Helping individuals, companies, and organizations understand key legal and practical considerations for promoting compliance and making better business decisions in these types of federal, state, and local government contracting matters MORE

A  recent article on this blog reported on the contents of the Senate version of the National Defense Authorization Act for Fiscal Year 2021 (NDAA), which had been rolled out of committee for consideration by the full Senate. The Senate has since passed its version (S. 4049) and the House has passed its own version of the bill (H.R. 6395). The House bill reflects some of the same concerns as its Senate counterpart, especially those relating to national security and supply chain risk. Some key portions of H.R. 6395 focused on these areas are discussed below:

  • Sec. 825 would require, as of October 1, 2021, at least 75% of the components of manufactured articles, materials, or supplies procured in connection with a major defense acquisition program to be mined, produced, or manufactured in the United States. The requirement would increase 5% per year through October 1, 2026, when the requirement would be 100%.
  • Sec. 826 would make the content requirement for the portion of printed circuit boards manufactured and assembled in covered countries at least 50% starting in FY 2023. Under the provision, this content requirement would grow over time to 100% in FY 2033.
  • Sec. 1254 would direct the Department of Defense (DoD) to develop and maintain a list of companies with ties to the Chinese military operating in the United States, the unclassified portions of which would be published in the Federal Register.
  • Sec. 1632 would require DoD to establish a threat intelligence program for obtaining information from and sharing it with the defense industrial base. Beginning one year after passage of the NDAA, this provision would prohibit DoD from procuring from any entity that is not participating in the program or an equivalent DoD program.
  • Sec. 1634 would require DoD to report on the feasibility of implementing a Defense Industrial Base Cybersecurity Threat Hunting Program to actively identify cybersecurity threats and vulnerabilities within the information systems, including covered defense networks containing controlled unclassified information (CUI), of entities in the defense industrial base. If the program were implemented, DoD would be prohibited from procuring from any entity that is not compliant with all program requirements starting one year after passage of the NDAA.
  • Sec. 1705 would direct the National Institute of Standards and Technology (NIST) to conduct a study and make recommendations about the impact of policies and industrial coordination within China on international bodies engaged in developing and setting international standards for developing technologies.

There are many other provisions in the House version of the bill. We can expect the House and Senate to work to develop a bill that incorporates some of the above, since the Senate bill also included similar provisions. We are tracking these matters closely, so stay tuned!

While some rules may seem basic enough to overlook, the Government Accountability Office (GAO) decision sustaining the protest in Avionic Instruments LLC (Avionic), B-418604, B-418604.2 (June 30, 2020) reminds us of a fundamental tenet in government contracting for both agencies and offerors: abide by the terms of the solicitation.

The underlying solicitation, a request for proposals (RFP), was issued by the Department of the Navy, Naval Air Systems Command for the development and production of certain equipment, a replacement digital inverter, for the UH-1Y helicopter. Essentially, inverters convert the direct current of a helicopter into an alternating current that can be used for alternative electronic needs. The solicitation was issued pursuant to Federal Acquisition Regulation (FAR) part 15, providing for full and open completion. Ultimately, the RFP contemplated the award of a fixed-price contract with a base award, as well as options.

The RFP provided that award would be made on a best value basis based on technical and price factors, with the technical factor having greater importance. Under the technical factor the agency was to evaluate the following elements: (1) overall design approach; (2) approach to qualification testing; (3) logistics planning; (4) an experience risk assessment of qualification testing and achieved reliability for similar aircraft applications of the prime and subcontractors; and (5) small business strategy. Further, each proposal would be given a technical rating and a technical risk rating, where the former corresponded with compliance with the solicitation’s requirements, and the latter corresponded with the risk associated with the technical approach. The solicitation clarified that the experience element would only factor into the technical risk rating.

The agency received proposals from Avionic and Physical Optics Corporation (Physical Optics). Avionic’s proposal was evaluated as having three risk reducers, which would be advantageous to the government during contract performance. Two of Avionic’s risk reducers were under the design element and one was under the experience element. Physical Optics’ proposal, which included a major subcontractor, was assessed as having four risk reducers: one under the design element; one under the qualification testing element; and two under the experience element. Neither Avionic’s nor Physical Optics’ proposals were assessed any strengths, weaknesses, significant weaknesses, deficiencies, or uncertainties under the technical factor. Because the proposals were evaluated as technically similar, Physical Optics’ lower-priced proposal was selected for award, and Avionic filed this protest.

Avionic raised issues with several aspects of the agency’s technical evaluation, including that the record contained insufficient support for the agency’s risk assessment with respect to prior experience.

With regard to the awardee’s lack of experience, Avionic’s argued that the agency unreasonably failed to consider the fact that Physical Optics and its major subcontractor did not provide, as required by the RFP, prior statements of work or performance work statements (PWS) and specifically cite to which portions corresponded to the tasks under the current solicitation’s PWS. While Physical Optics’ proposal contained a cross reference matrix with the current PWS requirements and its prior experience related to these requirements, Avionic noted that several of these prior experience references were not found in the prior contracts that Physical Optics’ provided.

The agency responded by arguing that simply because Physical Optics’ cross reference matrix did not indicate certain experience this does not mean that Physical Optics did not have such experience. Further, the agency submitted a supplemental report where it argued that it looked to other places in Physical Optics’ proposal to look for the relevant experience, even though Physical Optics’ did not claim such experience; however, this post-protest explanation was not supported by the contemporaneous record.

The GAO sided with the protester, and sustained the protest on this ground, as it found that the contemporaneous record did not show whether the agency actually evaluated either Avionic’s or Physical Optics’ proposals to determine compliance with the solicitation’s PWS requirement.

The GAO recommended that the agency reevaluate proposals and make a new, documented best value determination consistent with the GAO’s decision. The lesson for offerors and potential protesters: An agency’s compliance with the evaluation terms of the solicitation, and your compliance with the same in your proposal, is crucial to issuing a valid award. Accordingly, maximize the clarity in your proposal to indicate as precisely as possible how it meets the solicitation’s terms.

On July 14, 2020, the Federal Acquisition Regulatory (FAR) Council issued an interim final rule intended to clarify the scope and application of the requirements set forth in Section 889(a)(1)(B) of the FY2019 National Defense Authorization Act (FY19 NDAA). The rule’s release comes after months of eager anticipation by—and almost apocalyptic warnings from—a wide variety of government contractors and industry groups who argued, among other things, that contractors would find it impossible to comply with (a)(1)(B) requirements, much less to do so by the statutory deadline of August 13, 2020 (which they also urged should be extended). The rule does not move the deadline for compliance, but it does make clear that (a)(1)(B) applies only at “the prime contract level.” This has caused some to declare victory in the belief that the FAR Council has essentially done away with the arduous task of confirming supply chain compliance.

To this we say, “not so fast.” Just because the rule explains that it does not apply to subcontractors because they do not have privity with the government, that doesn’t mean that prime contractors don’t have a responsibility to look at their supply chain to ensure compliance company-wide, “regardless of whether that usage is in performance of a Federal contract.”

FY19 NDAA Section 889(a)(1)(B) Requirement

Section 889 was part of the John S. McCain National Defense Authorization Act (NDAA) that was signed into law on August 13, 2018. Section 889 “Prohibition on Certain Telecommunications and Video Surveillance Services or Equipment” established a “(a) Prohibition on Use or Procurement.—(1) The head of an executive agency may not—(A) procure or obtain or extend or renew a contract to procure or obtain any equipment, system or service that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system; (B) enter into a contract (or extend or renew a contract) with an entity that uses any equipment, system, or service that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system.” (Emphasis added.)

How far down a prime contractor must go to confirm that it does not “use” any covered equipment is not defined. Instead, Section 889(a)(2) provides a limited carve-out to allow a federal agency to procure “(A) with an entity to provide a service that connects to the facilities of a third-party, such as backhaul, roaming or interconnection arrangements” or “(B) cover telecommunications equipment that cannot route or redirect user data traffic or permit visibility into any user data or packets that such equipment transmits or otherwise handles.” Those exceptions to the prohibition on procurement and use of covered goods and services, however, also would require some due diligence on the part of the prime contractor to confirm the limitation on (A)’s service arrangements and the inability of (B)’s equipment to route, redirect or permit visibility into any user data or packets it handles.

The conference report accompanying the NDAA confirms that Section 889 prohibitions were intended to prevent the introduction of technology or services from “any company that the head of a relevant Federal agency reasonably believes is controlled by the government of the Peoples Republic of China.” The report included a specific list of companies identified initially as subject to the prohibition –Huawei Technologies Company, ZTE Corporation, Hytera Communications Corporation, Hikvision Digital Technology Company and Hahua Technology Company. Notably, the conference report also indicates that any limitation on the prohibitions was to be transitional, and that Congress sought to “assist affected businesses, institutions and organizations as is reasonably necessary for those affected entities to transition from covered communications equipment and services, to procure replacement equipment and services, and to ensure that communications services to users and customers is sustained.”

While rollout of the prohibition on federal agency procurement of covered systems and services came swiftly, but due to a deviation and then FAR provision, it has been almost two years since the provision’s passage and the road to FAR Council interpretation and implementation of Section 889(a)(1)(B)’s prohibition on a prime contractor’s uses of covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system has been rocky to say the least. However, the time for implementation—by August 13, 2020—is nearing. Contractors need to understand that there are issues that remain outstanding, as well as the current terms for compliance under the interim final rule.

Implementation by the Interim Final Rule and Issues that Remain Open

The rule provides the interim path for implementation of Section 889(a)(1)(B)’s complex edict. The rule implements Section 889(a)(1)(B) by amending the FAR and relevant FAR clauses to incorporate certain specific (a)(1)(B) requirements. For example, the rule amends FAR 52.204-25 Prohibition on Contracting for Certain Telecommunications and Video Surveillance Services or Equipment, which previously focused solely on Section 889(a)(1)(A), to add a new subsection (b)(2):

Section 889(a)(1)(B) … prohibits the head of an executive agency on or after August 13, 2020, from entering into a contract, or extending or renewing a contract, with an entity that uses any equipment, system, or service that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system, unless an exception at paragraph (c) of this clause applies or the covered telecommunication equipment or services are covered by a waiver described in FAR 4.2104. This prohibition applies to the use of covered telecommunications equipment or services, regardless of whether that use is in performance of work under a Federal contract.

In its discussion of this provision, the rule explains this prohibition “applies at the prime contract level to an entity that uses any equipment, system, or service that itself uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system, regardless of whether that usage is in performance of work under a Federal contract.” The FAR Council goes on to state that, while FAR 52.204-25’s Section (a)(1)(A) prohibition will continue to flow down to all subcontractors, the (a)(1)(B) prohibition does not because of the statute’s language and the fact that “the prime contractor is the only ‘entity’ that the agency ‘enters into a contract’ with, and an agency does not directly ‘enter into a contract’ with any subcontractors, at any tier.”

However, the rule also requires a representation from the contractor in the System for Award Management (SAM) as to whether it will use or has covered equipment or services. If the contractor does not have or use such equipment or services then it can represent it “will not” or “does not” and the contracting officer may rely on this representation “unless the contracting officer has reason to question the representations.” FAR 4.2103(a)(2). A contractor that selects “does” or “will” must complete the representation again in each procurement.

Where the contractor indicates that it “does” or “will” use such covered equipment or services in a particular procurement, the rule provides that the contracting officer will consider whether a one-time waiver is necessary to make an award. Where a waiver is deemed necessary, the rule provides that the contracting officer will “request the offeror provide: (1) A compelling justification for the additional time to implement the requirements under 889(a)(1)(B), for consideration by the head of the executive agency in determining whether to grant the waiver; (2) a full and complete laydown of the presences of covered telecommunications or video surveillance equipment or services in the entity’s supply chain; and (3) a phase-out plan to eliminate such covered telecommunications equipment or services from the entity’s systems.” In this regard, the rule and rulemaking history provide a very significant distinction between how it will handle offerors that represent that they will not use and do not have covered equipment or services and those that cannot make that representation. This is potentially going to be quite troublesome for contractors given the nature of what the rule says is required for the representation.

Specifically, the rule modifies FAR 52.204-24 Representation Regarding Certain Telecommunications and Video Surveillance Services or Equipment to require a contractor to represent as part of its offer, “[a]fter conducting a reasonable inquiry,” whether or not it uses “covered telecommunications equipment or services, or use[s] any equipment, system, or service that uses covered telecommunications equipment or services.” The rule also requires the submission of additional information about any covered equipment or covered services that will be used. In connection with such representations, the rule defines “reasonable inquiry” to mean “an inquiry designed to uncover any information in the entity’s possession about the identity of the producer or provider of covered telecommunications equipment or services used by the entity that excludes the need to include an internal or third-party audit.”

It may be tempting to read the definition of “reasonable inquiry” as relieving prime contractors of all responsibility to make inquiries of those within their supply chains, and permitting them to rely only on what they already know about the equipment, systems and services they use. But such an approach seems entirely too simplistic. If a contractor that represents that it knows it has covered equipment or services must provide a full and complete laydown of the presences of covered equipment and services in its supply chain, then shouldn’t a contractor that represents that it does not have or use such equipment or services be required to engage in a similar effort to ensure the accuracy of its representation? Given that the rule makes clear that the express purpose of the rule is “to protect the homeland … from the impact of Federal contractors using covered telecommunications equipment or services that present a national security concern,” it makes no sense to think that the rule establishes an arrangement under which the protection of the homeland’s national security depends solely on what prime contractors already know about the equipment and services they use. This should be a special concern since it is not likely that federal contractors (especially commercial item or service contractors) have previously understood that they had an obligation to inquire into this aspect of the telecommunications equipment, systems and services on which they rely.

These discrepancies (and others) point to the likely scenario that the present rule is only an interim gap-filler and that future rulemaking to impose greater requirements on the supply chain of the contractor will follow shortly. Indeed, the rulemaking poses a number of specific questions to the federal contracting community, inviting comment in this area. This may be due to the FAR Council’s own recognition of the rule’s inconsistencies—and, perhaps, its foreshadowing of things to come. For example, the rulemaking asks the community, “To what extent do you have insight into existing systems and their components?” It also seeks comments about “the challenges involved in identifying uses of covered telecommunications equipment or services (domestic, foreign and transnational) that would be prohibited by the rule.” Similarly, it asks, “What are the best processes and technology to use to identify covered telecommunications equipment or services? [and] Are there automated solutions?”

Given the nature and scope of these questions, it is clear that there remain unresolved issues in implementation of the prohibition of Section 889(a)(1)(B). It would be a mistake to interpret this interim final rule as providing a definitive answer on whether or to what extent a reasonable inquiry requires at least a top-level inquiry of suppliers by prime contractors to follow up on the important information they know they do not have. Contractors at all tiers would be well-served to engage in a well-documented process for identifying whether and to what extent they (and their affiliates and subsidiaries) have or use covered equipment or services enterprise-wide. In many cases, such an approach should include consideration of the contractors’ suppliers and even, depending on the specific facts, others in their supply chains. A reasonable response to the representation requirement will be one that is based on a reasonable, documented fact-gathering. Remember a representation is viewed in the same light as a certification. A false representation or one based on failing to take steps based on what you knew or should have known is the standard triggering the False Claims Act.

On June 30, 2020 at 11:00 PM Hong Kong time, the Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region (HK National Security Law) took effect. The HK National Security Law was adopted by the Standing Committee of the National People’s Congress of the People’s Republic of China (PRC), listed in Annex III of the Basic Law (the mini-constitution) of the Hong Kong Special Administrative Region (HKSAR), and promulgated by the government of the HKSAR.

In response to the then-expected HK National Security Law, on June 29, 2020 the Department of State announced that the U.S. would immediately end exports of U.S.-origin defense equipment to Hong Kong and would take steps to treat Hong Kong in the same manner as the PRC for U.S. defense and dual-use technologies. This means that the Directorate of Defense Trade Controls (DDTC) will not issue export licenses to Hong Kong for defense articles and defense services subject to the International Traffic in Arms Regulations (ITAR). Effective June 30, 2020, the U.S.  Department of Commerce Bureau of Industry and Security suspended license exceptions for exports and reexports to Hong Kong, and transfers (in-country) within Hong Kong. Those license exceptions allowed for Hong Kong to receive preferential treatment as compared to the PRC for items subject to the Export Administration Regulations (EAR). U.S. companies relying on any EAR license exception to export items to Hong Kong should immediately confirm whether that license exception remains available for shipments to the PRC. Otherwise, an export license will be required.

This situation is developing and it is expected that the U.S. will take further actions in response to the HK National Security Law.

Implementing Section 823 of the National Defense Authorization Act for Fiscal Year 2020 (NDAA FY ‘20), on July 5, 2020, the Department of Defense (DoD) amended the DoD Federal Acquisition Regulation Supplement (DFARS) to increase the threshold for requiring sole source justifications of awards to Small Business Administration (SBA) certified 8(a) small disadvantaged businesses.  Under the new DFARS final rule, DFARS 206.303-1, no formal justification and approval (J&A) will be required for a sole source award of $100 million or less to such an 8(a) small business.  This final rule is a significant increase over the current $22 million threshold which applies to procurements covered by the Federal Acquisition Regulation (FAR) Part 6.3 rule.

The SBA is responsible for administration of the 8(a) small business program.  To qualify as an 8(a) small business, the small business must be owned and controlled by an economically and socially disadvantaged individual whose income, net worth and assets do not exceed specific dollar amounts and who meets other requirements.  A small business accepted into the SBA 8(a) program that maintains its good standing may be certified as an 8(a) for a maximum of nine years.

The FAR provides for full and open competition for contracts unless a specific exception applies. Its sole source provisions allow an exception to this requirement where (1) there is only one responsible source and no other supplies or services will satisfy agency requirements, (2) there is unusual or compelling urgency, (3) it is necessary to award a contract to a particular source or sources for purposes of industrial mobilization; to maintain essential engineering, developmental, or research capability; or expert services, (4) it is required by international agreement or treaty between the U.S. and a foreign government, (5) it is authorized or required by statute, (6) where it is determined to be necessary for the national security, or (7) where it is determined by the agency head to be in the public interest.

Under the new rule, the SBA may not accept for negotiation a DoD sole source award to an 8(a) small business above the new $100 million threshold, unless DoD issues and approves a J&A in accordance with FAR 6.303-2 and the new DFARS rule 206.303-1(b).  The final rule provides that DoD J&A approval must be done by a member of the armed forces serving in a rank above brigadier general or rear admiral (lower half), or a civilian in a position of a comparable grade.  The final rule is effective immediately.

If you have questions about this new DFARS rule, the SBA 8(a) program, or other government contracts matters contact the author, a member of Stinson’s Government Contracts & Investigations practice group, or your Stinson counsel.