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

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

Highlights this month include:

  • House passes two bills to enhance national and border security
  • Civilian agency spending reaches highest level since 2010
  • House passes two bills to help small businesses enhance their cybersecurity

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

Legislative Updates

House passes two bills to enhance national and border security

On October 23, 2017, the House of Representatives passed a series of bills to increase national and border security, including the C-TPAT Reauthorization Act of 2017 and the INTERDICT Act.

C-TPAT Reauthorization Act of 2017 (H.R. 3551)

The C-TPAT Reauthorization Act aims to increase shipping security by reforming the Customs and Border Patrol Customs-Trade Partnership Against Terrorism (C-TPAT) screening program. As background, C-TPAT is a voluntary government-private sector partnership program started after September 11, 2001, to "strengthen and improve the overall security of the international supply chain and US. border security" and to "facilitate the movement of secure cargo through the international supply chain." Under this legislation, the US Customs and Border Protection (CBP) Office of Field Operations Executive Assistant Commissioner (Executive Assistant Commissioner) will conduct a background investigation of applicants to the program to determine if they meet the eligibility security requirements. If so, a private-sector entity will become, in essence, pre-vetted and, therefore, subjected to fewer customs inspections at the border and granted priority processing when they do get stopped.

This bill, which reauthorizes the program for the first time in more than a decade, encourages private-sector participants in the program to take an active role in security measures for shipments made to the US. Chiefly, the measure:

  • Expands the types of entities eligible for C-TPAT participation to include importers, exporters, customs brokers, forwarders, air, sea, land carriers and contract logistics providers
  • Establishes a process, including congressional oversight requirements, for CBP to continuously vet participants, review their security measures, and conduct site visits to their facilities to ensure compliance
  • Reduces redundant inspections on pre-vetted cargo and provides CBP with mechanisms to suspend or expel C-TPAT participants from the program if they fail to meet its security requirements or otherwise pose a threat to national security

If passed by the Senate and signed into law, government contractors that import goods into the US should carefully consider applying for C-TPAT certification in order to ease the process of customs inspections. (C-TPAT Reauthorization Act of 2017, H.R. 3551, 10/23/2017)

INTERDICT Act (H.R. 2142)

Formally known as the International Narcotics Trafficking Emergency Response by Detecting Incoming Contraband with Technology Act (INTERDICT), the INTERDICT Act would require the CBP to acquire several hundred new sets of chemical screening devices, to be used at points of entry into the US, for fentanyl, other synthetic opioids, other narcotics and psychoactive substances. If passed by the Senate and signed into law, the bill would also mandate agreements with testing labs to perform rapid detection tests on incoming shipping.

Together, the INTERDICT Act and the C-TPAT Reauthorization Act of 2017 represent a concerted effort by the government to enhance national and border security. (INTERDICT Act, H.R. 2142, 10/23/2017)

House passes two bills to help small businesses enhance their cybersecurity

On October 11, 2017, the House passed two bills, the NIST Small Business Cybersecurity Act and the Small Business Innovation Research and Small Business Technology Transfer Improvements Act of 2017, that would increase government resources for small businesses to help them conduct research and improve their cybersecurity.

NIST Small Business Cybersecurity Act

The NIST Small Business Cybersecurity Act would help small businesses to identify, assess, manage and reduce their cybersecurity risks by requiring, among other things, the National Institute of Standards and Technology (NIST) to consider them when it facilitates and supports the development of guidelines and procedures to reduce cybersecurity risks. These resources are important to small businesses, many of which are unable to properly secure their systems without assistance. For small business government contractors, if this legislation is passed, it will provide an opportunity to strengthen cybersecurity measures.

Small Business Innovation Research and Small Business Technology Transfer Improvements Act of 2017

The Small Business Innovation Research and Small Business Technology Transfer Improvements Act of 2017 would reauthorize a federal program that supports small businesses focused on key research areas by amending the Small Business Act. The program, which operates within a variety of different agencies, ranging from the National Science Foundation to the Department of Defense (DoD), promotes research funding to small businesses that are working in critical areas of cybersecurity.

Collectively, these bills, if signed into law, would represent an advancement for small business government contractors by providing support to boost their cybersecurity systems. Many small businesses lack the infrastructure and technology systems to prevent and respond to sophisticated cyberattacks. These bills would help to address and alleviate this cybersecurity vulnerability. (NIST Small Business Cybersecurity Act, H.R. 2105; Small Business Innovation Research and Small Business Technology Transfer Improvements Act of 2017, H.R. 2763, 10/11/2017)

NDAA Developments

As negotiations over the National Defense Authorization Act (NDAA) for FY 2018 continue, and the House and Senate prepare to go to conference on the bill, there are a number of crucial differences between the House and Senate versions of the bill that will need to be addressed. Some of the key areas of difference are:

  • House proposes Space Corps program
    The House version of the NDAA has proposed a new Space Corps program within the DoD in an effort to increase focus on space operations, but senior officials at the DoD as well as the Trump administration have opposed the idea of adding a Space Corps program, and the Senate has left the proposal out of its version of the bill. The program is expected to be a heavily debated topic throughout the conference negotiations.
  • Major acquisitions
    The House and Senate versions also differ in their approach to major defense acquisitions, such as new vehicles and equipment for the services. For example, the House version of the NDAA would authorize 87 F-35 fighter jets whereas the Senate version of the bill would authorize 94 fighter jets. Notably, both amounts far surpass the administration's request for 70 fighter jets. In addition, the House version of the bill would authorize funding for three littoral combat ships while the Senate version of the bill would authorize funding for only two ships.
  • War funds
    The Senate version of the NDAA calls for a $60 billion Overseas Contingency Operations (OCO) budget, whereas the House version of the bill would authorize $75 billion in OCO funds, with roughly $10 billion of that directed to fill in gaps in the DoD base budget.
  • GAO review of defense companies' contract protests
    Under the Senate version of the NDAA, the Government Accountability Office (GAO) would be required to review defense companies' bid protests in a more expedited manner than is currently in place. The Senate version of the bill would shorten the GAO's bid protest timeline to 65 days from its current timeline of 100 days. However, the Senate version of the bill would allow the US Comptroller General to extend the time to 100 days for "unusually complex issues or large agency records." Notably, the House version of the bill does not seek to change the GAO's bid protest timeline.

These differences between the Senate and House versions of the NDAA are expected to stir extensive debate as the two chambers enter conference.

Regulatory Updates

BIS issues final rule clarifying the EAR regarding the use of certain license exceptions

On November 1, 2017, the Bureau of Industry and Security (BIS), an agency within the Department of Commerce (Commerce), issued a final rule that clarifies the Export Administration Regulations (EAR) to provide guidance regarding the use of two license exceptions, namely, (i) License Exception Governments, International Organizations, International Inspections under the Chemical Weapons Convention, and the International Space Station (License Exception GOV), and (ii) License Exception Strategic Trade Authorization (License Exception STA).

Clarifications for License Exception GOV

This final rule provides clarification to License Exception GOV by revising paragraph (b)(2)(ii) of EAR §740.11, adding a new note to paragraph (b)(2)(iii)(C) of EAR §740.11, and adding a new note to paragraph (c)(1) of EAR §740.11. With respect to paragraph (b)(2)(ii), this final rule clarifies the applicability of the term "contractor support personnel" by noting that the term is limited to those individuals who provide such support within a US government owned or operated facility or under the direct supervision of a US government employee. In turn, a US government employee is an individual directly employed by the US government. Additionally, this final rule adds a sentence to paragraph (b)(2)(ii) to clarify that private security contractors are not "contractor support personnel" for purposes of that paragraph. Accordingly, although private security contractors may work within a US government owned or operated facility, such contractors do not fall within the definition of "contractor support personnel."

Additionally, this final rule adds a note to paragraph (b)(2)(iii)(C), which authorizes the temporary export, reexport or transfer (in-country) of an item in support of any foreign assistance or sales program authorized by law when certain criteria are met, to clarify that, within the context of that paragraph, "temporary" means that within no more than four years from the date of an item's initial export, reexport, or transfer (in-country), it must be returned to the exporter, reexporter or transferor.

Finally, this rule adds a note to provide clarification to paragraph (c)(1), which authorizes certain exports, reexports and transfers (in-country) to agencies of cooperating governments or agencies of the North Atlantic Treaty Organization (NATO). In particular, the new note clarifies that civil intergovernmental organization in which membership is limited to national governments that are "cooperating governments" are also considered "cooperating governments" for purposes of paragraph (c)(1).

Clarifications for License Exception STA

This final rule provides clarification for License Exception STA, EAR §740.20, by adding new clarification notes, in addition to making other minor clarifications. First, it adds a note to paragraph (a) of EAR §740.20 to provide guidance regarding when this exception may be used to authorize transfers (in-country). Second, this final rule adds a note to paragraphs (b)(2) and (b)(3) of EAR §740.20 to clarify that, for "600 series" items authorized under License Exception STA, the items must be provided to an eligible ultimate end user to stay in compliance with the original authorization. Therefore, regardless of how many times the item is transferred or whether it is incorporated into higher level assemblies, the item must ultimately be provided to an eligible ultimate end user or be otherwise authorized under the EAR. Third, this final rule adds a note to EAR §740.20(d)(2) to exclude Country Group A:5 and A:6 government consignees from the requirement to sign or provide a prior consignee statement under this exception. Finally, this final rule clarifies under this exception that intangible exports, reexports and transfers (in-country) are not subject to the notification requirements of paragraph (d)(3).

Notably, these revisions to the EAR do not add or change the requirements of the EAR, but instead, simply provide guidance based on existing agency understanding and practice. Government contracts that are involved in exports and international trade should review these clarifications closely for guidance as they add nuanced details to complying with the EAR.

Industry Developments

DCAA guidance clarifies cost or price analysis requirements for subcontractor proposals

*Thomas Lemmer, Partner; Steven Masiello, Partner; and J. Quincy Stott, Managing Associate of Dentons' Government Contracts practice contributed this piece to the Legislative and Regulatory Update.

The Defense Contract Audit Agency (DCAA) recently published a memorandum for regional directors (MRD), titled "Audit Alert on Requirement for Prime Contractor Cost and Price Analyses," that provides answers to frequently asked auditor questions regarding cost and price analyses to establish the reasonableness of proposed subcontract prices. Importantly, the MRD states that DCAA auditors should proceed with subcontract proposal audits even if contractor cost or price analyses are not yet available. This should help mitigate what has been a continuing problem for prime contractors—long waits for DCAA audits of subcontractor proposals—and expedite contract price negotiations.

FAR 15.404-3(b) requires a prime contractor or subcontractor to establish the reasonableness of proposed subcontract prices and to provide supporting cost or price analyses in the proposal. In certain circumstances, a prime contractor may not be able to complete the cost or price analyses by the time it submits a proposal. In such cases, the prime contractor may include a matrix in the proposal identifying the dates by which it expects to receive subcontractor proposals. The MRD states that this type of matrix does not satisfy the requirement to submit supporting cost or price analyses in the proposal, and a DCAA auditor would mark the proposal as inadequate on grounds of incomplete cost or price analyses.

Nevertheless, the MRD provides that "this inadequacy alone will not result in the audit team's inability to proceed with the audit." In these situations, the audit team should proceed with the audit and notify the contracting officer that, if the cost or price analysis remains unavailable by the time the team's fieldwork is complete, the proposed subcontract costs will be classified as "unsupported." This guidance is a significant development for prime contractors who have struggled with DCAA auditors who refused to move forward with their audits of proposals until the subcontractor cost or price analyses are available. Rather than continuing to suffer delays caused by DCAA auditors declaring an entire proposal submission inadequate and refusing to accept audit assignments, prime contractors and their government agency customers likely can now rely on DCAA auditors to move forward with the audit process. Ultimately, this should reduce the amount of delay leading up to negotiation of contract prices.

Additionally, if a prime contractor is unable to complete its cost or price analysis, it should communicate its timetable for completing the analyses to both the auditors and the contracting officer. And, where a subcontractor fails to comply with a prime contractor's request for cost or pricing data, the MRD states that the prime should document its efforts to perform the required cost or price analysis under FAR 15.404-1(b) and coordinate with the contracting officer to obtain any necessary audit and/or pricing support.

If the prime contractor has completed the cost or price analyses of subcontract pricing, but an assist audit has not been completed, the MRD states that the auditors should classify the proposed subcontract costs as "unresolved." The MRD emphasizes the importance of auditors' "early engagement" with the contracting officer and prime contractors in facilitating assist audits and reducing unresolved subcontractor costs.

Overall, this MRD provides useful guidance to DCAA auditors regarding their approach to subcontract pricing audits in ways that likely help prime contractors by reducing obstacles to the negotiation of contract prices. By emphasizing early engagement by auditors and an obligation to move forward with subcontractor pricing audits even where the supporting cost or price analyses are incomplete, the MRD's guidance should increase auditors' willingness to proactively complete audits and ensure the consistent treatment of proposals submitted without cost or price analyses due to their unavailability.

Civilian agency spending reaches highest level since 2010

Aggregate civilian agency contract spending in FY 2017 has reached $178 billion—its highest point since FY 2010, when it topped out at $172 billion. Additionally, aggregate civilian agency contract spending in FY 2017 grew 3.8 percent over the prior fiscal year. At the head of this growth was NASA, which spent $3.3 billion more in FY 2017 than in FY 2016, followed by the Department of Homeland Security (DHS) with a $2.1 billion increase, followed by the Department of State (State) with a $1.2 billion increase.

Only 6 of the 19 civilian agencies that spent $1 billion or more in FY 2017 experienced a decline in agency spending, the largest being the Department of Transportation (DOT), which saw a $1.8 billion decline in expenditures, bringing its fiscal year spend to the agency's lowest point in ten years. As civilian agency spending climbs, government contractors can expect to see more opportunities to develop and grow business.

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