United States: Government Contracts Legislative And Regulatory Update - October 2016

The October edition of  "Government Contracts Legislative and Regulatory Update" offers a summary of the relevant changes that took place during the month of September. This update will also be available in Contract Management Magazine, which is published by the National Contract Management Association (NCMA).

We wish to thank our readers for the positive and encouraging feedback we received last month when we launched this monthly newsletter. Our aim is to keep you up-to-date on legislative and regulatory changes relevant to government contractors, so please keep the feedback coming.

Legislative Update

November elections loom over Congress' continued progress on National Defense Authorization Act

The National Defense Authorization Act (NDAA)—H.R. 4909 in the House and S. 2943 in the Senate—is Congress' annual defense policy bill, and one of few remaining pieces of critical legislation on its to-do list during the lame-duck session following the November elections.

The most critical difference between the House and Senate versions of the bill is an $18 billion base defense budget disparity. The House version would allocate $18 billion in Overseas Contingency Operations (OCO) funds, America's war-fighting spending account, to the base defense budget as a technical end-around to avoid: (1) the existing defense spending cap; and (2) a related requirement that any increase above the defense spending cap must be paired with a corresponding increase in domestic spending. Under the House's NDAA framework, the OCO account would be funded through April 30, 2017, requiring Congress to approve a war-funding supplemental early next year. With Republican control of the Senate in 2017 now in jeopardy, many GOP defense hawks are wary of the House's framework, as they fear they may not be in a position to pass the necessary war-funding supplemental next spring without making major domestic spending concessions to Democrats. The Senate's version of the NDAA would fund the OCO account through the end of fiscal year (FY) 2017 (September 30, 2017).

House and Senate Armed Services Committee staff members worked during the July-August recess to resolve many of the key differences between the competing versions of the bill. Despite these efforts, House and Senate conferees were unable to produce a compromise version of the bill before Congress adjourned in September to hit the campaign trail one last time before the November elections. Although an environmental provision relating to the endangered species status of the greater sage grouse was publicized as a primary sticking point that led to the stalling of negotiations on the bill in September, final agreement on the base defense budget level remains the chief obstacle to production of a compromise bill. Conferees did reach a tentative agreement in September to increase the base defense budget by $9 billion, rather than the $18 billion increase included in the House bill, but exactly how the $9 billion will be allocated across Department of Defense (DoD) programs remains unresolved.

With White House veto threats hanging over both versions of the bill, and President Obama focused on legacy-building during the final months of his presidency, it is likely that the President will veto whichever version of the NDAA comes out of conference during Congress's lame-duck session. (The President vetoed the NDAA for FY 2016 in the fall of 2015 before eventually signing it later that year). Although the Senate passed its version of the NDAA this year by a significant veto-proof majority, the House version fell 13 votes shy of a veto-proof majority, so Congress will not be able to override a Presidential veto of the compromise bill. Further complicating passage of a compromise version of the bill is the President's recent decision to maintain a troop level in Afghanistan of 8,400 into 2017, rather than the 5,500 personnel accounted for in the Administration's defense budget request, and the recent deployment of 615 additional US troops to Iraq in preparation for the impending Mosul offensive. 

Several billion dollars in additional funding is required for these troop-level increases in Afghanistan and Iraq, and for an anticipated increase in US military operations against ISIS in Syria. In late September, Secretary of Defense Ash Carter announced that the DoD will send a request for supplemental defense funding to Congress during the lame-duck session in November. The Administration's position is that the supplemental must be paired with a corresponding increase in domestic spending.

The fates of the NDAA and DoD supplemental for Afghanistan, Iraq and Syria will be intertwined, and will depend, in part, on the outcomes of the Congressional and Presidential elections. House Armed Services Committee Ranking Member Adam Smith (D-WA) believes that during the lame-duck session, Congressional appropriators and leadership must first agree on the topline defense and domestic funding levels of a broad FY 2017 spending deal before conferees can complete their work on the NDAA. Although differences remain unresolved in conference and between Congress and the Administration, the NDAA has been signed into law every year for more than 50 straight years, and while continued negotiations and horse-trading must take place after the November elections, ultimately the NDAA will become law before year's end. (H.R. 4909; S. 2943).

House introduces bill to preserve right to protest certain task or delivery orders

On September 15, 2016, Rep. Mark Meadows (R-NC), with Rep. Gerald Connolly (D-VA), introduced the "GAO Civilian Task and Delivery Order Protest Authority Act of 2016." If passed, the bill would strike subparagraph (3) of 41 U.S.C. §4106(f) (Orders – Protests). Subparagraph (3) eliminates a party's ability to protest task or delivery orders past September 30, 2016. Under the current statute, a party may protest the issuance or proposed issuance of a task or delivery order if the task or delivery order is either valued in excess of $10 million or increases the scope, period, or maximum value of the contract under which the task or delivery order is issued. Consequently, if the bill passes, it would preserve the protest right. (H.R. 5995)

Regulatory Update

Final Rules

NARA issues final rule regarding controlled unclassified information

On September 14, 2016, the US National Archives and Records Administration (NARA) issued a final rule regarding controlled unclassified information (CUI). The final rule defines CUI as "information the Government creates or possesses, or that an entity creates or possesses for or on behalf of the Government, that a law, regulation, or Government-wide policy requires or permits an agency to handle using safeguarding or dissemination controls." Based on this new definition, an agency's treatment of information as CUI may be mandatory or permissive, and would give the agency the ability to designate information as CUI provided it is not expressly prevented from doing so.

The final rule's safeguarding standards require agencies to protect CUI "at all times in a manner that minimizes the risk of unauthorized disclosure while allowing timely access by authorized holders." This includes a requirement that agencies ensure that CUI is protected by "non-executive branch entities," including private contractors. The final rule formally provides for the creation and utilization of a CUI Registry to address, among other things, the uniform level of protection required for protection of each subcategory of information. 

The safeguarding standards addressed in the final rule will rely upon the National Institute of Standards and Technology's (NIST) Special Publication (SP) 800-171. According to the final rule, NIST SP 800-171 "defines the requirements necessary to protect CUI Basic on non-Federal information systems" and agencies "must use NIST SP 800-171 when establishing security requirements to protect CUI's confidentiality on non-Federal information systems[.]" The final rule confirms that contractors dealing with CUI will be required to comply with some subset of the standards outlined in NIST SP 800-171, depending upon the classification of the information maintained. A forthcoming Federal Acquisition Regulation (FAR) clause will apply CUI security controls to contractors. The rule will become effective on November 14, 2016. (81 Fed. Reg. 63,324, 09/14/16)

Department of Labor issues final rule establishing paid sick leave for federal contractors

On September 30, 2016, the Department of Labor (DOL) issued a final rule implementing Executive Order 13706, "Establishing Paid Sick Leave for Federal Contractors," which requires certain federal contractors to provide their employees with up to seven days (56 hours) of paid sick leave annually, including paid leave for family care. The DOL estimates that the rule will provide paid sick leave to approximately 1.15 million workers employed by federal contractors.

The final rule describes the categories of contracts and employees now subject to the paid sick leave requirements. The rule applies to new contracts and replacements for expiring contracts that result from solicitations issued on or after January 1, 2017. It applies to four categories of government contracts provided that employees' wages are governed by the Davis-Bacon Act, Service Contract Act or Fair Labor Standards Act: (1) procurement contracts for construction covered by the Davis-Bacon Act; (2) service contracts covered by the Service Contract Act; (3) concessions contracts, including those excluded from coverage under the Service Contract Act; and (4) contracts in connection with federal property or lands and related to offering services for federal employees, their dependents or the general public. The final rule does not apply to contracts for the manufacturing or furnishing of materials, supplies or equipment to the government.

Workers may use paid leave to recover from illness, take care of a sick family member or attend a doctor's visit. Workers may also use paid sick leave for reasons related to domestic violence, sexual assault or stalking. Sick leave will carry over from year to year, but employers are not required to pay out for unused sick leave when employees leave the company. Employers also cannot make the use of sick leave contingent on employees finding a replacement to cover their work. Employees can take up to two consecutive days of sick leave before employers can require a doctor's certificate or other form of certification. Employers cannot interfere with an employee's accrual or use of sick leave.

The final rule also provides requirements and restrictions governing the accrual and use of paid sick leave. Employers have choices in how to best adapt the paid sick leave requirement to their businesses. For example, employers may allow workers to accrue sick leave over time or offer paid sick leave at the beginning of each year for ease of administration. Employers must keep detailed records related to the final rule, including employee data, hours worked, deductions made, notifications of accrued paid sick leave, and dates and amounts of paid sick leave used by employees. Employers must retain these records for three years. The final rule also establishes the procedures applicable to complaints, investigations, remedies and administrative enforcement proceedings. This final rule will become effective on November 29, 2016, but will be applicable only after the effective date of regulations to be issued by the FAR Council. (81 Fed. Reg. 67,598, 09/30/16)

DoD issues final rule shifting burden of proving commerciality away from contractors seeking to protect technical data

On September 23, 2016, the DoD published a final rule reducing the requirement to respond to a contracting officer's challenge to restricted rights regarding the use of technical data by strengthening the presumption of development exclusively at private expense. Previously, a contracting officer's challenge to a contractor's restrictions on the use of technical data relating to a major system was upheld unless the contractor submitted information demonstrating the item was developed exclusively at private expense. The NDAA for FY 2016 changed this practice, which the DoD implemented in the final rule. The major systems rule was narrowed to apply only to major weapon systems. Also, the exception to the major systems rule for commercially available off-the-shelf (COTS) items was expanded to include three exceptions: (1) a commercial subsystem or component of a commercial item major weapon system; (2) a component of a commercial item subsystem; and (3) commercially available off-the-shelf items with modifications of a type customarily available in the commercial marketplace. The new rule shifts the burden to the government to demonstrate that the contractor did not develop a given item exclusively at private expense. This approach reflects the reality that modifying COTS items is a useful practice. The final rule became effective on September 23, 2016. (81 Fed. Reg. 65,565, 09/23/16)

DoD issues final rule prohibiting cost-plus contracting for military construction projects

On September 23, 2016, the DoD issued a final rule that prohibits any form of cost-plus contracting for military construction projects or military family housing projects. In promulgating the final rule, the DoD implemented Section 2801 of the NDAA for FY 2012. Section 2801 prohibits any form of cost-plus contracting for military construction projects or military family housing projects. The final rule specifically prohibits the use of cost-plus-fixed-fee, cost-plus-award-fee and cost-plus-incentive-fee contracts for military construction projects. The final rule became effective on September 23, 2016. (81 Fed. Reg. 65,563, 9/23/16)

FAR Council issues final rule adopting interim rule's prohibition on contracting with companies with delinquent federal tax liability

On September 30, 2016, the FAR Council adopted as final, without changes, an interim rule that prohibits the federal government from entering into a contract with any corporation with delinquent federal tax liability or a felony conviction. The FAR Council published the interim rule, which implements requirements of the Consolidated and Further Continuing Appropriations Act 2015, on December 4, 2015. The final rule does not differ from the interim rule. An exception to this prohibition requires that the agency consider suspension or debarment of the corporation and make a determination that suspension or debarment is not necessary to protect the federal government's interests. The rule also prohibits contract awards in excess of $5 million unless the putative awardee certifies that it (1) filed all required tax returns in the previous three years, (2) has not been convicted of a criminal offense under the Internal Revenue Code and (3) has not been notified of any unpaid federal tax assessment in the previous 90 days. The final rule became effective on September 30, 2016. (81 Fed. Reg. 67,728, 09/30/16)

FAR Council issues final rule to encourage offers from small business concerns and small business teaming arrangements or joint ventures

On September 30, 2016, the FAR Council issued a final rule creating a new FAR clause to encourage offers from small business concerns and small business teaming arrangements or joint ventures. The final rule implements certain sections of the Small Business Jobs Act of 2010. It provides that contracting officers insert a new FAR clause, FAR §52.207-6 (Solicitation of Offers from Small Business Concerns and Small Business Teaming Arrangements or Joint Ventures) in solicitations for multiple-award contracts above the substantial bundling threshold of the agency. The clause states that the government solicits and will consider offers from any responsible source, including small businesses and joint ventures, including small business teaming arrangements. The final rule will become effective on October 31, 2016. (81 Fed. Reg. 67,763, 09/30/16)

FAR Council issues final rule removing DoD-unique requirements for contractors' private security functions outside the US

On September 30, 2016, the FAR Council issued a final rule removing the DoD-unique requirements for contractors performing private security functions outside the US. The final rule amends FAR §25.302 (Contractors performing private security functions outside the US) and the associated clause at FAR §52.225-26. The final rule also adds a definition of "full cooperation" in the FAR clause to affirm that the contract clause does not foreclose any contractor rights arising in the law, the FAR, or the terms of the contract when cooperating with any government-authorized investigation into incidents reported pursuant to the clause. The final rule will become effective on October 31, 2016. (81 Fed. Reg. 67,776, 09/30/16)

FAR Council issues final rule adopting interim rule's cap on allowable employee compensation

On September 30, 2016, the FAR Council adopted as final an interim rule, with certain changes, amending the FAR to revise the allowable cost limit relative to the compensation of contractor and subcontractor employees. Specifically, the final rule amends and reorganizes FAR §31.205-6(p) (Compensation for personal services). The final rule implements Section 702 of the Bipartisan Budget Act of 2013, which sets the initial limitation on allowable contractor and subcontractor employee compensation cost at $487,000 per year, to be adjusted annually to reflect the change in the Employment Cost Index for all workers, as calculated by the Bureau of Labor Statistics. The final rule also implements a narrowly targeted exception to the allowable cost limit for scientists, engineers and other specialists if the agency determines that an exception is needed to ensure it has access to needed skills and capabilities. The final rule became effective on September 30, 2016. (81 Fed. Reg. 67,778, 09/30/16)

Interim Rules

FAR Council issues interim rule prohibiting discrimination connected with compensation information

On September 30, 2016, the FAR Council issued an interim rule prohibiting discrimination connected with compensation information. The interim rule implements Executive Order 13665, "Non-Retaliation for Disclosure of Compensation Information," and a related DoL rule at FAR §22.802 (General), FAR §52.222-26 (Equal Opportunity) and related clauses. It prohibits contractors from discriminating against an employee or applicant for employment because he or she inquired about, discussed or disclosed the compensation of the employee or applicant or another employee or applicant. The prohibition does not apply to instances where an employee has access to compensation information due to essential job functions and discloses that information to any unauthorized party. The interim rule includes definitions, the new prohibition and related clauses. The interim rule became effective on September 30, 2016. Interested parties should submit written comments on or before November 29, 2016. (81 Fed. Reg. 67,732, 09/30/16)

Proposed Rules

GSA issues proposed rule to simplify Multiple Award Schedules (MAS)

On September 9, 2016, the General Services Administration (GSA) issued a proposed rule designed to establish special ordering procedures for order-level materials when placing an order or establishing a blanket purchase agreement (BPA) against a Federal Supply Schedule (FSS) contract. The FSS program does not provide the flexibility to easily acquire order-level materials. The proposed rule would set up special procedures that clarify the authority to acquire order-level materials. For example, the proposed rule would add that offerors are not required to complete the commercial sales practices disclosure requirements for order-level materials. It would also include controls when the use of order-level materials is authorized. The controls include prohibiting order-level materials from being the primary basis of the order; limiting the total value of order-level materials to 33 percent of the overall order value; and requiring the ordering activity contracting officer to determine that all prices for order-level materials are fair and reasonable prior to placing an order, among other controls. Interested parties should submit written comments on or before November 8, 2016. (81 Fed. Reg. 62,445, 09/09/16)

GSA issues proposed rule regarding construction contract administrative procedures

On September 9, 2016, the GSA issued a proposed rule to clarify, update and incorporate existing construction contract administration procedures. (Previously, the Public Building Service, the GSA's largest operating unit, issued construction contract administration guidance.) The proposed rule would incorporate this preexisting guidance into the GSA's Acquisition Regulation (GSAR) by adding five new agency-unique provisions and corresponding clauses. The proposed rule would also help GSA maintain consistency between the GSAR and the FAR. It would accomplish this goal by adding supplemental clauses or revising the language of existing clauses to include the same requirements as the corresponding FAR clauses. Interested parties should submit written comments on or before November 8, 2016. (81 Fed. Reg. 62,434, 09/09/16)

FAR Council issues proposed rule raising automatic audit trigger

On September 14, 2016, the FAR Council issued a proposed rule to increase the dollar threshold requirement for the audit of prime contract settlement proposals and subcontract settlements. Currently, FAR §49.107 (Audit of prime contract settlement proposals and subcontract settlements) provides that the dollar threshold requirement for the audit of prime contract and subcontract settlements submitted in the event of contract termination is $100,000. Under the proposed rule, this threshold would increase from $100,000 to $750,000, which is the dollar threshold for obtaining certified cost or pricing data under FAR §15.403-4 (Requiring certified cost or pricing data). The FAR Council believes this change will alleviate contract close-out backlogs and allow contracting officers to more quickly release excess funds from terminated contracts. Interested parties should submit written comments on or before November 14, 2016. (81 Fed. Reg. 63,158, 09/14/16)

DoD issues proposed rule modifying mentor-protégé program

On September 23, 2016, the DoD issued a proposed rule that would amend its mentor-protégé program in order to implement provisions of the NDAA for FY 2016, which requires mentor contractors to report, inter alia, all technical or management support provided to the protégé, as well as any new subcontracts or increases in the scope of work. The statute also requires reporting of unreported payments, the amount of progress or advance payments, and any loans given to the protégé firm. These reporting requirements apply retroactively to mentor-protégé agreements entered into on November 25, 2015 or later. In addition to implementing these FY 2016 NDAA requirements, the proposed rule would encourage mentor firms to select firms as protégés that have not received significant prime contracts from a federal agency. Interested parties should submit written comments on or before November 22, 2016. (81 Fed. Reg. 65,610, 09/23/16)

DoD issues proposed rule revising the test program for negotiation of comprehensive small business subcontracting plans

On September 23, 2016, the DoD issued a proposed rule that would implement provisions of the 2016 NDAA and the 2015 NDAA regarding the Test Program for Negotiation of Comprehensive Small Business Subcontracting Plans (Test Program), which seeks to determine whether the use of comprehensive subcontracting plans increases subcontracting opportunities for small business concerns. The proposed rule would require that contractors participating in the Test Program report the amount of first-tier subcontract dollars awarded. The contractor would also report the total number of subcontracts active under the test program that would have otherwise required a subcontracting plan under 15 U.S.C. §637(d). The goal of the proposed rule is to determine if participation in the Test Program results in cost savings and opportunities for small business. To that end, the proposed rule would implement statutory requirements to extend the test program through December 31, 2017, and increase the threshold for participation in the test program from $5 million to $100 million. Interested parties should submit written comments on or before November 22, 2016. (81 Fed. Reg. 65,606, 09/23/16)

Notices

DOL issues notice regarding increase in applicable minimum wage

On September 20, 2016, the DOL's Wage and Hour Division issued a notice to announce the applicable minimum wage for workers performing work on or in connection with certain federal contracts. Executive Order 13658, "Establishing a Minimum Wage for Contractors," raised the hourly minimum wage paid by contractors performing work on covered federal contracts to $10.10 per hour beginning January 1, 2015, and called for the Secretary of Labor to determine the hourly minimum wage annually. In the notice, the DOL informed contractors and subcontractors that the minimum wage rate will increase to $10.20 per hour (from $10.15 per hour) for workers performing work on or in connection with covered contracts. The minimum wage rate will be increased to $6.80 per hour (from $5.85 per hour) for tipped employees. The increased minimum wage goes into effect on January 1, 2017. (81 Fed. Reg. 64,513, 9/20/16)

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