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DoD Proposes DFARS Rule Prohibiting Employee Confidentiality Agreements That Restrict Waste, Fraud, Or Abuse Reporting

June 28, 2022
DOD PROPOSES DFARS RULE PROHIBITING EMPLOYEE CONFIDENTIALITY AGREEMENTS THAT RESTRICT WASTE, FRAUD, OR ABUSE REPORTING

On June 23, 2022, the U.S. Department of Defense (DoD) issued a Proposed Rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) in order to implement Section 883 of the National Defense Authorization Act for Fiscal Year 2021 (NDAA 2021).  Section 883 prohibits DoD agencies from making contract awards to entities that request that their employees sign confidentiality agreements that prohibit or restrict them from reporting waste, fraud, or abuse to a designated DoD representative authorized to receive this information.  Comments to the Proposed Rule are due August 22, 2022.

The Federal Acquisition Regulation (FAR) at 3.909-1 already prohibits the federal government from contracting with entities that require employees or subcontractors to sign confidentiality agreements restricting them from reporting such waste, fraud, or abuse to a designated investigative or law enforcement representative of a federal department or agency authorized to receive such information.  Moreover, FAR clauses 52.203-18 and 52.203-19 incorporate this prohibition.

The Proposed Rule amends DFARS 203.900 to include a citation to the Section 883 prohibitions.  Since the differences between the prohibition currently in FAR and the prohibition under Section 883 are negligible, the Proposed Rule amends DFARS 203.909-3 to require insertion of FAR clauses 52.203-18 and 52.203-19 in DoD solicitations and contracts.

According to DoD, since FAR 3.909 applies government-wide, DoD was already implementing the largely duplicative DoD-specific requirements that are mandated by Section 883 of NDAA 2021.  Notwithstanding the redundancy, the Proposed Rule may serve as a reminder to federal government contractors to review their confidentiality agreements and nondisclosure agreements to ensure they are compliant under the existing FAR rule and under the proposed DFARS rule. 

DFARS Buy American Rule Becomes Final

June 24, 2022
DFARS BUY AMERICAN RULE BECOMES FINAL

On June 23, 2022, the U.S. Department of Defense (DoD) issued a Final Rule that amends the Defense Federal Acquisition Regulation Supplement (DFARS) to implement Executive Order 13881, Maximizing Use of American-made Goods, Products, and Materials.  These changes to DFARS were first announced in a Proposed Rule that DoD issued in August 2021 and that we explored in an earlier Bulletin.  The Final Rule makes no significant changes to the Proposed Rule.

Thus, as we discussed in our earlier Bulletin, for purposes of applying Buy American domestic pricing preferences to DoD procurements, under the changed DFARS rules, a product is foreign if the cost of all foreign components used in the product constitutes 45 percent or more of the cost of all components, except that iron and steel products are foreign if the cost of foreign iron and steel equals or exceeds 5 percent of the cost of all components.

The Final Rule becomes immediately effective, and DoD government contractors, especially contractors that are involved in producing hardware to DoD agencies, should examine the Final Rule closely. 

A Closer Look At DoD's Guidance on Inflation and EPA Clauses

June 21, 2022
A CLOSER LOOK AT DOD'S GUIDANCE ON INFLATION AND EPA CLAUSES

Against the backdrop of an economy grappling with runaway inflation, in late May, the U.S. Department of Defense (DoD), issued a memorandum titled Guidance on Inflation and Economic Price Adjustments (Guidance).  Unfortunately, the Guidance offers little relief to federal government contractors trying to manage today’s inflationary pressures in their existing contracts.  Indeed, the Guidance focuses mostly on how contracting officers (CO's) can use economic price adjustment (EPA) clauses in new contracts to mitigate future cost risks to the government and to contractors.

But first, the Guidance briefly lays out the current state of play for companies under contract now.  Specifically, the Guidance acknowledges that for purposes of existing DoD contracts, the treatment of cost increases that are caused by economic conditions such as inflation depends on the type of contract that government contractors are working under.  The federal government bears the greatest risk of increased costs, including those caused by inflation, under cost reimbursement contracts.  Once a contractor under a cost reimbursement contract provides the required notice that costs are approaching contract limitations, a contractor is not required to continue performing beyond funding limitations and the federal government can increase funding for continued performance. 

The Guidance acknowledges that fixed-price contracts can accommodate increased costs resulting from inflation only in two circumstances.  First, if the contract is a fixed-price incentive firm target contract (FPIF contract), then the contractor’s target profit can be adjusted when actual costs exceed target costs.  Second, if a fixed-price contract includes an economic price adjustment (EPA) clause (FPEPA contract) under which the contract price can be adjusted when certain contingencies arise such as changes in the cost of labor or materials or changes in cost indices for labor or material, then the government will bear the cost risk up to any limits specified in the EPA clause.  The Guidance reiterates that contractors under fixed-price contracts that are not FPIF or FPEPA contracts bear the risk of cost increases, including those due to inflation.

In short, for contractors currently performing under contract, the Guidance starts out painting the unfortunate reality that contracting rules currently provide limited avenues for government contractors to recover escalating costs caused by inflation. 

The remainder of the Guidance, then, largely serves to assist contracting officers as they consider whether to insert EPA clauses in new contracts.  Indeed, DoD's note of encouragement comes in the form of a suggestion that EPA clauses may lead to more grounded pricing proposals.  Specifically, the Guidance  anticipates that the use of EPA clauses will encourage government contractors to work under fixed price contracts that are not priced based on worst-case projections, since FPEPA contracts provide a mechanism for mitigating cost-risks attributable to unstable market conditions.

Instructing CO's further, and citing FAR clause 16.203-4 and DFARS clause 216.203-4, which both anticipate the use of EPA clauses when contract performance will occur over extended periods, the Guidance advises that contract length should be “one of the primary considerations when deciding whether to use an EPA clause.” 

The Guidance also counsels contracting officers to use an index that is closely related to costs that are judged to be most unstable when selecting an index to measure inflation under EPA clauses.  At the same time, the index should be broad enough that it will not be significantly affected by a single company.

Similarly, contracting officers are encouraged to limit the EPA clause to costs most likely susceptible to economic fluctuations while excluding other costs not so susceptible, such as labor costs that are locked in by definitive union agreements.

The Guidance also cautions CO’s to craft EPA clauses that are fair to both parties.  For example, under the Guidance, a fair EPA clause (1) allows for both upward adjustment and downward adjustments of the stated contract price; (2) uses the same index to establish the negotiated price and to adjust the negotiated price; and (3) incorporates ceilings and floors on adjustments that are of equal magnitude.

The Guidance sets out additional principles CO’s should adhere to:

  • EPA clauses should adjust contract prices based on pre-established formulas so that CO's avoid simply reopening price negotiations.
  • Any contingency allowances covered by EPA clauses should be excluded from the base contract price.
  • Each EPA clause should clearly explain price adjustment mechanics, as well as triggers for those adjustments.

The Guidance warns CO’s that any clause that addresses potential contract costs or price changes due to economic conditions (like inflation) is effectively an EPA clause even if the term is not used in the contract.  Thus, the Guidance applies to those clauses as well.

The Guidance also identifies additional resources CO’s should look to when using EPA clauses:

  • Local pricing and policy offices
  • The Defense Contract Management Agency or Defense Contract Audit Agency
  • Guidance set forth in DFARS PGI 216.203-4
  • Agency legal counsel

It seems reasonable to assume that DoD’s Guidance will spur an uptick in the use of EPA clauses in DoD fixed-price contracts.  DoD government contractors that anticipate performing under new fixed-price contracts, particularly contracts that will span multiple years, should therefore examine the Guidance to better prepare themselves for contract negotiations over significant EPA clause provisions, including those that identify a cost or inflation index.  Although the use of EPA clauses seems to favor DoD contractors in the current economic climate, contractors should never lose sight of the fact that EPA clauses can work both ways and result in downward pricing adjustments. 

Buy American Rules Update Part 2 - A Look At OMB’s Build America, Buy America Act Guidance

As we discussed in Part 1 of our Buy American Rules Update, a Final Rule issued under Federal Acquisition Regulations (FAR) that implement the Buy American Act raises the domestic content requirement for certain products. In another significant development, last month the Office of Management and Budget (OMB) issued Guidance to federal agencies on how they should implement the Build America, Buy America Act provisions of the massive infrastructure bill that was signed into law in November 2021.  In this edition of The GovCon Bulletin,™ we take a closer look at that OMB Guidance. 

May 20, 2022
 
BUY AMERICAN RULES UPDATE PART 2 - A LOOK AT OMB'S BUILD AMERICA, BUY AMERICA ACT GUIDANCE

Last month, OMB issued Guidance for how federal government agencies are expected to implement the Build America, Buy America Act (BABAA) provisions of the the Infrastructure Investment and Jobs Act (IIJA). 

BABAA

The BABAA requires OMB to establish within OMB the Made in America Office (MIA) that would ensure compliance with federal domestic preference laws.

The BABAA also requires federal agencies to ensure - by May 14, 2022 - that iron, steel, and manufactured products and construction materials used in projects for which federal infrastructure funds are obligated were “produced in the United States.” 

In the case of iron or steel products, “produced in the United States” under the BABAA means that all manufacturing processes - from the initial melting stage through the application of coatings - occur in the U.S.  For manufactured products, it means that (i) the product is manufactured in the U.S., and (ii) the cost of the manufactured product components that are mined, produced, or manufactured in the U.S. is greater than 55 percent of the total cost of components, unless another domestic content requirement under applicable laws or regulations applies.  For construction materials, “produced in the United States” means that all manufacturing processes for the construction material occurs in the U.S. 

Under the BABAA, federal agencies may waive these domestic production requirements if (1) applying them would be inconsistent with the public interest (the “public interest waiver”); (2) the types of iron, steel, manufactured products, or construction materials are not produced in the United States in sufficient and reasonably available quantities or of a satisfactory quality (the “nonavailability waiver”); or (3) the inclusion of iron, steel, manufactured products, or construction materials produced in the United States will increase the cost of the overall project by more than 25 percent (the “unreasonable cost waiver”).

Before issuing a waiver, agencies must publicize on their websites written explanations for any proposed waivers they intend to grant and must allow at least 15 days for public comment.  For waivers that are intended to apply generally to multiple contract awards, BABAA requires agencies to publish their justifications for the waivers in the federal register and to allow at least 30 days for public comment.

OMB’s Guidance

OMB's Guidance provides several key clarifications on how agencies should implement the BABAA domestic production requirements.

Applicable Projects

The Guidance reiterates that the BABAA domestic production requirements apply to all federal financial assistance programs - whether or not they are funded through IIJA - in which funds are appropriated, used or made available for infrastructure projects.

Infrastructure

IIJA’s definition of infrastructure encompasses all public infrastructure projects including, at a minimum: the structures, facilities, and equipment for U.S. roads, highways, and bridges; public transportation; dams, ports, harbors, and other maritime facilities; intercity passenger and freight railroads; freight and intermodal facilities; airports; water systems, including drinking water and wastewater systems; electrical transmission facilities and systems; utilities; broadband infrastructure; and buildings and real property. 

OMB’s Guidance explains that agencies should treat structures, facilities, and equipment that generate, transport, and distribute energy – including electric vehicle (EV) charging – as infrastructure.  The Guidance also states that federal agencies should interpret the term “infrastructure” broadly and should consider IIJA’s definition of the term as illustrative but not exhaustive.

The Guidance further instructs that when determining if a particular construction project of a type not listed in the definition constitutes infrastructure, agencies should consider whether the project will serve a public function, including whether the project is publicly owned and operated, privately operated on behalf of the public, or is a place of public accommodation, as opposed to a project that is privately owned and not open to the public.

Covered Programs and Awards

OMB’s Guidance explains that the BABAA domestic production requirements only apply to items used for an infrastructure project under a contract award and that if an agency determines that no funds from a particular award will be used for infrastructure, the domestic production requirement does not apply to the award.  Similarly, for a covered program, the domestic production requirement does not apply to non-infrastructure spending under an award that also includes a covered project.  A BABAA domestic production requirement applies to an entire infrastructure project, even if it is funded by both Federal and non-Federal funds under one or more awards.

Tools, Equipment and Furniture

The Guidance clarifies that the BABAA domestic production requirements only apply to articles, materials, and supplies that are consumed in, incorporated into, or affixed to an infrastructure project.  Consequently, they do not apply to tools, equipment, and supplies, such as temporary scaffolding brought to a construction site and removed at or before the completion of the infrastructure project.  Nor do they apply to equipment and furnishings, such as movable chairs, desks, and portable computer equipment, that are used at or within the finished infrastructure project, but are not an integral part of or permanently affixed to the structure.

OMB instructs that, for the purposes of its Guidance, an article, material, or supply should only be classified into one of the following categories: (1) iron or steel; (2) a manufactured product; or (3) a construction material.

Waivers

OMB’s Guidance contains several detailed instructions that federal agencies should follow when they wish to issue waivers of the BABAA domestic production requirements, including an instruction to submit proposed waivers to MIAO after applicable public comment periods have concluded.  The agency waiver applications to MIAO are required to contain approximately 14 items of information.  Under the Guidance, MIAO is required to review proposed waiver applications to determine if the waiver is consistent with applicable law and policy.

OMB’s Guidance also outlines the principles that agencies are encouraged to follow when issuing waivers – namely, that the waivers should be time-limited, targeted and with conditions that support the BABAA’s policies. 

Lastly, the Guidance sets out in detail the considerations that federal agencies should take into account when they grant nonavailability, unreasonable cost, and public interest waivers, as well as general applicability waivers.

Federal government contractors, particularly those that perform or intend to perform on contracts that may include infrastructure-related components or projects, should take care to examine if or how the BABAA domestic production requirements have been implemented into solicitations and awarded contracts and should familiarize themselves with OMB’s Guidance.