] 7 C.F.R.§ 1336.36(c)(3)(ii).

[39] See, e.g., FAR § 52.243-1 (Changes) and FAR § 52.243-7 (Notification of Changes).

[40] Special Provision No. 3, Fiscal Rule 3-1, 1 Colo. Code. Regs. § 101-1 (2007).

[41] Colorado Contract Procedures and Management Manual, available at http://www.colorado.gov/dpa/dfp/sco/contractprocedures.htm. Chapter 6 contains policy discussions, and Chapter 6A has a comprehensive list of terms and conditions.

[42] See, e.g., FAR § 16.205.

[43] Colorado Contract Procedures and Management Manual, supra n. 41.  

[44] See, e.g., Powder Horn Constructors, Inc. v. City of Florence, 754 P.2d 356 (Colo. 1988). See also Murdock & Sons Constr. Inc. v. Golden Constr. Inc., 461 F. 3d 837 (7th Cir. 2006) (considering federal procurement precedent in finding a viable constructive acceleration claim under Indiana law); New Pueblo Constructors, Inc. v. Arizona, 696 P.2d 185, 191 (Ariz. 1985) (in the absence of controlling state authority, state courts naturally look for guidance in public contract law to the federal cases).

[45]While federal procurement rules will not govern Lead State procurement, the Common Rule and Model Procurement Codes describe procedures that generally follow federal procurement models. One useful resource for understanding the federal model is the U.S. Army Judge Advocate General's, Contract Attorneys Course Deskbook, available at https://www.jagcnet.army.mil/JAGCNETINTERNET/HOMEPAGES/AC/TJAGSAWEB.NSF/TJAGLCSPublications. Chapter 9 of the Deskbook identifies legal issues relating to the process of negotiation.

[46] See, e.g., Consolidated Controls Corp., B-185979, Sept. 21, 1976, 76-2 CPD ¶ 261.

[47] Colorado Procurement Rule R-24-103-203-9(e), 1 Colo. Code Regs. 101-9.

[48] Colorado Contract Procedures and Management Manual, supra n. 41, Chapter 4, p. 5.

[49] See, e.g., C.R.S. § 24-103-203(6).

[50] See State of Florida Department of Lottery v. Gtech Corp., 816 So. 2d 648 (Fla. App. 1st Dist. 2001)(characterizing RFP as "little more than a ranking tool to determine a preferred provider and then negotiate a contract with that provider with little or no concern for the original proposal"). But see Fishbach and Moore, Inc. v. New York City Transit Authority, 79 A.D. 2d 14, 435 N.Y.S. 2d 984 (N.Y.A.D. 1981) (age

Richard Pennington