2020 NDAA-What’s New and What Isn’t New
When Bob posted his annual summary of the National Defense Authorization Act (NDAA) over at WIFCON, he offered the following description of this year’s model:
It's about 80 Congressional perfections to defense contracting. Some perfections have perfected other annual perfections, etc. There is something for everyone to love in it, I'm sure.
We look at the NDAA to see what impacts contract compliance. What shows up in the NDAA often becomes regulatory direction, sooner or later. Unless it doesn’t. (More on that in a bit.)
Let’s look.
Section 802 revives a very old concept called “alpha contracting” and mandates that “The Secretary of Defense shall select at least 2, and up to 5, initiatives to participate in a pilot to use teams that, with the advice of expert third parties, focus on the development of complex contract technical requirements for services, with each team focusing on developing achievable technical requirements that are appropriately valued and identifying the most effective acquisition strategy to achieve those requirements.” The associated Conference Report states that “this is intended to ensure that technical requirements are appropriately valued and that the most effective acquisition strategy to achieve these requirements is identified.” We shall see.
Section 803 seems pointed directly at Transdigm. The Transdigm situation—and its fallout—is what you get when you get a bad DOD OIG report that seems designed to generate press rather than report objective results. Section 803 is more fallout from that much ballyhooed situation. It modifies “Section 2306a(d) of Title 10, United States Code, to specify that offerors who do not make a good faith effort to comply with a contracting officer’s reasonable requests for data other than certified cost or pricing data are ineligible for award. The amendment would also direct contracting officers, when determining whether an offeror’s price is fair and reasonable, to not base that assessment solely on the historical prices paid by the government.”
Speaking of Transdigm fallout, Section 804 is more of the same, but pointed at the Secretary of Defense. It requires a report by the Comptroller General “on the efforts of the Department of Defense to obtain cost and pricing data for sole source contracts for spare parts."
Section 807 delayed implementation of a prior year’s NDAA requirement. Section 830 of the 2017 NDAA would have required use of only firm, fixed-price contracts for FMS contracts, to be effective within 6 months of the public law’s signature by the President. Well, that deadline came and went—with no new rulemaking. This is one of those times where the DAR Council (apparently) just didn’t want to follow Congressional direction. There must have been a lot of behind-the-scenes activity because, three years later, the implementation of that requirement was delayed for another year. In the meantime, DOD issued a Class Deviation that covered contracting officers’ backsides.
Section 810 makes it official: the Defense Cost Accounting Standards Board is dead. Created by a prior NDAA, it was a white elephant. Nobody wanted it and nobody knew what to do with it. I don’t think it was ever staffed. The best thing that can be said is that its creation spurred the official Cost Accounting Standards Board into action, after years of inactivity. So, bye.
Section 818 requires that “market research for commercial products and services be documented in a manner appropriate to the size and complexity of the acquisition.” So, okay then. That’s super clear and helpful, isn’t it?
Section 826 addresses a bit of DOD nitpickery related to the micro-purchase threshold. As readers know, Congress modified the micro-purchase threshold (and other acquisition thresholds) via a prior NDAA, but the DAR Council was strangely slow to implement the new thresholds. (Many blog articles on this topic were published; you can easily find them.) It took a series of Class Deviations to get around the DAR Council’s lack of alacrity and, even so, the implementation of the new thresholds was uneven, primarily because the legislation was poorly drafted and didn’t expressly modify all the statutory authorities it should have. (Or so went the argument.). Thus, the 2020 NDAA perfects the imperfect language from prior NDAAs, and amends Section 4106(c) of Title 41, United States Code, “by striking ‘$2,500’ and inserting ‘the micro-purchase threshold under Section 1902 of this Title’.” And so DOD is now free to fully implement Congressional intent. Let’s see how long it takes the DAR Council to do so, shall we?
Section 850 provides up to $37.42 million to fund the National Defense Stockpile to acquire rare earth and other critical defense materials. This is a topic we’ve been tracking for ten years. (About 7 years ago, I wrote an article for the ABA’s Public Contract Law Journal on the topic.) Anyway, it’s nice to see Congress finally authorize DOD to take action.
Section 870 permits prime contractor to take credit for lower-tier subcontractor awards with respect to socioeconomic reporting. It states:
… if the subcontracting goals pertain only to a single contract with a Federal agency, the prime contractor may elect to receive credit for small business concerns performing as first tier subcontractors or subcontractors at any tier … in an amount equal to the total dollar value of any subcontracts awarded to such small business concerns; and if the subcontracting goals pertain to more than one contract with one or more Federal agencies, or to one contract with more than one Federal agency, the prime contractor may only receive credit for first tier subcontractors that are small business concerns.
Section 873 directs that small businesses acting as prime contracts be paid as quickly as possible “with a goal of 15 days.” So that’s nice.
There are many other Sections (or “perfections,” if you will) but those are the ones that caught our eye.
Researching DFARS
Most of us would agree that the FAR is hard enough. But sometimes you have to go into the DFARS; and it turns out that is harder than it needs to be.
Recently I team-taught a class in England that was, essentially, an introduction to the FAR and the DFARS. A company had received multiple subcontracts from various US prime contractors, each of which contained a lengthy list of FAR and DFARS clauses—most of which had been incorporated by reference. Meaning that there was a clause number and a clause title and a date. And that was it.
An important exercise was looking up the clauses and their prescriptions. (For those who don’t know, the prescription tells the contracting officer when the clause is to be incorporated into a contract.) We also looked at the clauses themselves in order to identify whether the clause was a mandatory flow-down and, if so, then under what circumstances.
We taught the class that some DFARS clauses implemented a FAR clause while other DFARS clauses supplemented a FAR clause. (For your information, an implementation augments the FAR rule while a supplementation adds additional stuff not found in the FAR.) There are specific conventions that identify implementing clauses versus supplementing clauses, but you’re already bored so we’re moving on now.
In short, there was a lot of moving back and forth between the FAR and the DFARS, so as to see whether the FAR clause controlled, or if it had been modified somehow by the DFARS.
How did we do that? We did it electronically, using various websites.
Now, you might think that only one website would be necessary. Effective 30 September 2019, “Acquisition professionals and vendors will … have a single website to access and search the Federal Acquisition Regulation (FAR) and supplemental regulations.” And that website is www.acquisition.gov.
If you go to that site, on the very top of the page is a button marked “Regulations,” and clicking that button brings up all the various government acquisition regulations, from the FAR to the DFARS and even the military service supplements. The list of acronyms is amazing! Do you know what the DOLARS is? What about the LIFAR? Or the NRCAR? You get the picture.
Thus, if the site is to be believed, it’s a one-stop shop and one need go nowhere else. Yet we hardly used it.
Sure, as far as FAR research went, it was fine. But when navigating the DFARS, the site was lacking. It just didn’t work. The links between the DFARS clauses and their prescriptions didn’t. Or at least, they didn’t (link) consistently. The lack of effectiveness of the DFARS section of www.acquisition.com made me long for the days of farsite at hill.afb.org. That website worked and it was easy to navigate. But sadly, it’s no longer in existence.
So what did we do instead? We used the electronic Code of Federal Regulations website at www.ecfr.gov. Once you know that the FAR is Title 48 of the CFR and that the DFARS is Chapter 2 of Title 48, then you’re good to go. And the eCFR has really cool search features that turned out to be really useful.
We needed strong search features because of this little ditty buried in the DFARS clause 252.244-7000 (“Subcontracts for Commercial Items,” June 2013). That clause states:
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The Contractor is not required to flow down the terms of any Defense Federal Acquisition Regulation Supplement (DFARS) clause in subcontracts for commercial items at any tier under this contract, unless so specified in the particular clause.
What does that mean? It means that the only DFARS clauses that are mandatory flow-downs for subcontracts for commercial items are those clauses that expressly require flow-downs to subcontracts for commercial items. Let me give you an example. Suppose a clause states “Contractor must flow this clause down to all subcontracts.” That clause would not be a mandatory flow-down to a subcontract for commercial items because it does not expressly say “… all subcontracts, including those for commercial items.”
That’s right. “All” does not mean “all.”
Right. That blew my mind as well. But there you go.
I know, you’re thinking I’m crazy. Here’s an example of what I’m talking about. If you look at the DFARS clause 252.229-7014 “(Taxes-Foreign Contracts in Afghanistan,” December 2015) you see this clear direction to contractors that have received contracts that incorporate that particular clause: “(e) The Contractor shall include the substance of this clause, including this paragraph (e), in all subcontracts, including subcontracts for commercial items.” (Emphasis added.) If you see that direction, then you know the clause is a mandatory flow-down for subcontracts for commercial items. If you don’t see that, then the clause is not a mandatory flow-down.
If you think this is crazy hard (and you should), you should have seen the faces of the British folks we were training. (It took a couple of days, but they all got it in the end.)
Fortunately, we had the eCFR site so we could search for the clauses that needed to be flowed-down. Because if we had relied on the www.acquisition.gov site for the training, it would have been impossible.
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DOD Office of Inspector General Criticizes Contracting Officers (Again)
This blog has been active for more than ten years. That’s a decade of reporting observations and opinions about what we have seen in the Federal acquisition environment.
For much of that time, we’ve observed the Department of Defense Office of Inspector General (DOD OIG) criticize the contracting officers of the Defense Contract Management Agency (DCMA). Some of that criticism has been warranted, to be sure.i However, in our view (as expressed time and time again on this blog) much of the criticism has not been fair, or has been the result of sloppy (or even misleading) audit procedures that seemed designed to generate headlines and Congressional support rather than report an independent and objective conclusion. Much of that OIG criticism has been directed at contracting officers who deviate from Defense Contract Audit Agency (DCAA) audit findings without an adequately documented rationale.
For us, the bottom-line has been that DCMA contracting officers are charged with using independent business judgment to resolve administrative disagreements before they ripen into disputes. This is the policy of the United States Federal government, as expressed in Federal Acquisition Regulation 33.204. The policy is clear: “The Government’s policy is to try to resolve all contractual issues in controversy by mutual agreement at the contracting officer’s level. Reasonable efforts should be made to resolve controversies prior to the submission of a claim.”
The rationale for that policy position should also be clear: litigation wastes time and resources of both sides. The government simply does not have sufficient attorneys to litigate every disagreement, nor do contracting officers have sufficient time available to support those attorneys. Discovery efforts are lengthy and painful. Depositions are lengthy and painful. Going to court is often a crapshoot, and often bad precedents are set based on bad fact patterns. This is true for both sides, and thus both sides have a vested interest in avoiding litigation wherever possible.
Yet it seems that the auditors from the DOD OIG don’t see it that way. Based on the various audit reports we’ve seen (and discussed here), the OIG auditors seem to think that the use of independent business judgment should be curtailed unless the contracting officer has (1) reviewed all positions with legal support, and (2) documented all deviations from the initial DCAA audit positions.
Lost in this kerfuffle is the fact that DCAA audit positions are not always correct. Just before this blog started, you would have to go a long way to find anybody who thought DCAA’s audit conclusions were accurate or well-supported. It was the DOD OIG itself that leveled quite a bit of criticism at the DCAA audit procedures. Not to mention all the Congressional hearings. There was a real (and valid) belief at the time that DCAA as an audit agency had overstayed its welcome within DOD, and that DCMA contracting officers had better find alternate means of getting field pricing assistance or incurred cost audit assistance. That DCAA has come back from the brink is laudable—but its reputation was tainted and, for many, remains tainted to this day.
Thus, there is a tacit or even overt understanding that DCMA contracting officers will not always agree with DCAA audit findings—nor do they need to. As then-DCMA Director Charlie Williams expressed it to his contracting officers in 2011, with respect to forward pricing rates—
Working closely with DCAA auditors is a critical factor in your ability to be successful in the final outcomes that result from your rate decisions. … it is our policy that when you receive an audit report from DCAA, you should use the audited rates as the single government forward pricing rate recommendation. While this is policy, you will not find anything that states, ACOs should ignore common sense or relinquish their discretion in promulgating FPRRs. So simply put, it is my expectation that ACOs should always apply judgment and well informed thought prior to making any decision. I fully expect that there will be times when the contracting officer determines, in his or her judgment, that the rates contained in the audit may not be the best representation of future projections. When that judgment is well informed by fact and data, you must not be reticent or feel constrained in communicating your views with the auditors and if necessary requesting a Board of Review to elevate real differences.
But that was then and this is now.
Today, the DOD OIG criticizes DCMA contracting officers for using “common sense” and “discretion” to resolve differences in opinion between contractor and DCAA. And that is the relationship: DCAA has expressed a conclusion, the contractor disagrees, and it is up to the contracting officer to try to resolve that disagreement before it leads to litigation. Or, as the Claims Court stated: “[T]he contracting officer must act impartially in settling disputes. He must not act as a representative of one of the contracting parties, but as an impartial, unbiased judge.”ii
Despite the foregoing, DOD OIG auditors don’t see it that way. The latest manifestation of their concerns is Report No. DODIG-2020-049, a redacted version of which was issued January 10, 2020. In that report, the OIG auditors criticized 18 (of 28) contracting officers for failing to “adequately explain why they disagreed with DCAA’s recommendations to assess penalties on $43 million in unallowable indirect costs.” More specifically—
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For $32 million, the contracting officers determined that the costs were not subject to penalties. However, the DCMA contracting officers did not document adequate rationale for disagreeing with DCAA that the costs were unallowable and subject to penalties.
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For $11 million, the contracting officers determined that the costs met the FAR criteria for waiving penalties. However, the DCMA contracting officers did not document adequate rationale to show that the DoD contractor met the FAR criteria for waiving penalties.
Thus, according to the OIG auditors, “the contracting officers did not comply with the FAR requirement that contracting officers document adequate rationale when they disagree with DCAA recommendations.”
Because of the alleged violations of FAR requirements, “DCMA will review the 18 DCAA audit reports in which contracting officers did not document adequate rationale and attempt to recoup any unallowable costs and assess penalties and interest.” So if you are one of those 18 contractors who thought you had settled your final rates, you may want to think again.
We would say more but we think we made our point. It very much seems to us that any attempt by DCMA contracting officers to use their judgment and discretion to resolve controversies before they become full-fledged disputes will be met with criticism from the DOD Office of Inspector General.
ii Penner Installation Corp. v. United States, 89 F. Supp. 545, 547 (Ct. Cl. 1950); aff’d by an equally divided court, 340 U.S. 898 (1950). Cited in Atkins North America & Mactech Engineering and Consulting v. US, No. 09-112 C (Ct. Cl. Aug 30, 2012); motion for interlocutory appeal denied.
Good-Bye 2019, We Hardly Knew Ye
Last blog post for the year, and what a year it’s been.
There were eight Federal Acquisition Circulars (FACs) published. They included both proposed and final rules. In addition, there were several proposed and/or final FAR revisions published outside of the official FACs. Looking back, not many of the rules—whether proposed or interim or final—seemed especially significant. The definition of “commercial item” was expanded. The prohibition on obtaining certified cost or pricing data was restricted (but not for all agencies). Procurement of telecommunications equipment from Huawei Technologies Company or ZTE Corporation was prohibited. In summary, not a particularly eventful year.
DCAA published three Memoranda for Regional Directors (MRDs), continuing its unfortunate trend of hiding a lot of its audit guidance behind agency firewalls. However, what was published contained potentially significant changes to how DCAA uses materiality in its audits of contractor final billing rate proposals (aka incurred cost submissions). In addition, DCAA continued to build its “Selected Areas of Cost Guidebook” (which replaced what used to be Chapter 7 of the Contract Audit Manual); and DCAA also revised quite a few of its audit programs—most notably the 11070 audit program for performing Accounting System audits. Thus, it’s not fair to judge DCAA solely on its output of MRDs; one should strive to look at the total output.
Speaking of DCAA output, we’ve devoted a few recent blog articles to discussing DCAA productivity. In Government Fiscal Year 2019 (which ended 30 September 2019), the audit agency examined $365.2 billion using procedures that resulted in a GAGAS-compliance audit report. If we subtract out audit reports related to audits of contractor proposals, that figure drops to $246.3 billion. (Since the audit agency only issued audit reports in 26 percent of the assignments it completed, we can infer that roughly $950 billion was examined in non-proposal audits, in total).
Of the $246.3 billion that was reported upon, about $1.94 billion was questioned in an audit report (a figure that excludes “funds put to better use,” which is how DCAA reports findings related to proposal audits). Thus, DCAA questioned less than one percent of all dollars examined.
How did Apogee Consulting, Inc. fare in 2019? Let’s recap.
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51 blog articles published (counting this one)
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2 textbooks edited for ThompsonWest/LexisNexis
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1 six-week adult education class created and taught
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1 presentation for the Society of Corporate Ethics and Compliance
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1 presentation for the Association of Government Accountants
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1 presentation for the National Contract Management Association
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Participated in roundtable discussion at the Rocky Mountain Compliance Conference
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Participated in roundtable discussion at the BDO/Deltek Government Contracting Seminar in San Diego
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1 article drafted for publication (will be submitted in January)
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Testified in an arbitration proceeding
Thus, while blog article production fell precipitously, we made up for it in other areas.
Looking forward to 2020, we know we will be editing the two textbooks again. We have submitted a proposal to SCCE for another presentation. We expect to teach at SDSU once again. Our first 2020 engagement starts January 6th, and we hope to start another major project in late January/early February. We predict 2020 will be another busy year.
Here’s hoping your 2020 is as rewarding as we expect ours to be.
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