United States: July Government Contracts Legislative And Regulatory Update

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

Highlights this month include:

  • Kaspersky Lab Prohibition Codified in FAR
  • Government expands certification requirements to include arms control treaty violations
  • San Francisco and Montana pass new campaign finance regulation regarding government contractors

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

Kaspersky Lab Prohibition Codified in FAR

On June 15, the Department of Defense (DoD), General Services Administration (GSA) and National Aeronautics and Space Administration (NASA) issued an interim rule prohibiting contractors from providing to any federal government entity any hardware, software or services developed or provided by Russian cybersecurity company Kaspersky Lab (Kaspersky). The interim rule amends Part 4 of the Federal Acquisition Regulation (FAR) by adding a new subpart 4.20, with a corresponding contract clause at FAR section 52.204-23.

The rule will go into effect July 16, 2018, after which time contracting officers must include FAR section 52.204-23 in all solicitations and contracts. In addition to prohibiting contractors from providing any Kaspersky hardware, software or services, the interim rule prohibits contractors from using Kaspersky products or services in the development of data or deliverables first produced in the performance of a government contract. Once the rule is in effect, contractors will be required to report any Kaspersky products discovered during the contract's performance. Contractors will be required to flow down the substance of FAR section 52.204-23 in all subcontracts, including for the acquisition of commercial items. To avoid future delay, contractors should immediately begin identifying, recording and mitigating all possible Kaspersky products and services used.

The interim rule implements section 1634 of the National Defense Authorization Act for Fiscal Year 2018 (FY18 NDAA), which banned the use of Kasperksy products and services by all federal government entities. See Pub. L. No. 115-91, section 1634, 131 Stat. 1283. The interim rule follows last month's ruling by the US District Court for the District of Columbia, in which the court dismissed Kaspersky's lawsuits challenging the lawfulness of the FY18 NDAA provision and the Department of Homeland Security's Binding Operational Directive that preceded it. The embattled firm has filed an appeal with the US Court of Appeals for the District of Columbia.

The DoD, GSA and NASA will consider public comments in response to the interim rule before it becomes final. To be considered, comments must be submitted on or before August 14, 2018, to the Regulatory Secretariat via the Federal eRulemaking portal (www.regulations.gov) or by mail (General Services Administration, ATTN: Lois Mandell, 1800 F Street NW, 2nd Floor, Washington, DC 20405-0001). All comments should be identified by FAC 2005-99, FAR Case 2018-010. (83 Fed. Reg. 28,141, 06/15/2018).

Government proposes to narrow the standard for adequate price competition for contracts with DoD, NASA, and Coast Guard

FAR section 15.403-1(b) lists five exceptions to the requirements for the submission of certified cost or pricing data, including when a contracting officer determines that prices are fair and reasonable based on "adequate price competition."

On June 12, the DoD, GSA and NASA proposed an amendment to FAR section 15.403-1(c) that significantly changes the standard for adequate price competition. Under the proposed rule, contracting officers may determine a price to be fair and reasonable based on adequate price competition "only if two or more responsible offerors, competing independently, submit responsive and viable offers" (emphasis added). The proposed rule removes the additional standards, currently in place, that define "adequate price competition" to include: (i) when there was a reasonable expectation that two or more responsible offerors would submit offers even though only one offeror actually submitted an offer; and (ii) comparison to historical prices for the same or similar item. Importantly, this proposed rule only applies to contracts with the DoD, NASA, and Coast Guard.

Subsequently, on June 29, the DoD proposed a rule that would amend sections 215.371 and 252.215-7008 of the Defense Federal Acquisition Regulation Supplement (DFARS). The proposed rule is intended to supplement the proposed FAR rule, above. The proposed DFARS rule would remove DFARS 215.371-3(a) (providing for the "reasonable expectation" circumstances, described above); "streamline[s]" the remaining subsections of DFARS 215.371-3 to add "additional emphasis on the requirement to obtain certified cost or pricing data when only one offer is received." Under the proposed rule, DFARS 252.215-7008 is similarly streamlined "to only address requirements for when only one offer is received in response to a DoD solicitation." Both DFARS clauses would be revised to exempt contracts valued at or below the simplified acquisition threshold.

Affected contractors may expect an increase in demands for certified cost or pricing data as a result of these narrowed standards; however, the recent threshold increase regarding certified cost and pricing data is likely to counterbalance this effect by limiting the number of affected contracts. See Phillip R. Seckman & J. Quincy Stott, "Implications of the changing cost and pricing data thresholds for prime contractors and subcontractors," Dentons Insights (May 23, 2018), https://www.dentons.com/en/insights/alerts/2018/may/23/changing-cost-and-pricing-data-thresholds-for-prime-contractors-and-subcontractors.

Both proposed rules implement section 822 of the National Defense Authorization Act for Fiscal Year 2017. See Pub. L. No. 114-328, section 822, 131 Stat. 1283.

Comments for the proposed FAR rule must be made on or before August 13, 2018, to be considered. Written comments may be submitted through http://www.regulations.gov or by mail at General Services Administration, Regulatory Secretariat (MVCB), ATTN: Lois Mandell, 1800 F Street NW, 2nd Floor, Washington, DC 20405-0001. (83 Fed. Reg. 27,303, 06/12/2018).

Comments for the proposed DFARS rule must be made on or before August 28, 2018, to be considered. Comments may be submitted via any of the following methods: Federal eRulemaking portal: http://www.regulations.gov; email: osd.dfars@mail.mil; fax: 571037206094; or mail: Defense Acquisition Regulations System, ATTN: Ms. Amy Williams, OUSD(AT&L)DPAP/DARS, Room 3B941, 3060 Defense Pentagon, Washington, DC 20301-3060.

DoD excepts indirect offset costs in FMS transactions from the requirement to provide certified cost and pricing data

On June 29, the DoD issued a final rule amending DFARS 225.7303-2 to state that all indirect offset costs in the context of foreign military sales (FMS) transactions are deemed reasonable, with no further analysis necessary on the part of the contracting officer, provided that the US defense contractor submits to the contracting officer a signed offset agreement (or other documentation) showing that the FMS customer has made the provision of an indirect offset of a certain dollar value a condition of the FMS acquisition. Under this rule, indirect offset costs are described as those costs which "involve benefits or obligations, including supplies or services that are not directly related to the specific item(s) being purchased and are not integral to the deliverable of the FMS contact." (Examples of such offsets include certain manufactured products, agricultural commodities, raw materials, services, equity investments or grants of equipment, or other projects related to the FMS contract but not purchased under the contract.)

Importantly, the rule excepts such indirect offsets from the requirement for certified cost or pricing data under DFARS 215.403-1. These provisions are incorporated into the contract clause at DFARS 252.215-7014.

The rule implements section 812 of the National Defense Authorization Act for Fiscal Year 2016 (FY16 NDAA), which was designed to "[l]imi[t] the applicability of requirements under the Truth in Negotiations Act to submit certified cost and pricing data if: (1) the data relates to an offset agreement in connection with a contract for the sale of a weapon system or defense-related item to a foreign country or foreign firm, and (2) does not relate to a contract or subcontract under the offset agreement for work performed in a foreign country that is directly related to the weapon system or defense-related item being purchased under the contract." See Pub. L. 114-92, section 812, 129 Stat. 726. The rule is likely to ease the regulatory burden on contractors conducting FMS transactions and advance the Trump administration's goal of facilitating US arms sales abroad.

Government expands certification requirements to include arms control treaty violations

Each year, the US State Department prepares a report (with the concurrence of the director of central intelligence and in consultation with the secretaries of defense and energy and the chairman of the Joint Chiefs of Staff) addressing the status of US policy and actions with respect to the various arms control, nonproliferation and disarmament treaties and agreements to which the US is a signatory. The report also addresses other signatories' adherence to and compliance with these same agreements. Pursuant to section 403 of the Arms Control and Disarmament Act (22 USC section 2593), the president submits this report to Congress. Concurrently, the Treasury secretary submits to the appropriate congressional committees a report identifying every person for whom there is credible information indicating that the person has engaged in activity that contributed to or is a significant factor in the secretary of state's determination that such country is noncompliant with the above-referenced agreements.

On June 15, the DoD, GSA and NASA issued an interim rule that would require a contractor to certify that it has not engaged in activity that contributed to or is a significant factor in the president's or the secretary of state's determination that any country is not in full compliance with its obligations under an arms control, nonproliferation, or disarmament agreement to which the US is a participant. The rule amends FAR part 9, Contractor Qualifications, and adds a provision at FAR section 52.209-13, which is to be included in each solicitation for the acquisition of products or services (including construction) that exceeds the simplified acquisition threshold, other than solicitations for the acquisition of commercial items. The certification may be made in the System for Award Management (SAM) database, but it is not yet a part of the annual representations included therein.

Effective June 15, the offer of an offeror that has not provided the certification set forth in FAR 52.209-13(b)(1) will not be considered. The rule implements section 1290 of the FY17 NDAA.

DoD issued a final rule regarding documenting the cost impacts of undefinitized contract actions

The DoD issued a final rule, effective June 29, 2018, that provides a more transparent method for documenting the cost impact during the undefinitized period of undefinitized contract actions (UCAs). The objective of the final rule is to require contracting officers to document, in the relevant price negotiation memorandum, the rationale for assigning a specific contract a certain risk value. Previously, some DoD personnel did not document their consideration of the reduced risk that contractors incur during the undefinitized period of a UCA. This rule creates transparency regarding the assessment of risk and its impact on cost under UCAs.

The final rule amends the weighted guidelines form to provide a means of clearly demonstrating that the contracting officer has appropriately considered and documented the risk to the contractor during the undefinitized period, as well as the contractor's due diligence in submitting a timely, auditable proposal. Additionally, the management/cost control factor in the weighted guidelines is adjusted to allow contracting officers to recognize when contractors demonstrate efficient management and internal cost control systems through the submission of a timely, auditable proposal in furtherance of definitization of a UCA. Note that the new rule only impacts contracts above the simplified acquisition threshold and does not apply to commercial item contracts. (83 Fed. Reg. 30,584, 06/29/2018).

DoD, NASA, and GSA propose expansion of special emergency procurement authorities

The DoD, NASA and GSA are proposing to amend the FAR to expand special emergency procurement authorities for acquisitions of supplies or services that facilitate defense against or recovery from cyberattacks, provide international disaster assistance under the Foreign Assistance Act of 1961 or support response to an emergency or disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. The proposed amendment implements sections 816 and 1641 of the 2017 NDAA.

Specifically, the 2017 NDAA established special procurement authority to allow for higher micro-purchase and simplified acquisition thresholds for acquisitions of supplies and services in emergencies, and the proposed rule implements this authority. Under these changes, if the procurement has "a clear and direct relationship to the support of a contingency operation," the government may spend up to $20,000 for domestic purchases and up to $30,000 for international purchases under micro-purchasing rules, and up to $750,000 and $1.5 million for simplified acquisition purchases. Additionally, the new rule places cyberattacks in the same category as nuclear, biological, chemical and radiological attacks.

Interested parties should submit comments on or before August 27, 2018, to http://www.regulations.gov or by mail to General Services Administration, Regulatory Secretarial Division (MVCB), ATTN: Lois Mandell, 1800 F Street NW, 2nd Floor, Washington D.C. 20405-00001. (83 Fed. Reg. 29,736, 06/26/2018).

In connection with the expanded emergency procurement authority, the 2018 NDAA also expands special emergency procurement authority to include acquisitions, as determined by the head of the agency, that facilitate defense against cyberattacks and other emergencies. The DoD amended the DFARS to delegate to the head of the contracting activity this authority provided in the FY18 NDAA. The final rule became effective on May 30, 2018.

Prior to this change, DFARS section 218.271 delegated to the head of the contracting activity the determination authority for application of the previously existing special emergency procurement authorities (support of a contingency operation or to facilitate defense against or recovery from nuclear, biological, chemical or radiological attack). This final rule delegates authority to the head of the contracting activity the special procurement authorities specified in the FAR, which will likely soon include cyberattacks. (83 Fed. Reg. 4,888, 05/30/2018).

NIST's rule changes create uncertainty for contractors regarding ownership of patents

On May 14, 2018, rule changes from the National Institute of Standards and Technology (NIST) modifying the agency's regulations implementing the Bayh-Dole Act, went into effect. The rule changes are intended to reduce regulatory burdens on contractors performing federally funded research projects by, among other things, clarifying electronic reporting requirements, aligning certain sections with patent laws, streamlining the license application process, clarifying the role of funding agencies and addressing instances where a federal employee is a co-inventor. However, the rule changes also are likely to generate some uncertainty regarding contractor ownership of patents.

While many of the rule changes are unlikely to significantly impact contractors performing federally funded research projects, the most notable change is removal of the 60-day time limit for the government to decide whether to assert ownership of a subject invention. Previously, the government had 60 days to make a written request to a contractor to convey title after learning that the contractor failed to timely disclose an invention or elect title. Under this rule change, the government can claim title to the patents at any time after a contractor fails to timely disclose or elect title or there is a disagreement over the adequacy of a disclosure. This is significant because it likely will create uncertainty regarding ownership of patents in the event a contractor misses a deadline or a disagreement arises. Time will tell how this change will impact the federally funded research projects and to what extent, if any, the government will rely on this change to assert ownership of subject inventions well after the fact.

For more information, read Dentons' Insight at https://www.dentons.com/en/insights/alerts/ 2018/june/18/nists-rule-changes-create-uncertainty-for-contractors-regarding-ownership-of-patents.

DP/DPAP guidance increases defective pricing risk for contractors certifying current cost/pricing data

In an effort to avoid acquisition delays, the DP/DPAP recently issued guidance to contracting officers that targets contractor Truthful Cost or Pricing Data sweeps and will compress the timeframe for certifying cost or pricing data. Affected contractors should take note as the guidance may increase the risk of defective pricing claims.

Specifically, the memorandum instructs contracting officers to defer consideration of the impact of any cost or pricing data submitted after price agreement until after award of the contract action to avoid delays. Contracting officers will also request, based on the guidance, that offerors execute the certificate of current cost or pricing data no later than five business days after the date of price agreement.

For more information, read Dentons' Insight at https://www.dentons.com/en/insights /alerts/2018/june/13/ dp-dpap-guidance -increases-defective-pricing-risk-for-contractors.


San Francisco and Montana pass new campaign finance regulation regarding government contractors

San Francisco recently passed legislation, effective June 2018, prohibiting contractors from contributing to the election campaign of any government officer who approved a government contract. The restriction lasts for one year after the contract is granted. Additionally, a political group that receives $10,000 or more from a business must disclose whether that business has a contract with the city.

Similarly, Montana Governor Steve Bullock, signed an executive order in June 2018 requiring government contractors with service contracts greater than $25,000 and goods contracts greater than $50,000 to disclose political contributions within two years of the relevant bid proposal.

These local laws implement requirements that do not exist at the federal level, and local contractors should be aware of and comply with the new requirements.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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