2019 NDAA Signals Significant Expansion to Contractor Performance Evaluation Process

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Changes to past performance evaluation system may create further conflict between the Government and contractors, and lead to greater numbers of claims and appeals.

Takeaways

  • DoD will be required to develop policies regarding Government-issued performance evaluations of certain first tier subcontractors and joint venture partners.
  • DoD will be required to file a report detailing information on the number of performance evaluation appeals, with details on the timeliness and disposition of same.
  • Contractors will be able to request exceptions to the annual performance evaluation requirement in limited circumstances, such as where issues in dispute under the contract would likely cause the rating to inaccurately reflect the contractor’s actual past performance.

On August 2, 2018, the Fiscal Year 2019 National Defense Authorization Act (FY 2019 NDAA or NDAA) passed in the Senate, and it is now set for White House approval. The NDAA authorizes a $717 billion national defense budget, including $616.9 billion for the base Pentagon budget, $21.9 billion for nuclear weapons programs under the Energy Department, and $69 billion for U.S. war efforts under the Overseas Contingency Operations account. Beyond the numbers, however, the NDAA also imposes some significant changes to the landscape of government contractors’ performance evaluations.

Section 816 of the FY 2019 NDAA directs the Secretary of Defense to develop policies regarding the Government’s performance evaluation of subcontractors and joint venture partners. These policies call for required performance evaluations of first-tier subcontractors performing at least 20 percent of the value of a prime contract. Additionally, Congress has directed the Secretary of Defense to issue a report on contractor and subcontractor past performance evaluations and appeals within six months. The report is to include: “(1) data on the number of performance evaluation appeals filed by contractors and subcontractors within the previous five years; (2) the frequency that an appeal was successful and the performance evaluation was changed favorably for the contractor; (3) the time it takes for an appeal to make its way through the process from filing to adjudication; and (4) what impact the appeals process has on the tracking of information in the performance database system and consideration of contractor and subcontractor performance on future contracts.”

Given the frequent—and, in our experience, growing—number of disputes and appeals surrounding past performance evaluations and ratings in the Contractor Performance Assessment Reporting System (CPARS), it is not surprising that the Government should want to study the number, impact, resolution and resource drain of the overall performance evaluation system. However, given the complexity and number of disputes that involve CPARS ratings and comments, it is surprising that Congress has sought to impose more performance evaluations overall—and particularly with respect to first-tier subcontractors with whom the Government has no privity of contract. A requirement to evaluate first-tier subcontractors performing “not less than 20 percent” could result in the Government having to issue multiple evaluations for every project, greatly compounding the current challenges with the system.

Further, the administration of such a scheme appears significantly in doubt. Will the Government consult the prime contractor for input and feedback on the first-tier subcontractor, or will the Government execute a performance evaluation based on its own independent observation and evaluation of the first tier subcontractor? What if the Government has inadequate data to evaluate a first-tier subcontractor? If there are performance deficiencies under a contract, will the Government have sufficient insight into the prime-sub relationship to attribute blame correctly? If the subcontractor receives a negative review, what are its rights? Will it seek redress with its client, the prime contractor, who may have had little or nothing to do with the review, or would it have appeal rights directly against the Government, despite having no privity of contract with the Government in the first place?

The NDAA also envisions providing ratings for individual joint venture (JV) partners performing as a JV, with provisions for giving each partner the opportunity to submit comments and rebuttals, and the government’s obligation will be to do ratings fairly for each party provided: “the rating clearly identifies the responsibilities of joint venture partners for discrete elements of the work where the partners are not jointly and severally responsible for the project.” It is unclear how Government evaluators will be able to obtain and track this level of information on JV contracts, and to administer a discrete rating system for each JV partner.

Given the growing number of disputes, and perceived flaws with, the current past performance evaluation system, a plan to extend that system to subcontractors and individual joint venture partners—seems like an invitation for further conflict, leading to further claims and appeals.

On perhaps a more practical note, the NDAA also mandates new policies that would allow contractors to request exemptions from the annual performance evaluation requirement under a number of circumstances, including where “the contracting officer determines that there is an issue in dispute which, until resolved, would likely cause the annual rating to inaccurately reflect the past performance of the contractor.” In cases like these, where disputes, requests for equitable adjustment or claims exist, it is often prudent for the Government to delay issuing a performance evaluation until such a time as the underlying issues are resolved and a fair and appropriate evaluation can be issued.

Conclusion

The increased defense budget provided by the FY 2019 NDAA undoubtedly will be good news for many government contractors. However, the changes made in Section 816 may lead to a vast expansion of a system that already needs improvement. We will continue to analyze the FY 2019 NDAA and provide updates as new information comes to light.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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