Fiscal Year 2014 National Defense Authorization Act: A Cut to Contractor Compensation and Other Procurement Provisions

by Holland & Knight LLP

The National Defense Authorization Act for FY 2014 ("NDAA"), signed into law on December 26, 2013, contains a number of provisions relating to government procurement, perhaps most significantly a decrease in the amount of individual compensation the government considers "allowable" under government contracts. The law also reflects a continued commitment to reigning in acquisition spending. Below are some of the most important NDAA provisions for government contractors.

Contractor Compensation Cap (Sec. 811)

The law includes a provision to repeal the current formula for determining the allowable costs for contractor compensation. The 2014 NDAA's compensation cap of $625,000 (already a big hit compared to the 2013 allowable amount of $763,029) was not law for long though; it was trumped hours after being signed by the cap established in the Bipartisan Budget Act of 2013. That law sets the allowable cost ceiling for contractor compensation to $487,000 per fiscal year, which will be adjusted annually based on the Employment Cost Index. It also expands the compensation cap to all contractor and subcontractor employees with very limited exceptions for some scientists, engineers and other specialists. This includes contractors under civilian agency contracts who, in the past, had a compensation cap limited to senior executives.

The new compensation cap applies to costs incurred under contracts entered into on or after June 24, 2014 (180 days after enactment of the Bipartisan Budget Act). As before, the cap does not restrict what contractors can pay their employees, rather it makes any amount of compensation above the cap "unallowable" under covered contracts, which primarily include cost-type contracts and firm-fixed priced contracts with cost incentives.

Extension on spending restrictions for contractor services (Sec. 802)

This section extends Section 808 of the 2012 NDAA into fiscal year 2014, limiting the amount DoD can spend on contracts for services to the amount requested for contract services in the President's fiscal 2010 budget. It also requires that each Defense agency continues reducing its spending for staff augmentation contracts and contracts for inherently governmental functions by 10 percent each fiscal year. Any of that 10 percent not implemented for fiscal years 2012 and 2013 must be implemented in fiscal 2014.

Review of Defense Weapons Systems Acquisitions (Sec. 824)

As a result of this section, GAO will now be required to perform a comprehensive review of the process by which DoD acquires weapons systems, with the objective of identifying procedures that fail to provide value or which cause schedule delays without adding enough value. The GAO report is due in January of 2015 and must recommend modifications or elimination of problematic procedures and propose any necessary legislative or administrative action.

Small Business Provisions (Secs. 1611 and 1614)

Sec. 1611 requires DoD to issue a regulatory contract clause (i.e., a DFARS clause) to include in small business contracts which "requires the contractor to acknowledge that acceptance of the contract may cause the business to exceed the applicable small business standards" and no longer qualify as a small business concern in the relevant industry.

Sec. 1614 allows prime contractors to consider lower-tier subcontractors in determining whether they are satisfying small business subcontracting goals under individual contract plans. However, these prime contractors must also review and monitor their subcontractor's subcontracting plans to ensure compliance with contractual goals.

Enhanced Transparency of DoD Suspension and Debarment Decisions (Sec. 813)

This section of the NDAA mandates that, when the secretary of a military department determines there is a compelling reason for waiving a suspension or debarment, the determination must now be posted on a publicly accessible website to the maximum extent practicable. Previously, the secretary was merely required to transmit a notice to the Administrator of General Services describing the determination and maintain the determination ‘in a file available for public inspection."

Prohibition on Contracting with the Enemy (Sec. 831)

This provision requires the Secretary of Defense to establish a program to identify contractors that provide funds received under a DoD contract, grant or cooperative agreement to a person or entity that actively opposes U.S. or coalition forces in active hostilities, either directly or indirectly or who fail to take precautions to ensure those funds are not so provided. Contractors who are found to violate this restriction, which will be added to the DFARS, may have their contracts voided or terminated.

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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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