United States: For Government Contractors, 2015 Is In Full Swing: New Cyber-Incident Reporting Requirements, It Acquisition Reform, And Strategic Sourcing Top Developments For The Coming Year

Last Updated: December 22 2014
Article by Keir X. Bancroft and Christina K. Scopin

Contractors with their eyes on hot-button issues such as cybersecurity legislation, information technology (IT) acquisition reform, and strategic sourcing policy have plenty to consider in the 2015 National Defense Authorization Act (NDAA) and a recent policy memorandum issued by Office of Management and Budget (OMB) Administrator Anne Rung. Some key items to consider:

  • Cybersecurity: In 2015, the Department of Defense must issue rules requiring "operationally critical contractors" to report cyber incidents in their network and information systems.
  • IT Acquisition Reform: Under the Federal Information Technology Acquisition Reform Act (FITARA), Chief Information Officers in Federal agencies will take key roles in the acquisition process, which could affect the nature of IT-related acquisitions for years to come.  FITARA also sharpens the Government's FOCUS on strategic sourcing.
  • Strategic Sourcing and Category Management: In an initiative that complements strategic sourcing, OMB has established "category management" as a key Federal acquisition strategy, which will foster Government-wide purchasing of items, such as IT hardware and software, by one source instead of through multiple agencies.

For a broad array of contractors, those "operationally critical contractors" working with the DoD, providers of IT-related supplies and services, and those supplying "categories" of supplies throughout the Federal government, these changes will affect their daily operations and how they market and sell to their Federal customers in 2015 and beyond.

Cybersecurity Reporting Obligations under NDAA Section 1632

Summary

The Department of Defense in 2015 must establish cyber incident reporting procedures for contractors designated as "operationally critical" based on their supply of transportation and logistics services in support of Armed Forces contingency operations. Under the rule, operationally critical contractors must rapidly report "cyber incidents" that actually or have the potential to adversely affect their information, or information systems. Under the NDAA, DoD will develop a process for designating the contractors as "operationally critical contractors," and develop means of assisting contractors with a number of key considerations in the reporting process, including identifying and addressing cyber incidents, protecting trade secrets and other sensitive or proprietary information, and maintaining a limited focus on the disclosure of cyber incident information.

Under Section 1632, the DoD must require that each cyber incident report include:

  • An assessment by the contractor of the effect of the cyber incident on the ability of the contractor to meet the contractual requirements of the Department;
  • The technique or method used in such cyber incident;
  • A sample of any malicious software, if discovered and isolated by the contractor, involved in such cyber incident; and
  • A summary of information compromised by such cyber incident.

Take-Aways

Contractors must consider the upcoming Section 1632 cyber incident reporting requirements in light of a patchwork of existing and projected DoD cybersecurity requirements, including:

  • DoD's existing rule on Safeguarding Unclassified Controlled Technical Information under DFARS 252.204-7012, a requirement incorporated into all DoD contracts, and flowed down to all subcontractors and information services providers;
  • Section 941 of the 2013 NDAA, requiring DoD to promulgate rules for cleared contractors to report successful cyber-penetration of their network or information systems (the rule has not yet been promulgated); and, to the extent applicable,
  • DoD Instructions 8500.01, Cybersecurity, and 8510.01, the Risk Management Framework for Information Technology, which in 2014 replaced the Defense Information Assurance Certification and Accreditation Process.

Changes Implemented By FITARA Under NDAA Section 831 and Beyond

Summary

The NDAA at Section 831 enacts key components of FITARA, which reforms the IT acquisition process. In an effort to streamline Federal IT procurements, Federal civilian agency heads under FITARA are required to give agency Chief Information Officers (CIOs) key roles in planning, budgeting, execution, and reporting on IT purchases, which coincides with their authority for the management, governance, and oversight of agency IT. CIOs will be authorized to approve agency IT budget requests; certify incremental development of agency IT investments; funding for IT services and programs; and will be responsible for appointing CIOs within agency component organizations.

FITARA also emphasizes the Government's focus on strategic sourcing. Section 836 requires new rules in 2015 that will obligate agencies to document their contract files if they purchase services or supplies falling within the Federal Strategic Sourcing Initiative (FSSI), but they choose not to use FSSI for making the purchase. The documentation will need to detail the price and non-price factors differentiating the items offered under the Initiative compared to the source or sources used to make the purchase.

Take-Aways

Given the heightened stature of CIOs under FITARA, contractors should consider the following:

  • Re-calibrate their understanding of the Federal IT procurement process. A contractor used to limiting its interactions to agency acquisition or program offices will need to re-consider the involvement of the CIO, who will possess greater technical knowledge and face many more competing agency priorities in planning for and executing the agency's IT procurement strategy.
  • Consider the potential for shifting IT procurement opportunities. As CIOs seek ways to reduce perceived overlap in IT procurements, contractors may find that follow-on work to their current IT-related contracts fails to appear. Any incumbent contractor would be well-served to inquire if its customer agency will seek to re-procure its IT needs under a similar contract vehicle in the future, or if the CIO has other plans for reducing perceived requirements overlap.

Further, given FITARA's focus on strategic sourcing, contractors should:

  • Explore current and future solutions proposed for purchasing under FSSI, and be aware of proposed rules promulgating FITARA's strategic sourcing requirements. Depending on how the rule is promulgated in 2015, contractors will have an opportunity to make comments for the Government's consideration before it is finalized.

OMB Policy Memorandum: Using "Category Management" to Transform the Marketplace

Summary

Outside of Congress, the OMB mapped out the concept of "category management" as another means of strategically sourcing similar services and items of supply across the Federal government. Under the OMB Policy Memorandum titled "Transforming the Marketplace: Simplifying Federal Procurement to Improve Performance, Drive Innovation, and Increase Savings," category management will be used to reduce duplication in contract awards for the same or similar goods and services, in many cases to the same contractor, across various agencies.

Category management will focus on streamlining and strategically sourcing "commonly purchased goods and services" using common categories beyond those under the FSSI, such as IT hardware and IT software for example. The OMB explains common categories will facilitate transparency and encourage the exchange of best buying practices, performance standards and assessments, and other key contract information among agencies. Importantly, the memorandum also directs that "[e]ach category will be led by a senior Government executive who is a true expert in the category and who will develop a Government-wide strategy to drive improved performance."

In addition to category management, the OMB in 2015 will develop a plan to recruit the Government's first "Vendor Manager" for top IT commercial contractors. This will address a system where "[r]elationships with vendors are still managed individually across thousands of procurement units[,]" and will mirror[] other governments and industry, who manage their vendor relationships as a single enterprise."

Take-Aways

The OMB's Policy Memorandum should trigger a few considerations from contractors:

  • Consider areas of potential consolidation into singular categories. While the effects may not be immediate, category management may impact the way government contractors target contracting opportunities and develop responsive, competitive proposals. For example, the consolidation of various goods and services under common categories will require refocused business development efforts directed towards individuals with deep technical understanding of the subject goods and services.
  • Consider the effects of increased transparency. As contracting agencies seek to increase transparency in performance assessments and service/product pricing, a contractor will need to revisit its business strategy. With purchasing for a product centralized under one category, the contractor may have to re-think its teaming partners to ensure it is effectively positioned to provide competitive products. Further, the contractor will have to re-consider its pricing strategy if procurement officials will have access to pricing data for similar products across Federal agencies.
  • IT contractors should pay particular attention to OMB's effort to establish a single Vendor Manager. The outcome could affect many IT contractors' relationships with their federal counterparts in 2015 and beyond.

Venable's Government Contracts Practice Group will continue to monitor these developments in the coming year. For more information on how the new provisions in the 2015 NDAA or the OMB's latest policy memorandum might impact your business, please contact Keir Bancroft, Christina Scopin, or another member of Venable's Government Contracts Practice Group.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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