7 CFR Parts 210, 215, & 220, Procurement Requirements

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Proposed Rules

Federal Register
Vol. 69, No. 250
Thursday, December 30, 2004

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.

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
Food and Nutrition Service,
USDA.
ACTION: Proposed rule.
AGENCY:

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.

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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:
DATES:

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

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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

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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

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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

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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-ofcost 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 costreimbursable 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

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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

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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.

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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,

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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 preapproved 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

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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 preapproved 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

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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

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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

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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

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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
§§ 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

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Federal Register / Vol. 69, No. 250 / Thursday, December 30, 2004 / Proposed Rules
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.

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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

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78345

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

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Federal Register / Vol. 69, No. 250 / Thursday, December 30, 2004 / Proposed Rules

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 of
respondents

Section
National School Lunch Program State agency
review and approve procurements between
school food authority and contractor:
Total existing State agencies .......................
Total proposed State agencies ....................
School food authority provide procurement materials to State agency for approval:
Total existing school food authorities ..........
Total proposed school food authorities .......
School Breakfast Program*

Annual
frequency

7 CFR 210.19(a) ..........
7 CFR 210.19(a) ..........

57
57

22
30

7 CFR 210.16(c) ..........
7 CFR 210.16(a) ..........

1,648
1,648

1
1

Average burden
per response

Annual burden
hours

.167
4

207
6,840

.25
1.5

412
2,487

*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

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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

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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

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Federal Register / Vol. 69, No. 250 / Thursday, December 30, 2004 / Proposed Rules
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 programshealth, 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 § 210.2, add, in alphabetical
order, the definitions of ‘‘Applicable
credits’’ ‘‘Contractor’’, and ‘‘Nonprofit
school food service account’’ to read as
follows:
§ 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

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only for the operation or improvement
of the nonprofit school food service.
*
*
*
*
*
3. In § 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:
§ 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 § 210.10, with its
bid or proposal. * * *
*
*
*
*
*
4. In § 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:

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78347

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 § 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:
§ 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 §§ 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,

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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 preissuance 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;

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(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 § 210.24, amend the first
sentence by removing the word
‘‘§ 3015.103’’ and adding in its place the
words ‘‘Departmental regulations at
§§ 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 § 215.2, add paragraph (c),
previously reserved, and paragraphs (e–
3) and (r–1) to read as follows:
§ 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 § 215.14a;
a. Revise paragraph (a);
b. Amend paragraph (b) by removing
the words ‘‘OMB Circular A–102 and 7

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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:
§ 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 §§ 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 preissuance 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

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Federal Register / Vol. 69, No. 250 / Thursday, December 30, 2004 / Proposed Rules
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 §§ 215.15 through
215.17 as §§ 215.16 through § 215.18,
respectively; and add a new § 215.15 to
read as follows:
§ 215.15

Withholding payments.

In accordance with Departmental
regulations at §§ 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

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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 §§ 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 § 220.2, add paragraphs (a–1),
(d–1) and (o–3) to read as follows:
§ 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 § 220.7, revise paragraph (d) to
read as follows:

§ 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

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78349

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 § 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

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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 § 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
§ 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
§ 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

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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 § 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 § 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:
§ 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 §§ 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.

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(1) Pre-issuance review requirement.
The State agency may impose a preissuance 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

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Federal Register / Vol. 69, No. 250 / Thursday, December 30, 2004 / Proposed Rules
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 §§ 220.18 through
220.21 as §§ 220.19 through 220.22,
respectively; and add a new § 220.18 to
read as follows:
§ 220.18

Withholding payments.

In accordance with Departmental
regulations at §§ 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 § 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

DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Part 1124
[Docket No. AO–368–A30; DA–01–08–PNW]

Milk in the Pacific Northwest Marketing
Area; Decision on Proposed
Amendments to Marketing Agreement
and to Order
AGENCY:

Agricultural Marketing Service,

USDA.

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ACTION:

Proposed rule.

This document proposes to
adopt as a final rule, order language
contained in the interim final rule
published in the Federal Register on
January 12, 2004, concerning pooling
provisions of the Pacific Northwest
Federal milk order. This document also
sets forth the final decision of the
Department and is subject to approval
by producers. Specifically, the final
decision adopts an amendment that
would continue to amend the Producer
milk provision which will eliminate the
ability to simultaneously pool the same
milk on the order and on a Stateoperated order that provides for
marketwide pooling.

SUMMARY:

FOR FURTHER INFORMATION CONTACT:

Gino M. Tosi, Marketing Specialist,
USDA/AMS/Dairy Programs, Order
Formulation and Enforcement Branch,
Room 2968, 1400 Independence
Avenue, SW., STOP 0231, Washington,
DC 20250–0231, (202) 690–1366, e-mail
address [email protected].
This
administrative action is governed by the
provisions of sections 556 and 557 of
Title 5 of the United States Code and
therefore is excluded from the
requirements of Executive Order 12866.
These proposed amendments have
been reviewed under Executive Order
12988, Civil Justice Reform. This
proposed rule is not intended to have a
retroactive effect. If adopted, this
proposed rule will not preempt any
state or local laws, regulations, or
policies, unless they present an
irreconcilable conflict with this rule.
The Agricultural Marketing
Agreement Act of 1937, as amended (7
U.S.C. 601–674), provides that
administrative proceedings must be
exhausted before parties may file suit in
court. Under Section 608c(15)(A) of the
Act, any handler subject to an order may
request modification or exemption from
such order by filing with the Secretary
a petition stating that the order, any
provision of the order, or any obligation
imposed in connection with the order is
not in accordance with the law. A
handler is afforded the opportunity for
a hearing on the petition. After a
hearing, the Secretary would rule on the
petition. The Act provides that the
district court of the United States in any
district in which the handler is an
inhabitant, or has its principal place of
business, has jurisdiction in equity to
review the Secretary’s ruling on the
petition, provided a bill in equity is
filed not later than 20 days after the date
of the entry of the ruling.

SUPPLEMENTARY INFORMATION:

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Regulatory Flexibility Act and
Paperwork Reduction Act
In accordance with the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.), the
Agricultural Marketing Service has
considered the economic impact of this
action on small entities and has certified
that this proposed rule will not have a
significant economic impact on a
substantial number of small entities. For
the purpose of the Regulatory Flexibility
Act, a dairy farm is considered a ‘‘small
business’’ if it has an annual gross
revenue of less than $750,000, and a
dairy products manufacturer is a ‘‘small
business’’ if it has fewer than 500
employees. For the purposes of
determining which dairy farms are
‘‘small businesses,’’ the $750,000 per
year criterion was used to establish a
production guideline of 500,000 pounds
per month. Although this guideline does
not factor in additional monies that may
be received by dairy producers, it
should be an inclusive standard for
most ‘‘small’’ dairy farmers. For
purposes of determining a handler’s
size, if the plant is part of a larger
company operating multiple plants that
collectively exceed the 500-employee
limit, the plant will be considered a
large business even if the local plant has
fewer than 500 employees.
In the Pacific Northwest Federal milk
order, 805 of the 1,164 dairy producers
(farmers), or about 69 percent, whose
milk was pooled under the Pacific
Northwest Federal milk order at the
time of the hearing (April 2002), would
meet the definition of small businesses.
On the processing side, 9 of the 20 milk
plants associated with the Pacific
Northwest milk order during April 2002
would qualify as ‘‘small businesses,’’
constituting about 45 percent of the
total.
The adoption of the proposed pooling
standard serves to revise established
criteria that determine the producer
milk that has a reasonable association
with—and consistently serves the fluid
needs of—the Pacific Northwest milk
marketing area and is not associated
with other marketwide pools concerning
the same milk. Criteria for pooling are
established on the basis of performance
levels that are considered adequate to
meet the Class I fluid needs and by
doing so determine those that are
eligible to share in the revenue that
arises from the classified pricing of
milk. Criteria for pooling are established
without regard to the size of any dairy
industry organization or entity. The
established criteria are applied in an
identical fashion to both large and small
businesses and do not have any
different economic impact on small

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