- Big changes are under way for federal procurements in 2017. The 2017 National Defense Authorization Act (NDAA), for instance, unequivocally demonstrates the intent of Congress to modify Department of Defense (DoD) contracting programs and procedures. Specifically, Title VIII (Acquisition Policy, Acquisition Management, and Related Matters) of the 2017 NDAA will limit the use of lowest price technically acceptable (LPTA) procurements, when doing so would deny the DoD the benefits of cost and technical tradeoffs. This change will require DoD to use best value source selection procedures for a significant number of procurements.
- A recent Court of International Trade (CIT) decision also signals changes on the horizon for suppliers of U.S. government products when those products are principally created overseas. In Energizer Battery, Inc. v. United States, slip op. 16-116 (Ct. of Intl. Trade, Dec. 7, 2016), the CIT determined that military flashlights whose components were imported from China but whose assembly was carried out in Vermont were not "substantially transformed" under the Trade Agreements Act (TAA); thus, the "country of origin" was China and not the United States. This is significant because the TAA prohibits supplying products and services from countries that are not approved as TAA-eligible (e.g., China) in connection with TAA-covered procurements without a government waiver. It seems the bar for TAA compliance, which is already problematic for government contractors since production of many commercial item products has moved to countries that are not TAA-eligible, has just gotten higher.
- January has also been a busy month for the publication of final rules amending the Federal Acquisition Regulation (FAR). As discussed below, DoD, GSA, and NASA collectively issued numerous final rules to: (1) raise the simplified acquisition threshold for special emergency procurement authority, (2) implement regulatory clarifications made by the Small Business Administration (SBA) with respect to its 8(a) program, and (3) prohibit the use of funds for a contract with an entity that requires employees or subcontractors to sign an internal confidentiality agreement that restricts them from lawfully reporting waste, fraud, or abuse to a designated government representative. In addition, the General Services Administration (GSA) issued a final rule to clarify that the ordering-agency task and delivery order ombudsman has jurisdiction and responsibility to review and resolve fair opportunity complaints on tasks and delivery orders placed against GSA multiple-award contracts, and the Department of Transportation (DoT) extended its contracting initiative pilot program for a period of 5 years.
- More amendments to the FAR are in the works—numerous proposed rules have been issued for comments, including a rule promoting the acquisition of sustainable products, services, and construction methods in order to reduce energy and water consumption and reliance on natural resources, and enhance pollution prevention within the government.
New Restrictions on LPTA Procedures at DoD
The 2017 NDAA will force DoD to utilize best value source selection procedures as much as possible by restricting DoD's use of LPTA procedures. Specifically, the 2017 NDAA will limit the use of LPTA procedures to situations in which:
- DoD is able to comprehensively and clearly describe the minimum requirements expressed in terms of performance objectives, measures, and standards that will be used to determine acceptability of offers;
- DoD would realize no, or minimal, value from a contract proposal exceeding the minimum technical or performance requirements set forth in the request for proposal;
- the proposed technical approaches will require no, or minimal, subjective judgment by the source selection authority as to the desirability of one offeror's proposal versus a competing proposal;
- the source selection authority has a high degree of confidence that a review of technical proposals of offerors other than the lowest bidder would not result in the identification of factors that could provide value or benefit to DoD;
- the contracting officer has included a justification for the use of a lowest-price technically acceptable evaluation methodology in the contract file; and
- DoD has determined that the lowest price reflects full life-cycle costs, including for operations and support.
The 2017 NDAA also states that LPTA procedures "shall be avoided" in procurements that are predominantly for the acquisition of:
- information technology services, cybersecurity services, systems engineering and technical assistance services, advanced electronic testing, audit or audit readiness services, or other knowledge-based professional services;
- personal protective equipment; or
- knowledge-based training or logistics services in contingency operations or other operations outside the United States, including in Afghanistan or Iraq.
These changes codify a shift away from LPTA evaluations toward best value source selection procedures, and will fundamentally change the way contractors compete for DoD's business in the near future.
The Bar for TAA Compliance Has Gotten Higher
In December 2016, in a key decision of first impression, the Court of International Trade determined that military flashlights, whose components were imported from China but whose assembly was carried out in Vermont, were not "substantially transformed" under the TAA. See Energizer Battery, Inc. v. United States, slip op. 16-116 (Ct. of Intl. Trade, Dec. 7, 2016). Under the Federal Acquisition Regulation (FAR), products and construction materials derived from a TAA "designated country" must be manufactured or "substantially transformed" within that country in order to be treated the same as U.S.-made products for government procurement purposes. See FAR 25.4, 52.222-5. The Court's interpretation of "substantial transformation" made China—which is not a "designated country" under the TAA—the "country of origin," rather than the United States; thus the decision effectively prohibited the acquisition of the military flashlights.
In the Energizer Battery case, the Court carefully analyzed each of the factors generally discussed in substantial transformation determinations, including whether there had been a change in the character, use, or name of the Chinese components as a result of U.S. assembly. In rejecting any finding of substantial transformation, the Court held that: (1) there is no change in character, where the imported flashlight parts do not undergo a "physical change" because the post-importation processing consists of "assembly"; (2) there is no change in use, when the "end-use" of the imported flashlight parts was "pre-determined at the time of importation"; (3) that the name of each article as imported remained the same as that article in the completed tool, and thus there was no change in name of the imported flashlight parts; and furthermore that (4) where U.S. operations involved assembly that may have consisted of many steps, but involved "connecting" and "attaching" and not processing or "further working" of the imported materials, it was simple assembly and not substantial transformation.
So what does this mean for the government contracting community? Based on a clear statement of "Buy American" from President Trump in his inauguration speech, a targeted emphasis on American-made goods and enhanced support for U.S. businesses under the new administration is anticipated. While President Trump's comments have not been specifically tied to eligibility under the TAA and the Buy American Act yet, it is anticipated that additional pressures—whether from industry, whistleblowers, or government investigations—may quickly force the issue of whether a good made from imported parts and components is eligible for U.S. government acquisition into the forefront. Thus, contractors need to examine their supply chain, engage with suppliers, and internally assess whether products have been "substantially transformed" under U.S. Customs laws and interpretation pursuant to the comprehensive analysis set forth in Energizer Battery.
Increased Emergency Spending Authority
DoD, GSA, and NASA issued a final rule effective January 13, 2017, that amended the FAR to raise the simplified acquisition threshold for special emergency procurement authority. The rule affects FAR 2.101, 13.003, 19.203, and 19.502-2, which are being revised to increase the special emergency simplified acquisition threshold from $300,000 to $750,000 domestically, and increase the threshold from $1 million to $1.5 million outside of the United States. Covered acquisitions include those for supplies or services that are to be used to support a contingency operation or to facilitate defense against or recovery from nuclear, biological, chemical, or radiological attack. This change will lead to more acquisitions, and could mean larger contracts for vendors following emergency situations.
SBA 8(a) Program Changes
DoD, GSA, and NASA issued a final rule effective January 13, 2017, amending the FAR to implement regulatory clarifications made by SBA regarding the 8(a) program. The rule revises FAR 19.804-6(a) to clarify that offers and acceptances are required for orders under multiple-award contacts that were not set aside for competition among 8(a) contractors. The rule also revises FAR 19.814(a) to permit the SBA Inspector General to request a formal size determination. Furthermore, the rule revises FAR 19.815 to clarify that any follow-on 8(a) requirement shall remain in the 8(a) program unless there is a mandatory source for the requirement pursuant to FAR 8.002 or 8.002, or SBA agrees to release the requirement for procurement outside of the 8(a) program. The final rule serves to protect and promote the purpose of the 8(a) program going forward.
Prohibition Regarding Contracts Restricting Reporting Fraud, Waste, or Abuse
DoD, GSA, and NASA issued a final rule effective January 19, 2017, that amended the FAR to prohibit the use of funds for a contract with an entity that requires employees or subcontractors to sign an internal confidentiality agreement that restricts them from lawfully reporting waste, fraud, or abuse to a designated government representative. The rule specifically cites the agency's Office of the Inspector General (OIG) as a designated investigative or law enforcement representative of a federal department or agency. The rule adds that a contractor is required to give notice only to current employees and subcontractors that any prohibitions against and restrictions of any preexisting confidentiality agreements or statements covered by the rule are no longer in effect, to the extent that such prohibitions and restrictions are in conflict with the aforementioned prohibitions. The definition of "internal confidentiality agreement or statement" excludes confidentiality agreements arising out of civil litigation or agreements signed at the behest of a federal agency. This rule encompasses contractors and subcontractors alike. Whether the rule will lead to increased reporting remains to be seen.
Ombudsman Jurisdiction over Fair Opportunity Complaints
GSA issued a final rule effective January 9, 2017, that amended the General Services Administration Acquisition Regulation (GSAR) to clarify that the ordering-agency task and delivery order ombudsman has jurisdiction and responsibility to review and resolve fair opportunity complaints on tasks and delivery orders placed against GSA multiple-award contracts. The final rule also requires the ordering agency to include contact information for their task and delivery order ombudsman when placing task or delivery orders against GSA multiple-award contracts. Finally, the rule requires the contractor to provide a copy of its complaint to the GSA procurement ombudsman at the same time it files its complaint with the ordering agency.
DOT Contracting Initiative Pilot Program Extension
The Department of Transportation (DOT) has extended its contracting initiative pilot program, which became effective on March 6, 2015, for a period of 5 years. Under the pilot program, Federal Highway Administration (FHWA) and Federal Transit Administration (FTA) recipients and subrecipients can utilize contracting requirements that are generally disallowed because of concerns about adverse impacts on competition. The pilot program, which was established to collect data on whether such requirements (like local hire preferences) "unduly limit competition," has gathered only limited data so far. Its extension will enable DOT to gather more data, and will give FHWA and FTA recipients and subrecipients the flexibility to continue to operate under the program.
Proposed Rule to Promote Acquisition of Sustainable Products, Services, and Construction Methods
On January 18, 2017, DoD, GSA, and NASA issued a proposed rule to promote the acquisition of sustainable products, services, and construction methods to reduce energy and water consumption and reliance on natural resources, and enhance pollution prevention. The proposed rule would affect numerous parts of the FAR, to include:
- FAR Parts 7 and 11, which would be updated to reflect sustainability factors to be considered in acquisitions, and add guidance to ensure agencies are aware they must acquire sustainable products and services to the maximum extent practicable;
- FAR Part 23, which would note that sustainable acquisition prescriptions apply to construction and services contracts that require the supply or use of products falling within the sustainable products categories;
- FAR Part 36, which would delete the FY 2015 deadline for meeting the goal to divert at least 50 percent of construction and demolition debris;
- FAR Part 39, which would incorporate EPA-recommended specifications, standards, or labels for environmentally sustainable electronic products; and
- FAR Part 52, which would add new clauses for sustainable products and services requirements.
This proposed rule is open for comments until March 20, 2017. We will keep you updated on its progress.