Both houses of Congress now have voted to pass the National Defense Authorization Act (NDAA) for Fiscal Year 2021. Although the threat of a presidential veto still hangs over the NDAA, we highlight below a few of the procurement-related provisions that likely will remain once the NDAA is enacted and will be of wide interest to federal contractors. Note that many of these new statutory provisions will require implementation through notice-and-comment rulemaking before they are likely to have any practical effect on contractors.
Our colleagues in MoFo’s National Security group have compiled their own summary, which analyzes a host of sanctions and related measures, including sanctions targeting Turkey’s purchase of a Russian air defense missile system, Russian energy export pipelines, and Chinese Military Companies and other activities in the United States. We encourage you to read it, as well, and to engage with our National Security group should you have any follow up questions.
And stay tuned for further summaries and alerts on other important topics in the NDAA, including cybersecurity.
Section 804 of the NDAA calls for incremental, seemingly modest changes that may have significant long-term effects. Principally, Congress enhanced its support for the Modular Open Systems Approach (MOSA), a longstanding “plug-and-play” initiative within the Department of Defense (DOD) that seeks to break down weapons systems into modules that readily may be rearranged, interchanged, or replaced throughout a system’s lifecycle. A key component of this modularity goal is ensuring that the Government has data rights sufficient to facilitate the rearrangement and replacement of parts. To that end, Congress has in past NDAAs authorized DOD to assert government purpose rights in data related to interfaces between modules in major weapons systems, even if developed at private expense. Section 804 extends these rights to interfaces in all “modular” weapons systems and directs DOD eventually to expand them to cover software-based non-weapon systems as well, including business systems and cybersecurity systems.
Section 1833 reorganizes the primary DOD data rights statutes, currently at 10 U.S.C. §§ 2320 and 2321, into a series of new, substantively identical statutes at 10 U.S.C. §§ 3771-75, 3781-86, and 3791-94. The Conference Report suggests this reorganization “sets the conditions for future reform,” but was undertaken “with a commitment to the principle that a restructuring not result in policy changes.” Still, Congress’ proposed titles for some of the new statutes telegraph reforms on the way. For example, one of the new statutes, 10 U.S.C. § 3792, is titled “Technical data rights: non-FAR agreements,” suggesting a data rights statute for other transactions (OTs) may be in our near future.
CONTRACTOR BUSINESS SYSTEMS
It has been a decade since the 2011 NDAA called for a greater focus on the adequacy of defense contractors’ business systems, and nearly as long since DOD added the Business Systems regulations to the Defense Federal Acquisition Regulation Supplement (DFARS). Subsequent NDAAs have tinkered with those requirements. Section 806 of the 2021 NDAA returns to that theme, replacing the key term “significant deficiencies” with “material weaknesses.” The statute defines “material weakness” as “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.” The statute also defines “reasonable possibility” as “probable” or “more than remote but less than likely.”
The House Conference Report states that the changed terms and definitions will better align with generally-accepted auditing standards, eliminate “confusion about the seriousness of deficiencies identified in contractor business systems,” and provide for “a more nuanced approach to classifying contractor business system deficiencies according to their severity.” DOD will be required to update the DFARS to implement these statutory changes.
SPACE SYSTEM ACQUISITIONS
Section 807 is aimed at accelerating the acquisition process for space-related defense technology systems. The statute directs the DOD to develop a “pathway” for space systems in DOD’s new Adaptive Acquisition Framework, with the goal of allowing the Government to “quickly and effectively acquire end-to-end space warfighting capabilities needed to address the requirements of the national defense strategy.” This section calls on DOD to submit a proposed approach, which must also include details on budget line items and governance structures proposed for the U.S. Space Force. It also authorizes the Secretary of the Air Force to designate a program executive officer as the milestone decision authority for major defense acquisition programs of the Space Force.
COMMERCIAL ITEM CONTRACTING
Congress, DOD, and industry have been fighting for years over how to define “commercial items” for defense contracting purposes. If a purchase is classified a commercial item, it is subject to substantially fewer regulations. The House version of the NDAA originally contemplated a statutory presumption that any previous commercial product or service determination would apply to future procurements. Section 816 of the final version of the NDAA lacks that presumption, but it does create a new requirement that contracting officers document commerciality determinations within 30 days after award, and it allows contracting officers to request support from public- and private-sector entities to support those determinations. These provisions are intended to address the fact that “the Department has failed to fully comply with statutory requirements and internally manage commercial product and commercial service determinations to ensure consistency across the Department.” Although Congress seems generally in favor of commercial item contracting, it is unclear whether this section will increase, reduce, or leave unchanged DOD’s commitment to the practice.
Section 833 requires DOD to publish and maintain on the System for Award Management (beta.SAM.gov) a list of all consortia DOD uses to announce OT opportunities and solicit OT proposals. OTs in recent years comprise nearly $8 billion of DOD’s total spending, with an estimated 60 percent of that amount awarded through such consortia. This provision adds welcome transparency, in contrast to the relatively limited information available to the public and industry today.
SOFTWARE DEVELOPMENT AND ACQUISITION
Ongoing concerns over ensuring security while encouraging innovation in the development and acquisition of software systems led to the inclusion of Section 835 in the 2021 NDAA. This section aims to address concerns that software was potentially being developed or produced in adversary nations; that DOD has not yet complied with the 2018 NDAA’s requirements that it pilot the use of open source software where possible as a cost-saving mechanism; and that DOD does not have a uniform security-enhancing process for reviewing software code. Again looking to DOD’s adaptive acquisition framework, the 2021 NDAA directs the Under Secretary of Defense for Acquisition and Sustainment to create a “software pathway” that will allow software to be delivered securely and in a timely manner.
SUPPLY OF STRATEGIC AND CRITICAL MATERIALS
The recent heightened focus on domestic content preferences is reflected in numerous provisions of the 2021 NDAA, although Congress has chosen not to adopt some of the stricter domestic-preference measures that were under consideration. Among these provisions, Section 848 sets out an order of preference for the acquisition of such materials, preferring sources within the United States first, then sources within the national technology and industrial base, then other sources as appropriate. Section 851 directs DOD to issue a report to Congress on supply chain partnerships, vulnerabilities, and security measures related to the acquisition of rare earth minerals and metals. Section 852 rejects an earlier proposal for strict domestic sourcing requirements for aluminum and instead calls on DOD to report to Congress on the viability of incentives to increase domestic aluminum production.
Section 849 requires DOD to perform analyses of domestic or friendly-nation sourcing alternatives for strategic materials to minimize vulnerabilities and international reliance in supply chains for defense technologies, pharmaceuticals, and other key areas. And, under Section 850, DOD must develop recommendations for further strengthening the manufacturing and defense industrial base and the resilience of supply chains.
SMALL BUSINESS ITEMS OF NOTE
Section 862 of the NDAA transfers the responsibility for verifying Veteran Owned Small Business status and Service Disabled Veteran Owned Small Business (SDVOSB) status from the Department of Veterans Affairs to the Small Business Administration (SBA). As part of this centralization and simplification, the NDAA also calls for phasing out the current system of SDVOSB self-certifications in favor of formal SDVOSB certifications to be accomplished by the SBA itself. The process of rolling out regulations and implementing these changes may take upwards of two years to complete.
Section 863 alters the timeframe for analyzing a company’s size status under employee-based size standards. Rather than the average number of employees for the 12 months preceding self-certification of size, the new law will consider the average number of employees over the preceding 24 months. SBA will have a year to implement this change in regulations.
Section 868 further expands the existing statutory requirements for evaluating the past performance of small businesses and calls for new regulations. The statute calls for agencies to allow a small business offeror to rely upon the past performance of joint ventures to which it belonged if the offeror has no relevant past performance of its own and informs the contracting officer of what the offeror’s duties and responsibilities were within the joint venture. The statute also calls for regulations to allow a small business offeror to rely upon past performance it gained as a first-tier subcontractor and to require its prime contractor to provide it with its past performance record under that contract. The SBA will have four months to promulgate implementing regulations.
Section 869 directs the SBA to permit any company participating in the 8(a) program “on or before September 9, 2020” to extend its participation in the 8(a) program by an additional year, subject to new regulations that the SBA must issue within 15 days of enactment of the NDAA.
BENEFICIAL OWNERSHIP DISCLOSURES
Consistent with other sections of the NDAA that require disclosure of beneficial owners in other contexts, Section 885 will require prospective contractors and grantees to disclose beneficial ownership data for inclusion in the Federal Awardee Performance and Integrity Information System database (see FAR 9.104-6). Beneficial ownership is to be determined in “a manner that is not less stringent than the manner set forth in 17 C.F.R. § 240.13d-3,” which defines a beneficial owner as “any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (1) Voting power which includes the power to vote, or to direct the voting of, such security; and/or (2) Investment power which includes the power to dispose, or to direct the disposition of, such security.”
The 2018 NDAA contained an ambiguous and controversial requirement for DOD to implement a pilot program to determine the effectiveness of requiring some unsuccessful protesters to reimburse DOD for DOD’s cost to defend the protest. Section 886 of the 2021 NDAA repeals that requirement as unlikely to be of any practical benefit. The House Conference Report noted both the RAND report on bid protests (which we previously discussed here), as well as Professor Christopher Yukins’ fine study on agency-level protests (available here), and called upon DOD to consider how to obtain the data that the RAND report found to be missing, and to consider Professor Yukins’s recommendations for improving the agency-level protest process. DOD is to publish a responsive report by September 1, 2021.
UNDEFINITIZED CONTRACT ACTION FINANCING
In recognition of contracting challenges due to COVID-19, Section 891 permits DOD to waive some of the normal restrictions for progress payment financing (including temporarily increasing the permitted payment rate) under Undefinitized Contract Actions. The NDAA conditions this waiver authority on meeting certain conditions regarding “receipt of progress payments under other contracts, the companies’ efforts to flow cash to subcontractors and suppliers, and other matters, as well as reporting on the use of the waivers and the flow of payments to subcontractors and suppliers.” The Government Accountability Office will be required to report on the effectiveness of these and related measures by September 30, 2021.
*Michaela Thornton contributed to this blog post. Michaela is a full-time law student at The George Washington University Law School and a Law Clerk with Morrison & Foerster’s government contracts practice group.