Government Contracts Legislative and Regulatory Update - February

Dentons

Our February edition of “Government Contracts Legislative and Regulatory Update” offers a summary of the relevant changes that took place during the month of January.

Legislative Update

  • National Defense Authorization Act

Regulatory Update

  • FAR Council Issues a Final Rule Increasing the Buy American Act (“BAA”) Domestic Content Requirements and Price Preference for Domestic Products
  • DOL Implements Final Rule to Determine Independent Contractor Status Under the Fair Labor Standards Act
  • DoD Issues a Final Rule Regarding the Procurement of Covered Telecommunications Equipment and Services
  • FAR Council Amends the FAR to Implement Statutes Regarding Violations of Arms Control Treaties or Agreements with the United States
  • FAR Council Issues a Final Rule Specifying the Criteria for Using Lowest Price Technically Acceptable Source Selection
  • The SBA Issues two Interim Final Rules Implementing Amendments and Sections of the Economic Aid Act

Executive Actions

  • Key executive updates

Legislative Update

National Defense Authorization Act

On January 1, 2021, the National Defense Authorization Act (“NDAA”) for Fiscal Year (“FY”) 2021 became law (Public Law 116-283), marking the 60th straight year of the NDAA’s passage into law. The President vetoed the bill on December 23, 2020 as was widely expected. The President had long threatened to veto the bill if it did not include a repeal of Section 230 of the Communications Decency Act, which prevents social media websites from being held liable for users’ comments. On December 28, 2020, the House voted 322-87 to override the President’s veto. The Senate followed suit and voted 81-13 to override the veto on January 1, 2021. This law contains several provisions that significantly impact government contractors, which are summarized below:

  • Foreign Ownership, Control, or Influence
    • Section 803: Any “covered offeror” seeking an award of a shipbuilding construction contract as part of a covered major defense acquisition is required to disclose along with the offer and any subsequent revisions of the offer whether any part of the planned contract performance will or is expected to include “foreign government subsidized performance.” Foreign government subsidized performance is broadly defined to include “any financial support, materiel, services, or guarantees of support, services, supply, performance, or intellectual property concessions, that may be provided to or for the covered offeror or the customer of the offeror by a foreign government or entity effectively owned or controlled by a foreign government, which may have the effect of essentially subsidizing the cost or price of an end item or contract performance.”
    • Section 819: This section amends Section 847 of the 2020 NDAA that instructed DoD to mitigate the risk of foreign ownership, control, and influence over DoD contractors and subcontractors, which may be exerted through beneficial ownership of the covered contract and subcontractors. A ‘‘covered contractor or subcontractor’’ is generally defined as “a company that is an existing or prospective contractor or subcontractor of the Department of Defense on a contract or subcontract with a value in excess of $5,000,000,” but an exception applies to contracts for commercial products and services unless the appropriate determination is made. Section 819 essentially requires DoD to implement an audit/review function, which requires DoD to “report and conduct examinations on a periodic basis in order to assess covered contractors and subcontractors compliance” with the FOCI disclosure and reporting requirements set forth in the 2020 NDAA.
  • Business Systems and Cost and Pricing Data
    • Section 806: This section replaces the term “significant deficiency” with regard to the approval or disapproval of business systems with the term “material weakness.” Pursuant to Section 893 of the 2011 NDAA, the term “significant deficiency” means “a shortcoming in the system that materially affects the ability of officials of the Department of Defense to rely upon information produced by the system that is needed for management purposes.” “Material weakness” means “a deficiency or combination of deficiencies in the internal control over information in contractor business systems, such that there is a reasonable possibility that a material misstatement of such information will not be prevented, or detected and corrected, on a timely basis.” “Reasonable possibility” is further defined as a reasonable possibility exists when the likelihood of an event occurring is probable or is more than remote but less than likely. This change aligns with the recommendations from the Section 809 Panel to be more consistent with the definitions in generally accepted auditing standards. However, it is not yet clear how this new term will be applied during contractor business systems review.
    • Section 814: This section revised the Truthful Cost or Pricing Data Act (formerly TINA) threshold (10 U.S.C. § 2306a(a)(1)) for prime contracts and lower tier subcontracts to $2 million regardless of when the contract was entered into. Prior to enactment of Section 814, the threshold for contracts entered into on or before June 30, 2018 was $750,000. This revision makes the threshold uniform to covered contracts regardless of contract award date.
  • Space Acquisition
    • Section 807: This section describes the application of the adaptive acquisition framework to the acquisition of space systems in order to achieve faster acquisition, improve synchronization and more rapid fielding of critical end-to-end capabilities (including by using new commercial capabilities and services), while maintaining accountability for effective programs that are delivered on time and on budget. The goal of this program is to quickly and effectively acquire end-to-end space warfighting capabilities needed to address the requirements of the national defense strategy. 
  • Payment Provisions
    • Section 815: Section 815 removes language regarding the prompt payment of small business prime contractors and subcontractors which had limited the accelerated payment (within 15 days) to instances where a separate date was not established by the contract.
    • Section 891: This section permits DoD to waive progress payments to any undefinitized contractual action (“UCA”) as a result the COVID-19 national emergency and if one of two additional conditions are met. First, a contractor performing under a UCA has not already received increased progress payments on non-UCAs, or two, a contractor that is performing under a UCA has already received increased progress payments on non-UCAs, but can demonstrate the amount of the increase has already been paid to any small business subcontractors (at any tier) or suppliers.
  • Commercial Item
    • Section 816: This section revises the DoD statute regarding commercial item determinations. Specifically, DoD is permitted to request assistance from the Defense Contract Management Agency, Defense Contract Audit Agency, or other departmental experts when making a determination whether a product or service is a commercial item. DoD is also permitted to consider the views of “appropriate public and private sector entities.”
  • Safeguarding Intellectual Property, Technology, and Other Data
    • Section 837: This section directs the DoD to identify and, if appropriate, develop, policies and procedures protecting defense-sensitive United States intellectual property, technology, and other data and information, including hardware and software, from acquisition by the Government of the People’s Republic of China. Where DoD develops additional policies and procedures, DoD is instructed to (i) establish and maintain a list of critical national security technology; (ii) review existing authorities under which DoD employees may be subject to post-employment restrictions with foreign governments and with organizations subject to FOCI, and (iii) identify additional measures as appropriate. Section 837 also requires DoD to consider mechanisms to restrict current or former employees of DoD contractors or subcontractors (at any tier) that contribute significantly and materially to critical national security technology from working directly for companies wholly owned by the government of China, or for companies that have been determined by a cognizant Federal agency to be under the ownership, control, or influence of the government of China.
  • Domestic preference and sourcing requirements :
    • Section 844: This section expands the prohibition on acquiring certain specialty metals located at 10 U.S.C. § 2533c. The statute previously prohibited DoD from, among other things, procuring any “covered material melted or produced in any covered nation.” 10 U.S.C. § 2533c(a)(1). Section 844 expands this prohibition to “material mined, refined, separated, melted” in any covered nation. Additionally, Section 844(b) expands the commercial item prohibition for commercially available off-the-shelf (“COTS”) items. The statute previously prohibited the procurement of COTS items exceeding “50% or more tungsten by weight” to all “covered materials” by weight. Covered materials means (A) samarium-cobalt magnets; (B) neodymium-iron-boron magnets; (C) tungsten metal powder; (D) tungsten heavy alloy or any finished or semi-finished component containing tungsten heavy alloy; and (E) tantalum metals and alloys.
    • Section 848: This section requires that DoD, to the maximum extent practicable, acquire strategic and critical materials required to meet the defense, industrial, and essential civilian needs of the United States in the following order of preferences: (1) From sources located within the United States; (2) From sources located within the national technology and industrial base (as defined 10 U.S.C. 2500); and (3) from other sources as appropriate.
  • Small business Requirements:
    • Section 862: This section transfers the verification of small business concerns owned and controlled by veterans or service-disabled veterans to the Small Business Administration two years after the date of the NDAA’s enactment, and makes other certain amendments to the program.
    • Section 863: This section extends the period for determining the size of manufacturing concern based on employee head count. Previously small business size status of such manufacturing concerns was based on the manufacturing concern’s average employment based upon employment during each of the manufacturing concern’s pay periods for the preceding 12 months. Section 863 expanded this 12-month period to 24 months.
  • Nondisclosure Agreements Related to Waste, Fraud, and Abuse
    • Section 883: DoD is prohibited from awarding a contract for procurement of goods or services to a contractor unless the contractor represents that (1) it does not require its employees to sign internal confidentiality agreements or statements that would prohibit or otherwise restrict such employees from lawfully reporting waste, fraud, or abuse related to the performance of a Department of Defense contract to a designated investigative or law enforcement representative of the Department of Defense authorized to receive such information; and (2) it will inform its employees of the limitations on confidentiality agreements and other statements. This appears similar to the obligation imposed by FAR 52.203-19, which is to be included in all solicitations and resultant contracts, other than personal services contracts with individuals.
  • Bid Protests
    • Section 886: This section repeals the pilot program on payment of costs for denied Government Accountability Office bid protests.

Regulatory Update

FAR Council Issues a Final Rule Increasing the Buy American Act (“BAA”) Domestic Content Requirements and Price Preference for Domestic Products

On January 19, 2021, the Department of Defense (“DoD”), General Services Administration (“GSA”), and the National Aeronautics Space Administration (“NASA”) (collectively the “FAR Council”) issued a final rule amending the Federal Acquisition Regulation (“FAR”) to implement Executive Order (“EO”) 13881, Maximizing Use of American-Made Goods, Products, and Materials (84 Fed. Reg. 34257, July 18, 2019). As relevant to this final rule, the BAA and its implementing regulations require federal agencies to give preference to domestic end products during the procurement process. The final rule requires that the cost of foreign iron and steel for iron and steel products must be less than 5 percent of the cost of all components in the products in order to meet the definition of “domestic end product” or “domestic construction material.” For all other types of non-iron and non-steel products, the domestic content of such products must exceed 55 percent of the cost of all components. The final rule also increases the price preference for offerors proposing to use domestic end products and domestic construction material from 6 percent to 20 percent for large businesses, and from 12 percent to 30 percent for small businesses. The final rule also revises relevant definitions, including the terms “domestic construction material,” “domestic end product,” and “predominantly of iron or steel or a combination of both”; adds the definition of “foreign iron and steel”; and clarifies that the domestic content test does not apply to commercially available off-the-shelf (“COTS”) fasteners.

This final rule is effective on January 21, 2021, and the changes in this rule apply to solicitations issued on or after February 22, 2021 and resultant contracts. (86 Fed. Reg. 6180 (Jan. 19, 2021)).

DOL Implements Final Rule to Determine Independent Contractor Status Under the Fair Labor Standards Act

On January 7, 2021, the U.S. Department of Labor (the “Department”) issued a final rule to revise its interpretation of independent contractor status under the Fair Labor Standards Act (“FLSA” or the “Act”). The stated purpose of the final rule is to promote certainty for stakeholders, reduce litigation, and encourage innovation in the economy.

The FLSA requires that covered employers pay their nonexempt employees at least the Federal minimum wage and overtime for every hour worked over 40 in a workweek. The Act also mandates that employers keep certain records regarding their employees. As relevant to the final rule, a worker who performs services for an individual or entity as an independent contractor, however, is not considered the individual’s or entity’s employee under the Act. Accordingly, the Act does not require that an independent contractor be paid the minimum wage or overtime pay, nor does it require record-keeping for the independent contractor.

The Act does not exactly define the term “independent contractor,” but it does define “employer,” “employee,” and “employ.” Under 29 U.S.C. 203(d), an employer is “any person acting directly or indirectly in the interest of an employer in relation to an employee.” Under 29 U.S.C. 203(e), an employee is generally “any individual employed by an employer,” subject to certain exceptions. The Act also defines “employ” as “includ[ing] to suffer or permit to work.” Id. at 203(g). On this last point, courts and the Department have previously interpreted the “suffer or permit” standard to require an evaluation of the extent of the worker's economic dependence on the employer and have developed a multi-factor test in order to determine whether a worker is an employee or an independent contractor under the FLSA. In short, the ultimate inquiry on the matter is whether, as a matter of economic reality, the work is dependent on a particular individual, business, or organization for work or is in business for themselves.

According to the Department, the test has not always been sufficiently explained or consistently articulated, resulting in uncertainty among the regulated community. To remedy this, the final rule sets forth the Department’s interpretation of the law so the covered community may determine whether workers are employees or independent contractors under the FLSA. The final rule explains that independent contractors are individuals who, as a matter of economic reality, are in business for themselves, as opposed to being economically dependent on the potential employer for work. The final rule also explains that the analysis of economic dependence involves five distinct factors, with no one factor being dispositive. In addition, the final rule explains that the following factors are more probative on the question of economic dependence and typically carry greater weight in the analysis: (1) the nature and degree of the worker's control over the work, and (2) the worker's opportunity for profit or loss. The background information provides a historical analysis of the decisions leading up to the final rule, which is effective on March 8, 2021. (86 Fed. Reg. 1168 (Jan. 7, 2021)).

DoD Issues a Final Rule Regarding the Procurement of Covered Telecommunications Equipment and Services

On January 15, 2021, the DoD issued a final rule amending the DFARS to implement sections of the National Defense Authorization Acts (“NDAA”) for Fiscal Years 2018 and 2019 regarding the procurement of covered telecommunications equipment or services. The final rule, which adopts the interim rule with changes, bars the use of certain telecommunications equipment or services from certain Chinese entities, and from any other entities that the Secretary of Defense reasonably believes to be owned or controlled by, or otherwise connected to, the government of the People's Republic of China or the Russian Federation. The changes provide additional time to complete the reporting requirements required by the clause at DFARS 252.204-7018, Prohibition on the Acquisition of Covered Defense Telecommunications Equipment or Services. Specifically, the rule amends DFARS 252.204-7018 by extending: (1) the reporting timeframe for the discovery of covered defense telecommunications equipment or services from one day to three days, and (2) the reporting timeframe to submit information about mitigation actions undertaken from ten days to thirty days. 

The final rule is effective as of January 15, 2021. (86 Fed. Reg. 3832 (Jan. 15, 2021)).

FAR Council Amends the FAR to Implement Statutes Regarding Violations of Arms Control Treaties or Agreements with the United States

On January 14, 2021, the FAR Council issued a final rule to implement Section 1290 of the National Defense Authorization Act (“NDAA”) for Fiscal Year 2017. Section 1290 of the NDAA, codified 22 U.S.C. § 2593e, addresses measures against individuals who are involved in activities that violate arms control treaties or agreements with the United States as well as the applicable remedies for an individual who has submitted a false certification regarding such activities. The final rule amends the FAR in four main areas. First, the final rule clarifies at FAR 9.405 the effect of an ineligibility determination under 22 U.S.C. 2593e. Second, the rule enumerates the causes for suspension and debarment at FAR 9.407-2(a)(9) and FAR 9.406-2(b)(1)(vii), respectively. Third, the rule clarifies at FAR 9.406-4(a)(1)(iii) that the minimum period of debarment of not less than two years, as statutorily mandated by 22 U.S.C. 2593e, includes any suspension period if a suspension precedes the debarment under FAR 9.406-4(a)(2). A change to this effect is also made at FAR 9.109-4(d) concerning offerors’ certifications. Finally, the final rule corrects the threshold at FAR 52.209-13 regarding application of the certification requirement.

The final rule is effective on February 16, 2021. (86 Fed. Reg. 3677 (Jan. 14, 2021)).

FAR Council Issues a Final Rule Specifying the Criteria for Using Lowest Price Technically Acceptable Source Selection

On January 19, 2021, the FAR Council issued a final rule amending the FAR to provide criteria that must be met in order to include lowest price technically acceptable (“LPTA”) source selection criteria in a solicitation. The rule implements Section 880 of 2019 NDAA. In general, the purpose of this rule is to avoid the use of the LPTA source selection criteria in circumstances that would deny the Government the benefits of cost and technical tradeoffs in the source selection process. The criteria for using LPTA is set forth in FAR 15.101-2(c), and the new subsection (d) states that contracting officers are to avoid using LPTA when a procurement is predominantly for the acquisition of certain services and equipment, including but not limited to: information technology services; cybersecurity services, personal protective equipment; or knowledge-based training or logistics services in contingency operations or other operations outside the United States.

The final rule will be effective on February 16, 2021. (86 Fed. Reg. 3679 (Jan. 14, 2021)).

The SBA Issues two Interim Final Rules Implementing Amendments and Sections of the Economic Aid Act

The Small Business Administration (“SBA”) issued two interim final rules on January 14, 2021, affecting temporary changes to the Business Loan Program. Both rules deal with the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“the Economic Aid Act”), which authorizes the SBA to guarantee additional loans under the temporary Paycheck Protection Program (“PPP”), which was originally established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to provide economic relief to small businesses nationwide adversely impacted under the Coronavirus Disease 2019 (“COVID-19”).

The first interim final rule, issued jointly with the Department of Treasury, incorporates Economic Aid Act amendments and consolidates all the interim final rules issued to date governing borrower eligibility, lender eligibility, and PPP application, and provides general rules relating to loan increases and loan forgiveness. This interim rule governs new PPP loans made under the Economic Aid Act, and applications for loan forgiveness on existing PPP loans where the loan forgiveness payment has not been remitted, but it does not affect the requirements applicable to PPP loans closed prior to its enactment, unless the provisions apply retroactively consistent with specific applicability provisions of the Economic Aid Act as identified in this rule. Additionally, Treasury exercises its authority under section 1109 of the CARES Act to allow borrowers of first draw PPP loans to use 2019 or 2020 to calculate their maximum loan amount. This final interim rule went into effect retroactively on January 12, 2021. (86 Fed. Reg. 3692 (January 14, 2021)).

The second interim final rule implements section 311 of the Economic Aid Act, which adds a second temporary program to SBA’s 7(a) Loan Program titled, “Paycheck Protection Program Second Draw Loans” (“Second Draw PPP Loans”). Section 311 gives the SBA the authority to guarantee loans under the PPP Second Draw Program through March 31, 2021, (“Second Draw PPP Loans”) to borrowers that previously received a PPP loan under section 7(a)(36) of the Small Business Act (“First Draw PPP Loans”) and have used or will use the full amount of the initial PPP loan for authorized purposes on or before the expected date of disbursement of the Second Draw PPP Loan. Both loans are intended to provide quick relief to America’s small businesses. Comments on the interim final rule are due by February 16, 2021, and the rule is effective as of January 12, 2021. (86 Fed. Reg. 3712 (January 14, 2021)).

Executive Actions

As President Joe Biden took office on January 20, 2021, multiple executive actions came down the pipeline. Below we have linked to key executive updates that contractors should be aware of as the new administration sets its policies and priorities.

  • A regulatory freeze memorandum instructing executive agencies to refrain from issuing new rules and regulations and/or postpone, delay, or withdraw certain pending or published rules and regulations until review obtained for appropriate action was published on January 20, 2021.
  • Executive Order On Advancing Racial Equity and Support for Underserved Communities Through the Federal Government, (relevant Section 10 - revoking EO 13950), On January 20, 2021, the President issued an Executive Order (“EO”) on Advancing Racial Equity and Support for Underserved Communities Through the Federal Government. Section 10 of the EO revokes EO 13950 (Combating Race and Sex Stereotyping), which prohibited contractors from using “divisive concepts” in their diversity and inclusivity training.
  • An EO on Protecting the Federal Workforce and Requiring Mask-Wearing, issued on January 20, 2021, requires all on-site federal contractors to wear masks, maintain physical distance, and adhere to other public health measures, as provided in CDC guidelines. The EO also sets up a “Safer Federal Workforce Task Force” and encourages mask wearing across America.
  • On January 20, 2021, the President issued an Executive Order on Organizing and Mobilizing the United States Government to Provide a Unified and Effective Response to Combat COVID-19 and to Provide United States Leadership on Global Health and Security. The Order creates a White House position for a COVID-19 Response Coordinator, who will, among other things, coordinate the federal government’s efforts to produce, supply, and distribute personal protective equipment, vaccines, tests, and other supplies through the use of the Defense Production Act (“DPA”), 50 U.S.C. 4501, et seq. An overview of the DPA is provided in this Dentons Client Alert issued during the prior Administration.
  • The President issued an EO on a Sustainable Public Health Supply Chain on January 21, 2021. The EO instructs the Federal Government to take actions to secure supplies necessary for responding to the pandemic under the authority of the Defense Production Act of 1950.
  • On January 25, 2021, the President issued an Executive Order on Ensuring the Future Is Made in All of America by All of America’s Workers. The Order states the Biden Administration’s policy to use terms and conditions of federal financial assistance awards and federal procurements to maximize the use of goods, products, and materials produced in, and services offered in, the United States. Important sections of this Order and changes to domestic preference requirements are discussed in this recent Dentons Client Alert.

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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