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

Highlights this month include:

  • FCC proposed rule to avoid purchasing products that threaten national security
  • DoD issues final rule regarding voluntary disclosures of defective pricing
  • National Defense Authorization Act for Fiscal Year 2019 moves through the House and Senate

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




FCC proposed rule to avoid purchasing products that threaten national security

On May 2, 2018, the Federal Communications Commission (FCC) followed through on its April 18 notice of proposed rulemaking, by introducing a proposed rule designed to “ensure that Universal Service Fund [USF] funding is not spent on equipment or services from suppliers that pose a national security threat.” The FCC based its authority for the proposed rule on sections 1, 201(b) and 254 of the Communications Act of 1934 (47 USC §§151 et seq.).

Though the proposed rule specifically contemplates Chinese companies Huawei Technologies Company and ZTE Corporation as businesses whose products threaten the country’s national security, any final rule would likely prohibit the use of USF money to purchase products from any company the FCC determines to “pose a national security threat to the integrity of communications networks or the communications supply chain.” The means by which the FCC purports to make such a determination remain unclear, as the Commission requests comment on “how to identify companies that pose [such] a national security threat.” The FCC expects the proposed rule not only to affect “the recipient of [USF] funding,” but also “any contractor or subcontractor of the recipient.” Here, again, the FCC seeks comment on the manner and extent to which its proposed rule should be applied. Other issues upon which the FCC petitions input include the types of equipment and services the rule would cover; the manner of audit, compliance and enforcement procedures; the extent of any waiver policies; and any additional cost/benefit analyses the FCC might not yet have considered. Comments must be made on or before July 2, 2018 to be considered. Written comments may be submitted through www.regulations.gov or www.fcc.gov/ecfs/. (83 Fed. Reg. 19,196, 05/2/2018)

Key rate and threshold adjustments

Last month saw a series of key rate and threshold increases codified in the Federal Acquisition Regulation (FAR), all of which were introduced on May 1 and went into effect on May 31, 2018. Each of the rules purports to reduce government costs, while their net effect on the contracting community is likely more nuanced.

Threshold increase for task- and delivery-order protests

First, the Department of Defense (DoD), General Service Administration (GSA) and National Aeronautics Space Administration (NASA) announced a new rule (i) raising the threshold for task- and delivery-order protests to $25 million from $10 million (applicable to all DoD, NASA and Coast Guard contracts), and (ii) repealing the sunset date for authority to protest the placement of an order (for all other civilian agencies). According to the GAO, fewer than 10 protests are filed each year between $10 million and $25 million; thus, any “lost benefit to interested parties” no longer able to protest was deemed “de minimis.” Despite the fact “the FAR Council is not able to monetize [the] cost savings” from this “deregulatory action,” the higher threshold is expected to “result in savings for GAO and the affected Executive branch agencies” as the GAO will have fewer protests to adjudicate and the government fewer to defend. This rule implements section 835 of the National Defense Authorization Act for Fiscal Year 2017 (2017 NDAA), Pub. L. 114–328, 130 Stat. 2000 (Dec. 23, 2016) (amending 41 U.S.C. 4106(f)). (83 Fed. Reg. 19,145, 05/01/2018)

Liquidated damages for violations of overtime pay now tied to DOL regulations

Second, the DoD, GSA and NASA issued a final rule amending the FAR to “refer to the rate of liquidated damages for violations of the overtime provisions of the Contract Work Hours and Safety Standards Act, in accordance with Department of Labor [DOL] regulations.” While the previous provisions stated a sum of $10 per individual, per day, the revised provisions now state:

The contracting officer must assess liquidated damages at the rate specified at 29 CFR 5.5(b)(2) per affected employee for each calendar day on which the employer required or permitted the employee to work in excess of the standard workweek of 40 hours without paying overtime wages required by the statute. In accordance with the Federal Civil Penalties Inflation Adjustment Act of 1990 (28 U.S.C. 2461 Note), the Department of Labor adjusts this civil monetary penalty for inflation no later than January 15 each year.

FAR 22.302(a); see also FAR 52.222-4. The current applicable DOL regulation establishes this rate at $26 per individual per calendar day for laborers and mechanics (including watchmen and guards), a 260 percent increase over the previous rate. See 29 C.F.R. §5.5(b)(2). (83 Fed. Reg. 19,148, 05/01/2018)

Increased threshold for settlement and settlement proposal audits

Finally, the DoD, GSA and NASA issued a final rule that raised the dollar threshold requirement for the audit of prime contract settlement proposals and subcontract settlements from $100,000 to align with the threshold for obtaining certified cost or pricing data (currently, fixed at $750,000 but set to jump to $2 million on June 30, 2018). See Steven M. Masiello & Thomas A. Lemmer, DoD Thresholds for Cost and Pricing Data Poised to Increase to $2M, DENTONS ALERTS (Apr. 24, 2018). 

Much like the threshold increase for certified cost and pricing data to which this rule is tied, the settlement and settlement proposal audit threshold increase reduces the inherent risk and cost to contractors associated with the preparation and support of termination settlement audits. Moreover, the rule purports to “enable faster final settlement

Responsibilities of the Office of Small and Disadvantaged Business Utilization expanded 

On May 31, 2018, a new rule took effect that amends FAR Part 19 based on 2017 NDAA, adding responsibilities to the Office of Small and Disadvantaged Business Utilization (OSDBU) and the DoD Office of Small Business Programs (OSBP). The rule includes the following additional duties: 

  • OSDBUs and OSBPs now have flexibility to identify the best purchase card data available to their agency when implementing the statutory requirement when reviewing summary purchase card data for acquisitions above the micro-purchase threshold and below the simplified acquisition threshold to ensure the acquisitions are compliant with the Small Business Act.
  • OSDBUs and OSBPs must provide assistance to small business prime and subcontractors when identifying resources for education and training regarding FAR compliance.
  • OSDBUs and OSBPs must review all required small business subcontracting plans to ensure that the plans provide the best, practical opportunities for small businesses to participate as subcontractors. 
  • OSDBUs and OSBPs perform broader functions in supporting small business participation in solicitations with bundling under FAR 19.201(c)(5).

(83 Fed. Reg. 19,146, 05/01/2018)

DoD issues final rule regarding voluntary disclosures of defective pricing

On May 4, 2018, the DoD issued a final rule offering incentives to DoD contractors to voluntarily disclose defective pricing discovered after the award of an affected DoD contract. The final DFARS rule adjusts FAR 15.407-1(c), which requires a contracting officer to request an audit to evaluate the accuracy, completeness, and currency of certified cost or pricing data if the contracting officer learns or suspects after contract award that the furnished data did not meet this criteria. The final rule softens this requirement for DoD contracts by allowing DoD contracting officers to determine the nature and scope of DCAA audits when a contractor has voluntarily disclosed defective pricing.

The final rule has been adjusted from the proposed rule in that DoD contracting officers under the final rule have discretion to request a limited-scope audit whereas the proposed rule required that a limited-scope audit occur. In other words, it is possible that for certain voluntary defective pricing disclosures there would be no audit. Consistent with the proposed rule, however, under the final rule the DoD contracting officer retains discretion to order a full-scope audit when appropriate for the circumstances. For government contractors, this final rule may provide some incentive for voluntary disclosures of defective pricing. The true test, however, is whether the prospect of avoiding an audit, or undergoing a limited-scope audit, is sufficient inducement to prompt contractors to voluntarily disclose defective pricing.

The final rule creates DFARS 215.407-1, Defective certified cost or pricing data, which states that a contracting officer shall discuss voluntary disclosures of defective pricing with the Defense Contract Audit Agency (DCAA). The discussion will include topics such as:

  • The completeness of the contractor's voluntary disclosure;
  • The accuracy of its cost impact calculation; and
  • The potential impact of the defective pricing on existing contracts, orders or other proposals submitted to the government.

The final rule is designed to provide DoD contracting officers with discretion to resolve voluntary defective pricing disclosures without engaging a full-blown audit, while still seeking to ensure the government's interests are protected. The final rule does not affect the government's entitlement under FAR 15.407-1(b)(7) to the recovery of any overpayment, plus interest, and a contractor's voluntary disclosure does not waive the government's right to pursue defective pricing claims on the affected contract or any other government contract.

Implications of the changing cost and pricing data thresholds for prime contractors and subcontractors

As we reported last month, the dollar threshold triggering the requirement for certified cost and pricing data under FAR 15.403-4 and application of the Cost Accounting Standards (CAS) pursuant to FAR 9903.201-1 will increase to $2 million from $750,000 for DoD contracts on July 1, 2018. Specifically, section 811 of the NDAA for fiscal year 2018 (Pub. L. No. 115-91, 131 Stat. 1283 (Dec. 12, 2017)) (2018 NDAA), amends 10 USC section 2306a and 41 USC section 3502, increasing the threshold for obtaining certified cost or pricing data to $2 million. Government contractors should explore updates to their purchasing system policies and procedures regarding subcontracts subject to the Truthful Cost or Pricing Data statute (TCPD) and CAS requirements based on the upcoming increased threshold. Inevitably, this increased threshold impacts subcontracting, particularly under contractor purchasing systems that are subject to the DoD Business Systems Rule. 

A recent memorandum issued by Shay D. Assad, director of defense pricing/defense procurement and acquisition policy (DP/DPAP), detailed last month, directs that, effective July 1, 2018, DoD contracting officers shall use $2 million as the threshold for obtaining certified cost and pricing data “in lieu of the threshold . . . at [FAR] 15.403-4.” Notably, while this class deviation provides direction to DoD contracting officers, it does not change the “current threshold” in FAR 15.403-4. Accordingly, absent a contract specifying a different threshold, prime contractors must wait until the threshold in FAR 15.403-4 is updated to implement the $2 million threshold before they may safely use it for subcontracts and modifications that are not otherwise exempt.

Under FAR 52.215-12 and 52.215-13, a prime contractor’s obligation is to require a subcontractor to submit certified cost or pricing data when the expected value of the pricing action will exceed the threshold in FAR 15.403-4 and an exception does not apply. FAR 15.403-4(a)(1) states that certified cost or pricing data are required before the award or modification of subcontracts “expected to exceed the current threshold or, in the case of existing contracts, the threshold specified in the contract.” The same paragraph currently provides that “[t]he threshold for obtaining certified cost or pricing data is $750,000,” and has not yet been updated to reflect the increased threshold. 

In the context of contractor purchasing system reviews, the Defense Contract Management Agency has taken the position that the threshold for obtaining certified cost or pricing data is established in FAR 15.403-4 and automatically updates with changes to the FAR, rather than remaining static based on when the prime contract was awarded. Thus, unless a different threshold is specified in a prime contract, once FAR 15.403-4 is updated with the $2 million threshold, government contractors should revisit their policies and procedures, as this increased amount will become the threshold applicable to subcontract awards and modifications that are not otherwise exempt. 

More interesting is the impact of the increased thresholds when awarding subcontracts that may be subject to CAS. Specifically, prime contractors may have the ability to use the $2 million threshold for subcontracts without waiting until the relevant clauses incorporate the new, higher threshold. The CAS clauses (e.g., FAR 52.230-2(d)) currently reference the $750,000 threshold. Importantly, however, the CAS clause provides that it must be flowed down to “negotiated subcontracts in excess of $750,000, except that the requirement shall not apply to negotiated subcontracts otherwise exempt from the requirement to include a CAS clause as specified in 48 C.F.R. 9903.201-1.” Under CAS, a subcontract is exempt when, among other reasons, it is “not in excess of the Truth in Negotiations Act (TINA) thresholds, as adjusted for inflation (41 USC §1908 and 41 USC §1502(b)(1)(B).” (48 C.F.R. §9903.201-1(b)(2)) 

Notably, 41 USC section 1502(b)(1)(B) provides, in relevant part, that the CAS are mandatory for subcontract procurements “in excess of the amount set forth in section 2306a(a)(1)(A)(i) of title 10 as the amount is adjusted in accordance with applicable requirements of law.” Due to the 2018 NDAA, the amount set forth at 10 USC section 2306a(1)(A)(i) is $2 million for a contract entered into after June 30, 2018.

Accordingly, prime contractors would have a sound basis to conclude that they need only flow the CAS clauses on subcontract awards made after June 30, 2018, if the awards are expected to exceed $2 million. In other words, the increased threshold is immediately applicable to subcontracts for purposes of CAS as of July 1, 2018. Of course, before adopting such a practice, contractors should consult counsel to consider their particular circumstances and should also consider notifying their cognizant administrative contracting officers.


NDAA for FY 2019 passes both chambers and heads to conference

On May 24, 2018, the US House of Representatives passed its version of the National Defense Authorization Act for Fiscal Year 2019 (2019 NDAA) by a vote of 351-66. The Senate passed its version of the more than $700 billion annual defense policy bill on June 18 by a vote of 85-10. The House-passed version of the NDAA includes the following new acquisition reform provisions offered by House Armed Services Committee (HASC) Chairman Mac Thornberry (R-TX-13):

  • Separation of the definition of “commercial item” into definitions of “commercial product” and “commercial service” to “simplify and streamline procurement.”

    • A “commercial product” is a product “of a type customarily used by the general public or by nongovernmental entities for purposes other than government purposes . . . .” 
    • A “commercial service” is defined as including “installation services, maintenance services, repair services, training services, and other services if . . . those services are procured for support of a commercial product . . . and the source of the service provides similar services contemporaneously to the general public under terms and conditions similar to those offered to the Federal Government . . . .”
  • Creation of a “precise, unified” definition of “subcontract.”

    • A “subcontract” is “a contract entered into by a prime contractor or subcontractor for purposes of obtaining supplies, materials, equipment, or services of any kind under a prime contract. The term includes a transfer of a commercial product or commercial service between divisions, subsidiaries, or affiliates of a contractor or subcontractor.” 
  • A requirement that the Secretary of Defense annually report, through 2021, on the DoD's use of other transaction authority (OTA) to allow for “proper [Congressional] assessment of the effectiveness and success” of the DoD's use of OTA.
  • A requirement that the DoD develop and implement a strategy “to better leverage small business as a means to enhance or support mission execution” to increase entry points to the defense sector “for nontraditional and innovative companies.” 
  • An increase in the micro-purchase threshold for procurement through online marketplaces to $25,000 from $10,000.

The Senate-passed bill does not contain any provisions that would conflict directly with the inclusion in the final version of the NDAA of the acquisition reform provisions contained in the House-passed version of the bill. Now that the Senate has passed its version of the 2019 NDAA, the two versions of the bill will be reconciled by a House-Senate conference committee. The two chambers are likely to name their respective conferees before the end of June. During the conference process, HASC and SASC staff will work to resolve the minor disparities between the two versions of the bill, HASC and SASC members and staff will resolve some of the more challenging disparities, and the Big Four (the chairmen and ranking members of the two committees) will resolve the most contentious disparities. On June 13, Chairman Thornberry shared that he hopes to complete conference consideration by the end of July. This is a realistic timeline given that the chambers do not have to resolve disparate topline defense spending levels as a result of the existing two-year budget agreement. In the past several years, the difference in topline defense spending levels in the respective versions of the NDAA has been the primary cause for delay in producing the NDAA conference report (aka the final, reconciled version of the bill). Of course, the conference process will not be wholly absent of sticking points, including over differences in authorized funding levels for major weapons systems in the competing versions of the bill.

Congress has passed the NDAA for 57 straight years. It is one of but a few remaining must-pass annual bills on Capitol Hill. Companies that do business with the DoD should closely monitor the 2019 NDAA conference process in anticipation of the bill's enactment later this year.

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