United States: Government Contracts Legislative And Regulatory Update - September 24, 2019

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.

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

Regulations

DoD, GSA, and NASA Issue Interim Rule Disallowing Use of Certain Telecommunications Equipment

On August 13, 2019, the Department of Defense ("DoD"), General Services Administration ("GSA"), and National Aeronautics and Space Administration ("NASA") issued an interim rule establishing two new contract clauses in the Federal Acquisition Regulation ("FAR"). The two clauses—FAR 52.204-24, Representation Regarding Certain Telecommunications and Video Surveillance Services or Equipment; and FAR 52.204-25, Prohibition on Contracting for Certain Telecommunications and Video Surveillance Services or Equipment—implement section 889(a)(1)(A) of the John S. McCain National Defense Authorization Act ("NDAA") for fiscal year ("FY") 2019 (Pub. L. 115-232).

Effective immediately upon publication, these clauses prohibit agencies from procuring or obtaining, or extending or renewing a contract to procure or obtain, any equipment, system or service that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as a critical technology as part of any system, on or after August 13, 2019. The interim rule defines "covered telecommunications equipment or services" as any of the following:

  • Telecommunications equipment produced by Huawei Technologies Company or ZTE Corporation (or any subsidiary or affiliate of such entities);
  • For the purpose of public safety, security of government facilities, physical security surveillance of critical infrastructure, and other national security purposes, video surveillance and telecommunications equipment produced by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company (or any subsidiary or affiliate of such entities);
  • Telecommunications or video surveillance services provided by such entities or using such equipment; or
  • Telecommunications or video surveillance equipment or services produced or provided by an entity that the Secretary of Defense, in consultation with the Director of National Intelligence or the Director of the Federal Bureau of Investigation, reasonably believes to be an entity owned or controlled by, or otherwise connected to, the government of a covered foreign country.

The interim rule further defines the term "critical technologies" to have the same meaning as set forth in the FY 2019 NDAA, which includes, inter alia, defense articles or defense services included on the United States Munitions List, items included on the Commerce Control List set forth in the Export Administration Regulations, and emerging and foundational technologies controlled pursuant to section 1758 of the Export Control Reform Act of 2018.

Comments on the interim rule are due by October 15, 2019. (84 Fed. Reg. 40216 (Aug. 13, 2019)).

FAR Council Proposes Rule Regarding the Applicability of Small Business Regulations Outside the United States

On August 12, 2019, the FAR Council issued a proposed rule supporting the Small Business Administration's ("SBA") policy of including overseas contracts in agency small business contracting goals. Historically, the SBA has not included contracts performed overseas when establishing government-wide contracting goals for small business contracts awarded by federal agencies each fiscal year. However in 2013, Section 1631(c) of the FY 2013 NDAA required the SBA to review and revise the guidelines for establishing small business goals so that agency goals do not exclude contracts based on (a) type of goods or services for which the agency contracts, (b) how funding for the contracts is made available to the agency by an Appropriations Act or by reimbursement from another agency or account or (c) whether or not the contract is subject to the FAR.

As a result of a 2013 review, the SBA on October 2, 2013, published a final rule amending its regulations to clarify that certain SBA contract provisions were applicable to overseas contracts. This new proposed rule amends FAR Part 19 and specifically clarifies that SBA contracting provisions may apply to contracts performed overseas. The amendments make clear that contracting officers may use set-aside and sole-source awards in contracts performed outside the United States. Currently, as written, FAR Part 19 only applies to the United States and its outlying areas leading contracting officers to interpret that they are either prohibited from applying set-asides to overseas contracts or that FAR Part 19 procedures do not apply to overseas contracts. The proposed changes in the rule aim to eliminate any contradictory interpretations of FAR Part 19 by contracting officers and to bring small business contracting goals in line with SBA regulations. (84 Fed. Reg. 39793 (Aug. 12, 2019))

DoD Issues Final Rule Amending Definitization Procedures for UCAs

Earlier this year, we wrote about a rule proposed by the DoD proposing changes to the definitization procedure for undefinitized contract actions ("UCA"). Among other things, the proposed rule sought to (1) permit 90-day extensions to the 180-day maximum for UCAs to persist in their undefinitized status, pursuant to certain higher level approval; and (2) provide additional oversight for the unilateral definitization of contracts that exceed $50 million. As noted at the time, the 90-day extension fails to enact Congress' intent for section 811 of the FY 2017 NDAA, the underlying statute, by prolonging price definitization negotiations rather than expediting them.

On August 9, 2019, the DoD issued a final rule, implementing the proposed rule in a substantively unchanged state at DoD FAR Supplement ("DFARS") 217.7404. Accordingly, in particularly thorny UCA negotiations, contractors may see the definitization period extended beyond the current 180-day maximum. However, contractors can expect to see additional oversight exercised for unilateral definitization efforts related to the DoD's priciest contracts. (84 Fed. Reg. 39204 (Aug. 9, 2019)).

DoD Issues Proposed Rule Establishing 'Should-Cost Review' Contract Requirements

Under FAR 15.407-4(b) and DFARS 215.407-4, contracting officers may perform a specialized form of cost analysis known as "should-cost reviews," whereby the government employs "a multi-functional team" in evaluating the economy and efficiency of a contractor's existing work force, methods, materials, equipment, real property, operating systems and management. These reviews are usually associated with the acquisition of major systems (as defined in FAR 2.101).

On August 9, 2019, the DoD issued a proposed rule that would add a new contract clause at DFARS 252.215-701X, Program Should-Cost Review, for use in solicitations and contracts for the development or production of a major weapon system (as defined in DFARS 234.7001). The purpose of the new contract clause is to "ensure objectivity and efficiency in the should-cost review process" and, presumably, contains a grant of authority for the government's performance of the same. The proposed rule would, then, modify DFARS 215.407-4, outlining the features a should-cost review ought include, such as:

  • A thorough review of each contributing element of the program cost and the justification for each cost;
  • Benchmarking against similar DoD programs, similar commercial programs (where appropriate) and other programs by the same contractor at the same facility;
  • Identification of items or services contracted through third parties that result in unnecessary pass-through costs; and
  • Establishment of measurable targets and ongoing tracking systems (among other things).

The proposed rule implements section 837 of the FY 2018 NDAA. 

Comments on the proposed rule are due by October 8, 2019. (84 Fed. Reg. 39254 (Aug. 9, 2019)).

DoD Issues Final Rule Establishing Two-Tier Approval Requirement for Certain Commercial Products

On August 9, 2019, the DoD issued a final rule that would add a new DFARS provision at DFARS 212.272, Preference for Certain Commercial Products and Services. The new provision implements section 876 of the FY 2017 NDAA and restricts contracting officers from entering into contracts above the simplified acquisition threshold for facilities-related, knowledge-based (except engineering), medical or transportation services that are not commercial services, unless an appropriate official determines in writing that no commercial services are suitable to meet the agency's needs. The following officials are deemed "appropriate" for purposes of this requirement:

  • For contracts above $10 million: the head of the contracting activity; the combatant commander of the combatant command concerned; or the undersecretary of defense for acquisition and sustainment.
  • For contracts above the simplified acquisition threshold but at or below $10 million: the contracting officer.

The final rule was never published for public comment, and the DoD asserts that such publication is not required under 41 U.S.C. section 1707(a)(1), because the change "affect[s] only the internal operating procedures of the Government" and (presumably) has no "significant effect beyond the internal operating procedures of the agency," as contemplated by the statute.  (84 Fed. Reg. 39203 (Aug. 9, 2019)).

DoD Issues Final Rule Adding Australia to WTO GPA List

On October 17, 2018, the World Trade Organization ("WTO") Committee on Government Procurement approved the accession of Australia to the WTO Agreement on Government Procurement ("GPA"). Earlier this year, Australia submitted its instrument of accession to the Secretary-General of the WTO and the WTO GPA entered into force for Australia on May 5, 2019. Accordingly, the United States (also a party to the WTO GPA) agreed to waive discriminatory purchasing requirements for eligible products and suppliers of Australia. Finally, then, on August 9, 2019, the DoD issued a final rule adding Australia to the list of countries set forth in the DFARS 252.225-7021.

This is welcome news for contractors who conduct a significant amount of their manufacturing efforts in Australia, as products that are "substantially transformed" in Australia might now be considered "designated country end products" for purposes of the Trade Agreements Act (19 U.S.C. 2501 et seq.). Similarly, the US Trade Representative has determined that Australia will provide appropriate reciprocal competitive government procurement opportunities to US products and services.

Class Deviation Regarding Peer Reviews for Supplies and Services

On August 20, 2019, Defense Pricing and Contracting ("DPC") issued a class deviation memorandum (2019-O0010), effective immediately, that it will no longer conduct peer reviews for competitive procurements above $1 billion, as required by DFARS 201.170(a)(i), except for procurements of major defense acquisition programs above $1 billion. DPC may, at its discretion, conduct peer reviews upon request by a military department, defense agency or DoD field activity. DPC will also no longer conduct post-award peer reviews for acquisition of services, as required by DFARS 201.170(a)(iii), with a total estimated value greater than $1 billion. This will not affect DPC's requirement under Section 808 of the FY 2008 NDAA requiring independent management reviews of contracts for services. Accordingly, the class deviation directs military departments, defense agencies and DoD field activities to establish procedures for periodic independent management reviews of contracts for services consistent with section 808. The requirement for noncompetitive peer reviews remain unchanged. However, unless requested by the cognizant contracting officer, competitive procurements that had previously been required to conduct peer reviews and have undergone one or more phases of a peer review, are not required to undergo peer reviews associated with any remaining phases, unless they are Acquisition Category 1D.

Class Deviation Regarding Performance-Based Payments

On August 20, 2019, DPC issued a class deviation memorandum, effective immediately, providing that when issuing a solicitation that may result in contract providing for performance-based payments, contracting officers must deviate from the policy at DFARS 232.1001(a) and the clause provisions at DFARS 232.1005-70, and use the clauses attached in the deviation. The attached clauses are provided for performance-based contracts on a whole-contract basis and deliverable-item basis. The clauses provide no mention of cumulative payments as is found in the current DFARS clauses and provides additional language regarding a contractor's incurred costs.  Specifically, for incurred costs, the clauses provide:

"An acceptable job order cost accounting system (per DFARS 252.242-7006) is not required for reporting of incurred costs under this clause.  If the Contractor's accounting system is not capable of tracking costs on a job order basis, the contractor shall provide a realistic approximation of the allocation of incurred costs attributable to this contract in accordance with Generally Accepted Accounting Principles (GAAP) and the Contractor's accounting system. FAR 52.232-32(m) does not require certification of incurred costs."

The clauses also provide additional language regarding security requirements for contracting officer's to take into consideration.

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