The FY 2020 NDAA - What The Defense Contracting Community Needs To Know - Contracts and Commercial Law

On December 20, 2019, President Trump signed the fiscal year 2020 (FY20) National Defense Authorization Act (NDAA) into law (Pub. L. 116-92). The NDAA, Congress' annual defense policy bill, is a critical piece of legislation for the contracting community because it provides the funding authority for programs and activities of the Department of Defense (DoD), the largest procurer of goods and services within the US government. In addition, the NDAA is a vehicle for encouraging in some cases, and requiring in others, changes to both DoD and government-wide procurement practices. Therefore, it is critical for the contracting community to understand the provisions of the enacted NDAA.

Budget/Funding

The NDAA provides $738 billion in topline funding for the DoD, defense-related programs of the Department of Energy, and defense-related activities of other federal agencies, with a base budget of nearly $660 billion and an additional $71.5 billion in funding for overseas contingency operations. In total, the FY20 NDAA authorizes an increase of nearly $25 billion in national defense topline funding in comparison to the FY19 NDAA.

Establishment of the US Space Force

The NDAA, sections 951 through 961, establishes the US Space Force. The duties and functions of the Space Force, which is to be established within 18 months after the enactment of the NDAA, include: providing freedom of operation for the US in, from and to space; providing prompt and sustained space operations; protecting the interests of the US in space; deterring aggression in, from and to space; and conducting space operations. The President will appoint a chief of space operations, who will serve as a member of the Joint Chiefs of Staff and perform duties under the authority, direction and control of the Secretary of the Air Force. Members of the Space Force will be assigned by the Secretary of the Air Force. Following enactment of the NDAA, the Fourteenth Air Force was redesignated as the Space Force's Space Operations Command (SPOC). The NDAA further establishes a Space Force Acquisition Council within the Office of the Secretary of the Air Force. The Space Force Acquisition Council is to oversee, direct and manage acquisition and integration of the Air Force for space systems and programs in order to ensure integration across the national security space enterprise.

Cybersecurity

Congress is intently focused on enhancing cybersecurity throughout the national security innovation base (formerly, the defense industrial base) supply chain and providing government contractors with cybersecurity requirements they can implement and against which they can be consistently evaluated. Specifically, through section 1648 of the NDAA, Congress is requiring DoD to quickly develop (by February 1, 2020, with a briefing to Congress by March 11, 2020) a consistent and comprehensive cybersecurity framework that must include:

Unified cybersecurity standards, regulations, metrics, ratings, third-party certifications or requirements to be imposed on the national security innovation base for the purpose of assessing the cybersecurity of individual contractors;
Roles and responsibilities within DoD relating to, among other things, establishing and ensuring compliance with cybersecurity requirements, deconflicting existing cybersecurity requirements, coordinating with and providing assistance to contractors for cybersecurity matters;
The responsibilities of the prime contractors, and all subcontractors in the supply chain, for implementing cybersecurity requirements;
Definitions for ''controlled unclassified information'' (CUI) and ''for official use only'' (FOUO), as well as policies regarding protecting information designated as such;
Methods and programs for managing CUI, and for limiting the presence of unnecessary sensitive information on contractor networks;
A plan to provide implementation guidance, education, manuals, and, as necessary, direct technical support or assistance, to contractors on matters relating to cybersecurity;
Quantitative metrics for assessing the effectiveness of the overall framework over time, with respect to the exfiltration of CUI from the national security innovation base;
A comprehensive list of current and planned DoD programs to assist the national security innovation base with cybersecurity compliance requirements of DoD, including those programs that provide training, expertise, and funding, and maintain approved security products lists and approved providers lists; and
Processes for enhanced threat information sharing between DoD and the national security innovation base.

Congress has encouraged DoD to consult with its contractors, and industry groups representing the national security innovation base, in the development of such cybersecurity framework. For example, Congress recommends that DoD consider using a risk-based approach to tailor cybersecurity requirements for small- and medium-sized contractors.

It currently is unclear as to when DoD will implement this new framework. DoD will address implementation timelines in its March 11, 2020 briefing to Congress.

Commercial Items

The NDAA includes a number of provisions that continue to reinforce Congress' commitment to the acquisition of commercial items under commercial terms. These include requirements related to assessing intellectual property strategies, documenting market research on commercial item determinations, and providing exceptions to enhanced foreign ownership, control or influence for commercial item contractors.

Section 801 establishes a pilot program under which DoD, through both DoD and private sector subject matter experts, may assess contracting and acquisition mechanisms for the purpose of understanding the intellectual property benefits associated with the use of a commercial product, commercial service or nondevelopmental item as an alternative to a product or service to be specifically developed for a selected acquisition program (e.g., evaluating the benefits of reduced risk regarding cost, schedule, and performance). Under this pilot program, DoD also will seek to better understand the development of cost-effective intellectual property strategies, as well as the value and acquisition costs of intellectual property throughout the acquisition lifecycle.
Section 818 requires the head of an agency to document the results of market research related to commercial item determinations in a manner appropriate to the size and complexity of the acquisition. The requirement to conduct market research previously existed, but not the formal requirement to document the results of such market research.
Section 847 mandates, with the exception of commercial item contractors (unless DoD specifically requires otherwise), that existing and prospective DoD contractors and subcontractors on a contract or subcontract with a value in excess of $5 million must disclose their beneficial ownership and whether they are under foreign ownership, control or influence. "Beneficial ownership," to be determined in a manner that is not less stringent than the manner set forth in 17 C.F.R. 240.13d–3, broadly includes "any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares . . . [v]oting power which includes the power to vote, or to direct the voting of, such security."

Cost and Pricing

The NDAA places additional emphasis on ensuring that contracting officers obtain fair and reasonable pricing, and continues to focus on ensuring government contracting cost accounting requirements are consistent, where practicable, with commercial standards.

Section 803 prohibits a contracting officer from determining a price to be fair and reasonable based solely on historical prices paid by the government. It also adds a new standard that provides, that if a contracting officer requests the contractor submit other than certified cost or pricing data because the contracting officer is unable to determine proposed prices are fair and reasonable by other means, an offeror who fails to make a good faith effort to comply with such reasonable request generally will be ineligible for award. This enacted section was revised from earlier versions, including a House amendment that would have required the submission of other than certified cost or pricing data by commercial item contractors whenever DoD was the only buyer of that commercial item.
Section 804 requires the Comptroller General, by March 31, 2021, to submit a report on DoD's efforts to secure data from offerors relating to the price reasonableness of offers. This report specifically must include, among other things, the number of contracts awarded for which a request for cost or pricing data to determine price reasonableness, including data other than certified cost or pricing data, was denied by an offeror at the time of award, as well as actions taken by DoD when an offeror refused to provide cost or pricing data.
Section 810 repeals the Defense Cost Accounting Standards Board. The creation of the Defense Cost Accounting Standards Board was viewed by most as being inconsistent with the FY17 NDAA requirement to conform the cost accounting standards (CAS), where practicable, to the generally accepted accounting principles (GAAP).

Notably, the earlier versions of the NDAA included provisions that mandated specific reporting requirements for contractors for independent research and development costs, as well as bid and proposal costs. These provisions were removed from the final version of the FY20 NDAA.

Competition

The NDAA includes numerous significant provisions focused on competition and the manner in which DoD contracts with industry.

Section 800 requires the Secretary of Defense to establish "pathways" to provide for the efficient and effective acquisition, development, integration and timely delivery of secure software. These pathways are to have tailored requirements relating to, among other things: rapid contracting procedures, including expedited timeframes for making awards, selecting contract types, defining teaming arrangements and defining options; identifying initial contract requirements through the use of summary-level lists of problems and shortcomings in existing software and desired features or capabilities of new or upgraded software, which are to be continuously refined. DoD must issue initial guidance on the establishment of these pathways within 90 days from the enactment of the NDAA.
Section 802 requires DoD to use an "alpha contracting team" for at least two (and up to five) services contracting initiatives that will require the development of complex contract technical requirements. This "alpha contracting team" shall include the advice of expert third parties, and focus on developing achievable technical requirements that are appropriately valued and on identifying the most effective acquisition strategy to achieve those requirements. The contracting initiatives selected for this program are to be selected by May 1, 2020.
Section 807 requires DoD by February 2020 to review and brief Congress on how DoD elects the use of fixed-price contracts, including fixed-price incentive contracts, in its procurements. The purpose of this review is to ensure that such decisions support broader acquisition objectives and are made strategically and consistently. The Comptroller General also is to submit a report on DoD's use of fixed-price contracts by February 2021.
Section 819, which relates to agreements DoD issues pursuant to its other transaction authority, or OTAs, requires DoD to annually report on its use of OTAs to carry out prototype projects. This report is to include, among other things, the purpose, description and status of the project; the quantity of prototype projects to be produced pursuant to the OTA or follow-on contract; and the amount of payments made pursuant to the OTA or follow-on contract.
Section 823 increases the exception to the justification and approval (J&A) requirement for sole-source contracts to 8(a) small businesses from contracts valued under $20 million to, now, those valued under $100 million.
Section 874 requires that within 180 days of the enactment of the NDAA, the FAR be revised to require that, upon written request from an unsuccessful offeror on an award of a task or delivery order under an indefinite-delivery/indefinite-quantity contract valued above the simplified acquisition threshold but below $5.5 million, the offeror will be provided a brief explanation as to why the offeror was unsuccessful. This "brief explanation" must include a summary of the rationale for the award and an evaluation of the significant weaknesses or deficient factors in the offeror's offer.

Other Acquisition Reform Measures

In addition to the above NDAA provisions and the reformation Congress is seeking to implement therein, three more fundamental acquisition initiatives within the NDAA are worth highlighting.

Section 835 requires DoD to establish and maintain extramural acquisition innovation and research activities, to include an acquisition research organization within a civilian college or university that is not owned or operated by the Federal Government, to, among other things: (a) research past and current defense acquisition policies and practices, commercial and international best practices, and the application of new technologies and analytical capabilities to improve acquisition policies and practices; (b) prototype and demonstrate new acquisition practices for potential transition to wider use in the Department of Defense; and (c) review the implementation of recommendations contained in relevant DoD and private sector studies on acquisition policies and practices.
Section 845 mandates that DoD streamline and digitize its approach to identifying and mitigating risks to the national security innovation base across the acquisition process. Specifically, DoD is required to develop a framework that:
- Characterizes and monitors supply chain risks (e.g., counterfeit parts, cybersecurity of contractors, material sources and fragility, vendor vetting in contingency or operational environments, etc.);
- Characterizes and monitors risks posed by contractors' violations of laws or regulations (e.g., fraud, foreign influence, workers' health and safety, etc.);
- Characterizes and assesses acquisition processes and procedures (e.g., contract administration, contract management, contractor business system reviews, development of contract requirements, market research, responsibility determinations, technical evaluations, etc.); and
- Characterizes and monitors the health and activities of the national security innovation base (e.g., balance sheets, revenues, profitability, culture of performance, investment, innovation, and technological and manufacturing sophistication).
Section 861 modifies how the DoD acquisition workforce is managed, trained and selected. It specifically requires DoD to implement a professional certification program based on standards developed by a third-party accredited program that utilizes nationally or internationally recognized standards. The purpose of the DoD certification program is to establish a professional certification requirement for all members of the acquisition workforce. Further, DoD must authorize members of the acquisition workforce to participate in professional associations, consistent with the performance plan of such members in order to provide the members with the opportunity to gain leadership and management skills.

Conclusion

The FY20 NDAA includes wide-ranging and complex changes to the DoD acquisition process and related processes. Contractors doing business with DoD or seeking to do business with DoD must stay apprised of the evolving acquisition landscape to best position themselves for successful partnerships with DoD in 2020. Moreover, during the first quarter of 2020, Congress will begin its work on the FY21 NDAA, which itself will include numerous consequential provisions for defense contractors.

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United States: The FY 2020 NDAA - What The Defense Contracting Community Needs To Know