[Federal Register Volume 69, Number 250 (Thursday, December 30, 2004)]
[Proposed Rules]
[Pages 78340-78351]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-28532]


 ========================================================================
 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 69, No. 250 / Thursday, December 30, 2004 / 
Proposed Rules  

[[Page 78340]]



DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Parts 210, 215 and 220

RIN 0584-AD38


Procurement Requirements for the National School Lunch, School 
Breakfast and Special Milk Programs

AGENCY: Food and Nutrition Service, USDA.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This rule proposes to amend the regulations governing 
procedures related to the procurement of goods and services in the 
National School Lunch Program, School Breakfast Program and Special 
Milk Program to remedy deficiencies identified in audits and program 
reviews. This proposal makes changes in three areas: the school food 
authority's responsibility for proper procurement procedures and 
contracts; prohibitions on the school food authority's use of nonprofit 
school food service account funds for costs resulting from improper 
procurements and contracts; and the State agency's review and approval 
of school food authority procurement procedures and contracts. The 
proposed rule also makes technical amendments to the Special Milk 
Program and School Breakfast Program regulations to make the 
procurement and contract requirements and consequences for failing to 
take corrective action in these regulations consistent with the 
National School Lunch Program regulations and adds the definitions of 
contractor and nonprofit school food service account to the National 
School Lunch Program, Special Milk Program and School Breakfast Program 
regulations. These changes are intended to promote free and open 
competition in school food authority procurements, clarify State agency 
rights and ensure that only allowable contract costs are paid with 
nonprofit school food service account funds.

DATES: To be assured of consideration, comments must be received on or 
before February 28, 2005.

ADDRESSES: The Food and Nutrition Service invites interested persons to 
submit comments on this proposed rule. Comments may be submitted by any 
of the following methods:
     E-Mail: Send comments to [email protected], (In the 
subject line of the message, identify that the comments are for the CND 
proposed procurement rule.
     Fax: Submit comments by facsimile transmission to: (703) 
305-2879, attention Terry Hallberg.
     Mail: Comments should be addressed to Mr. Terry Hallberg, 
Chief, Program Analysis and Monitoring Branch, Food and Nutrition 
Service, Department of Agriculture, 3101 Park Center Drive, Room 640, 
Alexandria, Virginia 22302-1594. All written submissions will be 
available for public inspection at this location Monday through Friday, 
8:30 a.m. to 5 p.m.
     Hand Delivery or Courier: Deliver comments to 3101 Park 
Center Drive, Room 640, Alexandria, Virginia 22302-1594, during normal 
business hours of 8:30 a.m. to 5 p.m.
     Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the online instructions for submitting 
comments.

FOR FURTHER INFORMATION CONTACT: Denise Londos or Todd J. Barrett at 
the above address or by telephone at 703-305-2590.

SUPPLEMENTARY INFORMATION:

I. Background

    Generally, schools manage the school meals programs under the 
Department's Child Nutrition Programs--the National School Lunch 
Program, School Breakfast Program and Special Milk Program, on their 
own. School food service activities are self-managed by local school 
food authority officials. In conducting these activities, school food 
authorities manage the school meals programs but contract with vendors 
for goods and services related to the school food service operation, 
using either fixed price or cost reimbursable contracts. Under a fixed 
price award, the resulting contract has a firm fixed price, with or 
without adjustments. In a cost-reimbursable contract or contract with 
cost-reimbursable provisions, the school food authority pays the 
contractor for certain costs incurred by the contractor, with or 
without a fixed fee for services. The vast majority of these 
contractors are commercial enterprises.
    In other situations, school food authorities operating the National 
School Lunch Program and/or the School Breakfast Program contract with 
a commercial enterprise or nonprofit organization to manage the school 
meal programs. These companies are collectively known as food service 
management companies. These contracts may be either fixed price or 
cost-reimbursable. The vast majority of these contractors are 
commercial enterprises.
    School food authorities use funds from the nonprofit school food 
service account to pay for costs incurred under both self-managed and 
food service management company contracted programs. The funds in the 
nonprofit school food service account come from federal and nonfederal 
sources. The federal funds are provided as reimbursements through the 
Department's Child Nutrition Programs for meals and milk meeting the 
requirements in 7 CFR 210.10, 215.7 and 220.8 that are served to 
eligible children. The primary sources of nonfederal revenue are 
student payments, adult payments and a la carte sales revenue. 
Additional funding sources include State and local funds and sales 
revenue from vending and catering activities. Regardless of the source, 
the school food authority must retain all of these revenues in the 
restricted nonprofit school food service account and may only expend 
these revenues for the allowable costs of the school food authority's 
nonprofit school food service program. The allowability of the 
expenditures is determined using the applicable program and 
departmental regulations (7 CFR Parts 210, 215, 220, 3016 and 3019, as 
applicable) and Office of Management and Budget Cost Circulars (A-87 
Cost Principles for State, Local Governments and Indian Tribal 
Governments or A-122 Cost Principles for Non-profit Organizations, as 
applicable).
    A school food authority is permitted to engage in other activities 
that are outside of the scope of the nonprofit school food service; 
however the school food authority must ensure none of the resources of 
its nonprofit school food

[[Page 78341]]

service subsidize the costs of such activities. Some examples of these 
nonprogram activities include food service catering to the community 
and individuals, providing food and nonfood supplies for school 
functions such as graduation ceremonies, sports banquets and school 
club meetings, etc., sales of meals to school non-student visitors, and 
allowing school food service facilities and equipment to be used by 
other school or community groups. The direct and indirect costs of 
these activities are not Child Nutrition Program charges to the 
nonprofit school food service account. As a result, these costs must be 
fully funded by the revenues received from such activities or from 
sources outside the nonprofit school food service account.

II. Discussion of the Rule's Provisions

A. Procurement Procedures

    Regardless of the requested goods or services or the procurement 
method used, all procurements must be conducted in a manner that 
provides full and open competition. When conducting a procurement, a 
public school food authority must follow its own procurement procedures 
that reflect applicable State and local laws, provided that the 
procurement complies with the standards set forth in Department 
regulation 7 CFR 3016.36(b) through (i) and 3016.60(b) through (c). 
Similarly, a State agency conducting a procurement on behalf of one or 
more school food authority or other Child Nutrition Program participant 
would follow those same Department regulations. A not for profit school 
food authority may opt to follow its own organizational procedures for 
procurements made with nonprofit school food service account funds 
provided the procedures comply with the standards set forth in 7 CFR 
3019.40 through 3019.48.
    The procurement procedures used by school food authorities are 
either formal or informal. Formal procurement procedures use either 
sealed bids or competitive proposals and must be used when the proposed 
purchase will exceed the small purchase threshold. Formal procurement 
procedures require public advertising and direct solicitation of 
potential suppliers with written responses from the potential 
suppliers. Formal procurements also require the use of specific forms 
and processes that must be followed depending upon the formal 
procurement procedure chosen. The informal or small purchase 
procurement procedure is used for purchases that are not expected to 
exceed the small purchase threshold.
    In a small purchase procurement, an adequate number of suppliers 
are contacted to obtain price quotations. While obtaining written price 
quotations and contacting at least three suppliers is recommended, the 
number of suppliers that should be contacted depends on the 
marketplace. This means in some areas with a large number of suppliers, 
more than three suppliers should be contacted, while in other areas, 
less than three suppliers may exist.
    Full and open competition provides a ``level playing field'' so 
that all potential contractors have the opportunity to win the contract 
award. The outcome of a properly conducted procurement results in the 
school food authority obtaining the best product at the best price. 
When competition is impaired, the school food authority loses the 
fundamental benefit of an open marketplace. The loss of this benefit 
can needlessly diminish the resources of the nonprofit school food 
service account and inhibit the school food authority from providing 
high quality, nutritious meals to children and implementing needed 
improvements to its food service operations.

B. Goals of This Proposed Rule

    We are proposing to amend the National School Lunch Program 
regulations, 7 CFR Part 210, Special Milk Program regulations, 7 CFR 
Part 215, and School Breakfast Program regulations, 7 CFR Part 220 to 
remedy deficiencies in school food authority procurement practices that 
have been identified in audits conducted by the U.S. Department of 
Agriculture's Office of Inspector General, Report Numbers 27010-3-AT, 
February 2002 and 27601-0027-CH, April 2002. These identified 
deficiencies are undermining free and open competition and resulting in 
unallowable uses of nonprofit school food service account funds.

C. Audit Results--Cooperative Buying Groups

    In February 2002, the Department's Office of Inspector General 
(OIG) released Audit Report 27010-3-AT. The audit outlined problems in 
school food authority cooperative buying arrangements. Under these 
arrangements, school food authorities in a single jurisdiction or 
multiple, often geographically related, jurisdictions, pool purchasing 
needs and solicit a single service provider to provide goods and 
services. School food authorities, as a cooperative buying group, 
expect the service provider to perform a number of different functions. 
These functions generally include selling food and nonfood supplies to 
the school food authorities from the service provider's inventory, 
conducting procurements with manufacturers and food processors on 
behalf of the member school food authorities, and storing, distributing 
and managing the school food authorities' inventories of USDA donated 
foods and purchased foods and nonfood supplies. The OIG's audit 
identified a number of instances where the cooperative buying group, 
using nonprofit school food service account funds, failed to conduct 
procurement transactions in a manner that provided for full and open 
competition. For example, one cooperative buying group failed to 
include all items to be purchased in its bid solicitation and instead, 
purchased items directly from the service provider outside of the terms 
of the contract. In another instance, the service provider was 
permitted to make a material change to the contract resulting in an 
unallowable cost-plus-percentage-of-cost pricing structure. As a 
result, unallowable costs were paid by school food authorities with 
funds from the nonprofit school food service account.

D. Audit Results--Procurement Procedures and Allowable Costs

    In April 2002, OIG released Audit Report 207601-0027-CH which 
revealed problems in several cost-reimbursable contracts between school 
food authorities and food service management companies. Some contracts 
between school food authorities and food service management companies 
lacked controls as to exactly how the company would determine the 
allowability of costs charged to the school food authority, including 
how the company would provide the school food authority with the 
benefits of purchase discounts and rebates in the determination of net 
costs. In some cases, this resulted from the school food authority's 
failure to inform potential contractors of how costs should be charged 
to the school food authority under the resulting contract award. In 
other cases, even though the school food authority's procurement 
documents required return of such discounts and rebates, some school 
food authorities permitted a material change to the food service 
management company contract that specifically allowed the food service 
management company to keep discounts and rebates earned through 
purchases billed to the school food authority.
    The failure of a school food authority to fully describe its cost 
reporting requirements in its solicitation document undermines full and 
open

[[Page 78342]]

competition by placing unreasonable burdens on potential contractors. 
Without adequate details on how it must report costs to the school food 
authority, a potential contractor lacks the information needed to 
properly establish the fixed price component (management fee) of its 
offer. For example, one potential contractor, assuming that no 
discounts, rebates and credits will be returned to the school food 
authority, could provide an offer with a low management fee, knowing 
that its fixed costs and profit margin would actually be funded, in 
part, through the retained discounts, rebates and credits. A second 
potential contractor, recognizing the discounts, rebates and credits as 
being due to the school food authority might provide an offer with a 
higher management fee that included all its fixed costs and profit 
margin. Since school food authorities only evaluate the fixed fee 
component when determining the most cost effective offer under a cost 
reimbursable contract, the failure of a school food authority to 
address its cost reporting requirements in its solicitation documents 
creates unacceptable risks to full and open competition. Further, 
failure to adequately address issues regarding allowable costs in 
solicitation documents and contracts can result in unallowable cost 
charges to the school food authority that are paid with nonprofit 
school food service account funds.
    As the OIG found, the absence of a specific contract requirement 
limiting food service management company charges to allowable costs has 
resulted in food service management companies charging school food 
authorities for administrative costs that were already included as part 
of the fixed fee, billing for the same expense twice, and charging the 
school food authority for the food service management company's 
administrative cost overruns. Without adequate guidance from the school 
food authority on how costs must be billed, a contractor lacks the 
information needed to properly identify allowable and unallowable costs 
submitted for payment to the school food authority. In turn, the school 
food authority cannot determine whether nonprofit school food service 
account funds can be used to pay all or only part of the costs billed 
by the contractor. Either result is untenable.
    This proposed rule would clarify that only costs resulting from 
cost reimbursable contracts or cost reimbursable contract provisions 
that meet applicable cost allowability requirements are allowable 
nonprofit school food service account expenditures. The proposed rule 
does not interfere in the right of a school food authority to enter 
into a contract, including a contract with terms that result in 
unallowable costs. The proposed rule, does, however, prohibit the 
school food authority from using nonprofit school food service account 
funds to pay for those unallowable costs.
    In addition this proposed rule would prohibit contract terms that 
allow payments from the nonprofit school food service account in excess 
of the contractor's actual net allowable costs. Such net allowable 
costs must be computed by deducting certain discounts, rebates and 
other applicable credits. Contractors, using applicable department and 
program regulations and OMB cost circulars, would be required to 
provide sufficient information to permit the school food authority to 
identify allowable and unallowable costs and the amount of all such 
discounts and rebates on invoices and bills presented for payment to 
school food authorities. The school food authority would use this 
contractor supplied information to calculate the amount of net 
allowable costs that can be paid from the nonprofit school food service 
account. In making this calculation, the school food authority would 
apply the applicable program and department regulations and OMB cost 
circulars to identify the allowable costs, net of applicable credits, 
that may be paid from the nonprofit school food service account and 
unallowable contract costs that must be paid from other funding 
sources.
    Further, the proposed rule would require that upon request, 
contractors would be required to provide documentation of discounts, 
rebates and other applicable credits as well as costs billed to the 
school food authorities. As defined by the applicable OMB cost 
circulars, discounts, rebates and other applicable credits include, but 
are not limited to, price reductions due to: product promotion, volume 
purchasing, on-line ordering or other electronic ordering systems, 
prompt payments or advance payments and use of certain suppliers. This 
proposed rule would apply to all discounts, rebates and credits 
accruing to or received by the contractor, including any assignee under 
the contract to the extent those amounts are allocable to the allowable 
costs for which the contractor will be reimbursed by the school food 
authority. For reference purposes, this proposed rule clarifies the 
applicability of the definition of applicable credits is the respective 
OMB cost circulars.
    School food authorities that fail to comply with proper procurement 
procedures or permit a contractor to make a material change to a 
contract after contract award compromise the integrity of the entire 
procurement process. A material change to a contract after it has been 
awarded alters the terms and conditions of that contract to the extent 
that had other bidders known of these changes in advance, they could 
have bid differently and more competitively. This means that when a 
school food authority agrees to or allows a winning bidder to make 
changes to contract terms that are materially inconsistent with the 
underlying solicitation document, the school food authority has 
subverted full and open competition by denying all bidders the 
opportunity to compete under the same terms and conditions. While all 
school food authorities must have procedures to respond to bid 
protests, when a material change occurs to the contract after the bid 
has been awarded, the only way a disadvantaged bidder will learn of the 
change is through obtaining and reviewing the executed contract. This 
is inherently unfair given that the school food authority has 
undermined open and free competition by providing an unwarranted 
advantage to the successful bidder to the detriment of the other 
bidders.
    This proposed rule would prohibit school food authorities from 
using nonprofit school food service account funds for any cost 
resulting from a procurement that failed to meet program requirements.

E. State Agency Review of Contracts

    Under current regulations, State agencies generally do not review 
school food authority contracts until after the contracts have been 
executed (signed by the school food authority and contractor). Except 
for school food authority/food service management company contracts, 
State agencies do not receive copies of other school food authority 
contracts and generally only review these contracts during the normal 
on-site review process. In some States, a pre-approved prototype 
contract or contract terms are provided to the school food authority by 
the State agency. In the case of a pre-approved prototype contract, 
State agency officials generally do not review the executed contract 
since the State agency expects all school food authorities to use the 
approved prototype as it was drafted. In other cases, a State agency 
may limit its review only to discretionary contract terms and 
conditions because the State agency expects the school food authority 
has incorporated, verbatim,

[[Page 78343]]

the pre-approved contract terms the State agency provided.
    The OIG found that some food service management companies required 
material changes to contracts that operated to the disadvantage of the 
school food authorities. These included changes that were made after 
the State agency's review and approval of executed contracts, changes 
to pre-approved prototype contracts and changes to required contract 
terms. Many of the changes circumvented regulatory requirements. State 
agencies and school food authorities have indicated that food service 
management companies were able to accomplish these changes by requiring 
the school food authority sign a food service management company 
prepared contract or refusing to sign the school food authority's 
approved contract until the changes were made. While the school food 
authorities should have conducted a new procurement in response to 
these demands, the delay incident to such actions would have prevented 
some school food authorities from providing meals to students. Some 
State agencies have expressed concerns with their ability to obtain 
copies of contracts prior to their execution and have further expressed 
concerns that they do not have the ability or authority to mandate 
changes to contract terms and obtain required corrective actions.
    When the State agency finds problems with the terms of an already 
executed contract, it may be too late to remedy the problems for the 
current contract, except when State or local laws and procedures permit 
contract nullification. Since the school food authority is bound to 
fulfill its contract terms, in the most serious cases, the State 
agency's only recourse is to disallow all costs resulting from the 
contract. In the majority of cases, the State agency's required 
corrective action results in the school food authority initiating a new 
procurement process at the end of the current contract year, 
eliminating the option for contract renewals. None of these approaches 
provide timely corrective action. To reduce the number of contract 
disallowances and re-bid situations, this rule proposes that when a 
school food authority contracts with a food service management company, 
the contract must be reviewed and approved by the State agency prior to 
the contract being executed. The proposed rule also clarifies that for 
all other contracts, State agencies have authority to obtain copies of 
the contracts prior to execution and are encouraged to do so for all 
contracts. Further, this rule proposes that the school food authority 
obtain written State agency approval of any change to a prototype 
solicitation document or prototype contract before the revised 
solicitation is issued or the revised contract is executed. This 
provision does not interfere with the school food authority or 
potential contractor's right to negotiate, pursuant to Department 
regulations, 7 CFR parts 3016 and 3019, contract terms and conditions 
under a competitive proposal procurement. In this type of procurement, 
the pre-approved prototype contract or contract terms only address the 
nonnegotiable aspects of the contract. Contract terms for areas subject 
to negotiation are not prepared until after the negotiations have been 
completed.
    To ensure that school food authorities understand the scope of the 
authority granted to State agencies to properly administer the school 
meals programs, the proposed rule would clarify the right of the State 
agency to obtain procurement documents prior to issuance of the school 
food authority's solicitation as well as prior to the execution of the 
resulting contract. State agencies are encouraged to obtain these 
procurement documents prior to the school food authority's issuance 
(publication, direct mailing, internet posting, etc.) of the 
solicitation. Through this review, the State agency can provide 
technical assistance to the school food authority by identifying 
deficiencies in the procurement documents and processes before the 
solicitation is released. State agencies are also encouraged to obtain 
the school food authority's procurement documents when reviewing 
contracts to determine the adequacy of the contract terms and identify 
instances where the integrity of the procurement process may have been 
compromised.
    Further, this proposed regulation would prohibit school food 
authorities from using nonprofit school food service account funds to 
pay for unallowable contract costs, including costs that result from 
improperly procured contracts and from a school food authority's 
failure to initiate corrective actions to procurement and contract 
documents as required by the State agency. Currently, 7 CFR 210.24 
requires State agencies withhold program payments when a school food 
authority fails to comply with program requirements. This withholding 
would stay in effect until the school food authority took corrective 
action satisfactory to the State agency. At that point, the withheld 
funds are released to the school food authority. However, the school 
food authority would still be prohibited from using its nonprofit 
school food service account funds to pay for unallowable costs. 
Therefore, whether or not the State agency withheld program payments, 
costs incurred under an improperly procured contract as well as costs 
incurred during the period the school food authority fails to take 
State agency required corrective action would be unallowable costs.
    This proposed regulation does not absolve a school food authority 
from fulfilling its contractual obligations, even in those cases where 
the school food authority has failed to comply with required 
procurement practices. Additionally, this proposed regulation does not 
impair a school food authority's right to contract, including the right 
to contract for goods or services that represent unallowable nonprofit 
school food service account costs as long as the procurement and 
contract terms require adequate reporting and disclosure of such costs. 
Such costs could include catering school board luncheons or operating 
concession stands at school sporting events. While this proposed 
regulation would not impair a school food authority's right to contract 
for goods and services that represent unallowable costs, such 
unallowable costs cannot be paid with nonprofit school food service 
account funds.

F. Ethics and Integrity in the Procurement Process

    While not specifically identified as a deficiency in the OIG 
audits, the Department is aware of instances in which full and open 
competition has been undermined by a lack of ethical conduct on the 
part of potential contractors and school food authorities. When State 
agencies or others determine such conduct is intentional, the matter 
should be referred to the appropriate legal authorities. However, in 
some cases, the unethical conduct results from school food authorities 
failing to fulfill their responsibilities under applicable code of 
conduct rules. All public and nonprofit school food authorities must 
have a written code of conduct governing the performance of its 
employees engaged in the award and administration of contracts. The 
code of conduct must prohibit any employee, officer or agent of the 
school food authority from participating in the selection, award or 
administration of the contract if a conflict of interest, whether real 
or apparent, exists. The Department regulations at 7 CFR 3016.36(b)(3) 
and 3019.42 define the minimum standards for determining when a 
conflict of interest exists and the actions that must be taken if a 
conflict occurs. The information indicates that school food

[[Page 78344]]

authorities appear to know that an individual is prohibited from 
personally soliciting or accepting cash as an inducement to award a 
contract. However, we have been concerned that these same school food 
authorities seem unaware that soliciting or personally accepting 
noncash gratuities (gifts) or accepting cash or noncash gifts in the 
name of the school is also prohibited. This lack of awareness may stem 
from the various forms such inducements can take. Inducements to 
contract in any form are not acceptable under Departmental regulations.
    The Department is aware of situations in which school officials, in 
exchange for requiring the school food authority to purchase products 
from a specified contractor, have requested or accepted tickets to 
professional sporting events, contractor paid vacations, funds for 
student scholarships, and school building and athletic venue 
improvements. These situations have occurred primarily in two settings: 
First, in long term beverage contracting and second, in food service 
management company procurements.

G. Long Term Beverage Contracting

    A number of schools have entered into long term beverage contracts, 
particularly for the acquisition of carbonated soft drinks and bottled 
water. Generally, these contracts provide financial incentives to the 
school, either in the form of cash payments or improvements to school 
facilities, in exchange for the contractor's right to sell its 
beverages to the school on an exclusive, long-term basis. These 
contracts are usually obtained outside of the nonprofit school food 
service operation and school officials may or may not have followed 
competitive procurement requirements.
    While these incentives may represent improper inducements under 
applicable Department regulations, as long as nonprofit school food 
service resources i.e., cash, labor or other assets are not used to 
support, directly or indirectly, any purchase made under the contract, 
and the school observes the regulatory prohibitions on competitive food 
sales and the sale of foods of minimal nutritional value, the 
Department has no authority over the procurement or operation of these 
contracts.
    However, in some cases, the incentives offered by a potential 
contractor are contingent on the nonprofit school food service 
purchasing beverages under the contract. In these cases, a conflict of 
interest has arisen, applicable procurement requirements have been 
violated and the Department does have an interest in the contract. 
While the nonprofit school food service may be bound by the terms of 
the contract, all direct and indirect costs resulting from the contract 
would be unallowable nonprofit school food service account expenses. On 
the other hand, if the nonprofit school food service is included in a 
properly procured long term beverage contract that includes incentives, 
cost allowability is generally not an issue; however, these incentives 
represent program income. The full value of all incentives (cash and 
noncash) would be used to determine the amount of program income 
resulting from the contract. This full value of these incentives is 
used to compute the amount of the program income that is allocated and 
deposited into the nonprofit school food service account. Failure to 
provide the nonprofit school food service with its allocated share of 
noncash incentives (i.e., athletic equipment, classroom improvements, 
score boards, etc.) would circumvent the proper allocation of program 
income to the nonprofit school food service and would be a violation of 
existing Department regulations, 7 CFR 3016.25 and 3019.24.

H. Food Service Management Companies and Procurement

    In the area of food service management company procurements, we are 
aware of situations in which potential bidders have offered gifts to 
school officials or cash payments to the school upon execution of the 
contract. In some cases these payments were never requested, while in 
other cases, some school officials have required payment at the start 
of the contract in exchange for contract award; and in still others, 
the payment is offered as an advance on a guaranteed return provision 
of the contract. In all of these cases, whether or not the receipt of 
funds is a factor in awarding the contract, the payment creates the 
appearance of a prohibited conflict of interest.
    The Department is not proposing to add regulatory requirements to 
address these issues since existing regulations already require 
compliance with ethics and integrity requirements. However, the 
Department is seeking public comments to determine if there is a need 
for us to publish a rule on ethics and integrity for these situations.

I. Regulatory Consistency

    The procurement and contract requirements and consequences for 
failure to comply with program regulations are not consistently 
addressed in the National School Lunch, School Breakfast and Special 
Milk Program regulations. This proposed rule makes changes to School 
Breakfast Program and the Special Milk Program regulations to make the 
procurement and contracting requirements and the consequences for 
failure to comply with program regulations consistent with the National 
School Lunch program regulations.

J. Definition of Nonprofit School Food Service Account

    The phrase ``nonprofit school food service account'' is used by 
school food authorities, State agencies and the Department to describe 
the books and records maintained for the nonprofit school food service 
pursuant to Sec. Sec.  210.19(a)(2) and 220.13(i). We are proposing to 
add a definition of nonprofit school food service account to codify 
this commonly used term. This new definition does not create any new 
requirements and does not require creation of a separate bank account. 
In the Special Milk Program, the phrase ``nonprofit milk program'' is 
used instead of nonprofit school food service. For the Special Milk 
Program, the proposed definition of nonprofit school food service 
account is modified accordingly.

III. Procedural Matters

A. Executive Order 12866

    This proposed rule has been determined to be not significant and 
therefore was not reviewed by the Office of Management and Budget (OMB) 
under Executive Order 12866.

B. Regulatory Flexibility Act

    This proposed rule has been reviewed with regard to the 
requirements of the Regulatory Flexibility Act (5 U.S.C. 601-612). 
Roberto Salazar, Administrator for the Food and Nutrition Service, has 
certified that this proposed rule would not have a significant economic 
impact on a substantial number of small entities. This proposed rule 
would simplify school food authority administrative procedures by 
clarifying procurement requirements so that all cost reimbursable 
contracts or cost reimbursable provisions of contracts are bid in a 
consistent manner. The U.S. Department of Agriculture does not 
anticipate any significant fiscal impact that would result from 
implementation of this proposed rulemaking.

C. Public Law 104-4

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of

[[Page 78345]]

their regulatory actions on State, local, and tribal governments and 
the private sector. Under section 202 of the UMRA, the Food and 
Nutrition Service generally prepares a written statement, including a 
cost-benefit analysis, for proposed and final rules with ``Federal 
mandates'' that may result in expenditures to State, local, or tribal 
governments, in the aggregate, or to the private sector, of $100 
million or more in any one year. When such a statement is needed for a 
rule, section 205 of the UMRA generally requires the Food and Nutrition 
Service to identify and consider a reasonable number of regulatory 
alternatives and adopt the least costly, more cost-effective or least 
burdensome alternative that achieves the objectives of the rule.
    This proposed rule contains no Federal mandates (under regulatory 
provisions of Title II of the UMRA) for State, local, and tribal 
governments or the private sector of $100 million or more in any one 
year. Thus, this proposed rule is not subject to the requirements of 
sections 202 and 205 of the UMRA.

D. Executive Order 12372

    The National School Lunch Program, Special Milk Program and the 
School Breakfast Program, which are listed in the Catalog of Federal 
Domestic Assistance under Nos. 10.555, 10.556, and 10.553, 
respectively, are subject to the provisions of Executive Order 12372, 
which requires intergovernmental consultation with State and local 
officials. (See 7 CFR part 3015, subpart V, and final rule related 
notice published at 48 FR 29114, June 24, 1983.)

E. Executive Order 13132

    Executive Order 13132 requires Federal agencies to consider the 
impact of their regulatory actions on State and local governments. 
Where such actions have federalism implications, agencies are directed 
to provide a statement for inclusion in the preamble to the regulations 
describing the agency's considerations in terms of the three categories 
called for under section (6)(b)(2)(B) of Executive Order 13132. The 
Food and Nutrition Service (FNS) has considered the impact of this rule 
on State and local governments and has determined that this rule would 
not have federalism implications. This proposed rule would not impose 
substantial or direct compliance costs on State and local governments. 
Therefore, under section 6(b) of the Executive Order, a federalism 
summary impact statement is not required.

F. Executive Order 12988

    This proposed rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. This proposed rule, when finalized, would have 
preemptive effect with respect to any State or local laws, regulations 
or policies which conflict with its provisions or which would otherwise 
impede its full implementation. This proposed rule would not have 
retroactive effect unless so specified in the DATES section of the 
final rule preamble. Prior to any judicial challenge to the provisions 
of this rule or the application of the provisions, all applicable 
administrative procedures must be exhausted. In the National School 
Lunch Program and the School Breakfast Program, the administrative 
procedures are set forth under the following regulations: (1) School 
food authority appeals of State agency findings as a result of an 
administrative review must follow State agency hearing procedures as 
established pursuant to 7 CFR 210.18(q), 215.13(g) and 220.14(e); (2) 
school food authority appeals of FNS findings as a result of an 
administrative review must follow FNS hearing procedures as established 
pursuant to 7 CFR 210.30(d)(3) and 220.14(g); and (3) State agency 
appeals of State Administrative Expense fund sanctions (7 CFR 
235.11(b)) must follow the FNS administrative review process as 
established pursuant to 7 CFR 235.11(f).

G. Civil Rights Impact Analysis

    Under Department Regulation 4300-4, Civil Rights Impact Analysis, 
FNS has reviewed this proposed rule to identify and address any major 
civil rights impacts the proposed rule might have on minorities, women, 
and persons with disabilities. After a careful review of the rule's 
intent and provisions, FNS has determined that this rule would not in 
any way limit or reduce participants' ability to participate in the 
Child Nutrition Programs on the basis of an individual's or group's 
race, color national origin, sex, age or disability. FNS found no 
factors that would negatively and disproportionately affect any group 
of individuals.

H. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 35; see 5 CFR 
part 1320) requires that the Office of Management and Budget (OMB) 
approve all collections of information by a Federal agency from the 
public before they can be implemented. Respondents are not required to 
respond to any collection of information unless it displays a current 
valid OMB control number. This proposed rule contains information 
collections that are subject to review and approval by OMB; therefore, 
in accordance with the Paperwork Reduction Act of 1995, this notice 
invites the general public and other agencies to comment on the 
proposed information collection. Written comments on this proposed 
information collection must be received on or before February 28, 2005.
    Comments concerning the information collection aspects of this 
proposed rule should be sent to the Office of Information and 
Regulatory Affairs, OMB, Room 10235, New Executive Office Building, 
Washington, DC 20503, Attention: Desk Officer for the Food and 
Nutrition Service. A copy of these comments may also be sent to Mr. 
Terry Hallberg at the address listed in the ADDRESSES section of this 
preamble. Commenters are asked to separate their comments on the 
information collection requirements from their comments on the 
remainder of the proposed rule.
    OMB is required to make a decision concerning the collection of 
information contained in this proposed regulation between 30 to 60 days 
after the publication of this document in the Federal Register. 
Therefore, a comment to OMB is best assured of having full 
consideration if OMB receives it within 30 days of publication. This 
does not affect the deadline for the public to comment to the 
Department on the proposed regulation.
    Comments are invited on: (a) Whether the collection of information 
is necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility; (b) the 
accuracy of the agency's estimate of the burden of the collection of 
information, including the validity of the methodology and assumptions 
used; (c) ways to enhance the quality, utility, and clarity of the 
information to be collected; and (d) ways to minimize the burden of the 
collection of information on those who are to respond, including 
through the use of appropriate automated, electronic, mechanical, or 
other technological collection techniques or other forms of information 
technology.
    The title, description, and respondent description of the 
information collections are shown below with an estimate of the annual 
reporting and recordkeeping burdens. Included in the estimate is the 
time for reviewing instructions, searching existing data sources, 
gathering and maintaining the data needed, and completing and reviewing 
the collection of information. The chart below identifies only the 
burden hours associated with those

[[Page 78346]]

sections of 7 CFR Part 210, National School Lunch Program, 7 CFR Part 
215, Special Milk Program and 7 CFR Part 220, School Breakfast Program. 
These burden hours represent proposed changes to the current reporting 
and recordkeeping requirements and incorporate additional proposed 
requirements.

    Title: 7 CFR Part 210 National School Lunch Program.
    OMB Number: 0584-0006.
    Expiration Date: 07/31/2006.
    Type of Request: Revision of existing collection.
    Abstract: This proposed rule would update the National School Lunch 
Program regulations, 7 CFR Part 210 (OMB Number: 0584-0006) regarding 
the use of federal funds for the provision of meals and milk for school 
children under these programs.
    This proposed rule would prohibit a school food authority from 
using funds in the nonprofit school food service account for 
expenditures made under an improperly procured contract, including any 
cost reimbursable provision of a contract that permits the contractor 
to receive payments in excess of the contractor's actual net allowable 
costs. State agencies would also be responsible for reviewing and 
approving contracts between school food authorities and food service 
management companies prior to their execution.
    The expected result is that regulatory language will ensure optimum 
utilization of funds in the nonprofit school food service account. The 
burden associated with the proposed rules will only affect schools 
participating in the National School Lunch or School Breakfast Programs 
that contract with food service management companies.

                               Estimated Annual Recordkeeping and Reporting Burden
----------------------------------------------------------------------------------------------------------------
                                                  Annual  number
                                     Section            of            Annual      Average burden   Annual burden
                                                    respondents      frequency     per response        hours
----------------------------------------------------------------------------------------------------------------
National School Lunch Program
 State agency review and
 approve procurements between
 school food authority and
 contractor:
    Total existing State        7 CFR 210.19(a).              57              22            .167             207
     agencies.
    Total proposed State        7 CFR 210.19(a).              57              30           4               6,840
     agencies.
School food authority provide
 procurement materials to
 State agency for approval:
    Total existing school food  7 CFR 210.16(c).           1,648               1            .25              412
     authorities.
    Total proposed school food  7 CFR 210.16(a).           1,648               1           1.5             2,487
     authorities.
School Breakfast Program*
----------------------------------------------------------------------------------------------------------------
*The vast majority of schools participating in the SBP also participate in the NSLP. Therefore, the burden
  associated with state agencies and school food authorities contracting for goods and services to operate the
  School Breakfast Program is carried in the NSLP information collection budget:
 Total Existing: 619
 Total Proposed: 9,327
 Change: +8,708

    Title: 7 CFR Part 215 Special Milk Program.
    OMB Number: 0584-0005.
    Expiration Date: 01/31/06.
    Type of Request: Revision of existing collection.
    Abstract: This proposed rule would update the Special Milk Program 
regulations, 7 CFR Part 215 (OMB Number: 0584-0005) regarding the use 
of federal funds for the provision of meals and milk for school 
children under these programs. This proposed rule would prohibit a 
school food authority from using funds in the nonprofit school food 
service account for expenditures made under an improperly procured 
contract, including any cost reimbursable provision of a contract that 
permits the contractor to receive payments in excess of the 
contractor's actual net allowable costs. State agencies would also be 
responsible for reviewing and approving contracts between school food 
authorities and food service management companies prior to their 
execution. The expected result is that regulatory language will ensure 
optimum utilization of funds in the nonprofit school food service 
account. The burden associated with contract review in the proposed 
rule will only affect schools participating in the National School 
Lunch or School Breakfast Programs that contract with food service 
management companies. The burden associated with schools participating 
in the Special Milk Program would be minimal because milk is often the 
sole procured item and the procurement is generally handled at the 
school food authority level. Therefore this burden is also carried in 
the NSLP information collection budget.

    Title: 7 CFR 220 School Breakfast Program. ?>
    OMB Number: 0584-0012.
    Expiration Date: 08/31/07.
    Type of Request: Revision of existing collection.
    Abstract: This proposed rule would update the School Breakfast 
Program Regulations, 7 CFR Part 220, (OMB Number: 0584-0012) regarding 
the use of federal funds for the provision of meals and milk for school 
children under these programs. This proposed rule would prohibit a 
school food authority from using funds in the nonprofit school food 
service account for expenditures made under an improperly procured 
contract, including any cost reimbursable provision of a contract that 
permits the contractor to receive payments in excess of the 
contractor's actual net allowable costs. State agencies would also be 
responsible for reviewing and approving contracts between school food 
authorities and food service management companies prior to their 
execution. The expected result is that regulatory language will ensure 
optimum utilization of funds in the nonprofit school food service 
account. The burden associated with the proposed rules will only affect 
schools participating in the National School Lunch or School Breakfast 
Programs that contract with food service management companies. The vast 
majority of schools participating in the SBP also participate in the 
NSLP. Therefore, the burden associated with state agencies and school 
food authorities contracting for goods and services to operate the 
School Breakfast Program is carried in the NSLP information collection 
budget.

I. Government Paperwork Elimination Act Compliance

    FNS is committed to compliance with the Government Paperwork 
Elimination

[[Page 78347]]

Act, which requires Government agencies to provide the public with the 
option of submitting information or transacting business electronically 
to the maximum extent possible.

List of Subjects

7 CFR Part 210

    Children, Commodity School Program, Food assistance programs, 
Grants programs-social programs, National School Lunch Program, 
Nutrition, Reporting and recordkeeping requirements, Surplus 
agricultural commodities.

7 CFR Part 215

    Food assistance programs, Grant programs-education, Grant programs-
health, Infants and children, Milk, Reporting and recordkeeping 
requirements.

7 CFR Part 220

    Children, Food assistance programs, Grant programs-social programs, 
Nutrition, Reporting and recordkeeping requirements, School Breakfast 
Program.

    Accordingly, 7 CFR Parts 210, 215 and 220 are proposed to be 
amended as follows:

PART 210--NATIONAL SCHOOL LUNCH PROGRAM

    1. The authority citation for Part 210 continues to read as 
follows:

    Authority: 42 U.S.C. 1751-1760, 1779.

    2. In Sec.  210.2, add, in alphabetical order, the definitions of 
``Applicable credits'' ``Contractor'', and ``Nonprofit school food 
service account'' to read as follows:


Sec.  210.2  Definitions.

* * * * *
    Applicable credits shall have the meaning established in Office of 
Management and Budget Circulars, A-87, C(4) and A-122, Attachment A, 
A(5), respectively. For availability of OMB circulars referenced in 
this definition see 5 CFR 1310.3.
* * * * *
    Contractor means a commercial enterprise, public or nonprofit 
private organization or individual that enters into a contract with a 
school food authority.
* * * * *
    Nonprofit school food service account means the restricted account 
in which all of the revenue from all food service operations conducted 
by the school food authority principally for the benefit of school 
children is retained and used only for the operation or improvement of 
the nonprofit school food service.
* * * * *
    3. In Sec.  210.16:
    a. Amend paragraph (a)(7) by removing the word ``and'' at the end 
of the paragraph;
    b. Amend paragraph (a)(8) by removing the period at the end of the 
paragraph and adding a semicolon in its place;
    c. Add paragraphs (a)(9) and (a)(10) at the end; and
    d. Amend paragraph (b)(1) by removing the second sentence and 
adding a new sentence in its place.
    The additions read as follows:


Sec.  210.16  Food service management companies.

    (a) * * *
    (9) Obtain written approval of invitations for bids and requests 
for proposals prior to their issuance when required by the State 
agency. The school food authority must incorporate all State agency 
required changes to its solicitation documents prior to issuance of 
those documents; and
    (10) Ensure that, prior to the execution of any contract or 
amendment to an existing food service management company contract, the 
State agency has reviewed and approved the contract terms and the 
school food authority has incorporated all State agency required 
changes into the contract or amendment. Any changes made by the school 
food authority or a food service management company to a State agency 
pre-approved prototype contract or State agency approved contract term 
must be approved in writing by the State agency prior to execution of 
the contract. To obtain approval of any proposed contract or contract 
modification, the school food authority must submit all procurement 
documents, including responses submitted by potential contractors, if 
requested by the State agency.
    (b) * * *
    (1) * * * A school food authority with no capability to prepare a 
cycle menu may, with State agency approval, require that each food 
service management company include a 21-day cycle menu, developed in 
accordance with the provisions of Sec.  210.10, with its bid or 
proposal. * * *
* * * * *
    4. In Sec.  210.19:
    a. Amend paragraph (a)(2) by adding two new sentences between 
sentences two and three; and
    b. Amend paragraph (a)(6) by removing the first sentence and adding 
two sentences in its place.
    The additions read as follows:


Sec.  210.19  Additional responsibilities.

    (a) * * *
    (2) * * * All costs resulting from contracts that do not meet the 
requirements of this part are unallowable nonprofit school food service 
account expenses. When the school food authority fails to incorporate 
State agency required changes to solicitation or contract documents, 
all costs resulting from the subsequent contract award are unallowable 
charges to the nonprofit school food service account. * * *
* * * * *
    (6) * * * Each State agency shall annually review each contract 
between any school food authority and food service management company 
to ensure compliance with all the provisions and standards set forth in 
this part prior to the execution of the contract by either party. Each 
State agency shall review each contract amendment between a school food 
authority and food service management company to ensure compliance with 
all the provisions and standards set forth in this part prior to the 
execution of the amended contract by either party. * * *
* * * * *
    5. In Sec.  210.21:
    a. Revise paragraph (a);
    b. Amend paragraph (b) by removing the words ``7 CFR part 3015'' 
and adding, in their place, the words ``this part and parts 3015, 3016 
and 3019 of this title, as applicable,'';
    c. Revise paragraph (c); and
    d. Add a new paragraph (e).
    The revisions and addition read as follows:


Sec.  210.21  Procurement.

    (a) General. State agencies and school food authorities shall 
comply with the requirements of this part and parts 3015, 3016 and 3019 
of this title, as applicable, and applicable Office of Management and 
Budget Circulars, concerning the procurement of all goods and services 
with nonprofit school food service account funds.
* * * * *
    (c) Procedures. The State agency or school food authority may use 
its own procurement procedures which reflect applicable State and local 
laws and regulations, provided that procurements made with nonprofit 
school food service account funds adhere to the standards set forth in 
this part and Sec. Sec.  3016.36(b) through 3016.36(i), 3016.60 and 
3019.40 through 3019.48 of this title, as applicable, and in the 
applicable Office of Management and Budget Circulars. These 
requirements are adopted by FNS to ensure that all supplies, food,

[[Page 78348]]

equipment and services are obtained for the program in compliance with 
applicable laws and executive orders.
    (1) Pre-issuance review requirement. The State agency may impose a 
pre-issuance review requirement on a school food authority's proposed 
procurement. The school food authority must make available, upon 
request of the State agency, its procurement documents, including but 
not limited to solicitation documents, specifications, evaluation 
criteria, procurement procedures, proposed contracts and contract 
terms. School food authorities shall comply with State agency requests 
for changes to procurement procedures and solicitation and contract 
documents to ensure that to the State agency's satisfaction, such 
procedures and documents reflect applicable procurement and contract 
requirements and the requirements of this part.
    (2) Prototype solicitation documents and contacts. The school food 
authority must obtain the State agency's prior written approval for any 
change made to prototype solicitation or contract documents prior to 
issuance of the revised solicitation documents or execution of the 
revised contract.
    (3) Prohibited expenditures. No expenditure may be made from the 
nonprofit school food service account for any cost resulting from a 
procurement failing to meet the requirements of this part.
* * * * *
    (e) Cost reimbursable contracts. (1) Required provisions. The 
school food authority must include the following provisions in all cost 
reimbursable contracts, including contracts with cost reimbursable 
provisions, and in solicitation documents prepared to obtain offers for 
such contracts:
    (i) Allowable costs will be paid to the contractor net of all 
discounts, rebates and other applicable credits accruing to or received 
by the contractor or any assignee under the contract, to the extent 
those credits are allocable to the allowable portion of the costs 
billed to the school food authority;
    (ii) The contractor must separately identify for each cost 
submitted for payment to the school food authority the amount of that 
cost that is allowable (can be paid from the nonprofit school food 
service account) and the amount that is unallowable (cannot be paid 
from the nonprofit school food service account);
    (iii) The contractor's determination of its allowable costs must be 
made in compliance with the applicable Departmental and Program 
regulations and Office of Management and Budget cost circulars;
    (iv) The contractor must individually identify discounts, rebates 
and other applicable credits on all bills and invoices presented to the 
school food authority for payment; and
    (v) The contractor must maintain documentation of costs and 
discounts, rebates and other applicable credits, and must furnish such 
documentation upon request to the school food authority, the State 
agency, or the Department.
    (2) Prohibited expenditures. No expenditure may be made from the 
nonprofit school food service account for any cost resulting from a 
cost reimbursable contract that fails to include the requirements of 
this section, nor may any expenditure be made from the nonprofit school 
food service account that permits or results in the contractor 
receiving payments in excess of the contractor's actual, net allowable 
costs.
    6. In Sec.  210.24, amend the first sentence by removing the word 
``Sec.  3015.103'' and adding in its place the words ``Departmental 
regulations at Sec. Sec.  3016.43 and 3019.62 of this title''.
* * * * *

PART 215--SPECIAL MILK PROGRAM

    1. The authority citation for Part 215 continues to read as 
follows:

    Authority: 42 U.S.C. 1772 and 1779.

    2. In Sec.  215.2, add paragraph (c), previously reserved, and 
paragraphs (e-3) and (r-1) to read as follows:


Sec.  215.2  Definitions.

* * * * *
    (c) Applicable credits shall have the meaning established in Office 
of Management and Budget Circulars, A-87, C(4) and A-122, Attachment A 
A(5), respectively. For availability of OMB circulars referenced in 
this definition, see 5 CFR 1310.3.
* * * * *
    (e-3) Contractor means a commercial enterprise, public or nonprofit 
private organization or individual that enters into a contract with a 
school food authority.
* * * * *
    (r-1) Nonprofit school food service account means the restricted 
account in which all of the revenue from the nonprofit milk service 
maintained for the benefit of children is retained and used only for 
the operation or improvement of the nonprofit milk service.
* * * * *
    3. In Sec.  215.14a;
    a. Revise paragraph (a);
    b. Amend paragraph (b) by removing the words ``OMB Circular A-102 
and 7 CFR part 3015,'' and adding, in their place, the words ``this 
part and parts 3015, 3016 and 3019 of this title, as applicable,'';
    c. Revise paragraph (c); and
    d. Add a new paragraph (d).
    The revisions and addition read as follows:


Sec.  215.14a  Procurement standards.

    (a) General. State agencies and school food authorities shall 
comply with the requirements of this part and parts 3015, 3016 and 3019 
of this title, as applicable, and applicable Office of Management and 
Budget Circulars, concerning the procurement of all goods and services 
with nonprofit school food service account funds.
* * * * *
    (c) Procedures. The State agency or school food authority may use 
its own procurement procedures which reflect applicable State or local 
laws and regulations, provided that procurements made with nonprofit 
school food service account funds adhere to the standards set forth in 
this part and Sec. Sec.  3016.36(b) through 3016.36(i), 3016.60 and 
3019.40 through 3019.48 of this title, as applicable, and in the 
applicable Office of Management and Budget Circulars. These 
requirements are adopted by FNS to ensure that all supplies, food, 
equipment and services are obtained for the program in compliance with 
applicable laws and executive orders.
    (1) Pre-issuance review requirement. The State agency may impose a 
pre-issuance review requirement on a school food authority's proposed 
procurement. The school food authority must make available, upon 
request of the State agency, its procurement documents, including but 
not limited to solicitation documents, specifications, evaluation 
criteria, procurement procedures, proposed contracts and contract 
terms. School food authorities shall comply with State agency requests 
for changes to procurement procedures and solicitation and contract 
documents to ensure to the State agency's satisfaction, such procedures 
and documents reflect applicable procurement and contract requirements 
and the requirements of this part.
    (2) Prototype solicitation documents and contacts. The school food 
authority must obtain the State agency's prior written approval for any 
change made to prototype solicitation or contract documents prior to 
issuance of the revised solicitation documents or execution of the 
revised contract.
    (3) Prohibited expenditures. No expenditure may be made from the 
nonprofit school food service account for any cost resulting from a

[[Page 78349]]

procurement failing to meet the requirements of this part.
    (d) Cost reimbursable contracts. (1) Required provisions. The 
school food authority must include the following provisions in all cost 
reimbursable contracts, including contracts with cost reimbursable 
provisions, and in solicitation documents prepared to obtain offers for 
such contracts:
    (i) Allowable costs will be paid to the contractor net of all 
discounts, rebates and other applicable credits accruing to or received 
by the contractor or any assignee under the contract, to the extent 
those credits are allocable to the allowable portion of the costs 
billed to the school food authority;
    (ii) The contractor must separately identify for each cost 
submitted for payment to the school food authority the amount of that 
cost that is allowable (can be paid from the nonprofit school food 
service account) and the amount that is unallowable (cannot be paid 
from the nonprofit school food service account);
    (iii) The contractor's determination of its allowable costs must be 
made in compliance with the applicable Departmental and Program 
regulations and Office of Management and Budget cost circulars;
    (iv) The contractor must individually identify all discounts, 
rebates and other applicable credits on all bills and invoices 
presented to the school food authority for payment; and
    (v) The contractor must maintain documentation of costs and 
discounts, rebates and other applicable credits, and must furnish such 
documentation upon request to the school food authority, the State 
agency, or the Department.
    (2) Prohibited expenditures. No expenditure may be made from the 
nonprofit school food service account for any cost resulting from a 
cost reimbursable contract that fails to include the requirements of 
this section, nor may any expenditure be made from the nonprofit school 
food service account that permits or results in the contractor 
receiving payments in excess of the contractor's actual, net allowable 
costs.
    4. Redesignate Sec. Sec.  215.15 through 215.17 as Sec. Sec.  
215.16 through Sec.  215.18, respectively; and add a new Sec.  215.15 
to read as follows:


Sec.  215.15  Withholding payments.

    In accordance with Departmental regulations at Sec. Sec.  3016.43 
and 3019.62 of this title, the State agency shall withhold Program 
payments in whole or in part, to any school food authority which has 
failed to comply with the provisions of this part. Programs payments 
shall be withheld until the school food authority takes corrective 
action satisfactory to the State agency, or gives evidence that such 
corrective actions will be taken, or until the State agency terminates 
the grant in accordance with Sec. Sec.  215.16. Subsequent to the State 
agency's acceptance of the corrective actions, payments will be 
released for any milk served in accordance with the provisions of this 
part during the period the payments were withheld.

PART 220--SCHOOL BREAKFAST PROGRAM

    1. The authority citation for Part 220 continues to read as 
follows:

    Authority: 42 U.S.C. 1773, 1779, unless otherwise noted.

    2. In Sec.  220.2, add paragraphs (a-1), (d-1) and (o-3) to read as 
follows:


Sec.  220.2  Definitions.

* * * * *
    (a-1) Applicable credits shall have the meaning established in 
Office of Management and Budget Circulars, A-87, C(4) and A-122, 
Attachment A, A(5), respectively. For availability of OMB circulars 
referenced in this definition see 5 CFR 1310.3.
* * * * *
    (d-1) Contractor means a commercial enterprise, public or nonprofit 
private organization or individual that enters into a contract with a 
school food authority.
* * * * *
    (o-3) Nonprofit school food service account means the restricted 
account in which all of the revenue from all food service operations 
conducted by the school food authority principally for the benefit of 
school children is retained and used only for the operation or 
improvement of the nonprofit school food service.
* * * * *
    3. In Sec.  220.7, revise paragraph (d) to read as follows:


Sec.  220.7  Requirements for participation.

* * * * *
    (d)(1) Any school food authority (including a State agency acting 
in the capacity of a school food authority) may contract with a food 
service management company to manage its food service operation in one 
or more of its schools. However, no school or school food authority may 
contract with a food service management company to operate an a la 
carte food service unless the company agrees to offer free, reduced 
price and paid reimbursable breakfasts to all eligible children. Any 
school food authority that employs a food service management company in 
the operation of its nonprofit school food service shall:
    (i) Adhere to the procurement standards specified in Sec.  220.16 
when contracting with the food service management company;
    (ii) Ensure that the food service operation is in conformance with 
the school food authority's agreement under the Program;
    (iii) Monitor the food service operation through periodic on-site 
visits;
    (iv) Retain control of the quality, extent, and general nature of 
its food service, and the prices to be charged the children for meals;
    (v) Retain signature authority on the State agency-school food 
authority agreement, free and reduced price policy statement and 
claims;
    (vi) Ensure that all federally donated foods received by the school 
food authority and made available to the food service management 
company accrue only to the benefit of the school food authority's 
nonprofit school food service and are fully utilized therein;
    (vii) Maintain applicable health certification and assure that all 
State and local regulations are being met by a food service management 
company preparing or serving meals at a school food authority facility;
    (viii) Obtain written approval of invitations for bids and requests 
for proposals prior to their issuance when required by the State 
agency. The school food authority must incorporate all State agency 
required changes to its solicitation documents prior to issuance of 
those documents; and
    (ix) Ensure that, prior to the execution of any contract or 
amendment to an existing food service management company contract, the 
State agency has reviewed and approved the contract terms and the 
school food authority has incorporated all State agency required 
changes into the contract or amendment. Any changes made by the school 
food authority or a food service management company to a State agency 
pre-approved prototype contract or State agency approved contract term 
must be approved in writing by the State agency prior to execution of 
the contract. To obtain approval of any proposed contract or contract 
modification, the school food authority must submit all procurement 
documents, including responses submitted by potential contractors, if 
requested by the State agency.
    (2) In addition to adhering to the procurement standards under this 
part, school food authorities contracting with

[[Page 78350]]

food service management companies shall ensure that:
    (i) The invitation to bid or request for proposal contains a 21-day 
cycle menu developed in accordance with the provisions of Sec.  220.8, 
to be used as a standard for the purpose of basing bids or estimating 
average cost per meal. A school food authority with no capability to 
prepare a cycle menu may, with State agency approval, require that each 
food service management company include a 21-day cycle menu, developed 
in accordance with the provisions of Sec.  220.8, with its bid or 
proposal. The food service management company must adhere to the cycle 
for the first 21 days of meal service. Changes thereafter may be made 
with the approval of the school food authority; and
    (ii) Any invitation to bid or request for proposal indicate that 
nonperformance subjects the food service management company to 
specified sanctions in instances where the food service management 
company violates or breaches contract terms. The school food authority 
shall indicate these sanctions in accordance with the procurement 
provisions stated in Sec.  220.16.
    (3) Contracts that permit all income and expenses to accrue to the 
food service management company and ``cost-plus-a-percentage-of-cost'' 
and ``cost-plus-a-percentage-of-income'' contracts are prohibited. 
Contracts that provide for fixed fees such as those that provide for 
management fees established on a per meal basis are allowed. 
Contractual agreements with food service management companies shall 
include provisions which ensure that the requirements of this section 
are met. Such agreements shall also include the following requirements:
    (i) The food service management company shall maintain such records 
as the school food authority will need to support its Claim for 
Reimbursement under this part, and shall, at minimum, report claim 
information to the school food authority promptly at the end of each 
month. Such records shall be made available to the school food 
authority, upon request, and shall be available for a period of 3 years 
from the date of the submission of the final Financial Status Report, 
for inspection and audit by representatives of the State agency, of the 
Department, and of the Government Accountability Office at any 
reasonable time and place. If audit findings have not been resolved, 
the records shall be retained beyond the three-year period (as long as 
required for the resolution of the issues raised by the audit);
    (ii) The food service management company shall have State or local 
health certification for any facility outside the school in which it 
proposes to prepare meals and the food service management company shall 
maintain this health certification for the duration of the contract; 
and
    (iii) No payment is to be made for meals that are spoiled or 
unwholesome at time of delivery, do not meet detailed specifications as 
developed by the school food authority for each food component 
specified in Sec.  220.8, or do not otherwise meet the requirements of 
the contract. Specifications shall cover items such as grade, purchase 
units, style, condition, weight, ingredients, formulations, and 
delivery time.
    (4) The contract between a school food authority and food service 
management company shall be of a duration of no longer than 1 year and 
options for the yearly renewal of the contract shall not exceed 4 
additional years. All contracts shall include a termination clause 
whereby either party may cancel for cause with 60-day notification.
* * * * *
    4. In Sec.  220.16,
    a. Revise paragraph (a);
    b. Amend paragraph (b) by removing the words ``OMB Circular A-102 
and 7 CFR 3015'' and adding in their place the words ``this part and 
parts 3015, 3016 and 3019 of this title, as applicable'';
    c. Revise paragraph (c); and
    d. Add paragraph (e).
    The revisions and addition read as follows:


Sec.  220.16  Procurement standards.

    (a) General. State agencies and school food authorities shall 
comply with the requirements of this part and parts 3015, 3016 and 3019 
of this title, as applicable, and applicable Office of Management and 
Budget Circulars, concerning the procurement of all goods and services 
with nonprofit school food service account funds.
* * * * *
    (c) Procedures. The State agency or school food authority may use 
its own procurement procedures which reflect applicable State and local 
laws and regulations, provided that procurements made with nonprofit 
school food service account funds adhere to the standards set forth in 
this part and Sec. Sec.  3016.36(b) through 3016.36(i), 3016.60 and 
3019.40 through 3019.48 of this title, as applicable, and the 
applicable Office of Management and Budget Circulars. These 
requirements are adopted by FNS to ensure that all supplies, food, 
equipment and services are obtained for the program in compliance with 
applicable laws and executive orders.
    (1) Pre-issuance review requirement. The State agency may impose a 
pre-issuance review requirement on a school food authority's proposed 
procurement. The school food authority must make available, upon 
request of the State agency, its procurement documents, including but 
not limited to solicitation documents, specifications, evaluation 
criteria, procurement procedures, proposed contracts and contract 
terms. School food authorities shall comply with State agency requests 
for changes to procurement procedures and solicitation and contract 
documents to ensure that to the State agency's satisfaction, such 
procedures and documents reflect applicable procurement and contract 
requirements and the requirements of this part.
    (2) Prototype solicitation documents and contracts. The school food 
authority must obtain the State agency's prior written approval for any 
change made to prototype solicitation or contract documents prior to 
issuance of the revised solicitation documents or execution of the 
revised contract.
    (3) Prohibited expenditures. No expenditure may be made from the 
nonprofit school food service account for any cost resulting from a 
procurement failing to meet the requirements of this part.
* * * * *
    (e) Cost reimbursable contracts. (1) Required provisions. The 
school food authority must include the following provisions in all cost 
reimbursable contracts, including contracts with cost reimbursable 
provisions, and in solicitation documents prepared to obtain offers for 
such contracts:
    (i) Allowable costs will be paid to the contractor net of all 
discounts, rebates and other applicable credits accruing to or received 
by the contractor or any assignee under the contract, to the extent 
those credits are allocable to the allowable portion of the costs 
billed to the school food authority;
    (ii) The contractor must separately identify for each cost 
submitted for payment to the school food authority the amount of that 
cost that is allowable (can be paid from the nonprofit school food 
service account) and the amount that is unallowable (cannot be paid 
from the nonprofit school food service account);
    (iii) The contractor's determination of its allowable costs must be 
made in compliance with the applicable Departmental and Program 
regulations and Office of Management and Budget cost circulars;
    (iv) The contractor must individually identify all discounts, 
rebates and other

[[Page 78351]]

applicable credits on all bills and invoices presented to the school 
food authority for payment; and
    (v) The contractor must maintain documentation of costs and 
discounts, rebates, and other applicable credits, and must furnish such 
documentation upon request to the school food authority, the State 
agency, or the Department.
    (2) Prohibited expenditures. No expenditure may be made from the 
nonprofit school food service account for any cost resulting from a 
cost reimbursable contract that fails to include the requirements of 
this section, nor may any expenditure be made from the nonprofit school 
food service account that permits or results in the contractor 
receiving payments in excess of the contractor's actual, net allowable 
costs.
    4. Redesignate Sec. Sec.  220.18 through 220.21 as Sec. Sec.  
220.19 through 220.22, respectively; and add a new Sec.  220.18 to read 
as follows:


Sec.  220.18  Withholding payments.

    In accordance with Departmental regulations at Sec. Sec.  3016.43 
and 3019.62 of this title, the State agency shall withhold Program 
payments, in whole or in part, to any school food authority which has 
failed to comply with the provisions of this part. Programs payments 
shall be withheld until the school food authority takes corrective 
action satisfactory to the State agency, or gives evidence that such 
corrective actions will be taken, or until the State agency terminates 
the grant in accordance with Sec.  220.19. Subsequent to the State 
agency's acceptance of the corrective actions, payments will be 
released for any breakfasts served in accordance with the provisions of 
this part during the period the payments were withheld.

    Dated: December 21, 2004.
Roberto Salazar,
Administrator, Food and Nutrition Service.
[FR Doc. 04-28532 Filed 12-29-04; 8:45 am]
BILLING CODE 3410-30-P