We are pleased to bring you the December edition of “Government Contracts Legislative and Regulatory Update,” a summary of the relevant changes that took place during the month of November. Highlights this month include:

  • compromise version of the National Defense Authorization Act for FY 2017 nears completion
  • FAR Council issues a final rule requiring representation of contractor greenhouse gas emission disclosures
  • BIS issues a final rule to remove arms embargoes against certain countries
  • DoD proposes a rule that would increase contractors’ evaluated bid prices by including allowable IR&D expenses

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

On November 17, Dentons' Silicon Valley Institute on Government and Technology hosted a webinar on "The 2016 Presidential and Congressional Elections: Impacts on DoD's Technology Innovation Initiative." The National Defense Magazine and Bloomberg Government published articles mentioning some of the salient points made during the webinar. A recording of the webinar is available here.

On behalf of Dentons, we wish you and your loved ones a happy holiday season and a prosperous new year!

House Intelligence Committee introduces H.R. 6393, Intelligence Authorization Act for Fiscal Year 2017

On November 22, 2016, Representative Devin Nunes (R-CA) introduced an updated version of the Intelligence Authorization Act for fiscal year 2017 (H.R. 6393). Similar to its predecessor, H.R. 5077, but the bill incorporates changes from the Senate version, (S. 3017) after extensive negotiations, most notably adding a clause aimed at countering Russian “covert influence” in the United States. In order to address lawmakers’ growing concerns over Russia, the bill would, for example, place restrictions on the travel of Russian diplomats within the United States and create an interagency committee to counter covert Russian influence in the United States. The bill would also, among other things: (i) require a declassification review of intelligence on past terrorist activities of individuals transferred out of Guantanamo Bay and of the measures taken by countries to which these individuals are transferred; (ii) improve intelligence community whistleblower protection procedures; and (iii) strengthen intelligence community reporting to Congress by, for example, requiring the intelligence community to provide analysis and impact statements on foreign investments in the United States. Additionally, the bill includes improved outreach and the use of pay authorities to recruit and retain intelligence staffers with technology, engineering and math, or science skills, as well as providing the Inspector General of the Intelligence Community (ICIG) with greater independence. Finally, the bill directs the ICIG to submit a report of reprisals, i.e., discharges or other adverse personnel actions against covered contractor employees for disclosing information, which disclosure would have been legally protected were the contractor a government employee. The purpose of this is to encourage covered contractor employees to make protected disclosures. (H.R. 6393)

Compromise version of National Defense Authorization Act for Fiscal Year 2017 nears completion

The FY 2017 National Defense Authorization Act (NDAA) conference report was released on November 30, 2016. On December 2, the House of Representatives passed the compromise version of the annual defense policy bill by a vote of 375 to 34. The Senate will likely take up and pass the NDAA before the 114th Congress leaves Washington for the final time on December 9. Because conferees removed the most contentious provisions from the bill’s final version (which provisions had delayed its finalization in September) and as a result of the outcome of the intervening Presidential election, President Obama is now less likely to veto the bill.

The compromise version of the NDAA furthers the shared agenda of House and Senate Armed Services Committee Chairmen Mac Thornberry (R-TX 13th) and John McCain (R-AZ) to streamline the defense acquisition process and increase defense innovation, by including numerous defense acquisition reform and innovation provisions, including those that would:

  • Dissolve the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics (AT&L) by February 2018. Oversight responsibility for AT&L would be split between two new Department of Defense (DoD) roles: an Under Secretary of Defense for Research and Engineering and an Under Secretary of Defense for Acquisition and Sustainment.
  • Establish a preference for fixed-price contracts over cost-type agreements.
  • Reduce barriers to the use of commercial products, processes and standards.
  • Promote the goal of rapid deployment of new technologies through the application of incremental acquisition processes that provide flexible funding for experimentation and prototyping.

Some of the key innovation provisions in the bill include those that would:

  • Fully fund the Defense Advanced Research Projects Agency (DARPA) and the Strategic Capabilities Office (SCO).
  • Increase funding in support of the DoD’s Third Offset Strategy.
  • Make permanent the DoD’s Rapid Innovation Program.

The Defense Innovation Unit Experimental (DIUx), arguably the flagship enterprise of Secretary of Defense Ash Carter’s broader innovation efforts, did not fare as well as other innovation programs in the final version of the NDAA. The bill limits the funds available to DIUx to run its existing locations and outposts in Silicon Valley, Boston and Austin, TX, and withholds full funding for the unit’s research and development activities contingent on a reporting requirement. Despite this perceived setback for DIUx, the organization, during the fourth quarter of FY 2016, awarded 12 contracts worth over $36 million with an average turnaround time of 60 days, which is very rare in the DoD acquisition realm. $8.3 million of that $36 million was directly invested by DIUx, and the remaining funds were provided by other DoD components. DIUx has another 15 contracts worth over $60 million in the pipeline that it plans to execute in the near future, so the entity is doing its best to demonstrate to the incoming Trump administration that its mission should continue under new DoD leadership.

Although DIUx’s fate remains unclear, President-elect Trump’s Pentagon transition team showed a keen interest in the DoD’s ongoing innovation initiatives during early talks with the Department’s leadership, so the landscape for continued defense acquisition reform and expansion of the DoD’s innovation efforts should be ripe during the next Congress. (S. 2943)

Regulatory Update

DoD issues final rule amending the DFARS to enhance the effectiveness of independent research and development

On November 4, 2016, the DoD issued a final rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) in an effort to improve the effectiveness of independent research and development (IR&D) investments made by the defense industrial base. The rule requires that contractors, before generating costs, engage in “technical interchanges,” the informal engagements with the DoD designed to promote communication and transparency between IR&D participants and the Department. Particularly, beginning in FY 2017, IR&D costs will be allowable costs on DoD contracts for major contractors only if the contractor, on an annual basis, provides to the Defense Technical Information Center (DTIC) summary information regarding ongoing and completed IR&D projects and, prior to generating any new IR&D costs, communicates proposed IR&D efforts to proper DoD personnel via a technical interchange. The final rule applies only to “major contractors,” defined as contractors whose covered segments allocated more than $11 million in IR&D and bid and proposal costs to covered contracts during the preceding fiscal year.

Essentially, this rule renders IR&D costs unallowable on DoD contracts unless major contractors comply with the aforementioned reporting and oversight requirements. By requiring contractors to engage in technical interchanges, which are not clearly defined in the rule, the DoD is essentially reducing the independent nature of contractor IR&D. Further, the rule is unclear as to how major contractors’ sensitive IR&D information will be protected from disclosure as a result of the technical interchanges. In addition, the rule’s obligation to report via technical interchanges will likely result in heightened administration costs for contractors. Finally, given that this final rule provides ripe grounds for audit attacks, major contractors should, without delay, take steps to assess the financial viability of their IR&D projects. While this rule became effective on November 4, 2016, it only applies to IR&D projects initiated by contractors in FY 2017 or later. (81 Fed. Reg. 78,008, 11/04/2016)

FAR Council amends FAR to require contractor representations regarding GHG emissions disclosures

On November 18, 2016, the Federal Acquisition Regulatory (FAR) Council, which includes representatives of the DoD, the General Services Administration (GSA) and the National Aeronautics and Space Administration (NASA), issued a final rule amending the FAR to require certain federal government contractors to “represent whether or not they publicly disclose their greenhouse gas emissions and their greenhouse emissions reduction goals.” This rule implements Executive Order No. 13693, which aims to “reduce agency direct greenhouse gas emissions by at least 40 percent” by 2025.

This rule, which adds FAR 52.223-22, applies only to federal contractors that are both registered in the System for Award Management (SAM) and have received $7.5 million or more in contract awards during the prior federal fiscal year. For contractors receiving less than $7.5 million in the prior fiscal year, any such representation may be made on a voluntary basis.

The burden on contractors is minimal, as they need not directly provide the information contained in their emissions disclosures; the rule only requires that the contractor provide the publicly available website where such information is located (if indeed it is publicly disclosed). In allowing this, the FAR Council was being sensitive to comments submitted on the rule concerning the accidental disclosure of contractor trade secrets. By merely requiring contractors to direct regulators to where the emissions information is already publicly located, contractors will not be at risk of revealing any additional information which could be considered a trade secret.

In response to comments received, the FAR Council clarified several other aspects of the rule, two of which are of particular importance to contractors. First, in response to concerns from companies that do not disclose their emissions information that they would be placed at a significant competitive disadvantage against bidders who do make such disclosures, the FAR Council clarified that “the rule does not establish evaluation criteria to be used in a source selection decision.” Second, the rule does not provide an exception for contracts for commercial items or commercially-available off-the-shelf items (COTS), or for contracts falling under the “simplified acquisition threshold” (SAT) of $150,000. In fact, the rule establishes, at FAR 52.212-3, a commercial-item equivalent.

In response to other comments, the FAR Council: (i) broadened language from the proposed rule to require greenhouse gas emissions reporting programs to meet “accounting standards with publicly available and consistently applied criteria,” rather than the narrower “recognized standards”; (ii) clarifies that the reporting requirements for a specific contractor do not extend to their parent companies, or to the emissions management practices of a facility they do not own; (iii) makes certain technical and organizational amendments; and (iv) removes references to obsolete technologies, such as “telegraph” and “telegram.”

Moving forward, covered contractors will be tasked with making this representation merely by checking a box indicating whether or not they disclose their emissions information. This rule became effective on December 19, 2016. (81 Fed. Reg. 83,092, 11/18/2016)

DoD issues final rule amending criteria for pilot program for the acquisition of military purpose nondevelopmental items (MPNDI)

On November 4, 2016, the DoD finalized, with changes, an interim rule that was published on June 30, 2016 (80 Fed. Reg. 42,557) implementing §892 of the NDAA for FY 2016. The rule’s objective is to change the criteria for the pilot program at DFARS Subpart 212.71, Pilot Program for the Acquisition of Military Purpose Nondevelopmental Items. The final rule makes three primary changes:

  1. Removes the applicability requirement for the pilot program at DFARS §212.7102-1, which provides that contracts for the acquisition of military purpose nondevelopmental items must be awarded to “nontraditional defense contractors.” For purposes of the pilot program, “nontraditional defense contractor,” is defined at DFARS §252.212-7002 to mean an entity that is neither currently performing nor has previously performed (i) any contract or subcontract that is subject to full coverage under the cost accounting standards prescribed in 41 U.S.C. §1502 or (ii) any other contract in excess of the certified cost or pricing data threshold for at least a one-year period before the solicitation of sources by the DoD for the procurement.
  2. Removes the criteria that contract awards under the pilot program must be made using competitive procedures.
  3. Increases the maximum contract award value threshold to $100 million from US$53.5 million (i.e., the pilot program can be used on procurements up to US$100 million).

This final rule will have a positive impact on small businesses that develop products that could be applied to a military purpose, but that did not formerly meet the definition of “nontraditional defense contractors.” Data available in the Federal Procurement Data System for FY 2015 indicates that 6,514 unique small businesses were awarded DoD contracts in excess of the certified cost and pricing threshold ($750,000). As a consequence, they did not meet the definition of “nontraditional defense contractor” and were therefore ineligible to receive an award under the pilot program. All of these small businesses, to the extent they are developing a military purpose nondevelopmental item, will now be able to participate in the pilot program.

The requirements of §892 of the NDAA for FY 2016 are not applicable to contracts at or below the SAT or to the acquisition of COTS items. This rule became effective on November 4, 2016. (81 Fed. Reg. 78,012, 11/04/2016)

BIS issues final rule removing arms embargoes against certain countries

The arms embargo against Cote D’Ivoire was imposed in 2004 and the arms embargo against Liberia was imposed in 1992. This rule removes the UN embargo controls on these countries by removing them from the names of UNSC arms embargoed countries found in 15 C.F.R. §746.1(b) and from Country Group D:5 in Supplement No.1 to part 740 of the EAR, “U.S. Arms Embargoed Countries.” The termination of the arms embargoes against these countries means that it is no longer the policy of the United States to deny licenses or other approvals for the export or import of defense articles and defense services destined for or originating in these countries.

Further, this final rule also removes Sri Lanka and Vietnam from Country Group D:5 in Supplement No.1 to part 740 of the EAR, “U.S. Arms Embargoed Countries.” The Department of State imposed a US arms embargo against Sri Lanka in 2008, which restricted exports and imports to and from the country as well as imposed licensing restrictions. For Vietnam, the State Department’s lethal arms sale embargo dated back to the 1960’s during the era of the Vietnam War. In accordance with a determination by the Secretary of State, President Obama in May 2016 announced the termination of the arms embargo against Vietnam; this final rule officially removes the country from the list of “U.S. Arms Embargoed Countries.” Countries on the aforementioned list are reviewed consistent with the policies in 22 C.F.R. §126.1 of the International Traffic in Arms Regulations (ITAR) as provided in the EAR at 15 C.F.R. §742.4(b)(ii).

These removals are significant in that US contractors may now export and import defense articles and services to Cote D’Ivoire, Liberia, Sri Lanka and Vietnam.

Finally, with India’s formal accession to membership in the Missile Technology Control Regime (MTCR) on June 27, 2016, this final rule recognizes that country’s status as a member of the MTCR by removing from paragraph (d) of 15 C.F.R. §742 the reference to India being only an “MTCR adherent.” This rule became effective on November 4, 2016. (81 Fed. Reg. 76,859, 11/04/2016)

DoD proposes rule to increase contractors’ evaluated bid prices by including allowable IR&D expenses

On November 4, 2016, the DoD issued a proposed rule to amend the DFARS to ensure that a contractor’s IR&D expenses are included in its total evaluated offer price for competitive procurements. Currently, contractors use IR&D expenses to reduce total evaluated bid prices in competitive procurements by allocating allowable IR&D expenses as indirect costs, potentially spreading this cost across the total business. This enables a contractor to gain a price advantage in a specific competitive bid when it relies on its future IR&D costs to reduce its proposed bid price. The Under Secretary of Defense for Acquisition, Technology, and Logistics has noted that “[t]his is not the intended purpose of making IR[&]D an allowable cost.” Therefore, the purpose of this proposed rule is to ensure that “substantial” future IR&D expenses, used by contractors to reduce evaluated bid prices, are evaluated by contracting officers in a uniform way. To that end, under the proposed rule, contracting officers will be required to adjust the total evaluated cost or price of proposals, for evaluation purposes, to include the amount by which a contractor proposes that substantial future IR&D costs reduce the price of its bid. In essence, the DoD wants to make sure that the government’s possible reimbursement of allowable IR&D costs is reflected in a contractor’s total evaluated price so that bids for competitive procurements are evaluated on a level playing field. To support this initiative, the proposed rule would require an offeror to “include documentation in its price proposal to support [its] proposed approach” when it “intends to use IR&D to meet the contract requirements . . . .”

In particular, this proposed rule would create a new clause, DFARS §252.215-70XX, Notification of Inclusion of Evaluation Criteria for Reliance Upon Future Government-Reimbursed Independent Research and Development Investments. The applicability of this proposed rule would be limited to major defense acquisition programs, as defined in 10 U.S.C. §2430, and major automated information systems acquisitions, as defined in 10 U.S.C. §2445a. Furthermore, the proposed rule would be inapplicable to contracts at or below the SAT or to commercial items acquisitions, including COTS.

Notably, although the goal of the proposed rule is to ensure that “substantial” future IR&D expenses are evaluated in a uniform way during the competitive procurement process, “substantial” is not defined in the proposed rule. Nevertheless, contractors developing proposals for acquisitions covered under this proposed rule face significant upward adjustments to their proposed prices or estimated costs. As a consequence, this proposed rule reduces the incentive for contractors to engage in IR&D by cutting the benefits that contractors receive from IR&D projects. In turn, this has the potential to hurt the DoD’s ability to fund innovation and acquire cutting edge technology. As contractors look to place the most competitive offer on procurements, they may spend less on IR&D because, effectively, IR&D expenses would become a penalty in future competitive procurements. Contractors should evaluate how, under this proposed rule, their current IR&D efforts could impact their competitiveness in covered acquisitions.

In addition, this proposed rule seems to contradict statutory and regulatory policy because it arguably requires contractors to provide cost or pricing data in support of their bids, despite the fact that such data is not required when awards are based on sufficient price competition. See 10 U.S.C. §2306a(b)(1)(A)(i) and 48 C.F.R. §§15.403-1(b)(1) and 15.403-3(b). Lastly, this proposed rule does not address the following: (i) the methodology that contractors should use to account for future IR&D reimbursements, and (ii) whether IR&D costs that are expected to be reimbursed by non-DoD agencies must also be included in the total evaluated offer price adjustment.

This proposed rule is a follow-up to the DoD’s publication of an advanced notice of proposed rulemaking (ANPR) on February 8, 2016 (81 Fed. Reg. 6488). Comments on this proposed rule should be submitted in writing on or before January 3, 2017. (81 Fed. Reg. 78,014, 11/04/2016)

On November 7, 2016, the DoD issued six proposed rules that collectively outline revisions to the DoD Grant and Agreement Regulations (DoDGARs). In a “major step” toward a comprehensive revision of the DoDGARs, the proposed rules seek to simplify and eliminate guesswork in the existing scheme applicable to government grants and cooperative agreements, specifically with respect to administrative requirements, cost principles and audit requirements. While contractors may find the proposed changes to exact unnecessary administrative requirements, compliance with this proposed scheme could prove beneficial to both contractors and the DoD for ultimate ease in the award process.

  1. The first proposed rule proposes adding 2 C.F.R. 1104 to serve as a “central hub” or directory for the DoDGARs more generally. (81 Fed. Reg. 78,356, 11/07/2016)
  2. The second proposed rule outlines a standardized format for grant and cooperative agreement awards and modifications of awards, across all DoD components; and implements Office of Management and Budget (OMB) guidance on the minimum content required in a federal award. This proposed rule would require specific cover page content, directs the inclusion of award-specific terms and conditions, and governs the inclusion of general terms and conditions, including permitting the public posting of general terms and conditions in lieu of requiring their inclusion in each contract award. This proposed rule will likely benefit the government, as it will provide for a more standardized review process. However, its requirements may ultimately prove burdensome to contractors, who would be required to adapt their standard practices to comply with it. (81 Fed. Reg. 78,369, 11/07/2016)
  3. The third proposed rule would add seven new DoDGARs parts to the Code of Federal Regulations, which collectively would “establish a standard organization and content” for the administrative requirements included in general terms and conditions for DoD cost-type grants and cooperative agreements. These parts would apply to certain awardees, including institutions of higher education, nonprofit organizations, and other entities subject to the requirements at 2 C.F.R. 200. The proposed administrative requirements embrace various areas, including financial and program management; property administration; recipient procurement procedures; financial, programmatic and property reporting; and sub-awards. Of particular relevance to contractors is proposed Article V, Financial Management System Standards, which conveniently groups all information regarding non-federal audit requirements in a central location; this may help contractors better understand their non-federal audit obligations. With respect to payment, the DoD proposes a slight variation in the wording of OMB guidance stating that an awarding agency “must make payment” within 30 calendar days of receiving the billing. The proposed rule states that the DoD “generally” makes payment within that timeframe. If this flexibility is granted to the government, contractors may be disadvantaged by delayed payments. (81 Fed. Reg. 78,382, 11/07/2016)
  4. The fourth proposed rule seeks to “maximize uniformity” in the general terms and conditions concerning national policy requirements in DoD grants and cooperative agreements across all types of recipient entities. According to this proposed rule, national policy requirements include nondiscrimination, the environment and labor standards that originate in federal statutes, executive orders and regulations. In addition to the updated definition of “national policy requirement” discussed above, there are three major aspects to note regarding this proposed rule. First, it would organize types of national policy requirements by categories, and designate the standard wording for each type of requirement therein. Second, while all DoD entities must utilize the standard wording set forth in this rule, an exception exists where a statute or regulation provides for an alternative wording. Third, there would be no requirement for recipients to flow down these national policy requirements to lower tier contractors. (81 Fed. Reg. 78,376, 11/07/2016)
  5. The fifth proposed rule provides a unified set of definitions governing DoD grants and cooperative agreements, and proposes 2 C.F.R. 1108 as the new location for said definitions. Terms defined in the proposed part include “acquire,” “small award” (which refers to contracts under the SAT), “unique agency identifier” and various terms to distinguish among DoD offices and officials with distinct responsibilities. (81 Fed. Reg. 78,360, 11/07/2016)
  6. The final proposed rule proposes organizational changes to the DoDGARs, specifically, removal of two DoDGARs parts and revision to four other parts for consistency with the changes outlined above. (81 Fed. Reg. 78,442, 11/07/2016)

Ultimately, the proposed revisions aim to simplify the requirements applicable to DoD grants and cooperative agreements, and provide for better organization and less guesswork throughout the process. Contractors, however, should prudently observe subtle differences in the realms of definitions and terms and conditions that may counter widely accepted practice. Comments on each of these proposed rules must be received on or before February 6, 2017.

On November 29, 2016, the FAR Council issued a proposed rule to amend the FAR in order to implement §887 of the NDAA for FY 2016. Specifically, the proposed rule would amend FAR §1.102-2(a)(4) to state that government acquisition personnel are authorized, and even encouraged, to engage in responsible and productive dialogue with industry, as long as such exchanges are consistent with existing laws and regulations and do not promote unfair competition. The objective of this proposed rule is to better enable government acquisition officials to obtain information needed to issue high-quality solicitations from contractors, and to enhance the overall effectiveness of communication between the government and industry. The government would benefit from this proposed rule because it would be able to more effectively describe its acquisition requirements to contractors. Contractors, in turn, would be able to target their solicitations to the government’s requirements based on better communication with the government. Comments on the proposed rule should be submitted to the Regulatory Secretariat Division on or before January 30, 2017. (81 Fed. Reg. 85,914, 11/29/2016)

On November 29, 2016, the US Agency for International Development (USAID) issued a proposed rule that would amend the USAID Acquisition Regulation (AIDAR) to clarify the requirements in the clause in the AIDAR at 48 C.F.R. §752.245-70, Government Property, such that contractors would be required to submit an annual report on all government-furnished mobile information technology (IT) equipment. Principally, rather than requiring designation of mobile IT as accountable on a case-by-case basis, as determined by the government accountable officer, the clause would be amended to clarify that all mobile IT equipment is identified as accountable. For purposes of the proposed rule, mobile IT equipment includes both equipment that is USAID-owned and furnished to the contractor by the government and contractor-acquired equipment, the title to which vests in the government. Additionally, mobile IT equipment includes, but is not limited to, laptops, mobile phones, tablets and encrypted devices. Finally, the Annual Report of Government Property in Contractor’s Custody would be modified to read that all accountable government-furnished property must be reported. If finalized, contractors should be prepared for enhanced compliance obligations as a result of the clarification provided by this proposed rule. Namely, contractors would be required to submit an annual report on all government-furnished property rather than simply account for such property on a case-by-case basis. Comments on the proposed rule must be received no later than January 30, 2017. (81 Fed. Reg. 85,916, 11/29/2016)

In October 2016, the White House National Science and Technology Council’s (NSTC’s) Networking and Information Technology Research and Development Subcommittee released its National Artificial Intelligence (AI) Research and Development Strategic Plan. This plan outlines objectives for federal government investment in the market for AI and describes a $1.1 billion federal AI research and development market. Particularly, the plan emphasizes the potential for agencies to promote private-sector advances in AI in a number of areas including education, environmental conservation, transportation, medicine, and security. Technological trends, an explosion in demand for AI, and heightened government interest in AI are all signs of AI growth in the months and years ahead. Funding for AI can come in the form of contracts, grants, public-private partnerships, and Cooperative Research and Development Agreements. Contractors in the AI market can look forward to growth in the federal AI research and development market. National Science and Technology Council, Networking and Information Technology Research and Development Subcommittee, “National Artificial Intelligence Research and Development Strategic Plan,” October 2016. (For more information, visit: https://www.nitrd.gov/PUBS/national_ai_rd_strategic_plan.pdf.)

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