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The Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA) published a final rule, effective September 10, 2021, that updates the Federal Acquisition Regulation to conform to two changes regarding small business subcontracting, namely by providing examples of what does—and what does not—constitute good faith efforts to comply with a small business subcontracting plan, as well as when indirect costs must be used in commercial subcontracting plans.

The NDAA at issue:  Section 1821 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2017 (section 1821(c) of Pub. L. 114–328; 15 U.S.C. 637) requires the Small Business Administration (SBA) to amend its regulations to provide examples of activities that would be considered a failure to make a good faith effort to comply with a small business subcontracting plan.

SBA Implementation:  SBA issued a final rule at 84 FR 65647, dated November 29, 2019, to implement section 1821 of the NDAA for FY 2017.  SBA added a non-exclusive list of examples of what could and could not be considered good faith efforts to comply with a small business subcontracting plan at 13 C.F.R. § 125.3(d)(3).

Proposed Rulemaking:  DoD, GSA, and NASA published a proposed rule on June 3, 2020, at 85 FR 34155, to implement section 1821 of the FY 2017 NDAA.

Key Change of the Rule:

As noted above, SBA updated 13 C.F.R. § 125.3(d)(3) in 2019 to provide contracting officers guidance on evaluating whether a prime contractor made a good faith effort to comply with its small business subcontracting plan.  The final rule updates FAR 19.705-7, Compliance with the subcontracting plan, to provide similar examples of activities that contracting officers may consider when evaluating whether the prime contractor made a good faith effort to comply with its small business subcontracting plan.  Per commentary in the rule, this change provides contracting officers with consistent and uniform examples to identify and hold large prime contractors accountable for failing to make a good faith effort to comply with their subcontracting plans.

Similar to the SBA final rule, FAR 19.705-7(d) now discusses the corrective actions available to contracting officers when a contractor fails to make a good faith effort to comply with the subcontracting plan and that, in this context, “a failure to make a good faith effort to comply with a subcontracting plan is a material breach, sufficient for the assessment of liquidated damages, and also for other remedies the Government may have.”  The final rule also updates FAR 19.705-6 to address the contracting officer’s responsibilities vis-à-vis a small business subcontracting plan, including initiating action to assess liquidated damages in accordance with FAR 19.705-7.

Commentary in the final rule makes clear that it does not implicate when a small business subcontracting plan is required—merely what activities would be considered a failure to make a good faith effort to comply with such a plan. That means that the rule does not change (1) whether a small business subcontracting plan is required in the acquisition of commercial items, including commercially available off-the-shelf items, nor (2) does it expand the applicability of the small business subcontracting plan requirement to contracts at or below the simplified acquisition threshold. Continue Reading Assessing Good Faith Efforts to Comply with a Small Business Subcontracting Plan

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The Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA) published a final rule, effective September 10, 2021, that finally updates the methodology to calculate compliance with the limitations on subcontracting.

The NDAA:  Section 1651 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2013 (15 U.S.C. 657s) revised and standardized the limitations on subcontracting, including the nonmanufacturer rule, that apply to small business concerns.

Implementation in SBA’s Regulations:  The Small Business Administration (SBA) implemented section 1651 of the FY 2013 NDAA in a final rule published at 81 FR 34243 on May 31, 2016, which became effective on June 30, 2016.

Proposed Rulemaking to Update the FAR:  DoD, GSA, and NASA published a proposed rule at 83 FR 62540 on December 4, 2018, to implement regulatory changes made by the SBA.

Key Set of Changes Made to the FAR:

The final rule updates the methodology for complying with the limitations on subcontracting.  FAR 19.505 and FAR clause 52.219-14 provide that a small business concern subject to the limitations on subcontracting will pay no more than a certain percentage of the amount paid by the Government for contract performance to subcontractors that are not similarly situated entities.  As with 13 C.F.R. § 125.6, the relevant thresholds are set as follows:

  • For a contract assigned a services NAICS code, the small business concern must not pay more than 50% of the amount paid by the Government for contract performance to non-similarly situated subcontractors;
  • For a contract assigned a NAICS code for supplies or products (other than a procurement from a nonmanufacturer), the small business concern must not pay more than 50% of the amount paid by the Government for contract performance, excluding the cost of materials, to non-similarly situated subcontractors;
  • For a contract assigned a general construction NAICS code, the small business concern must not pay more than 85% of the of the amount paid by the Government for contract performance, excluding the cost of materials, to non-similarly situated subcontractors; and
  • For a contract assigned a special trade contracting NAICS code, the small business concern must not pay more than 75% of the amount paid by the Government for contract performance, excluding the cost of materials, to non-similarly situated subcontractors.

Continue Reading FAR Conformed to the “New” Limitations on Subcontracting Methodology at 13 C.F.R. § 125.6

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In an August 27, 2021 decision, GAO sided with protester InfoPoint LLC (“InfoPoint”), and the Small Business Administration (“SBA”) which was invited to submit comments, in finding that a Department of Defense (“DoD”) solicitation provision requiring a small business joint venture offeror to itself hold a facility clearance was inconsistent with the National Defense Authorization Act for Fiscal Year 2020 (“2020 NDAA”) and SBA’s regulation at 13 C.F.R. §121.103.  GAO ruled that the 2020 NDAA “clearly and unambiguously prohibits DoD agencies, like the Air Force here, from issuing solicitations that require a joint venture, rather than the members of the joint venture, hold the required facility clearance.”

The underlying statutory and regulatory framework for GAO’s decision is located in three places:

  • Section 644 of the Small Business Act, which states that, “[w]hen evaluating an offer of a joint venture of small business concerns, if the joint venture does not demonstrate sufficient capabilities . . . to be considered for award of a contract opportunity, the head of the agency shall consider the capabilities . . . of each member of the joint venture as the capabilities . . . of the joint venture.”
  • Section 1629 of the 2020 NDAA, which directly addresses the requirement for joint venture facility clearances, providing that, “[a] clearance for access to a Department of Defense installation or facility may not be required for a joint venture if that joint venture is composed entirely of entities that are currently cleared for access to such installation or facility.”
  • 13 C.F.R. § 121.103(h)(4), where SBA implemented these requirements, which as of November 2020 provides that, “[a] joint venture may be awarded a contract requiring a facility security clearance where either the joint venture itself or the individual partner(s) to the joint venture that will perform the necessary security work has (have) a facility security clearance.”

Here, InfoPoint is an unpopulated mentor-protégé joint venture under 13 C.F.R. §§ 125.8 and 121.103(h)(3) where both members possess the requisite security clearance.  InfoPoint challenged the fair opportunity proposal request issued under the OASIS small business pool, which required that “[o]fferors shall possess or acquire a facility clearance equal to the requirement on the DD254 (Attachment 2) without additional authorization (i.e. National Interest Determination (NID)) by the proposal due date.”  The Air Force argued broadly that none of the statutory or regulatory provisions cited by the protester or SBA prohibited this clearance requirement, and that the DoD’s regulations concerning security clearances should take precedence over any regulations issued by SBA.  While the Air Force advanced four main defenses, GAO rejected each one of them.  GAO ultimately agreed that the solicitation should be amended to permit joint ventures to be eligible for award where they are comprised of members that each hold the required facility clearance, like InfoPoint.

DoD contended that the 2020 NDAA was not effective until implementing regulations were in place, but GAO found that the 2020 NDAA provision did not direct DoD to issue regulations or otherwise take any action to implement the provision and found the NDAA effective upon enactment.

GAO also disagreed with DoD that the language of § 121.103(h)(4) that a “joint venture may be awarded a contract…” gave DoD discretion to choose whether the joint venture itself, or the individual members, were required to hold the required facility clearances, instead finding that this language defines the eligibility of joint ventures to receive awards where the joint venture members hold the required facility clearance.

GAO also found that DoD was not entitled to deference on this issue because DoD had not issued regulations interpreting the 2020 NDAA, so there was nothing to which GAO could defer, even if it found deference appropriate.

Finally, GAO found that the DoD regulations that DoD cited as conflicting with § 121.103(h)(4), such as 32 C.F.R. §§ 117.9(a)(5), (c)(5), were unavailing because, to the extent there was a conflict, the plain language of the NDAA would control. GAO noted that, while this pre-award protest was in the context of a small-business set-aside procurement for a task order, the 2020 NDAA does not, on its face, limit its application to small business joint ventures.  It remains to be seen if other-than-small joint ventures may attempt to rely on this provision to challenge a requirement that a joint venture itself hold the facility clearance.

Going forward, contractors should keep in mind that DoD agencies are not permitted to utilize solicitation requirements that a small business joint venture itself must hold a facility clearance, rather than the individual members.  Crowell will continue to monitor for further developments in this area.

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Crowell & Moring’s “Byte-Sized Q&A” podcast takes the complex world of government contracts cybersecurity and breaks it down into byte-sized pieces. In this second episode of a three-part series, hosts Kate Growley and Evan Wolff overview the high points from the new DFARS clauses 252.204-7019 and -7020.

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This week’s episode covers a bid protest relating to a Procurement Integrity Act matter, government reports about COVID contracting, and final rules relating to small businesses and subcontracting, and is hosted by Peter Eyre and Monica Sterling. Crowell & Moring’s “Fastest 5 Minutes” is a biweekly podcast that provides a brief summary of significant government contracts legal and regulatory developments that no government contracts lawyer or executive should be without.

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This week’s episode covers a White House announcement about COVID vaccines and safety protocols for contractors working at government sites, proposed rule regarding Buy American Act, GSA announcement about transitioning from the Data Universal Numbering System (DUNS) system in SAM.gov, and pending legislative amendments to the False Claims Act, and is hosted by Peter Eyre and Yuan Zhou. Crowell & Moring’s “Fastest 5 Minutes” is a biweekly podcast that provides a brief summary of significant government contracts legal and regulatory developments that no government contracts lawyer or executive should be without.

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In a string of recent cases following the Supreme Court’s 2019 decision in Food Marketing Institute v. Argus Leader Media, multiple courts have held that a party submitting information to the government need not demonstrate it obtained an assurance of confidentiality from the government in order for the agency to justify withholding that information in response to an information request made under the Freedom of Information Act (FOIA).  (Crowell & Moring previously wrote about the new test instituted by Argus Leader here.)

FOIA Exemption 4 allows agencies to withhold documents otherwise responsive to a FOIA request if the documents contain “trade secrets and commercial or financial information obtained from a person [that is] privileged or confidential.”  As discussed in our previous post analyzing the Argus Leader decision, the Supreme Court had left open the question of whether the submitting party must have received some assurance from the government that the information would be kept confidential.  Recently, in The Washington Post v. U.S. Small Business Administration, the District of Columbia District Court followed the lead of other post-Argus Leader decisions in “declin[ing] to ‘read the word confidential to impose a blanket requirement that the government provide an assurance of privacy in every case in which it asserts Exemption 4.”  This ruling follows the court’s observation in Renewable Fuels Assoc. v. U.S. Environmental Protection Agency that “no court has yet held that ‘privately held information lose[s] its confidential character for purposes of Exemption 4 if it’s communicated to the government without’ privacy assurances.”  These decisions signal that no “assurance of confidentiality” requirement currently exists.

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2020 was one of the first years in memory when many multinationals saw a reduction in the number of internal whistleblower complaints, and a sharp increase in the number of external whistleblower complaints. In this environment, several countries around the world are finding ways to incentivize external whistleblower complaints, including—following the United States’ lead—providing bounties tied to money that governments recover as a result of those complaints. In this article by Crowell & Moring Partner Preston Pugh and Incoming 2022 First Year Associate Danielle Alvarez, part one of a two-part series, we discuss the development of these laws and the specific types of complaints whistleblower bounty laws cover. In part two, we will provide recommendations on how multinationals can best prepare for these developments.

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Ultra Electronic Ocean Systems, Inc., ASBCA No. 62804 (June 17, 2021), the Armed Services Board of Contract Appeals (the “Board”) held that a contracting officer’s letter terminating the contract for default “effective immediately” constituted a Contracting Officer’s Final Decision for the purpose of granting the Board jurisdiction over the contractor’s appeal.

In Ultra, the Navy issued a “Notice of Intent to Terminate for Default,” stating that “effective immediately . . . , the Government hereby exercises its right to terminate the contract.” Although the letter unequivocally terminated the contract, it was not styled as a final decision, and did not provide the contractor appeal rights language that is generally required in a Contracting Officer’s Final Decision. Nonetheless, the contractor appealed the termination letter, after which the contracting officer issued a second letter titled “Notice of Termination,” which was expressly characterized as a final decision and described the contractor’s right to appeal. The Government filed two motions to dismiss the contractor’s appeal of the first termination letter, arguing first that it was not a final decision and second, that it had been made moot by the second termination letter.

The Board analyzed the language used in the first termination letter, and held that it constituted the final expression of the Government’s position, making it an appealable final decision. The Board also reaffirmed that the absence of appeal rights language in a final decision does not render an otherwise valid appeal invalid. Finally, the Board held that the second termination letter cannot render the earlier termination letter moot, because the second letter did not grant the contractor the relief it sought: conversion of the default termination to that of a termination for the convenience of the Government. The Board denied the Government’s motions.

This decision is another example of the occasional tension between the unique procedural requirements of the Contract Disputes Act, and the Act’s purpose of providing for the fair and efficient resolution of disputes. The Government’s attempt to use a default termination letter as both a sword to terminate the contract and a shield from judicial review of that decision, served only to delay resolution and increase costs to both the contractor and, ultimately, the U.S. taxpayer.

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On July 30, 2021, the FAR Council published a Proposed Rule to implement President Biden’s January 2021 Executive Order seeking to maximize the use of American-made products and materials in federal procurements.  Coming just six months after a recent January 2021 Final Rule increasing both the domestic content percentage and the price evaluation preferences for U.S. products and materials under the Buy American Act, the Proposed Rule would further increase the domestic content percentage for the Buy American Act, while also adopting new policies specifically aimed at increasing domestic production of “critical” goods and components. The Proposed Rule advances three major policy changes:

  • Phased Increase of Domestic Content Requirements: To provide time for supply chains to adjust, the Proposed Rule would provide phased step increases in the percentage of domestic component cost needed for the end product to qualify as domestic – jumping initially to 60%, then going to 65% for deliveries occurring in calendar years 2024 through 2028 and further increasing to 75% for deliveries scheduled for 2029 or beyond.  If no offered end product qualifies as “domestic” under these new thresholds (or is determined, under the evaluation preferences, to be offered at an “unreasonable cost”), the contracting officer is instructed to evaluate as “domestic” any offered end products with more than the current threshold of 55% domestic content.  The new rules leave intact the recent change applicable to domestic construction materials “wholly or predominantly of iron or steel or a combination of both” which requires that foreign iron and steel in such construction material constitute less than 5% of the cost of all components.
  • Increased Price Preferences for “Critical” Goods and Materials: The Proposed Rule also introduces a framework for increasing the price evaluation preferences to products and construction materials deemed critical to the domestic supply chain, including end products or construction materials containing critical components.  This price evaluation preference for domestic products would vary for each product, material, or component that the FAR Council – through subsequent rulemakings occurring at least once every four years – deems “critical.”
  • Additional Reporting Requirements to Increase Transparency: Finally, the Proposed Rule would require contractors to report the specific domestic content of such designated “critical” products, materials, and components, with the exception of commercially-available-off-the-shelf items, to provide the Government greater visibility and insight into the strengths and weaknesses of the domestic supply chain.

In addition, the Proposed Rule seeks input on a number of longstanding issues concerning how the regulations determine what constitutes a domestic end product.  The FAR Council, for example, seeks public comment on whether alternative approaches to calculating domestic content would better serve the goals of the Buy American Act than the traditional “component cost” test which completely ignores final assembly labor costs even where substantial.  It also seeks industry input on whether the “substantial transformation” test – used to determine country of origin for purposes of the Trade Agreements Act exception – is a useful tool for promoting domestic jobs and manufacturing.

Finally, the FAR Council poses various questions to industry such as (1) impact of a roll-back of the longstanding statutory exception for commercial information technology and (2) how the Government might promote the use of “Made in America” services, potentially foreshadowing a new Buy American preference for domestic services.

The Proposed Rule is anticipated to generate significant public interest and participation in light of its significant potential to impact domestic suppliers and manufacturers.  In addition to the ordinary opportunity to submit comments, the FAR Council has also tentatively scheduled a virtual public meeting for August 26, 2021 for a discussion of the rule that interested parties should consider attending.