Government Contracts Regulatory and Legislative Update - May/June 2019

Our monthly edition of the “Government Contracts Regulatory and Legislative Update” offers a summary and insight into the relevant industry developments that occurred during the previous month.

Regulations

DoD Issues Proposed Rule Establishing Preference for Fixed-Price Contracts

On April 1, 2019, the U.S. Department of Defense (DoD) issued a proposed rule to revise the Defense Federal Acquisition Regulation Supplement (DFARS) to establish a preference for fixed-price contracts when determining contract type, and to require use of firm fixed-price contracts for foreign military sales, subject to exceptions. Approval is required for cost-reimbursement contracts in excess of $50 million if awarded between October 1, 2018 and October 1, 2019, and for cost-reimbursement contracts in excess of $25 million if awarded on or after October 1, 2019. These revisions will implement Sections 829 and 830 of NDAA FY 2017.

The proposed rule includes the following key amendments:

• Adds “milestone decision authority” definition to DFARS 202.101.
• Revises DFARS 216.102(1) and adds DFARS 216.102(3) to reference the Section 829 NDAA requirements.
• Adds DFARS 225.7301-1 and -2 to implement the Section 830 NDAA requirements.

DoD Issues Proposed Rule Revising the Nonmanufacturer Rule for 8(a) Participants

On April 1, 2019, DoD issued a proposed rule to amend the DFARS to implement the Small Business Administration’s (SBA) final rule standardizing the nonmanufacturer rule (NMR). The NMR imposes certain requirements upon small business concerns that offer end items they did not manufacture, process, or produce.

This rule will update DFARS clause 252.219-7010 (Notification of Competition Limited to Eligible 8(a) Participants) to remove the nonmanufacturer rule exemption for contracts valued at or below $25,000 and awarded under simplified acquisition procedures. Instead, the NMR will apply to all 8(a) contracts regardless of dollar value, and will require 8(a) participants that are nonmanufacturers to offer end items manufactured, processed, or produced by small business concerns in the United States or its outlying areas.

DoD Issues Proposed Rule Regarding Demonstration Project for Contractors Employing Persons with Disabilities

On April 1, 2019, DoD issued a proposed rule to amend the DFARS to include an instruction on the Demonstration Project for Contractors Employing Persons with Disabilities, which provides defense contracting opportunities for entities employing severely disabled individuals. This rule implements Section 888 of NDAA FY 2019, and adds a new subpart to DFARS 226 (Other Socioeconomic Programs) and prescribes a new solicitation provision requiring the offeror to represent its status as an eligible contractor. The rule further requires that contracting officers use the percentage of the offeror’s total workforce consisting of severely disabled individuals as an evaluation factor for all Demonstration Project solicitations.

The rule applies to all eligible contractors interested in competing for Demonstration Project contracts. Eligible contractors are defined as contractors:

• Employing severely disabled individuals at a rate of no less than 33 percent of the contractor’s workforce over the twelve-month period prior to issuance of the solicitation;
• Paying not less than the minimum wage to those individuals; and
• Providing for employees’ health insurance and a retirement plan comparable to those provided by similar entities.

SBA Issues Notification of Revised Size Standards Methodology

On April 11, 2019, the SBA issued a notification about the agency’s revisions to its size standards methodology white paper. The SBA’s Size Standards Methodology (April 2019) white paper, available here, explains the agency’s methodology to establish, review, or revise small business size standards. Changes to the SBA size standards methodology include:

• Industry Analysis factor: Move from “anchor” approach to “percentile” approach to evaluate industry characteristics;
• Number of Size Standards: Assign separate size standard for each NAICS industry rather than selecting from limited number of fixed size standards;
• Federal Contracting factor: Evaluate each industry with $20 million or more in annual federal contracting dollars; and
• Industry Competition: Apply the 4-firm concentration ratio to all industries.

DoD Issues Interim Rule Restricting the Acquisition of Certain Magnets and Tungsten

On April 30, 2019, DoD issued an interim rule to amend the DFARS to prohibit acquisition of certain magnets and tungsten “melted or produced” in North Korea, China, Russia, or Iran, in accordance with new restrictions at 10 U.S.C. 2533c. A new DFARS section 225.7018 and clause 252.225-7052 (Restriction on the Acquisition of Certain Magnets and Tungsten) implement the new restrictions.

The rule is inapplicable to acquisitions:

• Subject to the Simplified Acquisition Threshold (SAT);
• Outside the United States, for an item used outside the United States;
• Of an end item that is a commercial off-the-shelf (COTS) item, with exceptions; or
• Subject to a DoD determination that covered materials of satisfactory quality and quantity, in the required form, cannot be procured as and when needed at a reasonable price.

Notably, there is no “qualifying country” exception for magnets.

DoD Issues Proposed Rules Modifying Clauses Applicable to Telecommunications Services

On April 30, 2019, DoD issued the following proposed rules to streamline contract terms and conditions applicable to telecommunications services contracts:

• Modify DFARS clause 252.239-7004 (Orders for Facilities and Services) to incorporate the language of DFARS clause 252.239-7005 (Rates, Charges and Services). These clauses specify how contractors must acknowledge receipt orders and provide terms and conditions regarding charges for facilities and services provided under the contract.
• Modify DFARS clause 252.239-7007 (Cancellation or Termination of Orders) to incorporate the language of DFARS clause 252.239-7008 (Reuse Arrangements). This rule will amend the -7007 clause to clarify DoD’s maximum liability to reimburse nonrecoverable costs in the event of cancellation or termination of telecommunications services.

Comments are due by July 1, 2019.

DoD Issues Proposed Rule for Performance-Based Payments

On April 30, 2019, DoD issued a proposed rule to amend DFARS subpart 232.10 (Performance-Based Payments) to address the use of performance-based payments, in accordance with 10 U.S.C. 2307 requirements. This rule removes prior DFARS restrictions limiting performance-based payments to amounts not greater than costs incurred up to the time of payment. Rather, payments will be conditioned on the achievement of negotiated performance outcomes. In addition, the rule imposes a new reporting requirement at DFARS 252.1003-70 regarding whether the offeror’s accounting system output is Generally Accepted Accounting Principles (GAAP)-compliant. Comments are due by July 1, 2019.

DoD, GSA, and NASA Issue Final Rule Expanding Special Emergency Procurement Authority

On May 6, 2019, DoD, GSA, and NASA issued a final rule to implement Sections 816 and 1641 of the NDAA for Fiscal Year 2017. Sections 816 and 1641 modify 41 U.S.C. 1903, Special Emergency Procurement Authority. The revisions to 41 U.S.C. 1903 establish special emergency procurement authorities to allow for a higher micro-purchase threshold (MPT) and simplified acquisition threshold (SAT) for acquisitions of supplies or services that: (1) facilitate defense against or recovery from cyber attack; (2) support a request from the Secretary of State or the Administrator of the United States Agency for International Development to facilitate provision of international disaster assistance pursuant to 22 U.S.C. 2292 et seq.; or (3) support responses to an emergency or major disaster (42 U.S.C. 5122). This new authority allows treatment of acquisitions, for property or a service, as a commercial item for acquisitions that facilitate the defense against or recovery from a cyber attack against the United States.

Acquisitions with an estimated value between the MPT or SAT and the higher thresholds for the expanded special emergency procurement authorities will use simplified procedures, thereby reducing the requirements imposed on the offerors when responding to the solicitation. The rule became effective June 5, 2019.

DoD, GSA, and NASA Issue Proposed Rule Revising the Definition of “Commercial Item”

On May 10, 2019, DoD, GSA, and NASA issued a proposed rule to amend the Federal Acquisition Regulation (FAR) to change the definition of “commercial item” at FAR 2.101, so that the regulatory definition conforms to statutory changes made to the definition by Section 847 of the National Defense Authorization Act (NDAA) for Fiscal Year 2018. Section 847 expands the scope of nondevelopmental items (NDIs) that qualify as commercial items to include items sold in substantial quantities on a competitive basis to multiple foreign governments. Under the proposed rule, for the first time, NDIs that are developed exclusively at private expense and sold in substantial quantities to multiple foreign governments may be treated as commercial items.

SBA Issues Proposed Rule Requiring Certification of Women-Owned Small Business Concerns

On May 14, 2019, the Small Business Administration (SBA) issued a proposed rule to amend its regulations to implement a statutory requirement to certify Women-Owned Small Business Concerns (WOSB) and Economically Disadvantaged Women-Owned Small Business Concerns (EDWOSB) participating in the Women-Owned Small Business Contract Program, in accordance with Section 825 of the National Defense Authorization Act (NDAA) for Fiscal Year 2015. The proposed rule serves as a follow-up to the final rule issued in 2014 implementing the sole source authority for WOSBs and EDWOSBs. The proposed rule requires that the concern be certified by a Federal agency, a State government, SBA, or a national certifying entity approved by SBA in order to be awarded a set aside or sole source contract under the authority of section 9(m) of the Small Business Act.

The proposed rule also suggests an adjustment to the economic disadvantage thresholds applicable to determining whether an individual qualifies as economically disadvantaged for participation in the 8(a) Business Development (BD) Program to make them consistent with the thresholds applicable to whether a woman qualifies as economically disadvantaged for EDWOSB status. Comments on the proposed rule are due by July 15, 2019.

DoD Issues Final Rule Revising Rules for Foreign Commercial Satellite Services and Certain Items on the Commerce Control List

On May 14, 2019, DoD issued a final rule to implement Section 1603 of the National Defense Authorization Act (NDAA) for Fiscal Year 2018 and Section 1296 of the NDAA for FY 2017. Section 1603 imposes additional prohibitions with regard to acquisition of certain foreign commercial satellite services, such as cybersecurity risk and source of satellites and launch vehicles used to provide the foreign commercial satellite services. Section 1603 also expands the definition of “Covered foreign country” to include Russia. Section 1296 prohibits purchase of items from a Communist Chinese military company. The final rule modifies DFARS clause 252.225-7007 (Prohibition on Acquisition of United States Munitions List Items from Communist Chinese Military Companies) and DFARS clause 252.225-7049 (Prohibition on Acquisition of Commercial Satellite Services from Certain Foreign Entities—Representation). The rule became effective on May 31, 2019.

DoD Issues Final Rule Requiring Justification and Approval for Use of Brand Name or Equal Descriptions in Solicitations

On May 31, 2019, DoD issued a final rule to amend DFARS 211.104 and DFARS 211.170 to restrict the use of brand name or equal descriptions in solicitations, implementing Section 888(a) of the National Defense Authorization Act (NDAA) for Fiscal Year 2017. The final rule requires that competition on DoD contracts not be limited through the use of brand name or equal descriptions, or proprietary specifications or standards in solicitations, unless a justification for such specification is provided and approved in accordance with 10 U.S.C. 2304(f). The final rule applies when using sealed bidding procedures, negotiated procedures, or simplified procedures for certain commercial items. The rule became effective May 31, 2019.

DoD Issues Proposed Rule Providing for Accelerated Payments to Small Business Contractors and Subcontractors

On May 31, 2019, DoD issued a proposed rule to amend DFARS parts 212, 232, and 252 to implement accelerated payments to small business contractors and subcontractors by accelerating payments to their prime contractors, in accordance with section 852 of the National Defense Authorization Act (NDAA) for Fiscal Year 2019. This rule requires DoD, to the fullest extent permitted by law, to establish an accelerated payment date for small business contractors, with a goal of 15 days after receipt of a proper invoice, if a specific date is not established by contract. The rule also requires DoD to establish an accelerated payment date where a small business subcontractor is involved, if the contract does not establish a specific date and the contractor agrees to make accelerated payments to the subcontractor without further consideration from, or fees charged to, the subcontractor.

The requirements of the proposed rule are in line with DoD’s current policy and practice to pay small businesses as quickly as possible. The rule will apply to contracts at or below the simplified acquisition threshold and will be applicable to commercial item contracts. Comments on the proposed rule are due by July 30, 2019.

DoD Issues Proposed Rule Increasing the Contractor Purchasing System Review Threshold

On May 31, 2019, DoD issued a proposed rule to amend DFARS 244.302 to establish within DFARS a contracting purchasing system review (CPSR) dollar threshold of $50 million. The proposed rule implements a recommendation from the Defense Contract Management Agency to raise the CPSR threshold at FAR 44.302(a) from $25 million to $50 million. This change is expected to reduce the number of contractor reviews by approximately 20%. Comments on the proposed rule are due by July 30, 2019.

DoD Issues Final Rules to Make Various DFARS Amendments

On May 31, 2019, the DoD adopted final rules to make the following DFARS amendments:

• Revise the DFARS to implement Section 821 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2018. This rule requires inflation adjustments of statutory acquisition-related thresholds under 41 U.S.C. 1908 to apply to existing contracts and subcontracts in effect on the date of the adjustment.
• Remove DFARS clause 252.247-7012 (Ordering Limitation), and the associated prescription at DFARS 247.271-3(g) because the FAR clause adequately addresses the necessary terms and conditions on minimum and maximum ordering limitations for the preparation of personal property for movement or storage, or performance of intra-city or intra-area movement.
• Remove DFARS clause 252.211-7001 (Availability of Specifications, Standards, and Data Item Descriptions Not Listed in the Acquisition Streamlining and Standardization Information System (ASSIST), and Plans, Drawings, and Other Pertinent Documents), and the associated clause prescription at DFARS clause 211.204(c)(i). The clause was removed because DoD determined it is not necessary to have two different provisions to communicate how or where an offeror can obtain or view documents associated with a solicitation, and the required information is sufficiently stated in DFARS clause 252.211-7002.

DoD, GSA, and NASA Issue Final Rule Creating Exception to Certified Cost or Pricing Data Requirements When Price Is Based on Adequate Price Competition

On June 12, 2019, the DoD, GSA, and NASA, issued a final rule revising the standard for “adequate price competition” applicable to DoD, NASA, and the Coast Guard, as required by section 822 of the National Defense Authorization Act (NDAA) for Fiscal Year 2017. Section 822 addresses the exception from certified cost or pricing data requirements when prices are based on adequate price competition. The rule excludes from the standard for adequate price competition the situation in which there was an expectation of competition, but only one offer is received. The standard of adequate price competition that is based on a reasonable expectation of competition is now applicable only to agencies other than DoD, NASA, and the Coast Guard. The final rule becomes effective July 12, 2019.

SBA Issues Proposed Rule Modifying Calculation of Annual Average Receipts

On June 24, 2019, the Small Business Administration issued a proposed rule to modify its method for calculating annual average receipts used to prescribe size standards for small businesses. Specifically, consistent with a recent amendment to the Small Business Act, SBA proposes to change its regulations on the calculation of annual average receipts for all receipts-based SBA size standards and other agencies’ proposed size standards for service-industry firms from a 3-year to a 5-year averaging period. The proposed rule is based on an effort to promote consistency government wide on small business size standards.

Implementation of the proposed rule would allow mid-size businesses who have just exceeded size standards to regain their small business status, and would allow small businesses close to exceeding the size standard, perhaps because they had a rapid growth year resulting in higher revenue, to retain their small business status for a longer period. The proposed rule that would modify section 121.104 would not distinguish between firms in service industries and other firms subject to receipts-based size standards.

SBA also proposes to clarify how it believes annual receipts should be calculated in connection with the acquisition or sale of a division. The proposed rule would provide that the annual receipts of a concern would not be adjusted where the concern sells or acquires a segregable division during the applicable period of measurement or before the date on which it self-certified as small. This would be different from how SBA treats the sale or acquisition of a subsidiary, where the annual receipts of an affiliate are excluded. SBA specifically requests comments on this issue. Comments on the proposed rule are due on August 23, 2019.

DoD, GSA, and NASA Issue Proposed Rule Implementing Inflation Adjustments of Acquisition-Related Thresholds

On June 24, 2019, the DoD, GSA, and NASA issued a proposed rule to amend the FAR to make inflation adjustments of statutory acquisition-related thresholds under 41 U.S.C. 1908 applicable to existing contracts and subcontracts in effect on the date of adjustment. This proposed rule would implement section 821 of the National Defense Authorization Act (NDAA) for Fiscal Year 2018. Comments on the proposed rule are due on August 23, 2019.

DoD, GSA, and NASA Issue Proposed Rule Granting Credit for Lower-Tier Small Business Subcontracting

On June 26, 2019, DoD, GSA, and NASA issued a proposed rule to revise the FAR to implement section 1614 of the National Defense Authorization Act for Fiscal Year 2014, as previously implemented by the Small Business Administration regulations.

Section 1614 requires a prime contractor that has an individual subcontracting plan for a contract with a single executive agency to receive credit towards its small business subcontracting goals for awards made to small business concerns at any tier by subcontractors with individual subcontracting plans. Section 1614 also provides new assurances for offerors to include in subcontracting plans related to plan approval and monitoring performance. Contractors will be required to demonstrate procedures are established to ensure subcontractors at all tiers comply with their subcontracting plans. The proposed rule does not impose any new reporting, recordkeeping or other compliance requirements for small entities.

The rule amends the FAR to update the definition of subcontract and add definitions of first-tier and lower-tier subcontracts. The proposed rule would modify FAR Subpart 19.7 (The Small Business Subcontracting Program), FAR subpart 42.15 (Contractor Performance Information), FAR 52.212-5 (Contract Terms and Conditions Required to Implement Statutes of Executive Orders—Commercial Items), and FAR 52.219-9 (Small Business Subcontracting Plan). Comments on the proposed rule are due by August 26, 2019.

VA Issues Final Rule to Make Various VA Acquisition Regulation (VAAR) Amendments

On June 24, 2019, the VA issued a final rule amending and updating its VAAR to revise or remove any policy superseded by changes in the FAR, to move procedural guidance internal to the VA to the VA Acquisition Manual (VAAM), and to incorporate any new agency-specific regulations or policies. The VA’s goal is to align the VAAR with the FAR, remove outdated and duplicative requirements, and reduce burdens on contractors. The final rule, which becomes effective July 24, 2019, revised part 817 (Special Contracting Methods) and makes the following amendments:

• Remove subpart 817.1 (Multi-year Contracting) in its entirety because it deals with internal procedures regarding the uses of multi-year contracting and internal approvals to be obtained.
• Remove subparts 817.202 (Use of options) and 817.204 (Contracts). Subpart 817.202 consisted of internal procedures to develop solicitations and cost comparisons under Office of Management and Budget Circular A-76. Subpart 817.204 contained internal procedures and approvals to be obtained for contracts with option periods greater than five years, and this coverage was moved to the VAAM.
• Remove subpart 817.4 (Leader Company Contracting) and 817.402 (Limitations) because they included internal procedures and approval requirements for leader company contracts. The coverage was moved to the VAAM.
• Revise the title of subpart 817.5 to read “Interagency Acquisitions.”
• Add subsection 817.501 (General), which requires that any governmental entity that acquires goods and services on behalf of the Department of Veterans Affairs to comply, to the maximum extent feasible, with the provisions of 38 U.S.C. 8127 and 8128, and the Veterans First Contracting Program as implemented at subpart 819.70.
• Remove section 817.502 (General), which is replaced with updated policy in 817.501.
• Add subpart 817.70 (Undefinitized Contract Actions) to provide policy and procedures for the use of undefinitized contract actions (UCAs) as UCAs are a high-risk method of procurement.
• Add subsection 817.7000 (Scope), which describes the material being introduced in this subpart.
• Add subsection 817.7001 (Definitions) to provide definitions of four terms used in the subpart: contract action, definitization, definitization proposal, and undefinitized contract action.
• Add subsection 817.7002 (Exceptions), which exempts simplified acquisitions and congressionally mandated long-lead procurement contracts from this policy but requires the contracting officer to apply the policy and procedures to the maximum extent practicable.
• Add subsection 817.7003 to convey that undefinitized contract actions should be limited to situations where it is not possible to negotiate a definitive contract action in time to meet the government’s requirements, and where the interests of the government demand that the contractor be given a commitment so that contract performance can begin immediately.
• Add subsection 817.7004 (Limitations), with no text; add subsection 817.7004-1 (Authorization), which provides guidance as to when the contracting officer must obtain approval to use an undefinitized contract action; and add subsection 817.7004-2 (Price Ceiling), which requires all undefinitized contract actions to include not-to-exceed price ceilings.
• Add subsection 817.7004-3 (Definitization schedule), which sets parameters for establishing definitization schedules and requires submission of a definitization proposal in accordance with the definitization schedule as a material element of the contract, where non-compliance may result in suspension or reduction of progress payments under FAR 32.503-6 or other appropriate action.
• Add subsection 817.7004-4 (Final price negotiation—profit), which provides guidance on negotiating profit that reflects the contractor’s reduced cost risk prior to definitization.
• Add section 817.7005 (Contract clause), which prescribes new clause 852.217-70, Contract Action Definitization, for all UCAs, solicitations associated with UCAs, basic ordering agreements, indefinite-delivery contracts, or any other type of contract providing for the use of UCAs.
• Add subsection 852.217-70 (Contract Action Definitization) to provide specific procedures required to definitize UCAs.

DoD Issues Proposed Rule Requiring Contractors to Notify Government of Accidents Involving Aircraft, Missile, or Space Launch Vehicles

On June 28, 2019, the DoD issued a proposed rule to amend DFARS 228.370 from permitting DFARS clause 252.228-7005 (Accident Reporting and Investigation Involving Aircraft, Missiles, and Space Launch Vehicles) to be included in all applicable solicitations and contracts, to requiring use of the clause. DFARS 252.228-7005 was implemented to ensure the Government receives timely notification of accidents involving aircraft, missile, or space launch vehicles being manufactured, modified, repaired, or overhauled by a contractor in connection with a contract and contractor cooperation with Government investigation of such accidents. The clause is included in solicitations and contracts that involve the manufacture, modification, overhaul, or repair of aircraft, missiles, and space launch vehicles. The clause requires contractors to promptly notify the contracting officer of all facts related to an accident involving such items, cooperate with and assist in the Government’s investigation of an accident, and include a similar clause in subcontracts under the contract. Comments on the proposed rule are due by August 27, 2019.

DoD Issues Final Rule Addressing the Requirement for Additional Cost or Pricing Data When Only One Offer is Received in Response to a Competitive Solicitation

On June 28, 2019, the DoD issued a final rule to amend the DFARS to partially implement section 822 of the National Defense Authorization Act (NDAA) for Fiscal Year 2017 to: (1) address the potential requirement for additional cost or pricing data when only one offer is received in response to a competitive solicitation; and (2) make prime contractors responsible for determining whether a subcontract qualifies for an exception from the requirement for submission of certified cost based on adequate price competition.

This DFARS rule supplements a FAR final rule, which modified the standards for adequate price competition at FAR 15.403-1(c) for DoD, NASA, and the Coast Guard. Section 822 excludes from the standard for adequate price competition a situation in which there was an exception of competition, but only one offer is received. The rule becomes effective July 31, 2019.

DoD Issues Rules to Make Various DFARS Amendments

On June 28, 2019, the DoD issued proposed and final rules to make the following DFARS amendments:

• Remove DFARS clause 252.247-7001 (Price Adjustment), and the associated prescription clause at DFARS 247.270-4, because these clauses, required to be included in solicitations and contracts for stevedoring services when using sealed bidding, are not used in practice. Other FAR and DFARS clauses can be used to provide the necessary information to contractors performing on stevedoring contracts. This final rule became effective June 28, 2019.
• Remove DFARS provisions and clauses that are included in solicitations and contracts for services to prepare personal property for movement or storage, or perform intra-city of intra-area movement of personal property, including DFARS 252.247-7008 (Evaluation of Bids), DFARS 252.247-7009 (Award), DFARS 252.247-7010 (Scope of Contract), DFARS 252.247-7011 (Period of Contract), DFARS 252.247-7013 (Contract Areas of Performance), DFARS 252.247-7017 (Erroneous Shipments), DFARS 252.247-7018 (Subcontracting), DFARS 252.247-7019 (Drayage). The clauses were removed because the information contained in these transportation-related provisions is specific to the requirement and/or within the contracting officer’s discretion. When applicable, the information more appropriately belongs in solicitation instructions or a performance work statement to ensure offerors and contractors receive a cohesive set of instructions and performance requirements. This final rule became effective June 28, 2019.
• Revise and rename DFARS 252.239-7013 (Obligation to the Government) to incorporate the information included in DFARS 252.239-7014 (Term of Agreement); create an alternate for DFARS 252.239-7013 that includes the information in DFARS 252.239-7013, 252.239-7014, and 252.239-7015; and amend the clause text to align with the termination requirement in the FAR. The proposed rule would remove DFARS 252.239-7014 and 252.239-7015. Because all three clauses provided terms and conditions that related to basic agreements for telecommunications services, it was determined that the text of the three clauses could be combined in a basic and an alternate clause to streamline the terms and conditions pertaining to telecommunications services. Comments on the proposed rule are due by August 27, 2019.