A Debrief on the Latest DoD Regulatory Developments

The National Defense Authorization Act (NDAA) is the name for a series of annual laws laying out the Department of Defense’s (DoD) budget for its various programs and activities. It also is a favorite vehicle for Congress to legislate how it wants DoD to operate (a companion bill, the Appropriations Act, actually funds the Department). As Congress debates the 2019 NDAA, the DoD continues to tackle tasks from previous bills. Three recent developments stemming from earlier NDAAs may be of particular interest to Defense contractors. 

 

The Continued Crackdown on Counterfeit Parts

In recent years, electronic counterfeit parts have become a major problem for the DoD. As a result, the agency has issued contract clauses implementing programs aimed at stopping or attenuating the influx of counterfeit parts. One new rule, effective May 4, implements a 2016 statute that requires that the contractor (and all of its subcontractors at every tier) obtain all electronic parts from certain sources. Specifically, contractors must purchase parts from the original manufacturer or a source approved by that manufacturer, or a supplier that obtains its inventory from the manufacturer or an authorized source. If this is impossible, the statute stipulates that the source of the parts must be approved by the contractor using established industry standards and processes.

The new addition to the rule clarifies the requirements for a contractor-approved source. Essentially, the contractor can approve the source, but DoD has the right to disapprove the contractor’s designation of a source as approved. The new rule outlines that this will happen either when the government is reviewing a contractor’s purchasing system, or because the government has credible evidence that the supplier has provided counterfeit parts.

So, disapproval is like the suspension process in the debarment and suspension rules, in which an indictment or credible evidence will disqualify a supplier from contract awards. That continues until the matter is resolved. Ultimately, this is an extension of the DoD’s very strict approach of walking the obligation to remove counterfeit parts all the way down the supply chain.

 

New $2M Threshold for Obtaining Certified Cost or Pricing Data  

While defense contractors may be challenged by the DoD’s increasingly strict measures to combat counterfeit parts, they might be pleased with another new measure. That is, there’s a new DoD class deviation with respect to the threshold under which the agency can obtain certified cost or pricing data. The new threshold, $2M, is significantly higher than the previous threshold of $750K, easing things up for defense contractors. Where there isn’t another exemption applicable such as price competition or a commercial item procurement, $2M is the dollar amount at which certified cost or pricing data is required.

The higher threshold is most meaningful for companies that don’t do a lot of Government contracting. Unlike the bigger guys, these contractors don’t have systems set up to capture and present certified cost or pricing data. They are now able to participate and obtain more contracts without having to provide that data, which was previously required and may have hindered their participation.

 

DoD’s Statement of Purpose

In last year’s NDAA, the 2018 NDAA, Congress dictated that the DoD should add a Statement of Purpose to the Federal Acquisition Regulation (FAR) supplement. Congress outlined the basic structure and content of the statement. Now DoD has promulgated it with some small changes worth mentioning here.

Generally speaking, the Statement of Purpose proposed by Congress states that there are three purposes of the defense acquisition system: 1) to management the investments of the US in technologies, programs, and product support to achieve the President’s national security strategy, and support the armed forces; 2) to support current and future DoD needs; and 3) to acquire quality supplies and services to satisfy user needs with measurable improvements to mission capability and operational support in a timely manner and at a fair and reasonable price. It’s a bit of a mouthful.

Now DoD has tweaked Congress’ wording. The original draft from Congress stated that they were talking about obtaining supplies. DoD updated this to read “supplies and services” because services take up such an enormous part of the defense acquisition. It’s a minor change, as most service contractors already understand that they are serving their client’s (the Government’s) needs.

 

Final Thoughts

Taken as a whole, the latest DoD regulatory developments are a mixed bag for contractors. On one hand, stricter measures to combat counterfeit parts mean that contractors may lose a source of supply that they thought was reliable. Although many contractors are already on board, those contractors who are able to show flexibility in meeting these requirements will be best served to win and keep DoD contracts. That said, the increased dollar threshold for which DoD contractors will have to present certified cost or pricing data will mean that the smaller guys or contractors who aren’t necessarily the usual suspects will be better poised to earn contracts worth less than $2M. Finally, DoD’s new Statement of Purpose is poised to have little impact on defense contractors, although it certainly can’t hurt to reinforce an agency’s basic goals and expectations from time to time.

 

For more the latest regulatory developments, listen to my conversation with Tom Temin on Federal News Radio’s “Federal Drive”.

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