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

Highlights this month include:

  • President Obama signed into law legislation which extends and cements whistleblower protection for certain contractor employees
  • FAR Council issues final rule amending the FAR in response to injunction of certain Fair Pay and Safe Workplaces rules
  • DoD issues class deviation regarding controversial IR&D costs rule
  • FAR Council issues final rule mandating privacy training for contractor employees privy to PII

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

If you are attending West's Government Contracts Year In Review conference in Washington, DC in February, please let us know. We would like to invite you to the activities that we are hosting that week. Please contact Sofia Abraham Mendoza for more information at sofia.mendoza@dentons.com.

Legislative Update

Regulatory Update

Legislative Update

On December 23, 2016, President Obama signed into law the compromise version of the 2017 National Defense Authorization Act (NDAA). The law impacts contractors in several ways, including establishing a preference for fixed-price contracts; reducing barriers to the use of commercial products, processes and standards; and limiting funding to the Defense Innovation Unit Experimental program (DIUx). The compromise version of the legislation was addressed in full in our December Legislative and Regulatory Update, which can be viewed here. (2017 National Defense Authorization Act, S. 2943, 12/23/2016)

Recent legislation extends and cements whistleblower protection for certain contractor employees

On December 14, 2016, President Obama signed into law a bill that strengthens whistleblower protections for certain contactor employees. The legislation, “To Enhance Whistleblower Protection for Contractor and Grantee Employees,” makes permanent existing protections currently applying to certain contractor employees via the four-year pilot program authorized in the FY 2013 NDAA. Specifically, the pilot program “prohibit[s] employees of a ‘contractor, subcontractor, or grantee’ from being retaliated against for blowing the whistle on waste, mismanagement, and abuse occurring in relation to a Federal contract or grant,” and provides a procedure for submitting complaints. As the pilot program is to expire in 2017, this legislation makes permanent the protections previously applicable to contractor employees.

In addition to cementing the FY 2013 NDAA protections, this legislation also adds “personal services contractors” to the list of protected individuals working on defense contracts or federal grants, as well as “subgrantee[s].” Further, the law prohibits federal government reimbursement of legal fees accrued in relation to a whistleblower claim. Finally, the head of each contracting agency must, in the event of a “major” contract modification, “make best efforts” to implement this law with respect to any contract awarded prior to the law’s enactment.

This law is of major importance to contractors, given that a greater range of contractor employees may be willing to come forward with whistleblower claims under this extended protection. Contractors should be careful to avoid “waste, mismanagement, and abuse” as a general matter, but the law provides an additional incentive for contractors to follow best practices and therefore avoid a whistleblower claim. (Pub. L. No. 114-261, 12/14/2016)

Regulatory Update

FAR Council issues final rule amending the FAR in response to injunction of certain Fair Pay and Safe Workplaces rules

On December 16, 2016, the Federal Acquisition Regulatory Council, composed of the Department of Defense (DoD), National Aeronautic Space Administration (NASA) and General Services Administration (GSA), responded to a nationwide temporary injunction preventing enactment of certain Federal Acquisition Regulation (FAR) provisions incorporating Executive Order 13673, Fair Pay and Safe Workplaces, issued in 2014. The majority of the original FAR provisions were enjoined by a Texas federal court on the eve of their implementation. Specifically, the injunction applies to a requirement that certain contractors disclose violations of labor laws, a fact which contracting officers may consider when awarding federal contracts, as well as to restrictions on certain arbitration clauses.

The FAR Council has amended the FAR provisions implementing Executive Order 13673 by placing a caveat in each section, provision and clause that the court’s ruling enjoined. Still, such language provides that the enjoined provisions are to immediately become effective if the court terminates the injunction.

The final rule reiterates the fact that the Fair Pay and Safe Workplaces provision requiring paycheck transparency is unaffected by the injunction, and has taken effect on January 1, 2017.

It is important that such caveat language be included in the FAR rules as an additional signal to contracting officers that these clauses are not to be included in solicitations and resulting contracts, as well as to contractors, so they have an opportunity to push back against any efforts made by a contracting officer to include such provisions in their contracts. Additionally, contractors should closely monitor the injunction’s status, as the rule notes that, should the injunction be lifted, said rules will be immediately effective. (81 Fed. Reg. 91,636, 12/16/2016)

NASA issues final rule increasing financial reporting for contractors holding greater than $10 million in NASA-owned PP&E

On December 16, 2016, NASA issued a final rule, without significant changes from the proposed rule, 81 Fed. Reg. 48,726, 07/26/2016, adding a provision to the NASA Federal Acquisition Regulation Supplement (NFS) requiring monthly financial reporting for contractors holding more than $10 million in NASA-owned property, plant and equipment (PP&E). This requirement was added at NFS 1852.245-73, and applies when, if at any time during performance of the contract, a contractor’s NASA-owned PP&E has a value of $10 million or more. In such an instance, the monthly report is due by the 21st of each month. If the property value drops below $10 million for the relevant reporting period, no monthly report is required. Consistent with the prior annual reporting requirement, submission of monthly financial reports occurs through submission of a form NF 1018, either filed in paper format to the appropriate NASA office, or electronically submitted.

Contractors should be aware of this requirement, and factor its application into their contract management practices so they are aware when contract-related NASA PP&E meets the designated reporting threshold. This rule also increases contractors’ responsibility for financial reports, and may therefore impact how they maintain their internal record-keeping systems. (81 Fed. Reg. 91,045, 12/16/2016)

FAR Council issues final rule requiring written notice of late or reduced payments to small business subcontractors

On December 20, 2016, the FAR Council issued a final rule (i) implementing the Small Business Jobs Act of 2010 and a July 2013 final rule issued by the Small Business Administration (SBA) requiring prime contractors to report any “untimely” or reduced payments made to their small-business subcontractors; and (ii) requiring contracting officers to keep a record in the Federal Awardee Performance and Integrity Information System (FAPIIS) of any contractors with a history of late or reduced payments to subcontractors.

The combined final rule reflects certain changes from the proposed rules (78 Fed. Reg. 42,391, 07/16/2013, and 81 Fed. Reg. 3,087, 01/20/2016). First, the rule adds to FAR clause 52.242-5 a 14-day window for reporting any late or reduced payments, reference to which is to be inserted in all contracts containing FAR clause 52.219-9. Second, the rule updates FAR 42.1502(g)(2)(ii) to reflect certain scenarios in which a late or reduced payment is not “unjustified” under the rule. These include instances in which (i) a contract performance dispute exists, (ii) a partial payment is made for an amount not in dispute, (iii) a payment is reduced due to prior overpayments on the same contract, (iv) there is an administrative mistake, and (v) late performance by the subcontractor that leads to a corresponding late payment by the prime contractor.

The rule applies only to prime contractor payments made to first-tier subcontractors, not to subcontractors at all tiers. Additionally, while the subject of penalties is outside the scope of the rule, the rule’s requirements allow for an “adverse past performance assessment” for failure to comply with the rule, based on an individual assessment.

The rule is applicable to both commercial items contracts and contracts for commercially available off-the-shelf (COTS) items. Thus, the rule adds FAR clause 52.219-9 to the clauses listed at FAR 52.212-5 for inclusion in commercial item contracts.

The rule benefits small business subcontractors by incentivizing prime contractors to make prompt and complete payments to them. Conversely, to avoid adverse past performance assessments, prime contractors should make sure they comply with these requirements, lest one of the exempted situations occurs.

The rule becomes effective January 19, 2017. (81 Fed. Reg. 93,481, 12/20/2016)

FAR Council issues final rule mandating privacy training for contractor employees privy to PII

On December 20, 2016, the FAR Council issued a final rule amending the FAR to ensure that contractor employees who handle, or have access to, records containing personally identifiable information (PII) complete training sufficient to protect PII under the Privacy Act of 1974. Through the addition of FAR Subpart 24.3 and FAR clause 52.224-3, the final rule specifies that contractors are charged with identifying employees who are privy to PII, and ensuring that such employees complete an initial privacy training, as well as annual privacy trainings. Contractors are also required to document that their covered employees have completed the required training, and be able to provide such documentation upon request.

The final rule gives a contractor flexibility as to the privacy training program it employs, allowing it to utilize training from any source, so long as the program satisfies certain minimum requirements. The training, however, must cover certain specified topics, including Privacy Act provisions and corresponding penalties; the appropriate handling and safeguarding of PII; system or equipment restrictions; and procedures to be followed in the event of a PII-related breach. Such flexibility does not exist, however, when Alternate 1 to FAR clause 52.224-3 is used in the solicitation, which requires that the contractor use only agency-provided training.

The final rule specifies that the requirements of FAR clause 52.224-3 flow down to all subcontractors involved in the handling or access of PII. Similarly, the rule’s requirements extend to items below the simplified acquisition threshold (SAT), currently $150,000, and to commercial items contracts and contracts for COTS items, where such contracts involve employee access to a system of covered records.

Contractors should take note of these requirements, develop individualized training programs for their practices, and maintain proper recordkeeping to remain in compliance with the rule’s provisions.

The rule becomes effective January 19, 2017. (81 Fed. Reg. 93,476, 12/20/2016)

DoD issues final rule adding Estonia to qualified country list for certain procurements

The amendment responds to a Reciprocal Defense Procurement Agreement (Agreement) entered into between the Secretary of Defense and Estonia in September 2016. The Agreement “removes discriminatory barriers to procurements of supplies and services produced by industrial enterprises of the other country,” though it does not apply to procurements for construction or construction materials. While not altering the applicability of relevant DFARS clauses, Estonia is now included in the list of “qualifying countries” in the following clauses: DFARS 252.225-7001; 252.225-7002; 252.225-7012; 252.225-7017; 252.225-7021; and 252.225-7036.

Estonia’s inclusion increases procurement opportunities for the United States and its contractors, as US contractors may now compete for procurement contracts issued by that Baltic republic.

This rule became effective December 22, 2016. (81 Fed. Reg. 93,840, 12/22/2016)

SBA issues final rule amending its regulations regarding prime contractor credit for small business subcontracts

On December 23, 2016, the SBA issued a final rule amending its regulations to credit other-than-small prime contractors who include in their individual subcontracting plan awards to small business concerns at any tier under the contract.

Under the Small Business Act, with certain exceptions, prime and subcontractors on unrestricted federal contracts exceeding $700,000 (or $1.5 million in the case of subcontracts for the construction of a public facility) are required to submit an Individual Subcontract Report (ISR) and Summary Subcontracting Report (SSR), pursuant to FAR Clause 52.219-9. Prior to the issuance of this rule, other-than-small-prime contractors could primarily receive credit only where they awarded a contract to a first-tier small business subcontractor. In contrast, the final rule, which implements Section 1614 of the FY 2014 NDAA, provides credit to other-than-small-prime contractors for awards to subcontractors at any tier.

To the extent that the Small Business Act does not require subcontractors to have a subcontracting plan if the contract is for a commercial item, these additional requirements similarly do not apply to those contracts.

Other-than-small prime contractors will benefit from this rule because it permits them to gain an advantage by making awards to a broader range of subcontractors. Small business subcontractors are also likely to benefit from this rule, as it increases potential contract opportunities, given that prime contractors are incentivized to make awards to them.

The rule becomes effective January 23, 2017. (81 Fed. Reg. 94,246, 12/23/2016)

FAR Council issues interim rule supplementing rules for contractor paid sick leave

The interim rule, which took effect on January 1, 2017, is very similar to the original Department of Labor (DOL) rule, which requires that all eligible employees performing services on a covered government contract receive paid sick leave that rolls over from year-to-year, for a variety of medical-related instances leading to absence from work. The interim rule creates FAR clause 52.222-62 and specifies the clause’s inclusion in certain types of FAR-based contracts. Specifically, with respect to existing contracts, contracting officers must include the clause in bilateral contract modifications where the modification extends contract performance, individually or cumulatively, more than six months. Such action constitutes a “new contract” under the terms of the original DOL rule. Additionally, while not mandatory, contracting officers are strongly encouraged to include said clause in indefinite-delivery, indefinite-quantity (IDIQ) contracts, “if the remaining ordering period extends at least six months and the amount of remaining work or number of orders expected is substantial.” As part of the overall regulatory scheme implementing paid sick leave requirements, there is no exception for contracts below the SAT, or for commercial items, or COTS items.

While contractors should be aware of the existing DOL rules regarding paid sick leave, the interim rule expands the contract actions to which these rules are applicable. Contractors should carefully observe the amended rules for consistency with their contract action, as the scope of responsibility for paid sick leave has broadened to include contracts in existence on January 1, 2017.

The interim rule became effective on January 1, 2017, and applies to solicitations issued on or after that date. Comments on the interim rule are due by February 14, 2017. (81 Fed. Reg. 91,627, 12/16/2016)

FAR Council issues proposed rule to implement changes adopted by SBA regarding use of small business set-asides under multiple-award contracts

On December 6, 2016, the FAR Council proposed to amend the FAR to implement regulatory changes made by the SBA in its final rule (78 Fed. Reg. 61,114, 10/02/2013) with respect to the use of small business partial set-asides, reserves and orders placed under multiple-award contracts. In particular, the proposed rule would implement statutory requirements in Section 1331 of the Small Business Jobs Act of 2010 (15 U.S.C. 644(r)) (Jobs Act). This proposed rule would provide additional guidance on the use of the following techniques:

  • Setting aside part or parts of the requirement for small businesses under multiple-award contracts. In the area of partial small business set-asides, the proposed rule seeks to improve the overall process by no longer requiring small businesses “to submit an offer on the non-set aside portion of a solicitation in order to be considered for the set-aside component of the solicitation.”
  • Reserving one or more contract awards for small businesses under full and open multiple-award procurements. “The proposed rule [would] add substantial coverage for the concept of a ‘reserve.’”
  • Setting aside orders placed against multiple-award contracts. The proposed rule provides several new ways to set aside orders under multiple-award contracts. Specifically, the contracting officer can either set aside all orders placed against multiple-award contracts for small businesses or do so on a case-by-case basis. In essence, greater flexibility is provided to the contracting officer to set aside orders under multiple-award contracts to small businesses.

Additionally, this proposed rule would move the nonmanufacturer rule coverage and limitations on subcontracting together in FAR Part 19. Further, the proposed rule would clarify that the “limitations on subcontracting may be determined by measuring the minimum percentage of work performed at the aggregate contract or order level.” Finally, “the proposed rule [would] clarif[y] that the performance of work requirements do not apply when full and open competition procurement methods are used, including reserves.”

By reducing the requirements for small businesses to obtain partial set-asides, providing contracting officers with greater flexibility in setting aside orders to small business, and clarifying that the performance of work requirements do not apply when full and open competition procurement methods are used, small business contractors submitting solicitations under multiple-award contracts should see a decrease in administrative burdens.

This proposed rule applies to acquisitions under the SAT and to COTS items. Comments on the proposed rule should be submitted in writing on or before February 6, 2017. (81 Fed. Reg. 88,072, 12/06/2016)

NASA issues proposed rule allowing for additional award terms to incentivize “superior” contract performance

On December 9, 2016, NASA issued a proposed rule to amend the NFS to include award term provisions that would reward contractors that have exhibited sustained “superior” performance with additional periods of contract performance. The proposed rule would add NFS 1816.405-277, which allows for an award of additional contract work, as an “award term” where the contractor’s sustained performance is superior, the government’s need to continue the contract exists, and funds are available to continue the contract.

The proposed rule specifies that the use of “award terms” is best suited where a relationship of five years or longer exists between the contractor and the federal government. Additionally, the rule would require that award terms only be used in acquisitions exceeding $20 million dollars, though the use of these incentives may be permissible in lower-value acquisitions in “exceptional circumstances.”

Additionally, the rule would require the use of a “term-determining official” and an “award term plan” that includes the methodology and schedule for evaluating contractor performance and eligibility for an award term. Further, while similar to an option, as set forth in FAR 17.207, an award term incentive is different in that an option may be awarded where a contractor’s work on a base contract is acceptable, while an award term requires “sustained excellent performance.” The rule specifies, however, that award terms may be used in conjunction with options, but only at the completion of any option periods.

Contractors, especially those doing business with NASA on an ongoing basis, would be impacted by such a change, as it would provide an additional incentive for outstanding contract performance. Further, the use of award terms in lieu of an altogether new solicitation process for each award would minimize the burden on contractors, and provide for a simplified “award” procedure for certain deserving contractors.

Comments on the proposed rule must be submitted in writing by February 7, 2017. (81 Fed. Reg. 89,038, 12/09/2016)

On December 1, 2016, the Director of Defense Procurement and Acquisition Policy in the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics issued a memorandum providing a class deviation from the DFARS rules for “Enhancing the Effectiveness of Independent Research and Development.” Specifically, the memorandum directs contracting officers, in lieu of the requirements at DFARS 231.205-18(c)(iii)(C)(4), to use an alternative cost principle related to independent research and development (IR&D) cost allowability. The alternative principle provides that, with respect to IR&D projects initiated in the contractor’s fiscal year 2017, the required technical interchange may occur “sometime during the contractor’s fiscal year 2017,” rather than “before IR&D costs are generated.”

By relaxing this requirement, contractors are provided a phase-in period to develop procedures to implement the new IR&D cost rules. The deviation became effective immediately upon publication and will remain so until incorporated in the DFARS or “otherwise rescinded.” To the extent contactors may be disadvantaged by the rule, such delay in its implementation affords them more time to adapt to the change and potentially minimize the burden ultimately imposed. (Memorandum Re: Class Deviation -- Enhancing the Effectiveness of Independent Research and Development from Director, Defense Procurement and Acquisition Policy, 12/01/2016)

On December 7, 2016, the Office of Federal Procurement Policy (OFPP) published a draft memorandum entitled “Anti-Trafficking Risk Management Best Practices & Mitigation Considerations,” which provides agency contracting officers guidance on assessing their compliance with the FAR Anti-Human Trafficking amendments issued in 2015. The draft guidance was developed by the Office of Management and Budget, the DOL and the Department of State’s Office to Monitor and Combat Trafficking in Persons.

The previous FAR amendments bolster FAR Part 22.17 and add corresponding FAR Clause 52.222-50. The revisions specify additional prohibited activities with respect to trafficking, place greater responsibility on contractors for the actions of their employees, require notification upon “credible evidence” of a violation of human-trafficking prohibitions, and impose other management responsibilities, including the development of a compliance plan to prevent prohibited activities.

While justly lauded as an important effort to reduce human trafficking, the amendments have raised many questions among contractors regarding how to actually apply the rule, especially given the vast differences among contractors in their size and supply chains. Thus, the OFPP memorandum details the best practices and mitigation strategies contractors must employ to remain in compliance with the FAR amendments.

The draft guidance outlines 10 “best practices” spanning both internal and external steps for compliance, including to establish an “[a]ccountable official” to ensure compliance throughout the company; disseminating a code of conduct throughout its supply chain; and maintaining auditing processes that are “recurring . . . and unannounced,” and validated externally. Importantly, the memorandum clarifies that despite the guidance’s plain language stating that domestic contractors are not required to submit a compliance plan, such plans are still “strongly encouraged” and “may act as a mitigating factor if a violation occurs.”

While this guidance does not expressly augment any of the FAR’s regulatory requirements, contractors are encouraged to take note of it in a timely fashion. Importantly, while in draft form, the memorandum indicates that agencies may immediately take the discussed recommended practices into consideration when assessing compliance with the FAR. While contractors should already be in compliance with the FAR requirements, compliance with the OFPP guidance could reduce the potential consequences to a contractor in the event that its employees may run afoul of these best practices.

Comments must be submitted on or before January 9, 2017. (81 Fed. Reg. 88,707, 12/08/2016)