Senate Passes $700 Billion 2018 National Defense Authorization Act, Including Procurement Reforms

Government Contracts Update

Date: September 21, 2017

Key Notes:

  • On September 18, 2017 the Senate passed its version of the annual National Defense Authorization Act (NDAA), authorizing $700 billion in defense spending for Fiscal Year 2018.
  • In order to provide the authorized level of spending through appropriation bills, Congress will need to address the limits of the Budget Control Act.
  • As is the case each year, the NDAA will include significant procurement reform provisions. For example, the Senate version would reform the debriefing and bid protest process and the House version would promote the use of online commercial marketplaces.
  • Both versions contain significant potential reforms to the regulation of commercial items. 

On September 18, 2017 the Senate passed its version of the National Defense Authorization Act for Fiscal Year 2018. The Senate version of the NDAA authorizes defense spending at close to $700 billion for Fiscal Year 2018, which begins on October 1. The Senate NDAA’s $700 billion total is more than President Donald Trump requested, and also exceeds the caps set by the Budget Control Act of 2011. In order to provide the authorized $700 billion level through appropriation bills, Congress will need to address the limits of the Budget Control Act and eliminate the threat of sequestration.

As is the case each year, the NDAA will include significant procurement reform provisions. Although it remains to be seen which of these provisions will be included in the final version of the NDAA passed by Congress and signed into law by the president, the Senate and House versions both contain notable reforms that would impact the laws and regulations applicable to government contractors. For example, the Senate version contains reforms to the debriefing and bid protest process and the House version would permit and promote Department of Defense (DoD) purchases through online commercial marketplaces. Both versions contain significant potential reforms to the regulation of commercial items.

In its recent vote, the Senate was acting on H.R. 2810, the House version of the 2018 NDAA, and voted on Amendment #1003, which included the Senate version of the NDAA. This version was further modified by numerous bipartisan amendments, including an amendment that incorporated the Modernizing Government Technology (MGT) Act. The MGT provisions would establish information technology working capital funds at 24 federal agencies and set up a separate $500 million modernization fund within the Department of the Treasury, to be administered by the General Services Administration, for the purpose of improving information technology and cybersecurity across the federal government.

Below is a summary of several significant procurement reform provisions in the Senate and House versions of the NDAA, each of which contain more than 50 separate sections related to procurement policies and reform.

Senate Version of 2018 NDAA
Section 801, “Repeal of temporary suspension of public-private competitions for conversion of Department of Defense functions to performance by contractors.”

This section repeals a provision of the 2010 NDAA that barred public-private competitions for DoD contracts under Office of Management and Budget (OMB) Circular A-76, and is effective one year after enactment of the 2018 NDAA. This provision would enable the administration to conduct public-private competitions that could outsource more work to government contractors, which would be consistent with current OMB policy positions and could signal a future shift in resources towards the private sector.

Section 821, “Government Accountability Office bid protest reforms.”

This section would create two major reforms to the Government Accountability Office (GAO) bid protest process for protests involving DoD.

First, a provision on the payment of costs for denied protests provides that large companies, when filing protests on DoD contracts that are ultimately denied by GAO, must pay to DoD the “costs incurred for processing a protest at [GAO and DoD].” This provision would apply to companies with revenues in excess of $100 million and only when all elements of the protest are denied in an opinion issued by GAO. This provision would shift some costs of the protest system to the private sector, and is clearly intended to reduce the frequency of protests by large companies (and of large awards), but this provision may not deter a protest by a company that is convinced it has been wrongfully treated during a competition.

Second, for incumbent contractors, there is a provision on the withholding of payments above the incurred costs of incumbents that file protests. This generally provides that an incumbent contractor filing a DoD protest would have “all payments above incurred costs withheld on any bridge contracts or temporary contract extensions” awarded to the contractor, as a result of a delay resulting from the protest.

The withheld funds would either be released to the incumbent contractor if any ground of its protest were upheld (or if the solicitation were cancelled), or to the awardee or DoD in other circumstances. The clear intent of this provision is to reduce protests by incumbents, but details of its potential implementation are unclear, and there appear to be many practical barriers to effective implementation (including the calculation of the incurred costs).

Section 822, “Enhanced Post-Award Debriefing Rights.”

This section requires new DoD regulations to establish procedures for enhanced debriefings, including the release of “all information that otherwise would be releaseable in the course of a bid protest challenge to an award.” The regulations would include:

  1. disclosure of the “agency’s written source selection award determination, redacted if necessary to protect other offerors’ confidential and proprietary information;”
  2. “a requirement for a combined written and oral debriefing for all contract awards and task or delivery orders valued at $10,000,000 or higher;”
  3. for the same high-value awards, an option for “access to an unredacted copy of the source selection award determination and the supporting agency record for outside counsel or other appropriate outside representative;”
  4. “provisions ensuring that both losing and winning offerors are entitled to the applicable enhanced post-award debriefing rights;” and
  5. “robust procedures” to protect the confidential and proprietary information of other offerors.

This section also provides for enhanced opportunities for follow-up questions following a post-award debriefing, with the debriefing held open until the questions are answered, and an extension of time to trigger an automatic stay of performance.

These provisions are based on the basic principle that better debriefings improve communication and reduce protests. These procedures would be robust, provide better information to disappointed bidders, and could improve both the usefulness of the debriefing process to the private sector and the fairness of the underlying competition.

Finally, this section provides that a protest arising from the DoD must be resolved by GAO within 65 days, although in protests that “present unusually complex issues or large agency records, the Comptroller General may extend the time for decision but in no event later than 100 days after the protest is submitted.” This provision could improve the timeliness of the bid protest system for DoD, but poses practical challenges to the protest process and can be expected to impose substantial burdens on parties to a protest and on GAO, which has expressed opposition to this provision in a letter to the Senate.

Section 825, “Use of Lowest Price Technically Acceptable Source Selection Process.”

This section amends the provision adopted by last year’s NDAA that established new restrictions on DoD’s use of Lowest Price Technically Acceptable (LPTA) source selection criteria. Last year’s NDAA adopted the policy that DoD must avoid using LPTA source selection criteria “in circumstances that would deny the Department the benefits of cost and technical tradeoffs in the source selection process,” and adopted six conditions required for use of the LPTA process, including a justification by the contracting officer.

This year’s Senate version adds two conditions to those six: “(7) the Department of Defense would not realize any additional innovation or future technological advantage by using a different methodology; and (8) the items procured are predominantly expendable in nature, non-technical, or a short life expectancy or short shelf life.” The House version, Section 856, includes almost identical language that specifies condition (8) is “with respect to a contract for procurement of goods.”

These provisions will have the effect of further restricting the ability of the DoD to employ LPTA criteria, resulting in more best-value trade-off decisions, which in turn give DoD the opportunity to select superior proposals when justified under the appropriate selection criteria.

Section 830, “Department of Defense Contractor Workplace Safety and Accountability.”

This section would establish certain measures similar to the more complicated labor law “blacklisting rule” enacted by regulation under the Obama administration and revoked by Congress under the Trump administration. In general, a contracting officer, “prior to awarding or renewing a covered contract [greater than $1 million], shall, as part of the responsibility determination, consider any identified violations of the Occupational Safety and Health Act of 1970 (29 U.S.C. 651 et seq.) or equivalent State laws by the offeror, and by any covered subcontractors.”

This section also requires DoD to establish policies and practices that would protect contractor rights. In similar fashion, Section 831 states that it is the sense of Congress that “the Department of Defense should aim to ensure that parties contracting with the Federal Government abide by existing law, including worker protection laws[.]” These provisions would likely be more balanced and less complex than the regulations previously revoked by Congress.

Section 855, “Inapplicable Laws and Regulations.”

This section calls for a “Review of Determinations Not to Exempt [DoD] Contracts for Commercial Items and Commercially Available Off-the-Shelf Items From Certain Laws and Regulations.” Section 855 calls for DoD to revise the Defense Federal Acquisition Regulation Supplement (DFARS) “to provide an exemption from each law subject to such determination unless the Secretary determines there is a specific reason not to provide the exemption.”

Further, this section calls for the “Elimination of Certain Contract Clause Requirements Applicable to Commercial Item Contracts.” Section 855 requires DoD to revise the DFARS to “eliminate all regulations promulgated after the date of the enactment of the Federal Acquisition Streamlining Act of 1994 … that require a specific contract clause for a contract using commercial item acquisition procedures under part 12 of the Federal Acquisition Regulation, except for regulations required by law or that the Secretary determines are vital to national security.”

Further, for commercially available off-the-shelf (COTS) subcontracts, DoD is required to revise the DFARS in order “to eliminate all requirements for a prime contractor to include a specific contract clause in a subcontract for commercially available off-the-shelf items unless the inclusion of such clause is required by law or is necessary for the contractor to meet the requirements of the prime contract.” Taken together, the provisions of Section 855 signal a clear intent to reduce the regulatory burdens on companies with commercial item contracts and COTS subcontracts.

House Version of 2018 NDAA

The summary below briefly highlights some of the significant procurement reform provisions of the House version of the 2018 NDAA (H.R. 2810).

Section 801, “Procurement through online marketplaces.”

This section requires the General Services Administration (GSA) to establish a program to procure commercial products through online marketplaces, using more than one contract with more than one online marketplace provider, and to design the program to enable government-wide use, including by DoD. This reform provision has been reported in the media as creating the opportunity for the DoD to use marketplaces similar to Amazon.com, and as a major change to government procurement of COTS items, to the extent these marketplaces become available as an alternative to existing vehicles, such as the GSA Schedules.

Among the criteria for online marketplaces, they must be used widely in the private sector, including in business-to-business e-commerce. Under Section 801, purchases “shall be made under the standard terms and conditions of the marketplace … and [GSA] shall not require an online marketplace to modify its standard terms and conditions as a condition of receiving a contract[.]” This heralds a major development in favor of commercial terms and conditions, although it remains to be seen how various federal legal requirements would be applied to these online marketplaces.

Section 802, “Performance of incurred cost audits.”

This section requires the DoD to comply with commercially accepted standards of risk and materiality in the performance of incurred cost audits, and to use qualified private auditors to perform a sufficient number of incurred cost audits to eliminate any backlog by October 1, 2020; to ensure incurred cost audits are completed within one year of a qualified incurred cost submission; and to ensure that the Defense Contract Audit Agency is able to devote ample resources to high-priority audits. This provision will be positive for private auditors hired to perform these functions, for contractors that need their audits completed in a timely manner, and for DoD in order to address its significant incurred cost audit backlogs.

Section 859, “Change to definition of subcontract in certain circumstances.”

This section amends the definition of “subcontracts” in U.S. Code, 41 U.S.C. 1906(c)(1), by adding, “The term does not include agreements entered into by a contractor for the supply of commodities that are intended for use in the performance of multiple contracts with the Government and other parties and are not identifiable to any particular contract.” The definition is limited to this provision of the U.S. Code, which addresses laws inapplicable to subcontracts for commercial items, but the amendment could have a significant impact on companies that may be subject to various flow-down clauses within the extensive DoD supply chain.

Section 866, “Training in acquisition of commercial items.”

This section requires the Defense Acquisition University to establish a comprehensive training program on the acquisition of commercial items, including part 12 of the Federal Acquisition Regulation. The Senate version of the NDAA includes an identical requirement (Section 841) and, taken together, these provisions, as well as the other provisions in each version of the NDAA addressing commercial items, signal the intent of Congress to renew and promote its mandate in favor of the acquisition of commercial items under more favorable commercial item terms and conditions.

Final NDAA Provisions Depend on Conference Committee

The House version of the NDAA must be reconciled with the newly-passed Senate version by a conference committee. It remains to be seen which of these procurement reform measures will be adopted in the final NDAA to be signed by the president, and what levels of funding will be provided in the separate appropriations process.

In his floor statement on September 18, 2017, Chairman of the Senate Armed Services Committee Senator John McCain (R-AZ) called for a bipartisan agreement to lift the caps of the Budget Control Act, which would result in a major increase in the resources available to the Defense Department. “For all of you who will join me in voting to authorize these vital, additional resources for our military,” he said, “I would urge you also to join me in demanding and passing a bipartisan agreement so that we can appropriate those resources.”

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Tom Mason
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Thomas.Mason@ThompsonHine.com

Francis E. Purcell, Jr.
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Chip.Purcell@ThompsonHine.com

Ray McCann*
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Joseph R. Berger
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Joseph.Berger@ThompsonHine.com

or any member of our Government Contracts practice group.

*Ray is not admitted to practice in the District of Columbia; he is admitted only in California and Virginia. His practice is supervised by principals of the firm.

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