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Supply Chain Impact of President Trump’s Executive Order Under the Defense Production Act

March 21, 2020

On March 18, 2020, in response to bipartisan calls from Congress and governors across the US, President Trump issued an executive order finding that health and medical resources needed to respond to the spread of COVID-19 meet the criteria under the Defense Production Act (DPA) to be given priority for purposes of supporting the national defense. The order identifies personal protective equipment (PPE) and ventilators as specific types of health and medical resources that will now be given priority. Examples of PPE the order is likely to cover include masks, goggles, gowns and gloves. Other health and medical resources, such as diagnostic test supplies, may soon be added to the list as the executive order delegates authority to the Secretary of Health and Human Services (HHS) to identify additional specific health and medical resources that meet applicable criteria under the DPA.

Because ongoing US production of essential health and medical resources is already addressing shortfalls related to the domestic impact of the COVID-19 pandemic, some experts, including at the Center for Strategic and International Studies, believe that the President’s invocation of the DPA may be used principally to provide financial incentives for increased and expanded production efforts. Moreover, soon after issuing the order, President Trump shared via social media that he, “only signed the [the order] … should we need to invoke it in a worst case scenario in the future.” In response, expressing the collective sense of urgency of state governments throughout the US, in a March 19, 2020, memorandum to the President and Vice President Mike Pence, the National Governors Association included in its list of top state priorities in response to the COVID-19 outbreak, “guidance on implementation of [the] Defense Production Act to include what health and medical resources Secretary of Health and Human Services Azar is prioritizing under his new authority.”

This advisory provides an overview of the DPA and what this executive order could mean for government contractors and their supply chains.

As discussed in our prior advisory, the DPA provides the President and delegated federal agencies the authority to essentially force private companies to prioritize orders rated for national defense. Rated orders may cover not only the manufacture and delivery of goods, but may also apply to services. What this means, in practice, is that companies must put the federal government’s orders at the front of the line to ensure timely delivery under a rated order. Companies receiving a rated order must also place rated orders with their suppliers (with limited exceptions) to meet delivery requirements, which means that entire supply chains may soon be subject to rated order requirements.

Many DoD contractors and subcontractors are already very familiar with the Defense Priorities and Allocation System (DPAS), as implemented by regulations issued by the Department of Commerce. 15 C.F.R. 700 et seq. Companies may be less familiar with the Health Resources Priorities and Allocations System, as implemented by the Department of Health and Human Services. 45 C.F.R. 101 et seq. The President’s recent executive order very likely will mean that private companies that have either never done business with the federal government or have done so on more routine “commercial item” basis may suddenly be faced with rated orders. Rated orders must be accepted or rejected in writing within specified periods of time. Moreover, the bases for rejection are specific and narrow. Ultimately, willful refusal to comply with a rated order can subject private companies and individuals to a variety risks, including potential criminal charges.

Companies with products and services that may fall within the scope of health and medical resources should immediately familiarize themselves with the DPA, its implementing regulations, and any nationwide priorities and regulations that may be established by the HHS Secretary. Given the pace of the pandemic and the changes and disruptions to the supply chain that are already being observed, another key consideration is how the DPA and the national security needs that it seeks to address in operation collide with state and local police power. Specifically, contractors and/or their suppliers are very likely located in places where workers have been encouraged or directed to work from home, among other social distancing practices that have been recommended or mandated. Similarly, business operations have likely been impacted by travel restrictions, significantly limited airline schedules, and regulations in foreign jurisdictions limiting the export of materials required to produce the health and medical resources necessary to combat COVID-19 that are in short supply in the US. In the most extreme cases, some local or state jurisdictions have issued orders for their residents to “shelter in place.”

California issued such an order, effective Thursday, March 19. In the face of these challenges, accepting and performing a rated order (or any other order) may well prove impossible. State and local officials and the federal government are working to provide clarity that the DPA allows continued performance by contractors and their employees not withstanding local orders limiting or closing businesses. While this is developing by the hour, the Department of Homeland Security issued guidance confirming that contractors performing defense or health related contracts are part of the nation’s “critical infrastructure.”

From a supply chain perspective, companies receiving rated orders must recognize that orders they place to support performance of a rated order must also be issued as a rated order, unless exceptions apply. Issuing a rated order properly requires:

  • Specifying the appropriate rating on the order, including special language in the order so that the supplier is notified of its obligations;
  • Obtaining timely written acceptance or rejection;
  • Identifying a specific delivery date for items being ordered; and
  • Obtaining timely acceptance or rejection of any changes made to the order, which amounts to a new rated order.

Any company combining rated items and un-rated items in the same order must separately designate those times. Further, a company does not need to issue an order as rated if it is under certain dollar thresholds, unless the company cannot ensure timely delivery without using the rating.

The issuance of rated orders for certain medical technologies may also have a wider impact in the overall supply chain that affects other contractors. This may include electronic components that are common to a variety of products, including medical devices. In addition, we have seen examples, such as in the UK, where the general manufacturing industry is being drafted to transition to medical device manufacturing. The UK Government, for example, asked both Rolls-Royce and Ford to transition to manufacturing ventilators. Similar realignment of the industrial base both in the US and abroad could have far reaching consequences for the overall supply chain for a variety of goods and services.

If entities receiving rated orders encounter problems, there are procedures to follow to secure what is known as special priorities assistance. There are also avenues to appeal the rating applied to orders and the rating itself.

Ultimately, the discussion above highlights the complexity and risk associated with the DPA and DPAS that private companies with no prior background in the area will soon be facing. The best way to deal with these extraordinary circumstances effectively is to be proactive and to secure assistance from knowledgeable counsel, where and when appropriate.

Stay up-to-date with all of our insights and guidance by visiting our US COVID-19 hub here.

Supply Chain Impact of President Trump’s Executive Order Under the Defense Production Act

Voluntary vs. Involuntary Stop Work: What contractors should consider as the COVID-19 pandemic evolves

March 17, 2020

The COVID-19 public health emergency that has been unfolding over the past weeks and months is predicted to get far worse before it gets better. On Friday March 13, 2020, the President declared a national emergency to combat the virus and we have seen unprecedented cancellations relating to international travel, sporting events and large public gatherings. There also have been employer-issued mandates that employees work from home. As part of our on-going series, this advisory addresses some of the issues government contractors should carefully consider in connection with interruptions to their contract work.

Indeed, as the pandemic evolves, there is increased potential that government contractor operations will be impacted in a variety of ways, some of which may be more likely than others. Under these circumstances, contractors should be proactively identifying and considering likely impacts and how best to position themselves to mitigate those impacts. For example, contractors may encounter circumstances where they conclude they must temporarily cease operations or direct their non-essential personnel to work remotely. Or they may be having difficulty securing material or other resources due to impacts in the supply chain. While all of these impacts on work trace back to COVID-19, there are likely intervening causes that, depending on relevant contract terms, may provide avenues for the contractor to excuse nonperformance and avoid default or, alternatively, seek recovery from the government for impacts associated with stopped or delayed work.

First, it will be important to distinguish between a contractor’s voluntary work stoppages and involuntary work stoppages.  Our prior advisory noted that if a contractor is temporarily unable to continue contract performance, i.e., is involuntarily delayed or impacted due to the pandemic, it is likely that force majeure principles would operate to excuse non-performance and prevent a government default termination. On the other hand, if it is proven that the contractor voluntarily or unreasonably stopped work or failed to perform, the contractor may risk default termination. Depending on the circumstances, there may also be an order or direction from the government to change or stop work, which may provide an avenue for the contractor to secure an equitable adjustment to compensate for delays and cost impacts. Accordingly, it will be critical to understand, anticipate and distinguish between situations where a delay or disruption could create a risk of default, and situations where a delay or disruption is justified and excusable, or is the government’s responsibility.

Second, contractors should be thinking ahead about what they could or would do if they experience difficulties performing their government contracts as a result of COVID-19. The magnitude of the impacts and delays contractors may experience, of course, will depend upon the nature of their work and their particular circumstances. Similar to what occurs during a shutdown period, any work that is dependent upon government action may be delayed, including the issuance of new work or task orders, technical direction, first-article acceptance, approvals to test, acceptance inspections, and payments. In addition, in instances where contractors are performing at government facilities, contractors’ employees may have limited or no access to these facilities.

To the extent that a contractor suffers any adverse impacts due to COVID-19, it may be able to recover costs associated with these impacts pursuant to its contract terms. See, e.g., FAR 52.242-14, Suspension of Work; FAR 52.242-15, Stop-Work Order; FAR 52.242-17, Government Delay of Work; FAR 52.243-1, Changes – Fixed-Price. Importantly, unlike government shutdown circumstances, establishing that performance interruptions were caused by the government, through a contractual order, will be important. It is possible, however, that government contracting officers will avoid issuing a written order for the contractor to stop work. In this regard, issues of authority will be important to consider. In the event that the federal government issues an order that impacts contract performance, contractors should make every effort to obtain direction in writing from their contracting officer. 

In instances where contractors are performing cost reimbursable contracts, even if the Stop Work clause is not incorporated into the contracts, any additional costs attributable to disruption in work due to COVID-19 likely are recoverable as allowable costs of performance. If the disruption significantly increases costs or the level of effort required, contractors may seek an adjustment to the contract’s estimated costs and/or fee pursuant to the Changes clause, FAR 52.243-2.

Where no stop-work order is issued and contractors continue performing their fixed-price contracts, but have been hindered by COVID-19, recovery of any increased costs is less certain because the government likely would assert that the COVID-19 public health emergency is entirely outside of its control. Additionally, where the President or federal health officials issue orders that adversely affect contract performance, the government likely will take the position that such action constitutes a sovereign act that precludes recovery.

Determining who is responsible for the costs and delays resulting from COVID-19 ultimately depends on the facts and circumstances, as well as relevant contract provisions. Nevertheless, similar to those best practices applicable in a government shutdown, contractors can best position themselves for recovery by adhering to the following guidance:

  • Document any cost impacts and performance delays that result from government contractual action. There is risk that a government direction resulting from, or in reaction to, other government orders regarding COVID-19 could be viewed as a sovereign act, precluding any contractual recovery. To mitigate this risk, ensure that you have received, or will receive, a stop-work notice or some other contractual direction and that this direction is maintained in the contract file. If no written guidance is issued, consider asking the contracting officer to do so as appropriate.
  • Costs resulting from COVID-19 disruptions may be recoverable depending on the contract type. When contractual direction exists, costs reasonably incurred as a result of the government order may be recovered through the stop-work order, or the contract’s suspension of work, government delay of work, or changes clauses, so long as the impacts and delays arise during a period where the contract is funded.
  • Schedule impacts from a government-ordered stop-work order should be addressed through extensions to the period of performance. Schedule impacts resulting from a government order also likely are addressable through the stop-work order, suspension of work, government delay of work, or changes clauses.
  • Contractors should mitigate the impact to contracts. While contractors may be entitled to recover costs and/or receive schedule adjustments to address the impact of a government- ordered stop-work, contractors are responsible for taking reasonable actions to reduce the cost and/or schedule impact. These actions may include examining the feasibility of workarounds, diverting employees to commercial efforts (if possible), and potentially furloughing employees. If a contractor fails to take mitigation steps, the government may assert that the contractor acted unreasonably and may attempt to reduce the total costs and/or length of the extension provided to address the impact of the stop-work.
  • Cost and schedule impacts should be carefully tracked. To recover increased costs or receive a schedule adjustment, contractors must be able to demonstrate that the cost or schedule impact occurred and tie the impact to the government’s contractual order or fault. Employees that are prevented from performing work, therefore, should provide detailed time entries and record their labor costs in segregated accounts to demonstrate the labor cost impact of the disrupted period. Other cost impacts, such as costs associated with rescheduling work or redirecting employees to perform commercial work (if possible), should be similarly documented. Likewise, any schedule impact should be fully documented and demonstrated through a critical path or similar schedule analysis.
  • Take appropriate actions with respect to subcontractors. If a stop-work order is issued by the government, then contractors should immediately issue similar stop-work orders to any affected subcontractors. If no stop-work order is issued by the government, managing subcontractors becomes more complicated.
  • Contractors performing work as subcontractors on government prime contracts should seek clarity and instructions from their prime contractor customers regarding any potential impacts COVID-19 may have on performance. To the extent that any subcontracts are stopped or suspended , consistent with the guidance above, subcontractors should ensure that they mitigate any resulting costs or schedule impacts, identify and accumulate any resulting costs, and seek contract direction from their prime contractor customers as appropriate.
  • To the extent possible, communicate with the contracting officer. Consider requesting guidance on whether a contracting activity is an essential activity or service that must continue, regardless of any orders regarding COVID-19.

The rippling impacts and effects of this unprecedented modern public health emergency likely will be with us for some significant amount of time. As always, contractors must be proactive in order to best position themselves to maximize any cost recoveries and/or contract extensions necessary to address the impact of COVID-19, including documenting, on a contract-by-contract basis, why certain actions taken were reasonable.

Stay up-to-date with all of our insights and guidance by visiting our US COVID-19 hub here

Voluntary vs. Involuntary Stop Work: What contractors should consider as the COVID-19 pandemic evolves

For commercial item contractors, some improvements—mixed with new and old barriers—in DoD’s final rule on procurement of commercial items and accompanying guidebook

For commercial item contractors, some improvements—mixed with new and old barriers—in DoD’s final rule on procurement of commercial items and accompanying guidebook

Authors: Phil Seckman, Steve Masiello, Quincy Stott

At long last, the Department of Defense (DoD) on January 31, 2018, issued its final rule regarding the procurement of commercial items. On the same day, the DoD also published an updated two-part “Commercial Item Acquisition Guidebook,” a draft of which the DoD circulated last year. Dentons has been tracking both, including an analysis regarding the proposed rule and an earlier DFARS case that contributed to it. Although the final rule contains some beneficial elements for commercial item contractors and nontraditional defense contractors, it fails to overcome several of the barriers that deter such contractors from selling to DoD and sets the stage for possible problems down the road.

Starting with some potentially good news, it is helpful that the discussion and analysis in the final rule expressly acknowledges that the DoD considers the commercial item determination to be separate from the price reasonableness determination. This was an issue that was of particular concern in industry comments submitted in response to the DoD’s proposed rules. Moreover, the DoD’s acknowledgement of these separate inquiries is important because it also emphasizes and reinforces the avenue by which items that have not previously been sold may nonetheless qualify as commercial items if they are “of a type.” It was not long ago that the DoD was actively engaged in an effort to revise the statutory commercial item definition to remove this very concept.

Another bit of good news in the final rule relates to nontraditional defense contractors. The final rule defines a nontraditional defense contractor as an entity “that is not currently performing and has not performed any contract or subcontract for DoD that is subject to full coverage under [CAS] . . . for at least the 1-year period preceding the solicitation . . . .” The language at DFARS 212.102 states that contracting officers may treat supplies and services provided by nontraditional defense contractors as commercial items.

Although this permissive authority is not intended to “recategorize” current noncommercial items, the provision states that contracting officers may consider using the authority to procure supplies and services from business segments that meet the definition of nontraditional defense contractor even though they are affiliated with traditional defense contractors. The new guidance is enshrined in a new clause: DFARS 252.215-7013, Supplies and Services Provided by Nontraditional Defense Contractors. The provision may create incentives for nontraditional defense contractors to do business with the DoD (or for traditional defense contractors to spin off segments or affiliates that could qualify as nontraditional), but only time will tell whether contracting officers will exercise their discretion to do so.

On the other side of the ledger, the final rule potentially retains and creates new barriers for commercial item contractors. First, while the final rule’s treatment of data requirements for both commercial item determinations (CIDs) and price reasonableness offers additional clarity, it ultimately fails to meaningfully reduce barriers for commercial item contractors. As noted above, the DoD professes that it considers CIDs separately from price reasonableness determinations. Nonetheless, under the new DFARS provision, the DoD requires documentation in support of both to be included at proposal submission. The DoD’s rationale is that requiring commercial item contractors to turn over detailed pricing information up front with its proposal avoids delays in contract award. Of course, this likely invites contracting officers to ignore the FAR pricing policy at FAR 15.402 and the orderly sequence of information the government is to utilize before calling on the contractor to turn over its own information.

Moreover, while contracting officers may not request certified cost and pricing data for a commercial item acquisition, the final rule contemplates that they use business judgment and have broad discretion to require additional information from commercial item contractors for purposes of establishing price reasonableness. Again, contracting officers should be limited to the order of preference in FAR 15.402 for the type of data required. Nevertheless, the new language in DFARS 215.404-1(b) fails to curb potential overreach through onerous data requests by contracting officers determined to avoid any second guessing of their efforts in support of the commercial item price reasonableness determination. This dynamic may very well have the predictable result of causing many nontraditional defense contractors to turn away from the DoD market.

The final rule also implements DFARS 252.215-7010, Requirements for Certified Cost or Pricing Data and Data Other Than Certified Cost or Pricing Data. Building on FAR 52.215-20, the new DFARS provision adds additional detail regarding submission of other than certified cost or pricing data. Contracting officers will use this new provision in lieu of FAR 52.215-20 in solicitations, including those using FAR Part 12 procedures for commercial item acquisitions. Notably, however, the final rule reworded the solicitation provision at paragraph (d) to require only the “minimum information necessary,” rather than the previous version’s “all data,” to determine that the proposed price is fair and reasonable

Finally, under DFARS 212.102 in the final rule, a contracting officer may presume that a prior CID “made by a military department, a defense agency, or another component of DoD shall serve as a determination for subsequent procurements of such item.” If a contracting officer does not presume a prior CID is valid, the head of the contracting activity conducting the procurement must, within 30 days, confirm that the prior CID is appropriate and still applicable, or issue a determination that it is no longer appropriate to use FAR Part 12 procedures to acquire the item. It seems that the presumption that Congress created in Section 851 of the FY 2016 NDAA may have unintended consequences. Rather than facilitating the DoD’s reliance on prior CIDs, the final rule suggests that it is within the contracting officer’s discretion to disregard them, though the risk of such discretion being exercised is low. Finally, despite industry urging, the DoD declined to extend the presumption for prior CIDs to those made by non-DoD agencies.

Simultaneous with the DoD’s publication of the final rule in the Federal Register, the department also published its final Commercial Item Acquisition Guidebook. Unlike the final rule, the guidebook contains no clear summary of changes made in response to industry comments. For this reason, contractors should carefully study the final version for valuable insight into how the DoD is approaching commercial item and fair-and-reasonableness-price determinations, and and use it to bolster your approach to commercial item issues in the context of contractor purchasing systems.

The culmination of many years of effort by the DoD, the final rule provides some needed clarity for commercial item contractors and opens up avenues for nontraditional defense contractors to sell their supplies and services to the government. The final rule does not, however, meaningfully reduce certain barriers for commercial item contractors and may even create new barriers. In future NDAAs, Congress will need to provide additional clarity regarding its goals for commercial item acquisition and to continue incentivizing the adoption of practices by the DoD that genuinely reflect the commercial marketplace. Only through the reduction of unnecessary complexity and the avoidance of onerous information demands will the DoD continue to attract and benefit from the commercial market.

For commercial item contractors, some improvements—mixed with new and old barriers—in DoD’s final rule on procurement of commercial items and accompanying guidebook

DoD announces industry day to facilitate implementation of new network penetration reporting clause

In response to a chorus of implementation questions raised by the contracting community, the US Department of Defense (DoD) has announced an industry information day, during which contractors who have questions or wish to provide feedback regarding DoD’s Network Penetration Reporting and Contracting for Cloud Services final rule can raise those questions. On April 5, 2017, DoD published a notice of meeting in the Federal Registerannouncing the “Industry Information Day” on June 23, 2017.

The public meeting will address the implementation of DFARS Case 2013-D018, and the associated DFARS clauses, including DFARS 252.204-7012, Safeguarding Covered Defense Information and Cyber Incident Reporting (Oct. 2016). The final rule, published October 21, 2016, finalized an interim rule mandating that both prime and subcontractors safeguard covered defense information, report on network penetrations, and require adequate security from external cloud computing services. We have previously analyzed these new requirements.

The industry day announcement is an important reminder to contractors of the upcoming December 31, 2017, deadline for implementing the new security requirements required under the final rule to qualify for new DoD awards. The event will be held on Friday, June 23, from 9 a.m. to 1 p.m. at the Mark Center Auditorium in Arlington, VA. Any contractors with questions or feedback about the rule’s requirements or implementation should attend. The registration deadline is June 12, 2017.  Contractors may register via email at: OSD.DIBCSIAEvents@mail.mil. DoD will accept written questions until May 1 at the same address, and contractors grappling with various implementation questions are encouraged to submit questions in advance.

For additional details regarding the Industry Information Day, registration and process for submitting questions, please consult the meeting notice.

DoD announces industry day to facilitate implementation of new network penetration reporting clause

DoD Clarifies Covered Defense Information Definition in Final Cyber Reporting Rule

The Department of Defense (DoD) on October 4, 2016, issued a rule finalizing cyber reporting regulations applicable to DoD contractors and subcontractors set forth in 32 CFR Part 236.  The rule finalizes an interim rule DoD issued on October 2, 2015 and  addresses cyber incident reporting obligations for DoD prime contractors and subcontractors.

Notably, the final rule clarifies the by now well-known definition of the term ‘covered defense information’ (“CDI”).  This same term is used in DFARS 252.204-7012.  This DFARS clause defines CDI to include four different categories: (1) covered technical information (“CTI”); (2) operations security; (3) export controlled information; and (4) any other information, marked or otherwise identified in the contract, that requires safeguarding or dissemination controls pursuant to and consistent with law, regulations, and government-wide policies.

Given the similarities of this final category to the definition of controlled unclassified information (“CUI”) promulgated in connection with the National Archives and Records Administration’s (NARA)  rule, we have understood this latter category to include CUI identified by NARA pursuant to its efforts under EO 13556.  The DoD’s new final rule provides support for this understanding because it narrows the definition of CDI to only two categories:  (1) CTI and (2) CUI.  This modification accordingly appears to make clear that the “catch-all” category of CDI contained in DFARS 252.204-7012 was intended to align with NARA’s CUI efforts.

Importantly, this final rule makes no changes to the DFARS clause itself,  and it is likely that conforming changes will be made to the DFARS clause in a future revision.  The December 2015 version of the DFARS clause remains effective.  Nevertheless, in light of the final rule contractors and subcontractors seeking to understand the scope of the CDI  under the DFARS clause should include CUI in their review as they await further revision to the clause.

DoD Clarifies Covered Defense Information Definition in Final Cyber Reporting Rule

Cybersecurity and your supply chain: What you don’t know may hurt you

Recently revised cybersecurity regulations affecting US defense contractors and their subcontractors seek to address gaps in government contractor supply chains and expand the breadth of regulations in this area. In the February issue of Contract Management magazine, Dentons Partners Phillip Seckman and Erin Sheppard provide guidance to contractors seeking to enhance subcontractor compliance under these regulations. In the attached article, entitled “Cybersecurity and your supply chain: What you don’t know may hurt you,” the authors provide a three-step approach to ensuring compliance with the updated Defense Federal Acquisition Regulation Supplement (DFARS) covered defense information regulations within a contractor’s supply chain. Please feel free to contact the authors with questions.
Cybersecurity and your supply chain: What you don’t know may hurt you

The gift of time: A second DOD interim rule grants contractors additional time to comply with cyber security requirements

The US Department of Defense (DOD) earlier today issued a second interim rule, effective immediately, that gives affected contractors until December 31, 2017, to implement fully compliant cyber security controls.

The cyber security requirements, contained in the National Institute of Standards and Technology (NIST) Special Publication (SP) No. 800-171, were part of a prior interim rule issued in August 2015. Sometimes referred to as the Network Penetration Rule, DOD’s first interim rule had required immediate compliance with NIST SP 800-171 at both the prime and subcontract levels. Although DOD’s second interim rule gives contractors additional time to implement the requirements of NIST SP 800-171, the rule as revised still imposes certain near-term burdens on affected contractors and subcontractors. Read the full article.

The gift of time: A second DOD interim rule grants contractors additional time to comply with cyber security requirements

DOD signals pivot away from proposed DFARS rule on evaluating price reasonableness for commercial items

The Department of Defense (DOD) published a report on the Open DFARS Cases as of December 7, 2015, which indicates that the controversial proposed rule on evaluating price reasonableness for commercial items (DFARS Case 2013-D034) was closed. As we previously reported, the proposed rule would have made significant substantive changes to what qualified as a commercial item under DOD-funded contracts and would have imposed significant data gathering burdens on prime contractors. In its place the DOD opened a new case, DFARS Case 2016-D006, Procurement of Commercial Items. The purpose of the new DFARS case is to implement the requirements of six sections of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2016, in addition to the requirements of section 831 of the NDAA for FY 2013. See National Defense Authorization Act for Fiscal Year 2016, Pub. L. No. 114-92; National Defense Authorization Act for Fiscal Year 2013, Pub. L. No. 112-239. A brief overview of some key requirements within the applicable sections of the NDAA for FY 2016 is provided below.

The DOD opened DFARS Case 2016-D006 on December 7, 2015, and has proposed a rule within the agency, which its staff is processing. We will continue to monitor the progress and will report back here with updates.

Section 851, “Procurement of Commercial Items.” This section requires the Secretary of Defense to establish a centralized capability to oversee the making of commercial item determinations for DOD procurements and to provide public access to these determinations. The section also permits contracting officers (CO) to rely on prior determinations made by a military department, Defense Agency or other component of the DOD. Notably, the section permits a CO to require a contractor to supply additional information to support the reasonableness of a price, irrespective of whether a contractor was required to provide such information in connection to a prior procurement.

Section 852, “Modification to Information Required to be Submitted by Offeror in Procurement of Major Weapon System as Commercial Item.” Under this section, an offeror must submit: (a) prices paid for the same or similar commercial items under comparable terms and conditions by both the government and commercial customers; and (b), if the information for (a) is not available, (i) prices for the same or similar items sold under different terms and conditions; (ii) prices for similar levels of work or effort on related products or services; (iii) prices for alternative solutions or approaches and (iv) other relevant information. The section also permits the CO to request additional information, such as labor costs, material costs and overhead rates.

Section 853, “Use of Recent Prices Paid by the Government in the Determination of Price Reasonableness.” This section provides that a CO, in determining whether a price is reasonable, must consider prior prices paid by the government for the same or similar commercial item if these prices are provided by an offeror and represent reasonable prices based upon the totality of the circumstances (i.e., the time elapsed, the quantities and the terms and conditions).

Section 855, “Market Research and Preference for Commercial Items.” This section requires the Under Secretary of Defense for Acquisition, Technology, and Logistics to issue guidance that: (a) prohibits an agency from contracting for noncommercial information technology products or services in excess of the simplified acquisition threshold, unless the agency determines in writing that commercial items cannot meet the agency’s needs; and (b) mandates that agencies conduct market research, where appropriate, prior to making a price reasonableness determination.

Section 856, “Limitation on Conversion of Procurements from Commercial Acquisition Procedures.” Under this section, for a CO to convert a procurement of commercial items or services valued over $1,000,000 from commercial acquisition procedures to noncommercial acquisition procedures, the CO must make a written determination that: (a) the commercial acquisition procedures were erroneously utilized or were utilized because of inadequate information; and (b) the conversion will result in cost savings. In making such a determination the CO must consider: (a) estimated research and development costs for improving future products or services; (b) transaction costs for both the DOD and contractor; (c) changes in purchase quantities and (d) potential delay costs resulting from the conversion. If the procurement is valued over $100,000,000, the head of the contracting authority must also approve the determination. The requirements in this section terminate in five years.

Section 857, “Treatment of Goods and Services Provided by Nontraditional Defense Contractors as Commercial Items.” This section permits the head of an agency to treat the items and services provided by nontraditional defense contractors as commercial items.

As previously stated, DFARS Case 2015-D006 will also implement section 831 of NDAA for FY 2013, which directed DOD to, among other things, issue guidance including “standards for determining whether information on the prices at which the same or similar items have previously been sold is adequate for evaluating the reasonableness of prices.” National Defense Authorization Act for Fiscal Year 2013, Pub. L. No. 112-239.

DOD signals pivot away from proposed DFARS rule on evaluating price reasonableness for commercial items

Department of Defense seeks to clarify contractor cybersecurity obligations

Earlier this year, we reported on the Department of Defense’s (DOD) imposition of new and revised cybersecurity requirements on DOD prime and subcontractors. The new requirements reflected in DOD’s interim rule, among other things, expanded the clause governing unclassified controlled technical information to cover all “covered defense information,” replaced old safeguarding requirements, and expanded contractors’ reporting obligations in the event of a cyber incident. Since DOD released these new and revised requirements, which took effect immediately, contractors have been hustling to understand the requirements and to ensure full compliance.

Just last week, likely in an attempt to address some of the confusion surrounding the new and revised requirements in the interim rule, DOD released (1) updated Defense Federal Acquisition Regulation Supplement (DFARS) Procedures, Guidance and Information (PGI), and (2) Frequently Asked Questions (FAQs) covering network penetration reporting, safeguarding covered defense information, and cloud services. These two documents shed light on the manner in which DOD is implementing the cybersecurity requirements. For example, together the FAQs and the PGI:

• Explain why DOD replaced the security protections from the National Institute of Standards and Technology (NIST) Special Publication (SP) 800-53 with the NIST SP 800-171;

• Provide DOD’s interpretation of the security controls outlined in NIST SP 800-171;

• Describe how covered defense information and operationally critical support will be identified;

• Provide examples of operationally critical support;

• Clarify that the DOD Cyber Crime Center is the “operational focal point” for receiving reports of cyber threats and cyber incidents; and

• Dictate the roles and responsibilities of the Contracting Officer and/or the requiring activity in, among other things, identifying and marking unclassified controlled technical information, handling a reported cyber incident, and conducting damage assessment activities.

Contractors struggling with how, precisely, to implement DOD’s cybersecurity requirements should look to this issued guidance to see if it addresses the questions they have and use it in formulating their own compliance plans. Additionally, contractors should consider attending DOD’s recently-announced “Industry Implementation Information Day” on December 14, 2015, wherein the department will present a briefing regarding DOD’s new and revised cybersecurity requirements. Information on the industry day, including registration information, can be found here.

Dentons lawyers will continue to monitor key developments in this area and will be providing more information about contractors’ compliance obligations and best practices as part of the Public Contracting Institute’s series on government contracts cybersecurity. More information on the series can be found here.

Department of Defense seeks to clarify contractor cybersecurity obligations

Extension of comment period and public meeting announced for proposed DFARS rule on counterfeit electronic parts

The Department Acquisition Regulation Systems, Department of Defense (DOD), announced today that it has extended the public comment period for the proposed rule Detection and Avoidance of Counterfeit Electronic Parts–Further Implementation, 80 Fed. Reg. 56,939 (Sept. 21, 2015) (Proposed Rule). The Proposed Rule, which was published in the Federal Register on September 21, 2015, amends the Department of Defense FAR Supplement (DFARS) to further implement Section 818 of the National Defense Authorization Act for Fiscal Year 2012 regarding counterfeit electronic parts. The public may now submit comments on the Proposed Rule until December 11, 2015.

Additionally, DOD announced that it will host a public meeting on November 13, 2015 to obtain feedback from experts and other interested parties in the public and private sector on the contents of the Proposed Rule. Registration for the public meeting must be completed by November 9, 2015, and more information about the meeting is available here.

Click here for a complete article discussing the Proposed Rule.

Extension of comment period and public meeting announced for proposed DFARS rule on counterfeit electronic parts