United States: Government Contracts Legislative And Regulatory Update – August 2017

Our August edition of "Government Contracts Legislative and Regulatory Update" offers a summary of the relevant changes that took place during the month of July.

Highlights this month include:

  • House passes DoD Appropriations Act of 2018
  • BIS issues final rule amending the EAR based on the 2016 MTCR Plenary Agreements
  • White House issues FY 2019 budget guidance to executive agencies

This update will also be available in Contract Management Magazine, which is published monthly by the National Contract Management Association (NCMA).

LEGISLATIVE UPDATE

  • House passes DoD Appropriations Act of 2018
  • Update on the status of the National Defense Authorization Act for Fiscal Year 2018
  • DoD sends acquisition office reorganization report to Congress

REGULATORY UPDATE

  • BIS issues final rule amending the EAR based on the 2016 MTCR Plenary Agreements
  • NASA issues final rule to add policy on the use of "award terms" as a contract incentive

INDUSTRY DEVELOPMENTS

  • President Trump's administration has a high level of unfilled positions
  • White House issues FY 2019 budget guidance to executive agencies
  • DOL issues memorandum raising rate of health and welfare fringe benefits issued under the SCA

LEGISLATIVE UPDATE

House passes DoD Appropriations Act of 2018

On July 27, 2017, the House of Representatives passed the Department of Defense (DoD) Appropriations Act of 2018. The $788 billion spending bill combines a $1.6 billion payment for President Trump's US-Mexico border wall with a large budget increase for the DoD. The measure would make good on a long-standing GOP promise to promote military readiness. Additionally, it would give veterans' programs a 5 percent increase and fund a 2.4 percent military pay raise. Notably, the House added President Trump's wall funding by a 230–196 procedural vote that denied Democrats an up-or-down vote.

The bill, introduced by Representative Kay Granger (R-TX), reduces clean energy programs, boosts the military and provides funding for the border wall. It passed the House by a vote of 235–192. On the whole, the bill would fund the legislative branch, the Army Corps of Engineers (USACE), the DoD and the Departments of Energy and Veterans Affairs.

Notably, although the bill provides appropriations to the DoD for military operations, including for Overseas Contingency Operations (OCO), it does not provide funding for military construction, military family housing, nuclear warheads and civil works projects of the USACE. The bill also increases total funding for the DoD as compared with FY 2017. Further, the bill repeals the Authorization for Use of Military Force that was enacted following the terrorist attacks on September 11, 2001. Finally, the bill restricts the use of funds to close the Guantanamo Bay detention facility, transfer its detainees to other countries, or construct or modify facilities for purposes of housing the detainees.

It is unclear whether this House version will ultimately garner the necessary votes to pass in the Senate. Nevertheless, contractors should be aware of the administration's and the House's respective defense spending priorities, and the potential corresponding opportunities that such military spending may bring. (H.R. 3219, 07/27/2017)

Update on the status of the National Defense Authorization Act for Fiscal Year 2018

*Chris W.K. Fetzer, Senior Advisor in Dentons' Public Policy and Regulation practice, contributed this piece to the Legislative and Regulatory Update.

On July 14, the House of Representatives passed its version of the National Defense Authorization Act (NDAA) for FY 2018, with strong bipartisan support, by a vote of 344-81. The Senate's version of the annual defense policy bill did not fare as well. On July 28, Senate Majority Leader Mitch McConnell (R-KY) moved to begin expedited debate on the NDAA, but the motion was blocked by Senator Rand Paul (R-KY). (Senator Paul's goal was to secure votes on an amendment that would prohibit indefinite detention and another that would repeal the 2002 Authorization for Use of Military Force against Iraq).

Senate Republican and Democratic leadership, out of deference to Senate Armed Services Committee (SASC) Chairman John McCain (R-AZ), who was recently diagnosed with brain cancer, had reached a tentative agreement to fast-track consideration of the NDAA so that the Senator could return to Arizona as soon as possible to begin treatment. However, because of the procedural delay imposed by Senator Paul, Senator McCain, rather than remaining in Washington in the hope of striking a deal to allow consideration of the NDAA to proceed before the commencement of the Senate's August recess, opted to return home to fight his cancer.

As a result, the Senate's consideration of the NDAA is now on hold until after Labor Day, when Congress reconvenes from its August recess. This means that formation of an NDAA Conference Committee to resolve the differences between the House and Senate versions of the bill will be delayed until mid-to-late September, or even early October. The Conference Committee will likely produce a compromise version of the NDAA in October, with votes on final passage of the bill likely to take place not long thereafter. Although the Congressional Republican leadership's plan to focus on tax reform this fall could impact the timing of passage of the FY18 NDAA by both chambers, the bill is very likely to be signed into law by the president no later than November.

DoD sends acquisition office reorganization report to Congress

*Chris W.K. Fetzer, Senior Advisor in Dentons' Public Policy and Regulation practice, contributed this piece to the Legislative and Regulatory Update.

On August 1, the DoD sent a report to Congress entitled "Restructuring the Department of Defense Acquisition, Technology and Logistics Organization and Chief Management Officer Organization." The so-called Section 901 report, named after a provision in the FY 2017 NDAA that imposed the reorganization requirement, addresses the elimination of the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics (USD [AT&L]), and details the splitting of USD (AT&L)'s portfolio between a new Office of the Under Secretary of Defense for Research and Engineering (USD [R&E]) and a new Office of the Under Secretary of Defense for Acquisition and Sustainment (USD [A&S]). SASC Chairman McCain championed the restructuring directive. Senator McCain believes that USD (AT&L)'s bloated portfolio has limited, if not destroyed, the office's ability to achieve its mission, such that the office's research and development—and procurement—functions should be decoupled. The reorganization becomes effective on February 1, 2018.

According to the report, the goal of the USD (R&E) office will be "to drive innovation and accelerate the advancement of our warfighting capability," while the goal of the USD (A&S) office will be "to deliver proven technology into the hands of the warfighter more quickly and affordably." The DoD's innovation components, including the Defense Advanced Research Projects Agency (DARPA), the Strategic Capabilities Office (SCO), and the Defense Innovation Unit Experimental (DIUx), will all be organized under the new USD (R&E). Although no shortlist of names for the USD (R&E) role has been floated as of this writing, the Senate on August 1 confirmed former Textron Systems President and CEO Ellen Lord to serve as the next undersecretary for the USD (AT&L). Upon the dissolution of the USD (AT&L) office, Lord is slated to become the USD (A&S) effective February 1, 2018.

On July 18, the Senate confirmed longtime Boeing executive Patrick Shanahan to serve as Deputy Secretary of Defense. DEPSECDEF Shanahan, who earned the nickname "Mr. Fix-It" during his tenure with the defense and aerospace giant, has stated that the acquisition office reorganization is a top priority. In discussing the commercial engagement objectives of the restructuring on August 2, he said that the DoD wants to "make it easy to do business with the government" and to "help the contractors and suppliers do more for less."

However vital the DoD's aggressive pursuit of its defense innovation and acquisition reform agenda, durable and impactful reform will take time, and will likely be driven by the ongoing cultural sea change at the agency, and effectuated by new generations of civilians and warfighters and continued public-private collaboration.

REGULATORY UPDATE

BIS issues final rule amending the EAR based on the 2016 MTCR Plenary Agreements

On July 7, 2017, the Bureau of Industry and Security (BIS) issued a final rule amending the Export Administration Regulations (EAR) to reflect alterations to the Missile Technology Control Regime (MTCR) Annex that were agreed to by MTCR member countries at the October 2016 Plenary and March 2016 Technical Experts Meeting (TEM). Among other things, the final rule revises thirteen export control classification numbers (ECCNs), adds one ECCN, revises two EAR defined terms and makes conforming EAR changes where needed.

Most notably, the final rule adds ECCN 9B104 to the Commerce Control List (CCL) and makes related conforming amendments to ECCNs 9D101, 9E001 and 9E002. Newly added ECCN 9B104 controls certain "aerothermodynamic test facilities," specifically those usable for missiles, rockets, or unmanned aerial vehicles (and their subsystems) capable of achieving a "range" equal to or greater than 300 km, and having an electrical power supply equal to or greater than 5MW, or a gas supply total pressure equal to or greater than 3 MPa. The definition of aerothermodynamic test facilities includes plasma wind tunnels for the study of thermal and mechanical effects of airflow on objects and plasma arc jet facilities.

Additionally, the final rule changes the definition of "missiles," which is defined in EAR section 772.1. Specifically, under the definition of the term "missiles," the final rule replaces the term "ballistic missile systems" with the term "ballistic missiles." Similarly, the final rule revises the definition of the term "cruise missile systems" under the definition of "unmanned aerial vehicle" in EAR section 772.1 to read "cruise missiles." Finally, conforming amendments were made via this final rule to EAR section 742.5(a)(2) and EAR section 744.3 regarding the definitions of "ballistic missile systems" and "cruise missile systems." These definitional changes were made in an effort to clarify that a missile is covered under these entries that use this control text, regardless of whether it is part of a larger system.

Contractors should take note of the new ECCN and the various definitional changes to ensure strict compliance with the EAR. This final rule became effective July 7, 2017. (82 Fed. Reg. 31,442, 07/07/2017)

NASA issues final rule to add policy on the use of "award terms" as a contract incentive

On July 25, 2017, the National Aeronautics and Space Administration (NASA) issued a final rule amending the NASA Federal Acquisition Regulation Supplement (NFS) to add policy on the use of additional contract periods of performance or "award terms" as a contract incentive. This final rule builds off of a proposed rule regarding award terms that NASA published in the Federal Register on December 9, 2016 (81 Fed. Reg. 89,038). Particularly, this final rule codifies NASA's use of additional contract periods of performance for which a contractor may earn if (i) the contractor's performance is superior, (ii) the government has an ongoing need for the requirement and (iii) funds are available for the additional period of performance. In other words, this non-monetary incentive is reserved for contractors whose performance is excellent. Notably, these non-monetary incentive award terms only apply to acquisitions for services exceeding $20 million dollars. Use of award terms for acquisitions of lesser value may be permitted in exceptional situations, such as those having direct health or safety impacts.

The goal behind this final rule is to provide incentives to preferred service contractors to maintain and grow their business with the agency, and to foster a longer-term relationship with a particular contractor where NASA deems it would be beneficial. Contractors that provide services to NASA should be aware of this final rule and take note of its potential impact on the procurement process.

This final rule becomes effective on August 24, 2017. (82 Fed. Reg. 34,416, 07/25/2017)

INDUSTRY DEVELOPMENTS

President Trump's administration has a high level of unfilled positions

Roughly six months after President Trump took office, many top positions within the administration remain vacant. Some of the more noteworthy unfilled positions include the deputy secretaries of the Departments of Commerce, Treasury, Agriculture, Energy, Education, Labor, Housing and Urban Development, Health and Human Services, Interior and Veterans Affairs. Additionally, and of particular importance for government contractors, is the lack of permanent leadership at the top of the General Services Administration and the Office of Federal Procurement Policy. This lack of leadership in many top positions across the administration has put the contracting community in a state of pendency, waiting for positions to fill up. The lack of administrative leadership also leads to a certain lack of mission clarity, authority and direction. Meanwhile, contractors remain hopeful that these positions will be filled so that implementing policies can be put in place. Contractors should monitor the nomination and appointment process to determine when leadership roles get filled.

White House issues FY 2019 budget guidance to executive agencies

On July 7, 2017, the OMB issued guidance to executive agencies regarding the FY 2019 budget. Chiefly, the guidance notes that the FY 2019 budget will present an opportunity to reduce the federal civilian workforce; reduce fraud, waste, and taxpayer abuse; and exercise the fiscal restraint necessary to achieve three percent economic growth over time.

In formulating their FY 2019 budgets, agencies are instructed to focus their limited resources on their most effective programs. Additionally, initial FY 2019 discretionary budget submissions from agencies are not to exceed the net total provided for each agency in the FY 2019 column of the FY 2018 budget, unless otherwise directed by the OMB. This guidance supports the Trump administration's goal of reducing the size of the administrative state and cutting federal spending. Notably, this guidance applies to both defense and non-defense spending, and agencies may not reduce spending in one category to offset increases in the other. Notwithstanding this guidance, agencies are directed to identify additional investments in effective programs that support the agency's mission. These investments, however, should be no more than a five percent increase above the agency's discretionary budget submission level. The guidance notes that these additional investment requests will be highly scrutinized by OMB.

The ultimate goal of the guidance is to help agencies develop budget proposals that enable the federal government to operate more effectively and efficiently. In order to foster this, the president issued Executive Order (EO) 13781 "Comprehensive Plan for Reorganizing the Executive Branch" and a "Presidential Memorandum Regarding the Hiring Freeze," which are being implemented by OMB Memorandum (M-17-22). In accordance with M-17-22, agencies must, concurrently with their FY 2019 budget requests, submit agency reforms plans and long-term workforce plans. The guidance notes that these plans should include proposals in four categories: (i) eliminate activities; (ii) restructure and merge activities; (iii) improve organizational efficiency and effectiveness; and (iv) workforce management. Critically, the FY 2019 budget process will give special consideration to bold reform or reorganization proposals that have the potential to significantly increase the effectiveness and efficiency of government operations.

Agencies should carefully review this guidance to ensure compliance with its directives. In turn, contractors should be aware of this guidance and the restrictions it places on agencies because the heightened scrutiny on federal spending potentially translates to heightened scrutiny in the procurement process. (Memorandum on FY 2019 Budget Guidance, M-17-28, 07/07/2017)

DOL issues memorandum raising rate of health and welfare fringe benefits issued under the SCA

On July 25, 2017, the DOL issued a memorandum entitled "2017 Service Contract Act Health and Welfare Fringe Benefit," in which it increased to $4.41 per hour the rate of the health and welfare fringe benefits issued under the McNamara-O'Hara Service Contract Act (SCA). Additionally, the memorandum contains a second SCA health and welfare fringe benefits level for employees performing under contracts covered by EO 13706, "Establishing Paid Sick Leave for Federal Contractors," of $4.13 per hour. Finally, the DOL memorandum sets new SCA health and welfare fringe benefits levels for Hawaii at $1.63 per hour for employees covered by EO 13706, and $1.91 per hour for all other employees.

Contractors must be aware of these new obligations, and can expect these updated health and welfare fringe benefit rates to be incorporated in solicitations issued or contracts awarded on or after August 1, 2017. Notably, these new rates do not apply to already-awarded contracts unless specifically incorporated into those contracts. (Memorandum on 2017 Service Contract Act Health and Welfare Fringe Benefit, AAM 225, 07/25/2017)

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