FY 2018 Forecasts: Items of Interest in Contracting, Small Business, and M&A

DefenseIn the final post of our 2018 Fiscal Year Forecast series, Kevin Mullen and Damien Specht focus on the use of Low Price Technically Acceptable (LPTA) contracts, the mounting backlog of security clearance applications, the increased use of unorthodox contracting methods such as Other Transaction Agreements, the success of and potential fallout from the All Small Mentor-Protégé Program, and increased consolidation within the industry.

Kevin Mullen

Curtailing the Use of LPTA Contracts

In FY 2018, we anticipate the procurement pendulum’s swing away from the use of LPTA solicitations.  In contrast with best value acquisitions, LPTA procurements determine an agency’s competitive source selection based on the offeror who satisfies specified minimum technical requirements at the lowest proposed price.

During the past decade, defense and civilian agencies have expanded their use of LPTA procurements from basic commodity-type services to sophisticated technical services, including high-end IT support and cybersecurity.  This expansion of LPTA contracts has driven the profit margins for many government services to rock-bottom levels, while also forcing contractors to offer the “greenest” possible workforce in order to offer the lowest possible price.  The result is a revolving door of contractors in even the most critical agency programs, as incumbents struggle to compete for the next contract with more senior (and more costly) personnel.  This procurement dynamic might save taxpayer money on any particular contract, but it also deprives the Government of performance quality for many sensitive and vital services.

The National Defense Authorization Act (NDAA) for FY 2017, signed into law by President Obama in December 2016, promises to end the overuse of LPTA solicitations by defense agencies.

Section 813 of the NDAA for Fiscal Year 2017 expresses clear congressional preference for the Department of Defense (DOD) to use best-value procurements whenever possible, and to avoid using LPTA “in circumstances that would deny the Department the benefits of cost and technical tradeoffs in the source selection process.”

Section 813 directed the Secretary of Defense to revise the Defense Federal Acquisition Regulation Supplement (DFARS) to limit the use of LPTA source selection to circumstances in which (1) the DOD is able to clearly describe the minimum requirements that will be used to determine acceptability of proposals; (2) the DOD would realize little or no value from a contract proposal exceeding the minimum technical or performance requirements set forth in the request for proposal; (3) the proposed technical approaches will require little or no subjective judgment by the source selection authority (SSA) as to the desirability of one offeror’s proposal as opposed to a competing proposal; (4) the SSA has a high degree of confidence that a review of technical proposals of offerors other than the lowest bidder would not result in the identification of factors that could provide value to the DOD; (5) the contracting officer (CO) has included a justification for the use of the LPTA evaluation methodology in the contract file; and (6) the DOD has determined that the lowest price reflects full life-cycle costs, including for operations and support.

Section 813 also called for avoiding the use of LPTA source selection criteria in certain procurements, including IT services, cybersecurity services, systems-engineering and technical-assistance services, advanced electronic testing, audit or audit-readiness services, and other knowledge-based professional services, as well as personal protective equipment and knowledge-based training or logistics services.

The NDAA for FY 2018, if passed into law, will further curtail the use of LPTA solicitations for defense acquisitions.  Section 825 of the Senate’s version of the NDAA for fiscal year 2018 adds two conditions to the six listed above for the use of LPTA by the DOD.  The Senate’s version adds that LPTA may be used in circumstances in which (7) the DOD 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 have a short life expectancy. Assuming these criteria are passed, they will have the effect of further restricting the ability of the DOD to use LPTA procurements, resulting in increased use of best-value decisions.

Finally, new legislation could sweep civilian agencies in this same anti-LPTA direction.  A bipartisan House bill, the Promoting Value Based Procurement Act (H.R. 3019), was introduced in July of this year.  The bill would amend the Federal Acquisition Regulation (FAR) to curtail the use of LPTA contracts by civilian agencies. It would introduce requirements for the use of LPTA source selection criteria by civilian agencies identical to the six conditions identified in Section 813 for the DOD.  The pendulum’s swing away from LPTA and toward best value is good news for both service contractors and the Government.

Security Clearance Process Stalled

In light of the lengthy process of attaining, and the mounting backlog of applicants seeking security clearances it is possible that we are moving toward a crisis point where demand for contractors with cleared personnel surpasses supply.

The Washington Post reported in August that the federal government is struggling to conduct background checks on individuals seeking security clearances, resulting in a backlog of more than 700,000 applicants.  Furthermore, the process for obtaining a top security clearance has slowed considerably over the past few years, and now takes over 450 days to complete.

The increased wait time for clearances is detrimental to contractors, who must compete for contracts that require employees to have security clearances and the ability to handle classified information.  Furthermore, the backlog is expected to grow, making it difficult to recruit new employees without clearances and leading to increased competition among contractors for cleared employees.

In July 2017, the Security Expediting Clearances Through Reporting Transparency Act of 2017 or the SECRET Act of 2017 (H.R. 3210) was introduced and passed in the House.  The bill would require the Office of Personnel Management’s National Background Investigations Bureau (NBIB) to report on the backlog of security clearance investigations.  As more Government programs – cybersecurity contracts in particular – require cleared personnel, this new legislation is an important step toward addressing this practical problem.

Damien Specht

Increased Use of Unorthodox Contracting Methods

Another topic to keep an eye on in the coming fiscal year is the increased use of unorthodox contracting methods such as Other Transaction Agreements (OTAs). The trend increasing use of OTAs will likely continue, because we have a business-minded administration and a procurement system that has all but ground to a halt.

An OTA is a unique procurement vehicle that certain federal agencies have been granted authority to use to obtain research development, and prototypes. The Federal Acquisition Regulation (FAR) and several other procurement-related statutes do not apply to OTAs; therefore, these agreements provide more flexibility and are designed to be more appealing to nontraditional contractors that may be hesitant to perform traditional government contracts.  With that said, OTAs have been lightly used in the past (outside of a few agencies, such as NASA) for a good reason:  They serve a limited purpose and are not subject to standard competition oversight.

Reflecting this trend, in the Senate and House reports for the 2018NDAA, the Armed Services Committees from both houses voiced their support for increased use of OTAs. Although the House version of the fiscal year 2018 NDAA, passed in July, did not address OTAs in any detail, the latest Senate version has some significant language that bears tracking.

The companion Senate bill, passed in September, would expand the DOD’s authority to enter into OTAs for the narrow purpose of prototyping projects. For example, currently the non-government parties to such an OTA must pay at least one-third of the costs; the Senate bill would expand this so that one third of the costs could be paid by any source outside of the federal government.  This is significant, because agreements to share costs are the most common way large contractors can participate in prototype OTAs.  Section 872 of the Senate bill would also create a preference for OTAs when executing “science and technology and prototyping programs.”  The bill is currently in conference, so it is unclear what these changes will look like if and when they come out.

Small Business

The All Small Mentor-Protégé Program (a significant expansion of the 8(a) Mentor Protégé program) was created to facilitate mentor-provided business development assistance to small businesses and to help participating small businesses compete successfully for government contracts. The program, which officially began in October 2016, has been a success, with more than 300 mentor-protégé pairs already approved.  Although this program has significant benefits for both small businesses (increased competitiveness and dedicated mentorship) and large businesses (the ability to obtain significant workshare on small business set aside contracts), the rules are still poorly defined and, as regards joint ventures that seek to compete as Service-Disabled Veteran Owned businesses, there are important inconsistencies between the SBA and the VA. As mentor-protégé joint ventures begin to receive significant contract awards, every detail of the program rules will begin to be picked over in courts and administrative tribunals.  As a result, this is an essential area to watch in 2018.

M&A

On the M&A front, we always talk about consolidation, and that is certainly happening.   By all public measures, the number of government contractors has decreased in current years, even as spending has increased.  As once again demonstrated by the Northrop Grumman/Orbital ATK transaction, the trend toward consolidation has created a market that has two primary segments:  multibillion-dollar players and sub hundred-million-dollar companies.  This stratification will likely continue in the coming year, as the “mid tier” becomes an increasingly challenging place to make money.

Deregulation and Increased Focus on Domestic Preferences

Finally, we can expect to see additional deregulation under the new administration.  While there is an increased focus on domestic preferences under the Trump administration, it is unclear whether the administration will be able to introduce new regulations in this area, or even enforce the regulations already in place.

*Victoria Dalcourt is a Law Clerk in our Washington, D.C. office and not admitted to the bar.