United States: Government Contracts Legislative And Regulatory Update - September 2017

Our September edition of "Government Contracts Legislative and Regulatory Update" offers a summary of the relevant changes that took place during the month of August. Highlights this month include:

Legislative Updates

Senate introduces Internet of Things Cybersecurity Improvement Act of 2017

On August 1, 2017, a bipartisan group of US senators introduced the Internet of Things Cybersecurity Improvement Act of 2017 (IoT Act). The IoT refers to the inter-networking of physical devices, including vehicles (also called connected or smart devices), buildings and other items embedded with electronics, software, sensors and actuators, and the network connectivity that enables these objects to collect and exchange data. The IoT Act chiefly addresses a number of vulnerabilities inherent in the IoT that pose a significant threat to domestic and global cybersecurity.

In particular, the bill would require vendors that provide Internet-connected equipment to the US government to:

  • Ensure that those IoT devices are patchable (a "patch" being a piece of software designed to update a computer program or its supporting data, for the purpose of fixing or improving it, including addressing any security vulnerabilities or other bugs);
  • Ensure that those devices contain no known vulnerabilities
    • If a contractor identifies a device containing a vulnerability, it must disclose it to the agency, explain why the device is secure notwithstanding the vulnerability, and describe any remedies employed to control or limit the vulnerability;
  • Ensure that those devices conform to industry security standards;
  • Ensure that those devices do not include "hard-coded" passwords (i.e., passwords that cannot be changed).

Contractors would be obligated to certify in writing that their devices comply with the aforementioned requirements. While this legislation, if passed by Congress and signed into law by the President, would impose new vendor requirements, there are a number of open questions, including, but not limited to: (1) the ability of agencies to ask the Office of Management and Budget (OMB) for permission to purchase non-compliant devices if they can demonstrate that certain compensating controls have been employed; and (2) the ability of agencies to waive these requirements under certain circumstances.

Additionally, in terms of government obligations, the bill would require executive branch agencies to inventory Internet-connected devices, from smartphones to activity-tracking bracelets to residential lighting systems.

On the whole, this bill represents a significant effort to enhance the cybersecurity of government networks. Contractors should monitor the bill's progress through Congress because, if passed, it will pose compliance challenges, particularly for information technology contractors, who will have to navigate compliance with the bill's requirements as applied to both end items and components that are connected to an Internet-connected device.

Industry Developments

Government shutdown could cause disruption to contracting community

The federal government faces a potential shutdown as Congress and President Trump battle over $1.6 billion in seed money for the latter's long-promised southern border wall. President Trump's proposed border wall has long been a controversial topic, but ever since he signed a spending bill in May that didn't include funding for the wall—after Republicans made clear that they were unwilling to fight for the project so early in his presidency—President Trump has been setting the stage for a government shutdown over the issue. At a rally in Phoenix, AZ on August 22, 2017, he doubled down on the threat, stating, "[B]elieve me, if we have to close down our government, we're building that wall." Although House Republicans passed an appropriations bill in July that included $1.6 billion for construction of the border wall, that measure is seen as a non-starter in the Senate. It should be noted that, to avoid a shutdown, the House and Senate must pass a spending bill by September 30. House Speaker Paul Ryan (R-WI) has already noted that such measure is likely going to be a continuing resolution (CR) and, as such, will not include money for the border wall.

Despite the fact that the odds of a government shutdown are slim—both Democrats and Republicans alike are seeking to avoid one—there is still a possibility that it will occur. In the event that it does, each agency has its own shutdown plans, and the rules for whether contracted-out work is halted are decided on a program-by-program and contract-by-contract basis.

A government shutdown could entail: closing down federal offices, government databases, and email systems; delayed paychecks to US military personnel on active duty; immediate furloughs for nearly 400,000 civilian defense workers; and under the Antideficiency Act, a prohibition on the Department of Defense (DoD), like all other departments, paying for services or products for the duration of the shutdown.

Notably, contractors should not stop working unless and until they receive a stop-work order. If a stop-work order is issued for a certain program or contract, contractors must transmit a copy of such order to all employees, subcontractors and vendors. Also, we recommend that contractors keep a detailed account of any changes that are required of them by the government in connection with the work stoppage, and keep track of the whereabouts of temporarily laid off employees so they can be notified as soon as the shutdown ends. Finally, risk mitigation is essential. If possible, rather than firing employees, contractors should attempt to reassign affected workers to a different project, including providing any necessary training; or encourage workers facing impending layoff to use their vacation or leave time to wait out the government stoppage.

DoD plans to restructure its acquisition department.

On August 2, 2017, the Pentagon revealed its plans to reorganize its acquisition enterprise by dividing the Office of the Undersecretary of Defense for Acquisition, Technology, and Logistics (OUSD(AT&L)) into three new offices: an undersecretary of defense (research and engineering) (USD(R&E)), an undersecretary of defense (acquisition and sustainment) (USD(A&S)), and a chief management officer (CMO). This reorganization is in response to Congress's previous instructions to DoD to split the OUSD(AT&L) position into two new undersecretary positions by Feb. 1, 2018, in order to inject more innovation into the Pentagon's weapons programs. In particular, the split is designed to improve the Pentagon's development and deployment of technology.

Under the new structure the USD(R&E) will research, develop and test new equipment; the USD(A&S) will oversee the purchase and sustainment of the new systems; and the CMO will try to streamline and consolidate the IT systems that process information related to human resources, health care, financial management and other such areas. Deputy Defense Secretary Patrick Shanahan stated that the new organizational structure should spur innovation and close the gap on current and emerging threats by "breaking down barriers to execution and reducing layers of oversight and unnecessary process imposed upon the Services which are executing acquisition programs." Notably, this reorganization may present contracting opportunities for non-traditional defense contractors because the USD(R&E) will be casting a wide net for any technologies that might give US war fighters a competitive edge over their adversaries. Further, companies that provide modeling and simulation capabilities should see their opportunities expand as the USD(R&E) seeks to make advancements in innovation. Accordingly, contractors should keep abreast of developments relating to the DoD's reorganization in the coming months.

Senate confirms a host of presidential nominees

During the first week of August 2017, the Senate confirmed approximately 70 of President Trump's nominees across a broad range of executive agencies, including the Department of the Treasury (Treasury), the Federal Communications Commission (FCC) and the DoD, among others. With respect to DoD nominations, the Senate confirmed Richard V. Spencer as Secretary of the Navy; Ellen Lord as USD(AT&L); and Lucian Niemeyer and Robert Hood as Assistant Secretaries for Defense. Other DoD nominees confirmed that week include Elaine McCusker as Principal Deputy Undersecretary of Defense; Robert Daigle as Director of Cost Assessment and Program Evaluation (DCAPE) for the Pentagon; Matthew P. Donovan as Under Secretary of the Air Force; and Ryan McCarthy as Under Secretary of the Army. Additionally, the Senate confirmed Richard Ashooh to be an Assistant Secretary of Commerce for Export Administration, Peter Davidson to be General Counsel of the Commerce Department and Mira Ricardel to be an Undersecretary of Commerce. Also, Christopher Wray was confirmed as the new Director of the Federal Bureau of Investigation (FBI).

The Trump administration has thus far lagged behind previous administrations in both naming nominees and getting them through the Senate confirmation process. The White House has put forward a bit more than 160 nominees out of nearly 600 Senate-confirmable executive positions. Before the first week of August 2017, the Senate had approved a total of approximately 50 of Trump's nominees, which is a number that more than doubled during that first week in August alone. These confirmations of many top positions across the administration provide a degree of mission clarity, authority, and direction that help to move the contracting community out of a state of pendency, as it waited for positions to fill up. Contractors should monitor the nomination and appointment process to determine when leadership roles get filled.

President Trump approves sending an additional 4,000 troops to Afghanistan

On Monday, August 21, 2017, President Trump addressed the nation to unveil his military strategy in Afghanistan, which entails sending an additional 4,000 troops to the war-torn country. This represents a significant increase from America's current military presence (as of Q4 2016) of approximately 9,800 troops and 26,000 contractors. Additionally, the Trump administration has increased the number of US airstrikes in Afghanistan exponentially, conducting approximately 2,000 in the first six months of 2017, nearly triple the amount from the same period in 2016, according to the Air Force. The Trump administration's decision to increase the number of troops in Afghanistan not only contradicts his campaign promises to extricate the United States from foreign conflicts, but will add billions of dollars per year to the cost of waging that war. In fact, direct US spending on the war in Afghanistan will rise to approximately $840.7 billion if the president's fiscal year 2018 budget is approved.

The increase in the number of troops and, correspondingly, in defense spending on the war effort in Afghanistan means more opportunities for government contractors, specifically defense contractors. In particular, the Pentagon spends about $179,000 annually per soldier, sailor, airman and Marine deployed there. In fiscal year 2016, it also spent approximately $2 billion on contracting work in Afghanistan. With defense spending set to rise in Afghanistan due to the addition of 4,000 troops, defense contractors can expect expanded opportunities and roles assisting in the ramp-up of troops.

Sequester may cause significant spending cuts to DoD programs

If spending bills approved by the House Appropriations Committee (HAC) become law, DoD funding for programs, projects and activity—other than paying and caring for military personnel—may experience across-the-board cuts of between 11 and 13 percent. As background, under current law, the FY2018 cap for base defense funding, which includes the defense budget, is $549 billion. The law requires the cap to be adjusted upward to accommodate Overseas Contingency Operations (OCO) funding, which, in the House bills, is about $64.6 billion, making the new, adjusted cap, about $613.6 billion.

However, the House spending bills would provide $686 billion in defense discretionary appropriations, which means that spending would exceed the cap by about $72.4 billion. This is problematic because, in accordance with the Budget Control Act of 2011, any spending above the caps that is appropriated by Congress and signed into law must be cut evenly from every program, project and activity. Thus, war funding is required to be cut (though military personnel pay can be exempted). As a consequence, if the House bills are passed and become law, a substantial sequester would be triggered. Notably, the amount of the FY18 sequester cut would be equal to how much funding exceeds the cap; however, the cut isn't only applied to FY18 funding. In fact, sequestration additionally applies to unobligated funds from prior years, which OMB has estimated for DoD alone to be approximately $130 billion at the end of FY17.

The practical ramifications for defense contractors of such a significant sequestration is profound. For example, the Air Force seeks to purchase 50 new F-35 joint strike fighter jets but, with sequestration, the DoD would need to cut funding sufficient to pay for about five aircraft. Although it's unlikely that Congress would pass and the President sign into law a series of bills that would cause such a substantial sequestration, defense contractors should monitor this development closely, and be prepared to deal with the negative ramifications of across-the-board cuts in all DoD programs, with the exception of military personnel.

Foreign Military Sales are on pace to set record in 2017

The DoD's Foreign Military Sales (FMS) program is expected to send more weaponry abroad, as measured in total value, than in any previous fiscal year, including 2012, when it sold $68 billion worth of weapons. The Defense Security Cooperation Agency (DSCA) reported to Congress that, since October 2016, FMS sales have totaled $64 billion. As background, the FMS program is a form of security assistance authorized by the Arms Export Control Act (AECA) that enables the US to sell defense articles and services to foreign countries and international organizations.

The last three years of FMS sales have been robust and will likely continue to grow, with NATO and Gulf Cooperation Council member states expected to begin multiyear munitions restock cycles, and the likelihood of new fighter jet and defense deals in the coming years. This robust level of FMS sales brings heightened opportunities for defense contractors in this space. Defense contractors should monitor developments in FMS opportunities and expect steady growth in the future.

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