On Tuesday, December 12, 2017, President Trump signed the fiscal year 2018 (FY18) National Defense Authorization Act (NDAA) into law (Pub. L. 115-91). An annual defense policy bill, the NDAA is a critical piece of legislation for the contracting community because it provides the funding authority for programs and activities of the Department of Defense (DoD), the largest procurer of goods and services within the US government. In addition, the NDAA is a vehicle for encouraging in some cases, and requiring in others, changes to both DoD and government-wide procurement practices. As the NDAA moved through the legislative process, Dentons and other commentators analyzed proposed provisions, some of which were adopted as written or in a revised form, and many of which were not included in the final bill. It is critical for the contracting community to understand the provisions of the NDAA, as enacted.

Budget/Funding

The NDAA provides over $700 billion in funding for the DoD, defense-related programs of the Department of Energy, and defense-related activities of other federal agencies. This amount reflects a significant investment in the DoD and exceeds the Trump administration’s budget request by billions of dollars. The increase reflects Congressional concerns that the DoD requires significant investment to rebuild and improve the readiness of US military forces after years of protracted engagements in the Middle East and South Asia, amid rising tensions on the Korean peninsula and to counter a resurgent Russian Federation and its growing geopolitical influence, among a host of other US national security issues and needs the bill seeks to address. Notably, the spending authorized in the NDAA exceeds the $549 billion defense spending cap for FY18 imposed by the 2011 Budget Control Act (BCA). Congressional Republicans and Democrats must strike a compromise to raise the BCA-imposed caps on defense and domestic spending to permit FY18 funding for the DoD at the full authorized amount without triggering automatic sequestration in January 2018.

Commercial items

The NDAA includes a number of provisions that reinforce the Congress’ commitment to the acquisition of commercial items under commercial terms. These include requirements for a reassessment of what general procurement statutes should apply to commercial items and the establishment of a so-called “Amazon for Government” online portal for the acquisition of commercial off-the-shelf or COTS items.

  • Section 846 requires the DoD to adopt a phased approach to begin procurement of certain commercial items via multiple online marketplaces. No later than 90 days after the date of enactment of the NDAA, the Office of Management and Budget (OMB) and General Services Administration (GSA) must submit an implementation plan to Congress. No later than one year after submission of the implementation plan, the OMB and GSA must conduct a market analysis of commercial e-commerce portal providers and recommend "any changes to, or exemptions from, laws necessary for effective implementation” of the program. No later than two years after the date of submission of the implementation plan, the OMB and GSA must issue guidance to implement and govern the use of the program, such as protocols for compliance with product screening requirements, data security and data analytics. The delay in full implementation of the program was incorporated into the provision during conference consideration of the NDAA to address concerns from various segments of the contracting community. The goal of the provision, originally introduced by House Armed Services Committee Chairman Mac Thornberry (R-TX 13th), is to streamline and simplify the DoD's acquisition of many COTS items, while creating cost-savings and promoting increased transparency and accountability.
  • Section 848 provides that the DoD’s acquisition of an item through commercial item procedures constitutes a “prior determination” that the item is a commercial item that is binding on future DoD acquisitions unless (i) the head of contracting authority determines that the prior determination was improper or (ii) the senior procurement executive for a military service or the DoD determines that it is no longer appropriate to acquire the item under commercial item procedures. This change may improve consistency within the DoD acquisitions system and streamline the determination process for future acquisitions.
  • Section 849 requires the Secretary of Defense to engage in a comprehensive review of the procurement statutes and regulations that are not required by statute to be applied to commercial item acquisitions but have nevertheless been applied through the DoD Federal Acquisition Regulation Supplement (DFARS) based on a determination that it is in the government’s interest to do so. The Secretary of Defense is required to review each provision and provide an exemption from the statute or regulation for commercial item acquisitions unless he or she “determines there is a specific reason not to provide the exemption.” This effort must be completed by December 12, 2018. The inclusion of this provision provides a strong signal to the DoD that Congress wants the number of provisions applicable to commercial item acquisitions to be reduced.

Cost and pricing

The NDAA includes a number of provisions that raise the thresholds for application of a number of procurement regulations, including the thresholds for micro-purchases, simplified acquisitions and the submission of cost or pricing data. These provisions reflect a recognition that more onerous or complex acquisition regulations should be limited to more costly procurements. The NDAA also reflects an emphasis on the use of commercial risk metrics when auditing contractors, and the use of non-government auditors to eliminate the backlog of pending incurred cost audits.

  • Section 803 requires the DoD, by October 1, 2020, (i) to comply with "commercially accepted standards of risk and materiality" in the performance of incurred cost audits and (ii) to begin using private auditors "to perform a sufficient number" of such audits. Among Congress' stated goals in requiring the DoD to begin using private auditors are (i) the elimination, by October 1, 2020, of the Defense Contract Audit Agency's incurred cost audit backlog and (ii) the completion of all incurred cost audits within one year or less from the date of receipt of a qualified incurred cost submission.
  • Section 805 increases the simplified acquisition threshold to $250,000 from $100,000, and Section 806 increases the micro-purchase threshold to $10,000 from $3,000.
  • Section 811 increases to $2 million from $750,000 the threshold for the submission of cost or pricing data for prime contracts awarded after June 30, 2018. The threshold for modifications to those prime contracts, subcontracts awarded under those prime contracts, and modifications to those subcontracts also increases to $2 million. The new threshold will be subject to periodic updating to keep pace with inflation pursuant to 41 USC § 1908. This provision should reduce the number of contracts and subcontracts, and modifications thereto, that are subject to the Truthful Cost or Pricing Data statute (formerly known as the Truth in Negotiations Act, or TINA) and reduce the associated liability for alleged defective pricing.
  • Section 815 limits a contracting officer’s ability to unilaterally definitize any undefinitized contract action with a value greater than $50 million. If the contractor objects to any element of definitization, including price and specifications, the matter must be referred to the service acquisition executive for the military service or the DoD Undersecretary of Defense for Acquisition and Sustainment (a position that will be created effective February 1, 2018, and filled by current Undersecretary of Defense for Acquisition, Technology, and Logistics Ellen Lord). This section (i) signals to the DoD acquisition community that Congress expects the parties to reach a bilateral definitization and (ii) incentivizes the contracting officer to reach a compromise rather than seek high-level approval for a unilateral definitization.
  • Section 820 modifies the definition of “subcontractor” to clarify that agreements for the purchase of commodity items that are not identified with a particular contract and that support contracts with the federal government and other parties are not “subcontracts” for purposes of government acquisition requirements. This is a welcome clarification that will likely exclude a number of agreements from flow-down and other subcontract requirements and allow for the acquisition of these materials under standard industry terms.

Competition/Bid protests

The NDAA includes two significant provisions affecting disappointed offerors and their ability to seek redress through a bid protest. In addition, the NDAA reflects a continued congressional view that lowest-price technically acceptable (LPTA) acquisition methodologies should be restricted to commodity or nontechnical items.

  • Section 818 provides for enhanced debriefing of disappointed offerors after a contract award. First, disappointed offerors in an acquisition that exceeds $100 million will be provided, as part of their debriefing, a redacted source selection decision document. The actual scope of the redactions, of course, will affect the usefulness of this provision (and may pose some concern to the awardee that its proprietary materials will be released despite the requirement for redactions). An unredacted version of the source selection decision is typically part of the administrative record in protests when a protective order is in place. Small businesses and nontraditional contractors may request this disclosure in acquisitions exceeding $10 million. Second, a debriefing is required for all contract and task order awards for contracts valued at $10 million or greater. Third, within two business days of the debriefing, the offeror will have an opportunity to pose additional questions in writing, and the agency will have five business days to respond to the questions. The debriefing is not considered to be “concluded”—the triggering event for the five-day time period to submit a protest to the Government Accountability Office (GAO) that requires the contract award to be stopped—until the agency’s responses are provided.
  • Section 822 expands the limitations on the use of LPTA acquisition methodologies that were enacted in the FY17 National Defense Authorization Act (Pub. L. 114-328). Specifically, the additional provisions limit the use of LPTA to acquisitions where: (i) the DoD will not realize any (or only minimal) additional innovation or future technological advantage by using a different acquisition methodology; and (ii) the goods that are being acquired are predominantly expendable in nature, nontechnical or have a short life expectancy or shelf life. This provision appears to be a response to a recent increase in the DoD’s use of LPTA acquisitions, including for more complicated or technical acquisitions, as a strategy to limit or avoid protests. Notably, the NDAA also includes Section 832, which outright prohibits the use of LPTA acquisitions for an “engineering and manufacturing development contract of a major defense acquisition program.”
  • Section 827 establishes a pilot program that will effectively run between October 1, 2019 and September 30, 2022, which will require certain unsuccessful protestors before the GAO to reimburse the DoD for its costs incurred defending against the protest. The pilot program will only cover protestors who: (i) had $250 million in revenues (in 2017 dollars) in the preceding year; and (ii) had a protest denied in an opinion issued by GAO. Importantly, the pilot program does not apply to protests that are brought before the US Court of Federal Claims. Affected contractors, therefore, may consider filing their protests with the Court of Federal Claims rather than with the GAO in order to avoid this fee-shifting provision. The contracting community will likely have to wait until the program is implemented in order to assess how the DoD will determine its costs, and more importantly, whether the existence of this pilot program will affect the DoD’s decisions to take corrective actions versus litigating a protest.

Conclusion

The FY18 NDAA includes wide-ranging and complex changes to the DoD acquisition process and related procedures. Contractors doing business with the DoD or seeking to do business with the DoD must stay apprised of the evolving acquisition landscape to best position themselves for successful partnerships with the agency in 2018.