Our March edition of “Government Contracts Legislative and Regulatory Update” offers a summary of the relevant changes that took place during the month of February.
Highlights this month include:
- President Trump issues executive order outlining new regulatory reform agenda
- House introduces several joint resolutions to overturn “burdensome” regulations across various sectors
- DoD issues new draft guidebook for acquiring commercial items
This update will also be available in Contract Management Magazine, which is published monthly by the National Contract Management Association (NCMA).
This month’s Legislative and Regulatory Update reflects a foundational principle of the Trump administration: the fewer regulations, the better. This edition of the Update reflects the limited legislative and regulatory changes that have taken place under the new administration in the wake of the regulatory freeze and substantial executive action discussed in detail in the February Legislative and Regulatory Update.
Executive Action Update
On February 24, 2017, President Trump signed an executive order (EO or Order), "Enforcing the Regulatory Reform Agenda," that requires agencies, unless a waiver is granted, to designate regulatory reform officers (RROs) and regulatory reform task forces (RRTFs) to assist in streamlining the federal regulatory framework. The goal of this initiative is to reduce or eliminate excessive regulations that inhibit job creation or business opportunities in the United States, or provide burdensome processes with minimal corresponding benefits. More specifically, the EO implements the following: (1) EO 13771, which requires agencies to offset the number and costs of new regulations; (2) EOs 12866 and 13563, which require regulatory planning and retrospective review; and (3) the general policy that programs or activities implementing EOs or other guidance that have since been rescinded should be terminated.
The EO requires agency heads, within 60 days of the Order, to designate an RRO to oversee the implementation of such policies. Agencies are also required to establish an RRTF headed by the RRO, which includes the agency regulatory policy officer, among others. Under the EO, the RRTF is charged with evaluating existing regulations for their potential removal or modification, specifically targeting those regulations that tend to hinder or eliminate job creation, have become “outdated, unnecessary or ineffective” or fail to survive a cost-benefit analysis.
For those regulations identified, the RRTF must make recommendations to the agency head, to the extent consistent with applicable law, regarding their “repeal, replacement, or modification,” prioritizing those deemed unnecessary or outdated under the Order. The RRTF is to provide a progress report on these required actions to the agency head within 90 days.
While still lacking much detail as to the precise regulations that may be recommended for repeal, replacement or modification, it is possible that President Trump may use this EO to decrease environmental regulations, and those surrounding financial institutions. Additionally, this EO provides a structure for implementing EO 13771, which more generally requires that for every new regulation introduced, two existing regulations must be recommended for repeal. Although it is unclear at this time precisely which regulations will be repealed, amended or replaced, or which agencies will catalyze developments as an effect of this action, contractors will nevertheless want to carefully monitor the regulatory landscape across any agencies they interact with given this new vehicle for regulatory reform and the administration’s ongoing push for regulatory reduction. (Presidential Executive Order on Enforcing the Regulatory Reform Agenda, 02/24/2017)
Recent executive action may provide increased opportunities for contractors
Since the inauguration and continuing presently, President Trump has taken a variety of actions that may impact opportunities for contractors, including the following:
- Executive branch hiring freeze. On January 23, 2017, President Trump issued a Memorandum for Heads of Executive Departments and Agencies regarding the hiring freeze that prevents the hiring of executive branch employees, subject to certain exceptions. The memorandum provides that within 90 days of its issuance, the Director of the Office of Management and Budget (OMB), along with the Director of the Office of Personnel Management (OPM), will recommend to the President a long-term plan for decreasing the size of the federal government’s workforce, upon which the memorandum’s order will expire. While the memorandum states that “[c]ontracting outside the Government to circumvent the intent of this memorandum shall not be permitted,” it is likely that contractors may be used in lieu of employees to complete excess work, especially following the anticipated long-term federal government workforce reduction. As the required long-term plan is currently in progress, service contractors may expect to see increased opportunities to complete work previously handled by executive branch employees. (Memorandum for Heads of Executive Departments and Agencies Re: Hiring Freeze, 01/23/2017)
- Push for increase in federal defense funding. As detailed in last month’s Legislative and Regulatory Update, President Trump revealed, in the early stages of budget planning, his strong preference for an increase in defense spending, including national security efforts, by as much as $54 billion, according to a White House Press Briefing. See The White House, Office of the Press Secretary, Press Briefing by Sean Spicer, 2/27/2017, #17 (statements of Office of Management and Budget Director Mick Mulvaney). While Director Mulvaney stated that such an increase will be used toward “rebuilding” the military and securing the border, in addition to “taking care of vets” and “increasing school choice,” he also stated that funding to other programs would necessarily be reduced, including less funding to the State Department for foreign aid. Id. This increase in defense-related funding could be both beneficial and problematic for certain contractors. Contractors working in the defense sector and on national security-related programs could see increased opportunities for contract awards, given the increased focus on such activities. In contrast, contractors whose contracts result from federal monies outside of the defense industry could see decreased opportunities where programs are cut to account for increased defense spending, though the benefits flowing from an increased focus on national security could outweigh this concern. Should this budget shift come to fruition, it may behoove contractors, to maximize their eligibility for available contracting opportunities, to give some consideration to whether and to what extent they can provide defense-focused goods and services to the federal government.
House introduces several joint resolutions to overturn “burdensome” regulations across various sectors
Since President Trump has taken office, the House of Representatives has introduced numerous joint resolutions seeking to overturn regulations based on its authority under the Congressional Review Act (CRA). Most notably, on February 2, 2017, the House passed (231-187) a joint resolution disapproving of the rules implementing the Fair Pay and Safe Workplaces Executive Order (EO 13673) originally published at 81 Fed. Reg. 58,562. If it is also passed by the Senate, such a resolution would overturn these requirements altogether.
The majority of the rules, which include a requirement that certain contractors disclose their own labor law violations, and their subcontractors’ violations, and a restriction on the use of certain arbitration clauses, have been preliminarily enjoined nationwide by a federal court. The paycheck transparency requirement, however, currently remains in effect. These rules, particularly the disclosure requirements, have been controversial from their original promulgation, raising Due Process, First Amendment and Administrative Procedure Act arguments, among others. See Associated Builders & Contractors of Se. Tex. v. Rung, No. 1:16-CV-425, 2016 WL 8188655 (E. D. Tex. Oct. 24, 2016). Labeled the contractor “blacklisting” provisions, many have opined on whether the benefit of these rules (i.e., a significant incentive for compliance with labor laws) outweighs the associated burdens (e.g., disqualification from consideration for a contract award, among others). See U.S. Senate Committee on Health, Education, Labor & Pensions, House, Senate Leaders Move to Protect Small Businesses, Promote National Security, Jan. 30, 2017, available online at this link.
Consistent with some of the criticisms identified, the White House issued a Statement of Administration Policy suggesting that this joint resolution is to “nullify unnecessary” and “burdensome” regulations that “force jobs out of our communities and discourage doing business in the United States.” See White House, Statement of Administration Policy, H.J. Res. 38, H.J. Res. 36, H.J. Res. 41, H.J. Res. 40, H.J. Res. 37, Feb. 1, 2017 (House), available online at this link.
While the nationwide preliminary injunction means that contractors are not currently subject to the majority of the above requirements, the wholesale removal of these requirements would eliminate the lasting burden contractors feared, and decrease the risk that contractors may be disqualified from federal awards based on the conduct covered by the rules. However, the industry may have stood to benefit from the use of standardized rules encouraging compliance with labor laws, as such rules would merely level the playing field among contractors, and ultimately benefit contractor employees. (H.R. J. Res. 37, 02/02/2017)
During the same timeframe, the House also introduced H.J. Res. 36, 38, 40 and 41, among others, seeking to overturn regulations across other sectors. For example, H.J. Res. 41, which sought to repeal a Securities and Exchange Commission (SEC) rule requiring resource extraction issuers to disclose payments made to certain governments for the commercial development of natural resources, has already been signed into law. (Pub. L. No. 115-4, 02/14/2017). Also signed into law was H.J. Res. 38, which overturns the Department of Interior’s (DOI) Office of Surface Mining Reclamation and Enforcement Stream Protection rules placing restrictions on certain mining operations that impact the surface and ground water, or other aspects of the environment. (Pub. L. No. 115-5, 02/16/2017).
Also in the energy sector, H.J. Res. 36, which has been passed by the House, seeks to overturn Bureau of Land Management (BLM) rules governing the reduction in waste from natural gas activities on certain federal or Indian leases, and clarifying restrictions on gas subject to royalties. (H.J. Res. 36, 02/03/2017). Additionally, H.J. Res. 40 was passed to overturn a Social Security Administration (SSA) rule requiring entry of individuals’ names in the National Instant Criminal Background Check System (NICS) when the SSA determines that the individual is mentally impaired. (Pub. L. No. 115-8, 02/28/2017)
Contractors engaged with the agencies whose rules were affected, or that perform in the affected industries, may now operate without being subject to such requirements, which may eliminate certain burdens. However, the countervailing concern exists that certain of the eliminated regulations, while tedious, sought to advance important goals, including the protection of the environment, that may have been sacrificed at the expense of efficiency. Contractors should stay abreast of these ongoing actions, as they impact day-to-day operations under contracts with certain agencies.
On February 3, 2017, the Department of Justice (DOJ) issued a final rule adjusting for inflation the monetary penalties attaching to False Claims Act (FCA) violations. Following the passage of the Bipartisan Budget Act of 2015, also known as the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, the DOJ has now increased the penalties associated with FCA violations on two occasions, the first adjustment being deemed the “catch-up adjustments” in 2016. The present rule increases FCA penalties a second time, to a minimum of $10,957 from $10,781, and a maximum of $21,916 from $21,563, as reflected in 28 C.F.R. 85.5.
Importantly, while these increased penalties are effective as of February 3, 2017 (i.e., for penalties assessed on and after that date), the rule covers conduct retroactively, as the increased penalties apply to violations occurring after November 2, 2015. This means that if a contractor’s conduct allegedly violating the FCA occurred on November 3, 2015 or after, but the case does not reach a disposition until after February 3, 2017, the conduct is still subject to the increased penalties even though the penalties were not in place at the time the conduct occurred.
While contractors already avidly seek to avoid FCA violations, the increased penalties, while considerably more marginal than the “catch-up adjustments” that nearly doubled penalties in 2016, offer an added incentive to do so. That said, the DOJ stands to draw increased monies from FCA violations, as do qui tam relators who may stand to benefit from a finding of FCA liability. Thus, contractors facing FCA allegations for conduct dating back to November 3, 2015, should also note the increase of penalties, and consider whether and to what extent the increase may motivate a decision to settle any pending FCA claims against them. The final rule became effective February 3, 2017. (82 Fed. Reg. 9,131, 02/03/2017)
VA issues final interim rule extending to three years the status verification timeframe for VOSBs and SDVOSBs
On February 21, 2017, the Department of Veterans Affairs (VA) issued a final interim rule extending, from every two years to every three years, the timeframe for verification of a business’s status as a Veteran Owned Small Business (VOSB) or Service Disabled Veteran Owned Small Business (SDVOSB) for the purposes of VA set-aside contract eligibility.
In doing so, the VA noted that several other measures exist to ensure that a business’s status is verified initially and on an ongoing basis. For example, before a business is deemed a VOSB or SDVOSB, it undergoes an extensive review process; once verified, the VA reserves the right to conduct unannounced site visits to confirm continued eligibility. Such businesses also are under an ongoing obligation to ensure that information provided to the VA is up-to-date, and to inform the VA’s Center for Verification and Evaluation of any changes in information that may compromise their eligibility. The VA also acknowledges the right to protest an entity’s qualification as a VOSB or SDVOSB, offering an additional check on delinquent entities.
While contractors qualified as a VOSB or SDVOSB should ensure that they continue to meet the requirements for these designations, the extended window for re-verification reduces the burden contractors previously felt by undergoing a review on a more frequent basis. This rule became effective February 21, 2017. Comments must be received on or before April 24, 2017. (82 Fed. Reg. 11,154, 02/21/17)
The Guidebook is comprised of two parts: Part A: Commercial Item Determination, and Part B: Pricing Commercial Items. Part A provides contracting personnel guidance in making a commercial item determination (CID), and emphasizes the importance of early market research and the need to ensure that such market research is well documented. Part A includes an array of information resources for contracting personnel to use in conducting CIDs, guidance on the use of prior CIDs and new determinations for the most commonly used types of commercial items, as well as a section on commercially available off-the-shelf (COTS) items, among others. Part B is focused on assisting contracting personnel in making a price reasonable determination and primarily discusses market research and pricing analyses. Part B also includes sections for specific types of price analyses, such as for services, and guidance on conducting pricing negotiations.
The Guidebook's new two-part structure is a departure from the previously issued Commercial Item Handbooks (Versions 1.0 and 2.0). The new structure is complementary to prior DPAP guidance, issued February 4, 2015, which emphasized the two-step process relating to commercial item acquisitions. See Commercial Items and the Determination of Reasonableness of Price for Commercial Items, Office of the Secretary of Defense, Acquisition, Technology and Logistics, Defense Procurement and Acquisition Policy, Feb. 4, 2015, available online at this link. Subsequently, on September 2, 2016, DPAP issued further guidance that previewed aspects of emphasis in the draft Guidebook. See Guidance on Commercial Item Determinations and the Determination of Price Reasonableness for Commercial Items, Office of the Secretary of Defense, Acquisition, Technology and Logistics, Defense Procurement and Acquisition Policy, Sept. 2, 2016, available online at this link.
Notably, omitted from the draft Guidebook is the more comprehensive treatment afforded to commercial item contract administration that existed in the Handbook. Omitted or reduced coverage of topics in the draft Guidebook include contracting policies and procedures, clauses and terminations regarding commercial items contracts, among others, and “Administering Commercial Items Contracts.” On the other hand, the draft Guidebook, while narrower in scope, includes numerous detailed examples that illustrate the application of certain rules and processes recommended by the Guidebook, which may be beneficial to contracting officials and contractors alike.
Both parts of the draft Guidebook contain references to prior and current National Defense Authorization Acts (NDAAs) as they impact commercial items contracting. Part A notes that the FY 2016 and 2017 NDAAs have “strengthened the preference for commercial supplies and services,” requiring a written justification if commercial items are not used for certain types of information technology and services contracts. Part B also discusses the impact of the 2016 NDAA on price analysis. Specifically, the 2016 NDAA outlines a hierarchy of information that contracting officials should consider in pricing commercial items, beginning with market research, followed by sales data for similar products and transactions. If a price reasonableness determination still cannot be made, contracting officers may request sales information under different terms and conditions or using alternative approaches. Part B also includes a section on the “Contractor Role in Supporting Price Reasonable Determinations,” which notes that contractors should be responsive to information requests relating to price analyses, as contractors who wish to contract with the Department of Defense (DoD) must assist the government in making such determinations.
DoD commercial item contractors and subcontractors should carefully review the draft Guidebook, which provides insight into the approach and analysis the DoD is, and will be, undertaking to determine whether a product or service qualifies as a commercial item, and how the item should be priced. Prime contractors subject to contractor purchasing system reviews, in particular, should pay close attention as the draft Guidebook makes clear that both the commercial item determination and the determination of price reasonableness is the prime contractor’s responsibility. If the DoD observes systemic issues of concern with how a prime contractor performs these determinations, it could trigger further scrutiny of the prime contractor’s purchasing system.
Finally, because this is a draft Guidebook, contractors and industry should consider submitting comments regarding any particular areas of concern. Comments must be received on or before March 24, 2017, at email@example.com. (Department of Defense Guidebook for Acquiring Commercial Items, Parts A and B, 02/24/2017)
On February 8, 2017, the DOJ’s Criminal Division, Fraud Section (Section), released a guidance titled "Evaluation of Corporate Compliance Programs" (Guidance). The Guidance summarizes the multifaceted evaluation the Section undertakes when assessing a corporate entity for criminal wrongdoing, providing contractors insight into how they can improve or maintain their compliance systems consistent with the areas scrutinized. In particular, the DOJ looks to the United States Attorney’s Manual's “Filip Factors” (the principles used when investigating and prosecuting business organizations), which include “the existence and effectiveness of the corporation’s pre-existing compliance program,” and the steps taken to “implement an effective corporate compliance program or improve an existing one.”
The Guidance notes that while an investigation, even one using the Filip Factors, is more art than science, it seeks to provide the points of inquiry engaged by the Section in making this evaluation. At the broadest level of “Sample Topics and Questions,” the Guidance includes the following categories: (1) Analysis and Remediation of Underlying Misconduct; (2) Senior and Middle Management; (3) Autonomy and Resources; (4) Policies and Procedures; (5) Risk Assessment; (6) Training and Communications; (7) Confidential Reporting and Investigation; (8) Incentives and Disciplinary Measures; (9) Continuous Improvement, Periodic Testing and Review; (10) Third Party Management; and (11) Mergers and Acquisitions (M&A).
Notable points of inquiry among these categories include: (i) whether the company had prior opportunities to detect the wrongdoing, and assessed why instances were not detected earlier; (ii) whether the company’s policies and procedures prohibited the particular misconduct and whether those policies and procedures had been adequately integrated; (iii) an evaluation of the procedure in place to identify risks; (iv) whether employees have undergone training in relevant areas; (v) the propriety of confidential reporting mechanisms throughout the company; and (vi) the steps taken to continuously improve and test existing policies and practices.
While the Guidance makes clear that it is “neither a checklist nor a formula,” it nevertheless offers contractors useful parameters as to best practices for compliance programs going forward. By keying in to the areas that are scrutinized by the DOJ, the Guidance offers contractors an opportunity to bolster potentially weak or problematic areas of their own compliance programs that may help them weed out criminal wrongdoing before it results in charges, or to avoid a criminal conviction. (U.S. Department of Justice, Criminal Division, Fraud Section, Evaluation of Corporate Compliance Programs, 02/08/2017)