We are pleased to offer you the inaugural issue of our newsletter, "Government Contracts Legislative and Regulatory Update." Our aim is to keep you up-to-date on legislative and regulatory ‎changes relevant to government contractors.

For decades, we have provided a similar update to the National Contract Management Association for publication in its monthly Contract Management Magazine. Our clients have told us they find the succinctly presented information helpful, so we decided to offer the update directly to our clients and friends.

We hope that you will find it useful and welcome your feedback.

Also, during the month of September, we will have the following two programs in California titled "Protecting your intellectual property: a program presented by Dentons' Government Contracts team." If you are in the area, please join us!

Legislative Update

There were no procurement-related bills introduced in the month of August.

Regulatory Update

DoD issues final rule amending DFARS to prevent counterfeit electronic parts from entering military systems

On August 2, 2016, the Department of Defense (DoD) issued a final rule amending supply chain requirements in the Defense Federal Acquisition Regulation Supplement (DFARS) to require that contracting officers more carefully scrutinize contractors' purchases of electronic parts from third parties. Under the new rule, if a defense contractor's supplier does not meet the trusted source requirements, the contractor itself is responsible for inspecting, testing and authenticating the parts. Although documentation of these additional processes will consume contractor resources, the rule's specific guidance will also save contractors time and effort by helping them map out procedures in the event that a subcontractor is unwilling or unable to fully authenticate a part. Also, if contractors obtain a part from the US government, then the US government will now be solely responsible for its authenticity.

The amendments were built around existing industry standards and best practices for identifying, assessing, addressing and mitigating risks, and represent a multi-year effort aimed at stemming the influx of inferior parts into the DoD supply chain. A draft rule was published in September 2015 implementing changes enacted by the Fiscal Year (FY) 2012 National Defense Authorization Act (NDAA) and amended in the FY 2015 version of the NDAA. By preventing the proliferation of counterfeit parts, the DoD hopes to avoid critical systems failures in the field, thereby protecting the lives and safety of American soldiers and civilians.

While certain Pentagon contractors will benefit from added confidence regarding their supply chain requirements, some concern has arisen that small businesses are not excluded. Substantial administrative burdens in documenting part traceability or performing testing, authentication and inspection arguably will impact small businesses more severely than larger operations. The DoD concluded that counterfeit parts have been deemed such a significant risk that the benefit of avoiding potential part failures outweighs the burden on small businesses. Finally, a related rule makes technical amendments to the DFARS to provide needed editorial changes to implement the amendments. The rule became effective on August 2, 2016. (81 Fed. Reg. 50,635, 8/2/16)

DoD, GSA and NASA issue final rule implementing Fair Pay and Safe Workplaces Executive Order

On August 25, 2016, the DoD, General Services Administration (GSA) and National Aeronautics and Space Administration (NASA) issued a final rule amending the Federal Acquisition Regulation (FAR) to implement Executive Order 13673, Fair Pay and Safe Workplaces, which is intended to increase efficiency and cost savings in federal contracting by improving contractor compliance with labor laws. Specifically, the rule requires that companies bidding on federal contracts or subcontracts of at least $500,000 disclose violations of labor laws, which will be taken into account by contracting officers in making their contract awards. After issuing the proposed rule in May 2015, the FAR Council and the Department of Labor (DOL) received over 12,500 comments. Although the final rule makes several changes to the proposed rule that will notably lessen the compliance burden on contractors, it still imposes substantial compliance obligations.

Specifically, companies seeking federal contracts must disclose any violations occurring within the past three years of 14 federal labor laws and Occupational Safety and Health Administration (OSHA)-approved state plans, under a phased-in approach. In addition to violations resulting in civil judgments and arbitral awards or decisions, companies must also disclose any "administrative merits determinations," including notices or findings following an investigation by relevant enforcement agencies. The final rule also requires that contractors publicly disclose on the System for Award Management (SAM) certain specific information about labor law violations, including the law violated, the case identification number, the date of award or decision, and the name of the body that made the decision.

In addition, the final rule requires contractors to provide their workers "paycheck transparency," notifying non-employees at the start of performance of their status as independent contractors and, with respect to employees, including certain information on the pay stubs they receive each pay period. On contracts worth more than $1 million, contractors also must agree not to impose mandatory arbitration on workers who file Title VII discrimination or sexual harassment claims. It is important to note that subcontractors must disclose labor law violations directly to the DOL rather than to their prime contractors. The rule will become effective on October 25, 2016. (81 Fed. Reg. 58,562, 8/25/16)

DoD issues final rule addressing allowability of costs related to counterfeit electronic parts

On August 30, 2016, the DoD issued a final rule amending the DFARS to implement §885(a) of the FY 2016 NDAA, which expands the safe harbor for allowability of costs of counterfeit or suspect counterfeit electronic parts and any related rework or corrective action. The rule affirms that costs of counterfeit electronic parts, suspect counterfeit electronic parts and rework or corrective action are generally unallowable, but provides that such costs may be allowable if four criteria are met: (i) The contractor has an operational system to detect and avoid counterfeit electronic parts that has been reviewed and approved by the DoD; (ii) the counterfeit electronic parts were provided to the contractor as government property in accordance with DFARS 252.246-7008 (i.e., from an original manufacturer, authorized supplier, supplier that sources parts exclusively from an original manufacturer or an authorized supplier, or a "contractor-approved supplier"); (iii) the contractor discovers the counterfeit electronic parts through inspection and testing, a Government Industry Data Exchange Program (GIDEP) alert or other means; and (iv) the contractor provides the contracting officer and GIDEP written notice within 60 days.

In softening the DoD's heretofore rigid stance on the allowability of costs where contractors unknowingly purchase counterfeit or suspect counterfeit electronic parts, the new rule is consistent with the DoD's recent clarification that contractors' costs of implementing counterfeit electronic parts detection and avoidance systems are generally allowable. See Defense Federal Acquisition Regulation Supplement: Detection and Avoidance of Counterfeit Electronic Parts – Further Implementation (DFARS Case 2014-D005, 81 Fed. Reg. 50,635). However, the safe harbor may currently have limited applicability because costs are only allowable when a contractor has an approved system, and the DoD has been slow to approve contractor systems to date. The rule became effective on August 30, 3016. (81 Fed. Reg. 59,510, 8/30/16)

Commerce and State Department rules harmonizing EAR and ITAR definitions became effective September 1, 2016

On June 3, 2016, both the Department of Commerce (Commerce) Bureau of Industry and Security (BIS) and the Department of State (State) Directorate of Defense Trade Controls (DDTC) issued final rules respectively revising the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR) to, among other things, harmonize certain definitions and enhance clarity and consistency across the regulations.

The objectives of the rules, and of the Administration's Export Control Reform (ECR) initiative generally, are to streamline, clarify and update the regulatory text. BIS and DDTC are seeking to improve the alignment between the language in the EAR and ITAR in instances when both sets of regulations share the same purpose, and when there are differences in purpose, BIS and DDTC seek to reflect those differences more clearly in the regulations. The initiative attempts to enhance U.S. national and economic security, facilitate compliance with export controls, update the controls, and further the goal of reducing unnecessary regulatory burdens on U.S. exporters. Terms receiving updated definitions include "access information," "technology," "required," "foreign person," "proscribed person," "published," results of "fundamental research," "export," "reexport," "release," "transfer," and "transfer (in-country)."

Additionally, the BIS rule revises the "Scope" part of the EAR at §734 to update and clarify the application of controls to electronically transmitted and stored technology and software, including transmission and storage through cloud computing. The significant substantive change spells out the safe-harbor provision exempting from EAR control data that is transmitted over electronic networks in encrypted form. The new EAR §734.18 states that BIS will not treat as an export, reexport, or transfer "sending, taking, or storing" unclassified technology or software that is secured using "end-to-end encryption." In essence, transmission of encrypted data meeting these criteria will not be subject to regulation under the EAR. There is no formal comment period, but public comments are welcome on a continuing basis. The rule became effective September 1, 2016. (81 Fed. Reg. 35,586, 6/3/16)

The definitional changes could have a substantial impact on exporters of items controlled on the Commerce Control List or the United States Munitions List. For example, regarding the definition of "release," formerly the EAR stated that a visual inspection of technology or source code by a foreign person was sufficient by itself to constitute a release of that technology or source code to a foreign person and thereby qualify as a "deemed export" to the home country of that foreign person. Now, under the revised definition of release, the standard is heightened, requiring a "visual or other inspection" of an item that actually reveals technology or source code to the foreign person. BIS explained that the mere act of seeing an item is not necessarily sufficient to constitute a release of the technology required to develop or produce it. Also, a release does not necessarily result from only providing a foreign person with access to controlled equipment, software, or technology in the United States, but oral or written exchanges with a foreign person of technology or source code would constitute a release. DDTC's updated ITAR definition of "release" accomplishes the same narrow tailoring objectives using harmonized terms. This is merely one among many changes that could impact exporters.

Another example relates to the definition of "export." DDTC, in response to comments on a 2015 proposed rule, has notably removed the "physical access" requirement from the definition of "export." Now, theoretical physical access by a foreign person is no longer the test for whether a violation occurred. However, exporters should still be cognizant of the fact that any actual release of technical data will continue to require authorization.

Exporters need to be aware that the EAR and ITAR definitions also still differ in certain significant ways signaling key divergences between the respective regulatory regimes, where the ITAR is fundamentally aimed at imposing stricter controls due to the more sensitive nature of the items controlled therein. Comments on the ITAR amendments were accepted until July 5, 2016. The rule became effective on September 1, 2016. (81 Fed. Reg. 35,611, 6/3/16)

NASA issues final rule clarifying award fee process

On August 1, 2016, NASA issued a final rule revising the NASA FAR Supplement (NFS) to clarify the award fee process. Specifically, the rule adds definitions for "earned award fee" and "unearned award fee" to provide clarity and consistency in how these terms are used in NASA's award fee evaluation process. The rule also provides further management review for final award fee determinations that meet certain criteria and provides clarification regarding the release of source selection information that is included in the Contractor Performance Assessment Reporting System. Finally, the rule adds language to clarify how provisional award fee payments are calculated in the first evaluation period of NASA end-item award fee contracts. The rule became effective on August 31, 2016. (81 Fed Reg. 50,365, 8/1/2016)

State issues final rule making procedural changes to suspension and debarment process

On August 3, 2016, State issued a final rule amending the Department of State Acquisition Regulation to simplify certain procedural aspects of the suspension and debarment process. In addition to simplifying the fact-finding process by allowing a single fact-finding official to be used in lieu of a fact-finding panel, the rule also eliminates specific entitlements and deadlines not required by the FAR. The rule became effective on September 2, 2016. (81 Fed. Reg. 51,125, 8/3/16)

SBA issues final rule amending regulations governing the HUBZone program

On August 4, 2016, the Small Business Administration (SBA) issued a direct final rule amending SBA regulations relating to its Historically Underutilized Business Zones (HUBZone) program to implement §866 of the FY 2016 NDAA. This section authorizes Native Hawaiian Organizations to own HUBZone small business concerns, expands the definition of "base closure area," and authorizes the inclusion of "qualified disaster areas." The purpose of the rule is to mirror the changes the FY 2016 NDAA made to the Small Business Act, and to avoid public confusion and possible misinterpretations of the HUBZone program. The rule will be effective on October 3, 2016 unless significantly adverse comments are received by September 6, 2016, in which case SBA will publish a timely withdrawal of the rule. (81 Fed. Reg. 51,312, 8/4/16)

Commerce and State issue final rules harmonizing destination control statements

On August 17, 2016, Commerce and State issued final rules clarifying rules pertaining to the export of items subject to the EAR and the ITAR, and revising the ITAR and EAR destination control statements to harmonize the language between the respective regulatory regimes. Destination control statements alert recipients of ITAR- or EAR-controlled items of US export control requirements associated with the items. Under the rules, such statements are required to be included on commercial invoices, but are no longer required on the bill of lading, air waybill or other shipping documents. Clarifying language has also been added in the ITAR regarding the use of exemptions to the license requirements and export of items subject to the EAR, when the EAR items are shipped with items subject to the ITAR. The rules will become effective on November 15, 2016. (81 Fed. Reg. 54,721, and 54,732, 8/17/16)

DOL issues final rule implementing Workforce Innovation and Opportunity Act

On August 19, 2016, the DOL issued a final rule to implement Titles I and III of the Workforce Innovation and Opportunity Act (WIOA), which is designed to reform and modernize the nation's workforce development system. Specifically, "the rule provides the framework for changes for statewide and local workforce development systems to increase the employment, retention, earnings, and occupational skill attainment of U.S. workers." WIOA is intended to increase access to and opportunities for employment, education, training and support services for job seekers and workers, with an emphasis on individuals facing barriers to employment. The rule will also implement initiatives to improve the quality and labor-market relevance of workforce investment, education and economic-development efforts. The rule will become effective on October 18, 2016. (81 Fed. Reg. 56,071, 8/19/16)

DoD proposes rule to address acquisition of commercial items

On August 11, 2016, the DoD proposed a rule to amend the DFARS to address requirements relating to federal acquisition of commercial items. The proposed rule is part of DoD's ongoing effort to both provide access to nontraditional defense contractors through a more streamlined acquisition process while simultaneously addressing concerns that contracting officers have sometimes failed to secure "fair and reasonable" prices for commercial item acquisitions. The proposed rule follows a prior DoD effort to implement §831 of the FY 2013 NDAA (80 Fed. Reg. 45,918), which was withdrawn in December 2015 following significant and broad-based criticism from industry and passage of the FY 2016 NDAA.

The current proposed rule would implement §831, §§851 through 853, and §§854 through 857 of the FY 2013 NDAA. Specifically, the rule would include a solicitation provision requiring offerors to submit a written request for a commercial item exception and to provide the contracting officer "information that is adequate for evaluating the reasonableness of the price for this acquisition, including prices at which the same item or similar items have been sold in the commercial market." Currently, in determining whether an offered price is fair and reasonable, the contracting officer considers information from offerors only if the information obtained through market research is insufficient to determine price reasonableness. The proposed rule would impose an immediate demand for information from the contractor that conflicts with the requirement in FAR 15.402 that contracting officers are to first rely on other available data sources before demanding information from the contractor.

The proposed rule would also provide that a contracting officer may presume that a prior commercial item determination made by the DoD shall serve as a determination of commercial item status for subsequent procurements. This presumption is expressly limited to prior commercial item determinations from within the DoD.

Finally, to enhance the DoD's ability to access products and services from cutting-edge firms, the proposed rule would permit DoD contracting officers to treat as commercial items any goods and services provided by nontraditional defense contractors. "A "nontraditional defense contractor" is one that is neither currently performing nor has previously performed any contract or subcontract preceding the DoD's solicitation of sources." Comments must be submitted on or before October 11, 2016. (81 Fed. Reg. 53,101, 8/11/16)

DoD proposes rule to provide DoD with authority over contractor-approved suppliers of electronic parts

On August 2, 2016, the DoD proposed a rule to provide the DoD with authority to approve, review and audit contractor-approved suppliers of electronic parts in accordance with §885(b) of the NDAA for FY 2016. Specifically, the rule would amend the DFARS to implement §885(b) of the FY 2016 NDAA. The amendment does not impose any reporting, recordkeeping or other compliance requirements other than being subject to approval by the DoD. Further, contractors may proceed with the acquisition of electronic parts from contractor-approved suppliers unless otherwise notified by DoD. Comments must be submitted on or before October 3, 2016. (81 Fed. Reg. 50,680, 8/2/16)

DoD proposes rule to facilitate pilot program for streamlining award process for small businesses and nontraditional defense contractors

On August 30, 2016, the DoD proposed a rule to amend the DFARS to provide exceptions from the certified cost and pricing data requirements and from the records examination requirements for certain awards to small business or nontraditional defense contractors. Specifically, the rule would implement §873 of the FY 2016 NDAA, which provides an exception from certified cost and pricing data requirements for contracts valued at less than $7.5 million awarded to small businesses or nontraditional defense contractors pursuant to technical, merit-based selection procedures (i.e., broad agency announcements) or the Small Business Innovation Research (SBIR) program. A "nontraditional defense contractor" is one that is neither currently performing nor has previously performed any contract or subcontract for DoD that is subject to full cost accounting standard (CAS)-coverage for at least the one-year period preceding the DoD's solicitation of sources.

However, the rule would provide authority for the head of the contracting activity to determine that submission of cost and pricing data should be required based on past performance of the entity or analysis of other information specific to an award. These disclosure and reporting exceptions would end on October 1, 2020 as part of a pilot program. Comments must be submitted on or before October 31, 2016. (81 Fed. Reg. 59,594, 8/30/16)

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