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Much that has been written about the bid protest reforms in the Section 809 Panel’s final report has focused on Recommendations 66-69, which expressly address (and propose changes to) the protest process at the U.S. Government Accountability Office (“GAO”) and the Court of Federal Claims (“COFC”). But the 809 Panel’s most impactful recommended changes to the protest process actually may be contained in Recommendation 35 (“Rec. 35”). There, in the context of a discussion of “updating” the Department of Defense’s (“DoD”) process for the acquisition of commercial and related items and services, the 809 Panel proposes to eliminate entirely GAO/COFC protests for such acquisitions valued at less than $15 million (and likely many above that threshold as well).

As discussed further below, the implementation of Rec. 35 may have unstated consequences that could ripple across both DoD and civilian agency acquisitions.

A. Recommendation 35: An Entirely Different Protest Process for Acquisitions of “Readily Available” Goods and Services

Rec. 35 proposes that DoD “[r]eplace commercial buying and existing simplified acquisition procedures and thresholds with simplified, readily available procedures for procuring readily available products and services and readily available products and services with customization.” The recommendation stems from the 809 Panel’s belief that to operate effectively, DoD must be able to procure readily available items and services as would a private sector company, without the current FAR-based constraints.[1]

In Rec. 35, the 809 Panel proposes replacing DoD’s current commercial-buying framework with two newly-defined categories of products and services: “readily available” (“RA”) and “readily available with customization” (“RAC”). These two categories would greatly expand the concept of “commercial items.” The 809 Panel defines RA products and services as those “that require no customization by the vendor and can be ordered directly by customers, to include products and services that only governments buy.” RAC products and services are defined as those “sold in the private sector, including to other public-sector customers, for which customization or manufacturing that is consistent with existing private-sector practices is necessary to meet DoD’s needs.” The only acquisitions not covered under these two categories are those for which “DoD finance[s] development . . . to provide a defense-unique capability.”

The breadth of these definitions is important given the 809 Panel’s recommendations for acquiring these goods and services and, significant here, challenging those acquisitions:

  • No Advance Public Notice. Procurements for RA goods or services—whether customized or not—valued at less than $15 million would have no public solicitation or bidding process. Instead, a DoD contracting officer would need only to conduct sufficient market research to confirm that the goods and services being acquired were, in fact, readily available.[2] The lack of public notice or solicitation precludes the possibility of pre-award protests. And following award in such procurements, the procuring agency would need only post a notice of the award, and make the contracting file publicly available.[3]
  • Limited Award Challenges. GAO and the COFC would no longer have jurisdiction to consider protests arising out of RA procurements—customized or not—below the $15 million threshold. Instead, contractors wishing to challenge an award would be able to file only a post-award, agency-level protest, limited only to the question of whether the agency conducted adequate market research and reasonably concluded that the goods or services in question were readily available. (Procurements where a traditional solicitation is issued would generally remain subject to the GAO’s and COFC’s bid protest jurisdiction (subject to other recommendations contained in the 809 Report).

B. Impact of Recommendation

By their very terms, the procedures proposed in Rec. 35 would drastically change the way commercial items are procured. And given the expansive definitions of RA and RAC, there are few things—beyond major defense acquisition programs—that would not qualify. Indeed, the 809 Panel acknowledges that under these broad definitions in the report, “nearly all of the services DoD procures should meet the definition of readily available with customization.” Moreover, because the 809 Panel proposes that DoD may use the RA procedures for procurements in excess of the $15 million threshold with only authorization at the local level by the “chief of the contracting office,” DoD could use these procedures for procurements well in excess of $15 million with minimal, if any, transparency.

If implemented, these procedures also could have a ripple effect across DoD procurements in a variety of ways, and affect non-DoD procurements as well.

First, the new acquisition procedures would eliminate pre-award public scrutiny—and protests—of RA and RAC procurements where there is no public solicitation. This could stifle opportunity for small businesses and nontraditional contractors to access DoD procurements in favor large, traditional contractors with deep connections to DoD. This also would allow DoD to operate a huge swath of its expenditure of taxpayer funds unchecked at the pre-award stage, precluding both public scrutiny and eliminating potential offerors’ ability to challenge the ground rules of the procurement where the agency’s procurement may unduly restrict competition, improperly favor one offeror over another, or otherwise violate procurement law or regulation.

Second, the new procedures would significantly circumscribe the post-award protest process. The procedures completely remove oversight outside of DoD itself by eliminating GAO/COFC jurisdiction and leaving only agency-level protests. And even what is left within DoD can hardly be described as a protest. By limiting agency-level protests to the question of whether an agency conducted sufficient market research to determine commercial availability, Rec. 35 removes all other traditional grounds of protest—i.e., equal treatment of offerors, realism of proposed pricing, sufficient consideration of apparent organizational conflicts of interest, rationality of award decision, etc.

The ability to bring these types of traditional protest grounds serve not only to protect the investment of individual offerors in a given procurement, but to safeguard the integrity of the procurement system. Under the 809 Panel’s proposal, for the acquisition of RA products/services—with or without customization—where a solicitation is not issued, there would be nearly zero outside oversight of DoD procurement decisions. And although the 809 Panel asserts that releasing the “contract file” would increase transparency, even if true, that transparency is offset by the minimal information that would be included in the file and the lack of a viable mechanism to act on it.

Third, the limitation of protests proposed by the 809 Panel would also call into question the decades of legal precedent at GAO and COFC that contractors and agencies rely upon when planning acquisitions and bidding on procurements. And this uncertainty would likely have a severe impact on agency and contractor productivity and efficiency when it comes to planning and executing a procurement. Without a process to incentivize compliance, DoD agencies using RA procedures may choose to ignore established decisional law, adversely affecting an offeror’s ability to understand the legal boundaries of the agency’s procurement process.

Moreover, the proposed changes in Rec. 35 (and others) will create separate procurement and protest systems for the DoD and civilian agencies. Historically, this bifurcated approach created significant confusion, inefficiency, especially among the contractor community and particularly for those companies who operate in both the DoD and civilian spaces. These concerns eventually prompted the departure from the old Armed Services Procurement Regulation (“ASPR”)/Federal Procurement Regulation (“FPR”) split and the development of unified procedures under the FAR. Rather than propelling procurement to the future, the 809 Panel essentially seeks to revert to bygone days. As such, contractors once again will have to adapt not only to the new DoD processes, but also to the different, civilian agency procurement process.

All of these issues demonstrate that the RA procedures proposed by the 809 Panel may create significant upheaval in the DoD procurement community that could dramatically change how contractors will need to operate with regard to DoD procurements. But despite its “bold” proposals, the 809 Panel cites to very little by way of studies or research to support the benefits—much less the necessity—of these recommendations. Indeed, just last year the RAND Corporation released a comprehensive study of DoD procurements that found that bid protests were not a significant impediment to the procurement process. Thus the drastic revisions to the DoD protest process appear to be simply change for change sake, at best a solution in search of a problem.

Although improvements to the procurement process are always worth considering, the drastic measures called for in Rec. 35 threaten to upend decades of established legal principles in the procurement arena, and make the process less, not more, transparent for the public and for contractors. Contractors should take heed when examining their positions on these important issues and continue to monitor congressional activity in this area going forward as these reforms likely will dramatically impact many defense contractors’ business.

 

[1] In putting forward its belief that drastic changes are needed, the 809 Panel makes no distinction between the procurement of cutting-edge technology advancements from nontraditional businesses and the procurement of office supplies or custodial services for a support agency office.

[2] Although the report identifies a $15 million maximum for use of its new market research process, it also authorizes the process for RA and RAC procurements of any value in excess of $15 million if the “chief of the contracting office” authorizes use of the process in writing. No criteria govern use of this authority. The 809 Panel references FAR subpart 2.1, Definitions, for the definition of “chief of the contracting office,” but that term is not defined in the FAR. The term “contracting office” is defined essentially as any “office that awards or executes a contract.”

[3] Publicly posted contracting files would include identification of the products/services procured and the price paid, the contracting officer’s market research, and a “short award decision document” when the awardee was chosen based on factors other than price.

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Adding to the Defense Contract Management Agency’s (DCMA) new cybersecurity responsibilities, the Department of Defense (DoD) Under Secretary of Defense for Acquisition and Sustainment (USDAS) recently issued a memorandum titled Strategically Implementing Cybersecurity Contract Clauses that increases DCMA’s role.  The memorandum tasks DCMA with implementing a process to perform company-wide assessments of contractors’ compliance with the DFARS Safeguarding Clause and the related solicitation provision, DFARS 252.204-7008 Compliance with Safeguarding Covered Defense Information, in lieu of the current contract-by-contract assessment of the Clause and Provision requirements.

Specifically, the memorandum addresses the inefficiencies caused by DFARS 252.204-7008, which requires contractors to self-certify on a contract-specific basis implementation of National Institute of Standards and Technology (NIST) Special Publication (SP) 800-171 as required by the Safeguarding Clause.  USDAS notes that this approach impedes the effective implementation of requirements to protect the DoD’s Controlled Unclassified Information (CUI).  To resolve these issues, the memorandum directs DCMA to develop a proposed path to issue no-cost bilateral block modifications to contracts administered by DCMA and recommend to the USDAS a set of business strategies to:

  • obtain and assess contractor system security plans (SSPs) and associated plans of action and milestones (POAMs) at a strategic level as an alternative to the contract-by-contract review;
  • propose a methodology to determine contractors’ cybersecurity readiness at a strategic level and assign levels of confidence for contractors’ readiness assessment at the corporate, business sector or facility level; and
  • propose how to communicate contractors’ cybersecurity readiness and confidence level to DoD components.

Of note, DCMA is further instructed to engage industry to discuss methods to oversee the implementation of the DFARS Safeguarding Clause and NIST SP 800-171.  It is possible that this industry engagement may occur through another DoD Industry Day, since the last DFARS Safeguarding Clause-related Industry Day occurred almost two years ago.

Industry will once again take a “wait and see” approach to the DoD’s policy implementation since the DCMA is directed to take action after March 1, 2019.

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The Department of Defense (DoD) Office of Inspector General (IG) recently released a July 6, 2015 Memorandum announcing that it will “immediately” begin the field work for its assessment of DoD compliance with Section 847 of the 2008 National Defense Authorization Act (NDAA), “Requirements for Senior Defense Officials Seeking Employment with Defense Contractors.” Section 847 mandated that, before a defense contractor may hire a “covered” current or former government official (generally, an official who has participated “personally and substantially” in the procurement or management of a DoD contract or program valued in excess of $10 million), the official must seek, and the contractor must review, “a written opinion from the appropriate ethics counselor regarding the applicability of post-employment restrictions to the activities that the former official is expected to undertake on behalf of the contractor.”  See 2008 NDAA § 847(a); see also DFARS § 203.171 (implementing § 847).  Section 847 also tasked the DoD IG with conducting periodic reviews to ensure that these written opinions (commonly known as “Designated Agency Ethics Official (DAEO) Letters” or simply “Ethics Letters”) are being provided and retained by DoD in a “central database or repository.”  See, e.g., Report No. DODIG-2014-050 (Mar. 31, 2014). Although the recent Memorandum addresses only the Government’s responsibilities under Section 847 (specifically the DoD IG’s objectives for its upcoming assessment), it is a good reminder that contractors, as well, should make the collection and retention of Ethics Letters a priority.  Hiring a former government official is often an effective way for a contractor to gain insight into a particular government program, or to simply bring a fresh perspective to the contractor’s operations.  However, such hiring decisions implicate a wide variety of statutory and regulatory provisions, and can expose contractors to substantial risk.  For example:

  • DFARS § 252.203-7000, which is included in DoD solicitations and contracts, prohibits a contractor from providing compensation to a covered current or former DoD official without first determining that the official has sought and received the appropriate Ethics Letter. Subsection (c) of that regulation provides that a contractor’s failure to abide by this prohibition may subject the contractor to rescission of its contract, suspension, or debarment in accordance with the Procurement Integrity Act (which also contains its own prohibitions on the compensation of specified current or former government officials, as well as civil, administrative, and even criminal penalties for “knowing” violations—see 41 U.S.C. §§ 2104, 2105).
  • Similarly, DFARS § 252.203-7005, which is included in DoD solicitations, requires a contractor to certify that: “all covered DoD officials employed by or otherwise receiving compensation from the [contractor], and who are expected to undertake activities on behalf of the [contractor] for any resulting contract, are presently in compliance with [a variety of post-employment restrictions].” This certification should not be taken lightly, as qui tam relators and some courts increasingly have taken an expansive approach to assessing False Claims Act liability based on theories of fraudulent inducement and false implied certifications.
  • Also, the Government Accountability Office has held that when a former government official participates in a contractor’s effort to obtain a contract, he/she is presumed to use any competitively useful non-public information to which he/she had access as a government employee. See, e.g., Health Net Fed. Servs., LLC, B-401652.3, Nov. 4, 2009, 2009 CPD ¶ 220 (sustaining protest based on awardee’s unfair competitive advantage stemming from employment of former government official).

These are just a few of the many potential risks when a contractor hires a former government official. However, in each case, the contractor may be able to avoid potential problems up front, or to defend against particular challenges on the back end, where it obtains and keeps handy a well-reasoned and supported Ethics Letter. While the Ethics Letter will not always be dispositive (and does not cover non-statutory issues, such as unfair competitive advantage and organizational conflicts of interest), and should be but one element among many in a contractor’s due diligence review in any hiring process, it is an element that should not be overlooked.

On December 3, 2013, the Department of Defense (“DoD”) published the second part of a trio of promised regulations regarding efforts contractors must take to prevent the entry of counterfeit electronics into the DoD supply chain.  We previously discussed the first proposed rule here, published on May 16, 2013, which was supposed to provide the foundation for detection and avoidance of counterfeit parts.  The third proposed rule has still not been released, but will address reporting requirements for identified counterfeit parts.

The second proposed rule, by its own admission, “does not directly implement any specific aspect of section 818,” the statute requiring DoD to assess its policies and systems for the detection of counterfeit electronic parts (see our previous blog post here for more details).  Instead, it continues DoD’s focus on contractor’s purchasing systems to stem the impact of counterfeit parts by amending the regulations concerning the use of higher-level quality systems (such as ISO, ASQ, and SAE standards).  According to the proposed rule, its purpose is “to ensure that agencies assess the risk of nonconforming items when determining whether higher-level quality standards should be used by the Government and relied on by contractors.”  Continue Reading New Proposed Rule Targeted at Counterfeit Parts

On April 26, 2013, the Under Secretary of Defense for Acquisition, Technology, and Logistics issued Department of Defense (“DoD”) Instruction No. 4140.67 to further establish policy to prevent counterfeit materiel at any level of the DoD supply chain. As we have previously blogged about, Section 818 of the National Defense Authorization Act of 2012 required DoD to assess its internal policies for detection and avoidance of counterfeit electronic parts by June 28, 2012 and revise the DoD acquisition regulations to address the detection and avoidance of counterfeit parts by September 26, 2012. However, despite the statutory mandate, DoD has not revised its acquisition regulations and this Instruction appears to be another interim measure.

The instruction serves two main purposes – (1) to establish DoD’s policies regarding counterfeit prevention and (2) assign responsibilities for the prevention, detection, and remediation of counterfeit material. Pursuant to the Instruction, it is DoD’s policy not to procure counterfeit material and DoD will employ a risk-based approach to reduce the frequency and impact of such material by applying prevention and early detection procedures within the supply chain and strengthening the oversight and surveillance procedures for critical material. DoD’s policy under the Instruction is to investigate all cases of suspected counterfeit material and document all occurrences of suspected and confirmed counterfeit material. DoD will make information about counterfeiting available at all levels of the supply chain, seek restitution when cases of counterfeiting are confirmed, and notify at the earliest opportunity criminal investigative organizations or intelligence authorities and those who use such materials. Continue Reading Department of Defense Tightens Counterfeit Prevention Policy

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Less than a week before most people departed for December holidays, the Department of Justice posted to its website its annual summary of False Claims Act matters and recoveries.  Among other data points, the FY 2012 summary reports the number of new FCA “matters” that were filed or opened, both by qui tam relators and the government, the amount of money that the government recovered through settlements and judgment during the year, and the amount of money recovered that went to qui tam relators.  In a series of posts, I’m going to examine what these statistics reveal about FCA enforcement trends. The FCA–Better Than Apple, Inc. Stock Lawyers love to talk about the “exponential growth” in FCA cases-especially plaintiff and defense lawyers.  But a look at the number of new cases filed each year shows that this is more than just malarkey: the number of new FCA cases is rising, and rising fast.  This illustration maps the number of new FCA matters, defined as “newly received referrals, investigations, and qui tam actions” since 2000.   As shown, the number of new matters has doubled in the past ten years (2002 to 2012).  FCA enforcement is trending up.  But what industries are being targeted?  The DOJ summary further breaks-down these statistics by industry. As the following illustration shows, new FCA matters are predominately being initiated in the healthcare and non-Department of Defense (DoD) contexts.  This is not to say that there is less of a focus of DoD procurements, which seems to have remained consistent over the past decade, but that the government and qui tam relators are using the FCA to target new industries. Although the DOJ summary does not indicate what federal agency procurements are covered by the “Other” category, it would include GSA Schedule contracts and contracts with various executive agencies, such as the Department of Homeland Security, the Department of Labor, Department of State, and the Department of Housing and Urban Development, among others.  This should be a red flag for companies receiving federal funds that do not consider themselves to be a ‘traditional’ government contractor – educational institutions and other grant recipients, for example – that the FCA is no longer focused solely on defense contractors and healthcare fraud.

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The Department of Defense (“DoD”) continues to contract out work that should be handled by federal employees, according to a new Government Accountability Office (“GAO”) study, which finds shortcomings in DoD’s tracking and management of such “inherently governmental” tasks.

The study urges DoD to better police its inventory of contracts—and bring in-house those functions too sensitive or policy-oriented for private contractors. DoD has agreed with the findings and has pledged to carry out GAO’s recommendations within the next year.

Inherently governmental functions are tasks intimately related to the public interest and that require discretion or value judgments in making decisions for the federal government. FAR § 7.503(c) contains a lengthy list of examples: criminal investigations, determinations of budget priorities, and setting agency policy, among many others. In addition, some functions not inherently governmental may still have to be brought in-house. FAR § 7.503(d) contains examples: budget preparations, evaluation of contractors, and inspection services, among others.

Congress, in section 803(c) of the National Defense Authorization Act for Fiscal Year 2010, directed GAO to report annually for three years on DoD’s inventory of contractor activity. In its first report, in January 2011, GAO found numerous holes in DoD’s inventory protocols and recommended the agency establish a plan for achieving goals and a time frame for reform. The new GAO study, however, finds only “limited progress” by DoD in meeting those goals.

The Army’s FY2009 inventory review found 1,935 instances where inherently governmental tasks were contracted out. The Air Force review found 91. The tasks included engineering and technical services, program management, and support services.  In the new study, GAO examined 12 of these improperly contracted-out tasks in-depth and found eight of them were still in the hands of private contractors despite GAO and Congress’s prior warnings.  In general, the GAO study concludes DoD needs  “greater accountability and management attention” in managing its contractor inventory.

With GAO slated to revisit the issue again in a year, DoD will likely increase its efforts to bring certain contracts in-house. Federal contractors would be wise to evaluate whether their work falls into the inherently governmental category and thus possibly work the federal government will soon seek to reclaim.