2 Purchase Planning

1. The supplier is responsible for providing supplies or services in conformance with the purchase requirements, and for providing reasonable assurance that requirements are met. The Postal Service retains the right to verify conformance through process audits, inspections, and testing.

2. The purchase team must determine what quality requirements are needed, and the contracting officer must put them in all solicitations and contracts.

2.2.1.b Quality Assurance Requirements. In most cases, the supplier performs all necessary inspection and testing for conformance before delivery. The Postal Service may opt to test or inspect supplies or services before delivery.

2.2.1.c Clauses

1. General. Paragraph (a) of Clause 4-1, General Terms and Conditions, addresses the basic inspection and acceptance requirements for Postal Service contracts. As appropriate, the purchase team may replace or supplement these requirements by the following inspection and quality management clauses which:

(a) Require the supplier to maintain a quality system acceptable to the Postal Service and make documentation available.

(b) Give the Postal Service the right to test and inspect while work is in process.

2. Use

(a) Clause 2-1, Inspection and Acceptance, may be included in contracts for supplies or services.

(b) Clause 2-2, Quality Management System, should be included in supplies or services contracts when the supplies or services being purchased are extensive, complex, or unique, and the Postal Service requires that the supplier maintain a quality management system.

(d) Clause 2-23, Reimbursement - Postal Service Testing, must be included when Clauses 2-1 or 2-2 are included in the contract.

2.2.1.d Inspection at Destination. Inspection performed at destination is generally limited to inspecting the supplies or services.

2.2.2 First-Article Approval

2.2.2.a Uses. The purpose of first-article approval is to validate the capability of a supplier's production process. Approval is the testing and evaluation of the first article for conformance with contract requirements at the initial stage of production. The first article should be manufactured using the contract drawings and specifications, the production drawings developed from them and production tooling. The approved first article then serves as the manufacturing baseline for production units.

2.2.2.b General

1. First-article approval is particularly appropriate when the first article will serve as a manufacturing standard or is described by a performance specification. In deciding whether first-article approval should be required, the purchase team should consider the increased costs and time of delivery resulting from first-article tests, the risk of foregoing the tests, and the availability of other, less costly, methods of achieving the desired quality.

2. Normally, first-article approval should not be required for:

(a) Research or development.

(b) Prequalified products.

2.2.2.c Solicitation and Contract Requirements

1. When the supplier is responsible for first-article testing, the solicitation and contract must contain or reference the performance factors or other characteristics that must be met, including the data that must be submitted in the first-article approval test report, and Clause 2-4, First-Article Approval - Supplier Testing.

2. When the Postal Service is responsible for first-article testing, the solicitation and contract must contain or reference:

(a) The performance factors or other characteristics that must be met;

(b) The tests to which the first article will be subjected; and

2.2.3 Acceptance

2.2.3.a Place of Acceptance. The solicitation and contract must specify where acceptance will take place.

2.2.3.b Delayed Acceptance. The purchase team may consider using a special testing requirement after delivery and before acceptance (such as a preacceptance test) for purchases of complex equipment (such as mail-handling systems, telecommunications equipment, computers, and building systems). Requirements should be thoroughly described in the solicitation. When a preacceptance test program is specified, the contract must include Clause 2-6, Delayed Acceptance.

2.2.4 Warranties

2.2.4.a Generally, it is Postal Service policy to take advantage of commercially available warranties to the extent practical. Paragraph o of Clause 4-1 requires the supplier to warrant that items purchased are merchantable and fit for use. In most cases, this should suffice to meet Postal Service needs. However, purchase teams should also consider the following during purchase planning.

2.2.4.b Warranty clauses should be used when it is in the Postal Service's interest to reserve the right to assert claims regarding defective supplies or services after acceptance. A warranty clause gives the Postal Service additional time after acceptance to require correction of deficiencies or defects, reperformance, an equitable adjustment in the contract price, or other remedies. Warranty coverage may begin with delivery, or when a specific event occurs. This coverage may continue for a given number of days or months, or until the occurrence of another specific event. The value of a warranty clause depends on the supplies or services purchased. The clause, its use, terms, and conditions are influenced by many factors and should be tailored to fit the purchase or a specific type of purchase. Warranty clauses usually increase the purchase price and this should be carefully weighed before deciding to use one (see 2.2.4.c).

2.2.4.c Considerations. A warranty clause or provision may be used for either individual purchases or classes of purchases. Before making this decision, the purchase team should consider, for example, such matters as the cost of the warranty, potential damage to the Postal Service resulting from defective performance, and the ability of the Postal Service to enforce the warranty.

2.2.4.d Cost. Offerors usually include a price estimate for warranty work in their proposals. Because the cost of warranty work might not equal the benefits, the purchase team should carefully evaluate the cost of a warranty by requiring alternate price proposals with and without a warranty; comparing the cost of a separate service contract that provides similar protection; or requiring separate pricing for warranties, when feasible.

2.2.4.e Marking and Notices. When a warranty clause is used, the purchase team should consider requiring the warranted items to be marked or having a warranty notice furnished with the items. This tells people who store, stock, and use the items that they are warranted and encourages them to advise the contracting officer of any defects. The marking or notice need not state the complete warranty; a short statement that a warranty exists, its duration, and whom to notify if an item is defective is usually sufficient. In deciding whether to require marking or a notice, the purchase team should consider the feasibility of marking the items and the added cost of the marking or the notice in relation to its benefits.

2.2.4.f Terms. The terms of a warranty clause vary with the item or service being purchased, but factors such as the following should be considered:

1. The schedule must state the warranty's duration. It may provide that the supplier will be liable for defects or nonconformance that either exist at the time of delivery or that develop within a specified period or before the occurrence of a specified event.

2. The schedule must state the specific period during which a notice of defects or nonconformance may be given to the supplier. Generally, the Postal Service will be protected if this "warranty period" starts "at the time of delivery" or "upon acceptance of the service." However, in some cases, it may be necessary to start the warranty period later. For example, if it cannot be determined that supplies conform until they are used, the warranty period should not begin until the items are actually used; or if supplies are purchased in lots inspected by sampling and delivered in increments for storage, the warranty period may begin when the supplies are actually used or from the date of the last delivery.

3. If the Postal Service specifies the item's design and precise measurements, tolerances, materials, test requirements, or inspection requirements, the supplier's liability for defects or nonconformance is usually limited to those that exist at the time of delivery.

4. If a contract contains performance specifications, and design is of minor importance, a supplier's liability may extend to defects that arise after delivery of the supplies or acceptance. When appropriate, the warranty may be limited to defects or nonconformance existing at the time of delivery or acceptance.

5. The right to return nonconforming supplies for correction or replacement generally satisfies the Postal Service's need under a warranty. However, when correction or replacement will not be possible (for example, perishable items), the clause should provide that:

(a) The Postal Service may return the supplies to the supplier, dispose of them in a reasonable manner, or replace them with similar supplies; and

(b) The supplier is liable for any costs incurred by the Postal Service.

6. When it is foreseen that, due to the nature of its use, or the cost of return, it would be impracticable to return an item for correction or replacement, the clause should provide that the Postal Service, at the supplier's expense, may correct or require the supplier to correct the article in its place.

7. A warranty may be required only for a particular aspect of an item that may need special protection (for example, components, accessories, parts, or packaging).

2.2.4.g Clause 2-8, Warranty. When the terms of Paragraph o of Clause 4-1 are insufficient to protect the interests of the Postal Service, solicitations and contracts should include Clause 2-8, Warranty, modified as needed.

2.2.5 Delivery or Performance Schedule

2.2.5.a General. A realistic delivery or performance schedule is an essential element of a contract and must be stated clearly in the solicitation. Schedules that are unreasonably short or difficult to attain may restrict competition and result in higher contract prices.

2.2.5.b Use. Except when clearly unnecessary, solicitations must inform suppliers of the basis of which their proposals will be evaluated in terms of time of delivery or performance. For example, delivery schedules may be identified as "required" or "desired." If the delivery schedule is expressed as "desired," the solicitation's performance evaluation factors must indicate the extent to which proposals offering more or less favorable delivery terms will be considered and the relationship of that consideration to the other performance evaluation factors.

2.2.5.c Considerations

1. Supplies and Services. When developing delivery or performance schedules for supplies and services, purchase teams must consider applicable matters such as urgency of need, industry practices, market conditions, administrative time needed for evaluating offers and awarding contracts, and the sufficient time for suppliers to comply with conditions affecting performance, such as the furnishing of Postal Service property.

2. Construction. When scheduling the time for completion of a construction contract, purchase teams must consider applicable matters such as the nature and complexity of the project, the construction seasons involved, the required completion date, availability of materials and equipment, and the supplier's capacity to perform.

3. Separable Items and Dates. Separable completion dates may be established for separable items of work in any contract. When multiple completion dates are used, requests for extension of time must be evaluated for each item, and the affected completion dates modified as appropriate.

2.2.5.d Delivery Terms

1. Supplies and Services. Contract delivery or performance schedules may be expressed in terms of:

(a) Specific calendar dates;

(b) Specific periods from the date of the purchase (i.e., date of award or acceptance by the Postal Service, or date shown on the contractual documentation as the effective date of the purchase);

(c) Specified periods from the date of receipt by the supplier of the notice of award or acceptance by the Postal Service (including notice by receipt of contract document executed by the Postal Service); or

(d) Specific time for delivery after receipt by the supplier of each individual order issued under the contract, as in indefinite delivery type contracts.

2. Notice

(a) The time specified for contract performance should not be curtailed to the prejudice of the supplier because of delay in the Postal Service's giving notice of award.

(b) If the delivery schedule is based on the date of the contract, the contracting officer must mail or otherwise furnish the supplier the contract, notice of award, acceptance of proposal, or other contract document not later than the date of the contract.

(c) If the delivery schedule is based on the date the supplier receives the notice of award, or if the delivery schedule is expressed in terms of specific calendar dates on the assumption that the notice of award will be received by a specific date, the contracting officer must send the contract, notice of award, acceptance of proposal, or other contract document by certified mail, return receipt requested, or by any other method that will provide evidence of the date of receipt. In the event that the notice of award is not timely received by the specified date, the delivery schedule must provide that the schedule will be extended by the number of days after the date that the supplier actually received notice of award.

2.2.5.e Provisions

1. Supplies and Services

(a) General. Provision 2-2, Time of Delivery, and its alternatives may be used as provided or adapted as necessary for solicitations and contracts other than those for construction and architect/engineering services. Because the actual delivery schedule is set out in Part 1 of the contract and not in the provision, particular care must be taken that the terms of the delivery provision are consistent with the delivery schedule.

(b) Required or Desired Delivery. Paragraph (a) of Provision 2-2 assumes that the solicitation contains a schedule by which delivery is required and that no additional consideration will be given for accelerated delivery. Alternate paragraph (a)(1) may be substituted for paragraph (a) if the schedule includes a desired delivery schedule as well as a required schedule, and if suppliers will not be penalized for their inability to meet the required delivery date.

(1) Paragraph (b) of Provision 2-2 assumes that the delivery schedule will be based on the date of contract award. If the delivery schedule is expressed in terms of specific calendar dates or specific periods and is based on assumed date of award, substitute alternate paragraph (b)(1) for paragraph (b).

(2) If the delivery schedule is expressed in terms of specific calendar dates or specific periods and is based on an assumed date the supplier will receive notice of award, substitute alternate paragraph (b)(2) for paragraph (b).

(3) If the delivery schedule will be based on the actual date the supplier receives a written notice of award, delete paragraph (b).

2. Construction. See 4.3.3.a.9 and Clause B-7.

2.2.5.f F.O.B. Points

1. Delivery instructions for supplies must specify an f.o.b. (free on board) point, which is determined on the basis of overall costs, including rates, delivery terms, redirection in transit costs, and other factors. Generally, f.o.b. origin will produce lower costs for large scale and consolidated purchases, or when the Postal Service may benefit from determining and managing the transportation provider. The solicitation should require the supplier's proposal to include both f.o.b origin and destination prices for transportation analysis. A transportation analysis is available from field material management specialists or non-mail freight transportation at Headquarters.

2. F.o.b. origin means that the Postal Service makes the arrangements for the pickup, transportation and delivery to the required destination. Title passes to the Postal Service when delivery is made to the carrier. The supplier's risk is limited to loss or damage caused by improper marking or packing of the goods, while the transportation carrier is accountable to the Postal Service for loss or damage to the shipment. This payment for transportation services is separate from the price of the purchased supplies.

3. F.o.b. destination means delivery, free of expense to the Postal Service, to a destination or shipment base points specified in the purchase document. Title to the supplies passes to the Postal Service when they arrive at the stated destination. The supplier pays the carrier and assumes the risk for loss or damage until delivery to the specified destination.

2.2.5.g Acceptance. When goods are being accepted at destination, delivery terms in the purchase document must specify f.o.b. destination.

2.2.5.h Using Mail

1. Unless delivery will be made by the supplier's own personnel or equipment, delivery of mailable items (according to the Domestic Mail Manual) to postal facilities must be made by the Postal Service. This requirement may be waived by the contracting officer if in the best interest of the Postal Service.

2. Large mailings that exceed 500 pieces must be coordinated with the area distribution network office. This must be done by the contracting officer or contracting officer's representative at least 30 days before shipment to minimize problems during receipt and processing.

3. When the weight of a consolidated mailing to a single destination exceeds 300 pounds, the contracting officer should consult a material management specialist for cost analysis. If freight deliveries will result in lower costs, the material management specialist will arrange for a carrier.

2.2.5.i Packing and Packaging. All supplies require some form of protection to ensure that they are useable upon receipt. Generally, suppliers are expected to use packing and packaging practices standard for the supplies being purchased. However, depending on the nature of the purchase, purchase teams may require specialized packing and packaging.

2.2.5.j Clause. Contracts specifying an f.o.b. point must include Clause 2-9, Definition of Delivery Terms and Supplier's Responsibilities.

2.2.6 Liquidated Damages

2.2.6.a General. Liquidated damages are a contractual remedy the Postal Service may use when there are delays in delivery or performance. Liquidated damages are based on an estimate of daily losses that would result directly from a delay in delivery or performance. It is important to remember that providing for liquidated damages usually increases the contract price; therefore, their use should be carefully considered.

2.2.6.b Use

1. Generally, liquidated damages are included in all construction contracts, and may be included in other contracts when:

(a) The Postal Service may suffer disruption of mail service or substantial financial loss due to a delay in delivery or performance;

(b) Delivery or performance is so critical that the probable increase in contract price is warranted; and

2. Liquidated damages may not be used as a penalty for failure to deliver or perform on time.

2.2.6.c Rate. The rate of liquidated damages must represent the best estimate of the daily damages that will result from delay in delivery or performance. A rate lower than the actual estimated rate may be used to avoid excessive price contingencies in proposals. The contracting officer must determine and document in each case that the rate is reasonable and not punitive. The rate should, at the minimum, cover the estimated cost of inspection and supervision for each day of delay. Whenever the Postal Service will suffer other specific damages due to a supplier's delay, the rate should also include an amount for these damages. Examples of specific damages are:

1. The cost of substitute facilities.

2. The cost of lost workhours/productivity.

3. Rental of buildings or equipment.

4. The cost of additional inspection.

2.2.6.d Assessment. If appropriate to reflect the probable damages, considering that the Postal Service may terminate for default or take other action, the assessment of liquidated damages may be in two or more increments with a declining rate as the delay continues. To prevent an unreasonable assessment of liquidated damages, the contract may also include an overall maximum dollar amount, a period of time during which liquidated damages may be assessed, or both.

2.2.6.e Clause. Whenever liquidated damages will be assessed for a supplier's delay, the contract must include Clause 2-10, Liquidated Damages, modified as necessary.

2.2.7 Postal Service Property

2.2.7.a General. The Postal Service may provide materials or other property to suppliers when it will result in significant economies, standardization, expedited production, or when it is otherwise in the Postal Service's interest.

2.2.7.b Solicitations. The property to be furnished must be specified in the solicitation in sufficient detail (including requisitioning procedures) to enable offerors to evaluate it accurately.

2.2.7.c Special Tooling and Test Equipment

1. The purchase team may decide to provide Postal Service special tooling and test equipment to suppliers for use in contract work, if doing so will not disrupt programs of equal or higher priority, or it is in the Postal Service's best interests.

2. Contracts authorizing the furnishing of special tooling or test equipment must contain:

(a) A complete description of the tooling or equipment;

(b) The terms and conditions of shipment; and

3. In competitive purchases when Postal Service special tooling or test equipment is not available, suppliers ordinarily provide and retain title to special tooling and test equipment required for contract performance. Competition usually results in fair charges for amortizing the costs of such tooling and equipment. In noncompetitive situations, the Postal Service should obtain the special tooling or test equipment, or the rights to it, because it may facilitate future competition.

4. When special tooling or equipment is provided by the supplier, the purchase team should decide whether to purchase the tooling or equipment, or rights to it, by considering:

(a) Future needs for the items (including in-house use);

(b) The estimated residual value of the items;

(d) The feasibility and probable cost of making the items available to other offerors in future purchases;

(e) The amount, if any, offered by the supplier for the right to keep the items; and

(f) The effect on future competition and prices.

5. When the Postal Service obtains identifiable special tooling or test equipment under a contract, the solicitation must specify each item or category as a contract line item. A category of items costing less than $1,000 may be grouped as a single line item.

6. When there is a possibility of future purchases of the same item and the purchase team has decided not to obtain rights or title, the solicitation must indicate current estimates of the future requirements, in the interest of reducing amortization charges. Offerors must be cautioned that these are only estimates and not a guarantee to purchase future quantities.

2.2.7.d Clauses

1. When the Postal Service will furnish property, include one of the following clauses in the contract:

(a) Clause 2-11, Postal Service Property - Fixed-Price, when a fixed-price contract will be awarded and the total value of Postal Service property is $50,000 or more. If the contract provides for reimbursement of costs for certain materials, use the clause with its alternate paragraph c.

(b) Clause 2-12, Postal Service Property - Short Form, when a fixed-price, time-and-materials, or labor-hour contract will be awarded and the total value of Postal Service property is less than $50,000.

(c) Clause 2-13, Postal Service Property - Non-Fixed-Price, when a cost-reimbursement, time-and-materials, or labor-hour contract will be awarded with Postal Service property valued at $50,000 or more. If the contract is for basic or applied research at a nonprofit institution of higher education or nonprofit organization whose primary purpose is to conduct scientific research, use the clause with its alternate paragraph c.

2. When Postal Service property will be furnished "as is," the contract must also include Clause 2-14, Postal Service Property Furnished "As Is."

3. Clause 2-15, Special Tooling, or Clause 2-16, Special Test Equipment, must be included in solicitations for fixed-price contracts when the rights or title to special tooling or test equipment will be required but cannot be identified as a specific line item. Rights or title to special tooling or test equipment in a cost-reimbursement contract are obtained using Clause 2-13, Postal Service Property - Non-Fixed-Price.

4. When a contract is for repair of Postal Service property, and the property is valued under $10,000, no Postal Service property clause is required.

2.2.8 Options

2.2.8.a Use

1. Option clauses may be included in contracts when increased requirements are foreseeable during the contract period, or when continuing performance past the original period is in the best interest of the Postal Service. Option clauses may require that additional quantities be priced the same as the basic quantities or at a different price. The clauses may also allow for unpriced options at the time of award. The price for these options is subject to discussions when the option is exercised. Priced options may require suppliers to guarantee prices for definite time periods, with no guarantee that the option will be exercised. Their improper use may result in unfair prices to the Postal Service or an unfair financial burden on the supplier. When additional requirements are foreseeable and subsequent competition would be impracticable because of factors such as production lead time and delivery requirements, the use of priced options may be preferable to negotiating a price later when the supplier is the only practicable source.

2. Contracts containing priced options that exceed 5 years must include an economic price adjustment clause (see 2.4.3.c and 2.4.3.d).

3. Option provisions and clauses may not be included in contracts when:

(a) The supplier would be required to incur undue risks (as when the price or availability of necessary materials or labor is not reasonably foreseeable);

(b) An indefinite quantity or requirements contract is appropriate, except that options for continuing performance may be used;

(d) The option quantities represent known firm requirements for which funds have been budgeted and approved, unless (1) the basic quantity is a learning or testing quantity and there is some uncertainty as to supplier or equipment performance, and (2) realistic competition for the option quantity is impracticable once the initial contract is awarded.

2.2.8.b Evaluating Options

1. Options need not be evaluated to award a contract when:

(a) The option would have no effect on the outcome of the evaluation (when the option quantity must be offered at the same price as the basic quantity, the option is for a time extension only, or the option is unpriced); or

(b) When there is a reasonable certainty that funds will not be available to exercise the option.

2. When options will not be evaluated, the contract file must contain the rationale for the decision. When the purchase team decides before issuing the solicitation that options will not be evaluated, the solicitation must include Provision 2-4, Evaluation Exclusive of Options, or Provision 2-5, Evaluation Exclusive of Unpriced Options. In all other cases, purchase teams must follow the instructions in paragraph b of Provision 4-2, Evaluation, or include Provision 2-3, Evaluation of Options, in the solicitation.

2.2.8.c Setting Limits. The contract must limit the additional quantities of supplies or services that may be purchased or the duration of the period for which performance of the contract may be extended under the option, and must fix the period within which the option may be exercised. This period should be set to give the supplier adequate notice for performance under the option. In fixing the period, consider the lead time needed to ensure continuous production and the time required for additional funding and other approvals. The period for exercising the option should always be kept to a minimum. When a solicitation contains an option for additional quantities of supplies at prices no higher than those for the initial quantities, care should be taken to ensure that the option quantities are reasonable and do not cause the supplier financial hardship. The quantities or the period under option and the period during which the option may be exercised must be justified and documented in the contract file by the contracting officer.

2.2.8.d Prices. The solicitation may allow varying prices to be offered for the option quantities depending on the quantities actually ordered and the dates when ordered. If so, the solicitation must specify the price at which the options will be evaluated (for example, highest option price offered or option price for specified quantities or dates).

2.2.8.e Expressing Options in a Contract. An option for increased quantities may be expressed as (1) a percentage of specific line items; (2) a number of additional units of specific line items; or (3) additional numbered line items (identified as the option quantity) with the same name as the items initially included in the contract. An option for increased services (including construction) may similarly be expressed in terms of (1) percentages; (2) increases in specific line items; or (3) additional numbered line items expressed in the units of work initially used in the contract (for example, labor hours, square feet, or pounds or tons handled). When exercising the option would result in extending the duration of the contract, the option may be expressed in terms of an extended completion date or an additional time period.

2.2.8.f Clauses. When a priced option will be used, purchase teams must follow the instructions in paragraph b of Provision 4-22-3, or the solicitation must include either Provision, Evaluation of Options, or Provision 2-4, Evaluation Exclusive of Options. When an unpriced option will be used, the solicitation must include Provision 2-5, Evaluation Exclusive of Unpriced Options. In addition, the contract must include one of the following clauses:

1. Clause 2-17, Option for Increased Quantity, must be used when the contract gives the option quantity as a percentage of the basic contract quantity or as an additional quantity of a specific line item.

2. Clause 2-18, Option Item, must be used when the contract identifies the option quantity as a separately priced line item having the same name as a corresponding basic-contract line item.

3. Clause 2-19, Option to Extend (Service Contract), must be used when it is intended to extend the services to be performed and written notice of intent to extend the contract is not required (see 2.2.8.f.4).

4. Clause 2-20, Option to Renew (With Preliminary Notice), must be used to provide for continuing performance of the contract beyond its original term and it is necessary to include in the contract a requirement that the Postal Service will give the supplier a preliminary written notice of its intent to extend the contract.

5. Clause 2-25, Unpriced Options, must be used when the contract provides for unpriced options.

6. Care must be exercised to ensure that the schedule of any contract which contains one of the above option clauses includes the information relating to the option which the clause requires, i.e., notice of intent to renew.

2.2.8.g Exercising Options. See 6.5.1.f.

2.2.9 Multiyear Contracts

2.2.9.a General. The purchase team should analyze the marketplace and recurring needs to determine whether there are benefits to contracting beyond 1 year. Longer term contracts tend to benefit the Postal Service by developing and sustaining supplier relationships and reducing administrative effort and cost. In addition, savings may be obtained if the supplier can reduce overall prices by spreading startup costs over more than 1 year or making similar commitments with major subcontractors. There is no limit on the term of a multiyear contract, except that it must reasonably reflect foreseeable requirements.

2.2.9.b Solicitations. When the purchase team determines that multiyear savings are possible and recurring needs are reasonably certain, the solicitation should include both a single and a multiyear quantity to see which price is most advantageous. However, award must be made to the offeror proposing the best value.

2.2.9.c Types. See 2.4.

2.2.10 Value Engineering

2.2.10.a General. Value engineering is a method of encouraging suppliers to independently develop and propose changes to improve an end item, the way it is produced, or the way a contract is performed. The change must reduce the contract's cost and not impair the essential characteristics or functions of the product or service. Savings are shared by both parties, and the supplier is paid allowable development and implementation costs.

2.2.10.b Definition. A value-engineering change proposal (VECP) is a proposal that:

1. Requires a change to a current contract;

2. Results in savings to the contract; and

3. Does not involve a change in:

(a) Deliverable end items only;

(b) Test quantities due solely to the results of previous testing under the contract; or

2.2.10.c Sharing Savings. If the Postal Service accepts a VECP, the supplier shares in the contract savings based on the negotiated agreement contained in the contract. The contracts savings are calculated by subtracting the sum of the estimated cost of performing the contract with the VECP, Postal Service costs, and the supplier's allowable development and implementation costs, from the estimated cost of performing the contract without the VECP. If priced options are included in the contract, those prices will be adjusted in accordance with the above calculation. Profit is excluded when calculating contract savings.

2.2.10.d Noncompetitive Purchases

1. The contracting officer may negotiate a noncompetitive contract or contract modification for an additional quantity incorporating a change proposal when:

(a) An otherwise acceptable value-engineering change proposal is received too late during performance to provide a significant benefit under the current contract; or

(b) If additional quantities are required that are not provided for under the contract.

2. When a proposer who does not have a current contract submits an unsolicited proposal in the form of a value-engineering change proposal and it meets the requirements of Clause 2-22, the purchase team may decide to have the contracting officer negotiate a noncompetitive contract incorporating the value-engineering change proposal.

3. Sharing contract savings is done in accordance with 2.2.10.c.

2.2.10.e Evaluation

1. Generally the purchase team will evaluate a VECP and either accept it or reject it, in whole or in part, within 45 days of its submission to the contracting officer. To expedite the evaluation, suppliers may give oral presentations to the appropriate parties.

2. If evaluating the proposal will take more than 45 days, the contracting officer must notify the proposer of the expected decision date.

3. If a proposal is rejected, the contracting officer must notify the proposer and explain the rejection.

2.2.10.f Withdrawal. The supplier may withdraw all or part of a value-engineering change proposal any time before it is accepted by the Postal Service.

2.2.10.g Acceptance

1. Acceptance of all or part of a value-engineering change proposal and determination of the savings requires the agreement of both parties. Acceptance is accomplished by a supplemental agreement to the contract. If agreement on price is reserved for a later supplemental agreement, but agreement cannot be reached, the matter must be treated as a dispute under Clause B-9, Claims and Disputes.

2. The supplier must perform according to the existing contract until a value-engineering change proposal is accepted.

3. The contracting officer's decision to accept or reject all or part of a value-engineering change proposal is final and not subject to Clause B-9, or to litigation under the Contract Disputes Act of 1978 (41 U.S.C. 601-613).

2.2.10.h Subcontracts. If the purchase team foresees a potential cost reduction through value engineering under subcontracts, additional paragraph j should be added to Clause 2-22.

2.2.10.i Clause. If there is a potential for savings through value engineering, Clause 2-22 should be included in firm fixed-price contracts of $100,000 or more, at any time during the term of the contract. However, the clause may not be used in:

1. Fixed-price incentive contracts (see 2.4.3.b).

2. Research and development contracts.

3. Contracts with nonprofit or educational organizations.

4. Contracts for professional or consultant services (see 4.5.3 and 4.5.4).

5. Contracts for product or component improvement.

6. Contracts for commercially available goods and services.

2.2.11 Price Reduction

When purchase teams plan to award strategically sourced and long-term contracts, they must consider including in the contract the right of the Postal Service to negotiate price reductions (in addition to the rights provided when negotiating options, see 2.2.8). During contract performance, price reductions may be sought because of (1) changes in market conditions or industry trends and indexes that affect a supplier's cost elements; or (2) because the supplier has or should have gained experience in developing more cost-effective means to lower performance costs. Suppliers may also be required to identify opportunities for cost or price reduction during the term of the contract. When the purchase team anticipates that cost reductions should be achieved by the supplier during the term of a contract, the following clauses should be included in the contract (also see 2.2.10):

1. Clause 2-48, Most Favored Customer Pricing; and

2. Clause 2-49, Cost/Price Reduction.

2.2.12 Investment Recovery

2.2.12.a General. Supply chain management advocates total life cycle management of all Postal Service equipment and materials. The intent is to provide a strategic approach for completing the final phase of a life cycle management plan to maximize total cost of ownership.

2.2.12.b Planning. An effective and efficient Investment Recovery Plan adds to the profit margin that is achieved in the overall supply chain management plan. To attain the optimum total cost of ownership, planning should start with the beginning of the requirement and continue through use to end-of-life disposition. By attaining the best return on assets, the Postal Service can realize significant cost savings, cost avoidance, and revenue while providing for environmentally safe disposition. Some of the factors to be considered are:

1. Reuse or disposal of the existing product.

2. Management of undepreciated value of existing product.

3. Environmental issues associated with the use and repair of new product.

4. Reporting, tracking, and reallocation of surplus products.

5. Opportunities for buy-back by the manufacturer or distributor.

6. Potential for revenue generation.

7. Recycling opportunities.

8. Environmentally safe disposal methods.

2.2.12.c Provision. Provision 2-8, Investment Recovery, must be included in solicitations when investment recovery will play a significant role in the overall success of the purchase.

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2.2 Planning Considerations

2.2.1 Quality Requirements

2.2.1.a General