Since our last publication there have been several important updates to a number of rules that we have discussed in earlier editions of this Reporter. In this first anniversary issue, we highlight some of the most important updates.

Federal Intent to Reduce or Deny Award Fees due to Health or Safety Issues

In our January 2011 Reporter, we highlighted a Department of Defense (“DoD”) interim rule that would allow contracting officers to reduce or deny an award fee for any contractor who put the health or safety of government personnel at risk.

As we wrote back in January, DoD issued an interim rule on November 12, 2010, to implement section 823 of the National Defense Authorization Act for Fiscal Year 2010 (“NDAA 2010”). Section 823 mandated that the Secretary of Defense ensure that all covered contracts using award fees “provide for the consideration of any incident … in evaluations of contractor performance for the relevant award fee period … .” The Secretary of Defense was also authorized “to reduce or deny award fees for the relevant award fee period, or to recover all or part of award fees previously paid for such period, on the basis of the negative impact of such incident on contractor performance.” National Defense Authorization Act for Fiscal Year 2010, Pub. L. 111-84, § 823, 123 Stat. 2190 (2010).

NDAA 2010’s definition of the type of incident for which award fees could be withheld was fairly broad. It included certain criminal, civil or administrative proceedings in which it is determined that the contractor caused “serious bodily injury or death to any civilian or military personnel of the Government through gross negligence or with reckless disregard for the safety of such personnel.” Id. at § 823(b). It also included certain criminal, civil or administrative proceedings if it is determined that a contractor is liable for the actions of its subcontractor which caused serious bodily injury or death. See id. at § 823(b)(2) (emphasis added). The November 12 interim rule was brief, but it made clear that if the contracting officer (“CO”) found that gross negligence or reckless disregard caused serious bodily injury or death to a government employee, the CO must consider reducing or denying a fee award for the time period when the offensive conduct occurred. See Award-Fee Reductions for Health and Safety Issues, 75 Fed. Reg. 69,360 (Nov. 12, 2010) (to be codified at 48 C.F.R. pts. 216, 252).

On January 7, 2011, President Obama signed into law the National Defense Authorization Act for Fiscal Year 2011. Pub. L. No. 111-383, 124 Stat. 4137 (2011) (“NDAA 2011”). NDAA 2011 further enhanced the Secretary of Defense’s authority to reduce or deny award fees by allowing the Secretary to have “an expeditious independent investigation” of the causes of the injury or death if the contractor is not subject to the jurisdiction of U.S. courts. NDAA 2011 at § 834(d). NDAA 2011 also instructed that any information on the final determination of contractor fault should be entered into the Federal Awardee Performance and Integrity Information System (FAPIIS).

As a result of all this, DoD released another interim rule that took immediate effect on September 16, 2011. This interim rule describes the Secretary’s enhanced authority and incorporates comments responding to the November 12, 2010, interim rule. It applies to any contract entered into on or after September 16, 2011. It also applies to any task order or delivery order issued on or after September 16, even when the contract under which the task or delivery order was issued was entered into before the effective date.

The interim rule describes a new clause that will be included in solicitation provisions and contract clauses. See 76 Fed. Reg. at 57,677. The clause defines “covered incident” and “serious bodily injury.” Id. In addition to the types of proceedings that are considered covered incidents, the clause now considers “a final determination by the Secretary of Defense of Contractor or subcontractor fault” to be a covered incident, when the contractor or subcontractor is not subject to the jurisdiction of the U.S. court system. Id. The interim rule was published without any prior opportunity for public comment due to “urgent and compelling reasons,” although these reasons are not specified in the rule. 76 Fed. Reg. at 57,676.

The new interim rule also incorporates FAPIIS and reflects the government’s increased interest in using FAPIIS as a means of increased transparency in federal contracting. We have written previously about the increasing importance of FAPIIS. The interim new rule is broader than the November 12, 2010, interim rule because it now allows contracting officers to reduce or deny fee awards based on final determinations from DoD investigations of contractors or subcontractors that are not subject to U.S. jurisdiction. If such an investigation demonstrates that a contractor or subcontractor caused death or serious bodily injury to any government employee through its own gross negligence, that finding must be entered into FAPIIS within three days of receiving notice of the determination. See 76 Fed. Reg. at 57,677. The award-fee determination does not go into FAPIIS. Rather, it is just the “final determination of contractor fault.” Id. at 57,676.  

DoD will accept comments on the new interim rule until November 15, 2011. All comments should reference DFARS Case 2011-D033.

Repeal of the 3 Percent Withholding Requirement

Last month, the U.S. House of Representatives voted 405 to 16 to repeal the rule that requires the government to withhold 3 percent from certain payments made to government contractors. See H.R. 674, 112th Cong. (2011). The bill strikes the proposed subsection (t) to Section 3402 of the Internal Revenue Code, which contained the withholding requirement. The proposed subsection (t) was intended to apply to payments made after December 31, 2011. On November 7, the U.S. Senate voted 94–1 to take up debate on the rule as well and the bill ultimately passed the senate on a 95–0 vote on November 10.

We wrote about the potential pitfalls of the 3 percent withholding requirement in our July issue. Implementation of the withholding requirement had already been delayed several times and the requirement is not politically popular, so we are not surprised by this bipartisan support in congress. This is good news for federal contractors, but it is always possible that the withholding requirement could come back to life in a new form as a source of federal revenue once the election year is over.

DoD Wants to Talk to You!

A final rule published in September amends part 215 of Defense Federal Acquisition Regulation Supplement (DFARS) so that it will now include language advising contracting officers to conduct discussions with offerors within the competitive range on acquisitions with an estimated value of at least $100 million prior to submission of final proposals. See Defense Federal Acquisition Regulations Supplement; Discussions Prior to Contract Award, 76 Fed. Reg. 58,150 (Sept. 20, 2011) (to be codified at 48 C.F.R. pt. 215). DoD intends to “expand the situations in which discussions are held” beyond those where they may be already mandated. 76 Fed. Reg. 58,151. The Rule also responds to DoD’s concern regarding the correlation between “high-dollar source selections conducted without discussions and the number of protests sustained.” Id.

DoD previously, on November 24, 2010, published a proposed rule regarding this new discussions requirement. The comments period on that proposed rule closed on January 24, 2011, and only three respondents provided comments on the rule. Although one unidentified commenter called the rule “overkill,” DoD made no changes in the final rule in response to that comment. Id. Instead, DoD asserted that its research shows that early discussions “improve[] both industry’s understanding of solicitation requirements and the Government’s understanding of industry issues.” Id. In its discussion and analysis of the rule, DoD emphasized that the number of protests related to competitive negotiated contracts and orders that are more than $100 million is “substantially higher” than when discussions are not held. Id. DoD believes there “are no practical alternatives that will accomplish the objectives of the proposed rule” and that, ultimately, “[a] preference for holding discussions is recognition of a best practice.” Id. at 58,150-51. This final rule took immediate effect on September 20, 2011.