The Government Contracts Quarterly Update is published by BakerHostetler’s Government Contracts Practice team to inform our clients and friends of the latest developments in federal government contracting.

In This Issue:

• Steps Taken to Avoid Government Shutdown, but Obstacles Remain
• GAO Bid Protest Statistics
• Ban on Contractor Campaign Contributions Upheld
• DoD IG Report Criticizes DCMA’s Handling of Business System Deficiencies
• BARDA Update
• DoL Compensation Policy Updates
• Executive Order Requires Federal Contractors to Provide Paid Sick Leave
• Government Proposes Numerous Cybersecurity Regulation Updates
• Rare Successful Challenge to a Small-Business Set-Aside Decision at GAO
• DoD Proposed Rule Offers Guidance on Commercial Item Pricing
• Federal Court Lifts and Nullifies USAID’s Contract Suspension of Relief Organization
• Contractors Continue to Face False Claims Act Risk
• Seen and Heard
• D.C. Watch – Proposed Legislation, Agency Rulemakings, and Contract Requirements

Steps Taken to Avoid Government Shutdown, but Obstacles Remain

On November 2, 2015, President Obama signed the Bipartisan Budget Act of 2015, a long-term budget bill that will fund the government through the 2017 fiscal year. This bill comes on the heels of a last-minute stopgap spending bill that delayed a government shutdown by funding federal agencies through December 11, 2015. Although the long-term bill establishes a framework for spending through 2017, it does not appropriate any funds past December 11, 2015. In order to avoid a shutdown, the House and Senate appropriations committees will have to work under the framework of the bill to write legislation allocating funds to specific agencies and programs. If Congress does not pass that legislation by December 11, a government shutdown will occur.

Federal agencies are required to have shutdown plans, and contractors should have them in place as well. Contractors with active contracts should communicate with their contracting officers and obtain written guidance regarding how to proceed in the event of a government shutdown. If a shutdown occurs, contractors should track all costs associated with the shutdown so that they can assert a claim for those costs once government operations resume.

GAO Bid Protest Statistics

The number of Government Accountability Office (“GAO”) protests has remained consistent over the past several years, exceeding 2,300 protests for the third year in a row. Despite these consistent protest statistics, the actual number of solicitations that can be protested has decreased in recent years, due in part to the government’s increased use of multiaward contract vehicles with task orders that frequently cannot be protested. While the GAO has not yet published formal numbers, the statistics regarding the types of outcomes also appear to have remained steady over the past several years.

Ban on Contractor Campaign Contributions Upheld

On July 7, 2015, the D.C. Circuit Court upheld a decades-old ban on direct campaign contributions from federal contractors to federal candidates. The unanimous en banc decision was joined by the entire 11-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit. The campaign contribution ban, codified at 52 U.S.C. § 30119, prohibits any “person” who enters into a federal contract from making any political contributions from the beginning of negotiations of a federal contract to the completion of the contract (or to termination of negotiations). A group of individual contractors challenged the ban as a violation of their First Amendment and equal protection rights. In upholding the ban, the court held that “the concerns that spurred the original bar remain as important today as when the statute was enacted.”

DoD IG Report Criticizes DCMA’s Handling of Business System Deficiencies

On July 1, 2015, the Department of Defense (“DoD”) Inspector General (“IG”) issued a report criticizing the Defense Contract Management Agency (“DCMA”) for improperly handling deficiencies identified in contractors’ cost-estimating systems – i.e., noncompliance with Defense Federal Acquisition Regulation Supplement (“DFARS”) 252.215-7002, Cost Estimating System Requirements. The IG found that in the majority of the cases it reviewed, the DCMA contracting officers failed to follow the requirements set forth in DFARS 242.7000, Contractor Business System Deficiencies, specifically by failing to meet deadlines for initial determination letters and final determinations and, in some cases, failing to withhold payments despite the continued presence of significant deficiencies.

BARDA Update

In the past two quarterly editions, we wrote about the process for applying for contracts with and grants from the Biomedical Advanced Research and Development Authority (“BARDA”). BARDA has three open Broad Agency Announcements (“BAAs”), which seek white papers and proposals related to (1) the development of medical countermeasures (“MCMs”) for chemical, biological, radiological, and nuclear (“CBRN”) agents; (2) the development of MCMs for pandemic influenza; and (3) the development of platform technologies that enhance capabilities for developing and manufacturing MCMs. Last month, BARDA published new BAAs in the same three categories. Look to the next quarterly edition for more on the new BAAs.

DoL Compensation Policy Updates

Contractors should take note of two changes regarding employee compensation from the Department of Labor (“DoL”):

• First, under new DoL policies, federal contractors will soon be subject to reviews of employee compensation, not just for base pay but also for all forms of employee compensation, including bonuses, overtime pay, incentives, and commissions. Such broad reviews are called for in a new scheduling letter for compliance reviews put forth by DoL’s Office of Federal Contract Compliance Programs (“OFCCP”). As part of the Obama administration’s objective of closing the gender pay gap, the reviews are intended to help OFCCP detect and prevent gender- and race-based discrimination among federal contractors.
• The OFCCP has also finalized a new rule aimed at curbing pay secrecy. The rule ensures that employees of federal contractors and subcontractors are free to discuss, disclose, and inquire about compensation. The rule, proposed under Executive Order (“EO”) 13,665, aims to combat employment discrimination by allowing employees and applicants to share sensitive yet important pay information. While the rule does not require employers to share pay data, it prevents employers from taking adverse action against employees and applicants who discuss and inquire about compensation information.

Executive Order Requires Federal Contractors to Provide Paid Sick Leave

On September 7, 2015, President Obama marked the Labor Day holiday by signing an EO requiring federal contractors and subcontractors to provide paid sick leave to their employees. The Labor Day EO is one of many EOs the president has signed that impose new administrative and compliance burdens on government contractors. The EO applies to all covered federal government contracts that are solicited or awarded on or after January 1, 2017. Per the EO, all federal contractors and subcontractors must provide their employees with at least one hour of paid sick leave for every 30 hours worked, for a minimum of 56 hours per year (about seven working days). Accrued paid sick leave carries over year to year, must be reinstated for employees rehired by a covered contractor within 12 months after a job separation, and may be used by an employee for absences resulting from:

• Physical or mental illness, injury, or a medical condition;
• Obtaining diagnosis, care, or preventive care from a healthcare provider;
• Caring for a child, parent, spouse, domestic partner, or any other individual related by blood or affinity whose close association with the employee is the equivalent of a family relationship; or
• Domestic violence, sexual assault, or stalking, provided that the leave is used to seek medical attention, obtain additional counseling, seek relocation, seek assistance from a victim services organization, or prepare for or participate in any related civil or criminal proceedings.

The EO also imposes other requirements on federal contractors, including:

• Providing paid sick leave upon an employee’s oral or written request, which must be made at least seven calendar days in advance where the need for leave is foreseeable and as soon as practical in other cases;
• Introducing a requirement that covered contractors may not require employees to provide a certification from a healthcare provider unless the employee takes three or more days of sick leave; and
• Introducing a requirement that the employee’s use of paid sick leave may also not be contingent on requiring the employee to find a replacement to cover any work time to be missed.

While the EO does not immediately take effect, the DoL is tasked with adopting regulations by September 30, 2016. In the meantime, federal contractors should verify whether their existing paid leave policies satisfy the EO’s requirements.

Government Proposes Numerous Cybersecurity Regulation Updates

The federal government continued its focus on cybersecurity this past quarter, introducing a number of proposed and interim regulations that will affect federal contractors and subcontractors. The proposals that may directly or indirectly impact contractors include:

• On July 22, 2015, the Federal Risk and Authorization Management Program (“FedRAMP”) Third-Party Assessment Organizations (“3PAO”) Accreditation Program issued a draft version of the 3PAO accreditation requirements for public comment. According to the accreditation program, the proposed changes and updates are intended to provide for greater oversight and ensure that FedRAMP-accredited 3PAOs provide high-quality and technically accurate assessment results. While the changes are not expected to directly impact contractors with existing FedRAMP accreditation, they may result in more stringent evaluation of cloud service providers seeking to gain accreditation.
• On July 24, 2015, the Defense Information Security Agency, the federal agency tasked with developing the DoD’s security requirement guides for cybersecurity, issued three draft documents regarding the DoD’s acquisition of secure cloud computing systems. The draft documents include the (i) Security Requirements Guide (“SRG”) (Version 1, Release 2), (ii) Cloud Access Point (“CAP”) Functional Requirements Document (Version 2.2), and (iii) Concept of Operations (“CONOPS”) for Cloud Computer Network Defense (Version 1).
• At a high level, the draft SRG may open the door for additional contractors to receive authorization by more closely following the FedRAMP cloud security model, although it imposes additional security obligations beyond FedRAMP. The draft CAP Functional Requirements Document, meant to protect the DoD Information Network at points where it connects with cloud offerings, outlines specific CAP performance requirements that go beyond the scope of the SRG, although the Performance Requirements section of the document is still incomplete. Finally, the draft CONOPS for Cloud Computer Network Defense adds new reporting and data-sharing requirements for cloud operators, including a matrix of procedures to be performed by contractors in response to cyber incidents.
• On August 11, 2015, the Office of Management and Budget (“OMB”) issued proposed guidance to federal agencies for improving cybersecurity protections in the federal acquisitions process “for products or services that generate, collect, maintain, disseminate, store, or provide access to Controlled Unclassified Information (CUI) on behalf of the federal government.” The proposed guidance contains specific requirements for agencies to follow when drafting solicitation and contract clauses, including minimum standards for security controls, cyber-incident reporting, security assessments, continuous monitoring, and business due diligence, that meet or exceed those specified in the guidance. Additionally, the proposed guidance calls for amendments to the Federal Acquisition Regulation (“FAR”) to provide for the inclusion of contract clauses that address these areas of interest.
• On August 12, 2015, the U.S. General Services Administration (“GSA”) issued a Request for Information (“RFI”) seeking industry feedback on ways to improve the sale of cybersecurity products and services through GSA’s Information Technology (“IT”) Schedule 70. The GSA is considering the creation of a new Special Item Number (“SIN”) under IT Schedule 70, specifically designated for Cybersecurity and Information Assurance (“CyberIA”) products and services.
• On August 26, 2015, the DoD issued an interim rule, effective immediately, that expands existing DFARS requirements for contractors and subcontractors to protect “covered defense information” and report cyber incidents for unclassified information systems. The rule introduces a new class of information at DFARS subpart 204.73, covered defense information, which includes controlled technical information, export-controlled information, and critical information. The rule makes a parallel change to DFARS clause 252.204-7012, “Safeguarding Covered Defense Information and Cyber Incident Reporting,” to cover safeguarding and reporting of cyber incidents involving this new class of information. DFARS 252.204-7012 is required in all DoD solicitations and contracts and subcontracts, including those for commercial items.
• The rule also adds new clauses, including DFARS 252.239-7009, “Representation of Use of Cloud Computing,” which requires offerors to represent their intention to utilize cloud computing services in the performance of the contract, and DFARS 252.239-7010, “Cloud Computing Services,” which provides standard contract language for the acquisition of cloud computing services. DFARS 252.239-7009 and 252.239-7010 are required for all DoD solicitations and contracts for the acquisition of information technology services, including commercial item acquisitions. DFARS 252.239-7010 is required to be included in all subcontracts that involve or may involve cloud services, including subcontracts for commercial items.
• On September 21, 2015, the DoD published a proposed rule to amend the DFARS regarding counterfeit electronic parts. The DoD previously implemented counterfeit electronic parts rules in May 2014, including the clause DFARS 252.246-7007, “Contractor Counterfeit Electronic Part Detection and Avoidance System.” The proposed rule seeks to clarify the existing rule through the (i) removal of embedded software or firmware from the definition of “electronic part,” (ii) clarification of traceability expectations, and (iii) guidance on determination of risk. While the existing DFARS 252.246-7007 is applicable only to prime contractors subject to the Cost Accounting Standards (“CAS”), the proposed DFARS 252.246-70XX would apply to non-CAS-covered contractors, contain flowdowns to subcontractors (including subcontractors for commercial items), and apply to small-business set-asides.

Rare Successful Challenge to a Small-Business Set-Aside Decision at GAO

On July 15, 2015, the GAO issued a decision in the Protest of Triad Isotopes, Inc., B-411360, represented by BakerHostetler’s Government Contracts Practice, which sustained Triad’s protest of the Department of Veterans Affairs’ (“VA’s”) decision to set aside a procurement for small businesses. This rare opinion provides an important precedent for large businesses seeking to overturn an agency’s decision to set aside solicitations.

Under the FAR “rule of two,” an agency must have a reasonable expectation of receiving two or more offers from small businesses in order to set aside a procurement for small businesses. Prior to GAO’s decision in Triad, an agency’s decision to set aside a procurement for small businesses was almost unassailable so long as the agency received two or more small-business proposals in response to a small-business set-aside solicitation, even where the record showed that the agency’s expectation of receiving two or more offers was unreasonable when the set-aside decision was made (i.e., inadequate market research).

In its July decision, GAO drew the line and held that the receipt of proposals could not cure the VA’s lack of a reasonable expectation that it would receive small-business proposals. GAO stated that “[w]hile our case law has found in certain circumstances that the receipt of offers from two or more apparently responsible small businesses in response to the [Request for Quotations (“RFQ”)] may support an agency’s decision to set aside a procurement for small business concerns, the receipt of the offers here does not remedy the flawed market research or failure of the contracting officer to evaluate the market research in accordance with the RFQ.”

DoD Proposed Rule Offers Guidance on Commercial Item Pricing

On August 3, 2015, the DoD proposed a rule that could significantly affect DoD acquisitions of commercial items at the prime and subcontract levels. The rule would rely on “market-based pricing” as the preferred method of establishing a reasonable price in the absence of competition. The rule states that there is a “strong likelihood” of market-based pricing when nongovernmental buyers account for 50 percent or more of the sales volume for a given item in the commercial marketplace. If adopted, the rule would allow contracting officers to collect “relevant sales data” and instruct prime contractors to “obtain from subcontractors whatever information is necessary to support a determination of price reasonableness.” The rule defines “relevant sales data” as a “subset of an offeror’s sales data that, as considered by a prudent person, could reasonably be expected to influence the contracting officer’s determination of price reasonableness.” This broad definition provides contractors limited protection from agency demands for more data to confirm price reasonableness. Notably, by linking market-based pricing to actual sales, the rule appears to eliminate the “offered for sale” prong of the “commercial item” definition in instances where there have been limited or no commercial sales.

Federal Court Lifts and Nullifies USAID’s Contract Suspension of Relief Organization

On August 3, 2015, the U.S. District Court for the District of Columbia overturned the U.S. Agency for International Development’s (“USAID’s”) suspension of International Relief and Development Inc. (“IRD”) and its affiliates from receiving future federal grants and contracts. Notably, the district court lifted IRD’s suspension ab initio – as if the suspension never happened at all.

IRD, which provides economic and humanitarian assistance to countries around the world, has been one of the largest recipients of USAID grants and cooperative agreements in recent years. USAID suspended IRD and its affiliates in January 2015 from all federal procurements and non-procurement contracts and awards, citing evidence that IRD mischarged USAID over a period of four years and lacked adequate internal controls. The suspension came shortly after a May 2014 Washington Post article that alleged that IRD was mismanaging and wasting taxpayer funds by providing generous salaries and millions of dollars in bonuses to employees and hosting lavish company-funded parties and retreats, and after the December 2014 indictment of an IRD executive for allegedly soliciting and accepting bribes in exchange for government-funded contracts in Afghanistan.

IRD filed a lawsuit challenging the suspension order, alleging that USAID’s decision violated the Administrative Procedure Act and USAID’s own rules and regulations, because USAID failed to make the required finding that “immediate action” was necessary to protect the public interest from a “realistic and articulable threat of harm.” In its complaint, IRD asserted immediate action was not necessary because, months before the suspension, it had implemented mitigating measures by instituting stronger internal controls, imposing new financial controls, conducting layoffs of implicated executives, and dissolving its board of directors. IRD further alleged that USAID had initially responded positively to these changes but abruptly changed its position following the publication of a letter from Senate Foreign Relations Committee Chairman Senator Bob Corker criticizing USAID’s purported mismanagement of government funds, which specifically referenced IRD.

After IRD filed suit, USAID issued a press release explaining that it was lifting IRD’s suspension due to a potential conflict of interest involving the suspension and debarment official. The court, however, found USAID’s decision to lift IRD’s suspension inadequate, ordering USAID to fairly consider IRD proposals as if the suspension were never issued, issue a statement that the suspension was null and void from its commencement, and correct any misstatements made to third parties. Although voiding a suspension ab initio is a unique remedy that is generally reserved for egregious agency conduct, the court’s decision in IRD may prove to be a powerful precedent for contractors seeking to clear their records of similar suspensions.

Contractors Continue to Face False Claims Act Risk

On July 6, 2015, the Department of Justice (“DoJ”) announced that LB&B Associates Inc. and its principals, Lily A. Brandon and F. Edward Brandon, agreed to pay $7.8 million to resolve allegations that they made false statements to obtain contracts through the Small Business Administration’s (“SBA’s”) 8(a) Business Development Program for Small Disadvantaged Businesses. LB&B allegedly falsely represented that Lily Brandon – who satisfied the criteria for a socially and economically disadvantaged person under SBA’s 8(a) Program – controlled the operations of LB&B. Additionally, LB&B allegedly made false claims in connection with contracts it obtained pursuant to the SBA’s Mentor-Protégé Program, which allows participants to obtain set-aside contracts, following LB&B’s graduation from the 8(a) Program. This case highlights the lengths the DoJ will go to protect the integrity of SBA’s 8(a) program.

On August 19, 2015, the DoJ announced that U.S. Investigations Services Inc. (“USIS”) and its parent company, Altegrity, agreed to settle charges that USIS violated the False Claims Act (“FCA”) by failing to provide adequate background checks as required under its contract with the Office of Personnel Management (“OPM”). The parties agreed to forgo $30 million in payments for work previously completed for OPM. The FCA lawsuit against USIS was originally filed by former USIS executive Blake Percival.

On September 28, 2015, L-3 Communications Corporation, Vertex Aerospace LLC, and L-3 Communications Integrated Systems LP agreed to pay $4.63 million to resolve allegations that they violated the FCA by inflating labor hours for time spent by independent contractors at the military’s Continental U.S. Replacement Centers (“CRCs”) in Fort Benning, Georgia, and Fort Bliss, Texas. The government alleged that the companies knowingly overcharged the government for time their independent contractors spent at the CRCs by billing for each individual based not on the actual time that individual spent at the CRC but instead on the earliest arrival or latest departure time of any other individual who also was processed through the center that same day.

Seen and Heard

• Partner Hilary Cairnie spoke on the panel “Common Compliance Pitfalls During Disaster Response” at the Aid and International Development Forum Global Disaster Relief Summit in Washington, D.C., on September 10-11. Cairnie addressed the legal perspective of compliance during disaster response.
• Hilary Cairnie was interviewed in August by Law360 regarding a recent U.S. Court of Federal Claims opinion involving unduly restrictive intellectual property clauses. Cairnie’s comments were published in an article titled “OSHA Solicitation Axed Over Clause for Bidders’ IP.”
• Partners Hilary Cairnie and Randy Gainer published an article titled “DoD Takes Data-Centric Approach to Contractor Cybersecurity” in Law360 on September 11 regarding the DoD’s recently announced interim cyber rule. The article summarizes the interim rule, highlights the practical consequences of the rule’s requirements, and describes the steps contractors must take to comply with the rule.
• Barron Avery spoke at two recent National Association of Surety Bond Producers events, both titled “What Surety Professionals – and Their Contractors – Should Know About Federal Government Contract Compliance.” The first event took place on September 11, 2015, in British Columbia, and the second one occurred more recently, on October 2, 2015, in Kansas City, Missouri.
• Barron Avery also spoke at the September 17, 2015, meeting of the American Bar Association Section of Public Contract Law, Intellectual Property Committee, with a presentation titled “Implications of American Safety Council v. United States.”
• Several BakerHostetler attorneys attended BARDA Industry Days. The three-day event brought industry and government representatives together to discuss topics related to BARDA’s support for the advanced development of medical countermeasures for chemical, biological, radiological, and nuclear threats; pandemic influenza; and emerging infectious diseases, such as Ebola.

D.C. Watch – Proposed Legislation, Agency Rulemakings, and Contract Requirements

We have been tracking the activities of Congress and key agencies regarding proposed legislation and agency rules in order to keep you better informed about new developments that are likely to impact procurement policies, rules, and contract clauses.

Legislative Updates

Regulatory Updates

The Government Contracts Quarterly Update is for informational purposes only and does not constitute specific legal advice or opinions. Such advice and opinions are provided by us only upon engagement with respect to specific factual situations. This communication is considered attorney advertising.