Quarterly Regulatory Update

August 2017

FINAL FAR

EXECUTIVE COMPENSATION THROUGH TOTAL SHAREHOLDER RETURN FOUND UNALLOWABLE; ASBCA NO. 58966, APPEAL OF EXELIS INC.

Key Details: The appellant’s executive compensation model included total shareholder returns, calculated using unallowable variables and therefore expressly unallowable. The contracting officer properly applied a penalty for submitting a final indirect cost rate proposal including expressly unallowable costs.

Effective: April 21, 2017

FINAL RULE – UNIFORM ADMINISTRATIVE REQUIREMENTS, COST PRINCIPLES, AND AUDIT REQUIREMENTS FOR FEDERAL AWARDS

Key Details: The Office of Management and Budget (OMB) is updating the final guidance that appeared in the Federal Register on December 26, 2013. Guidance on the effective/applicability date is revised to allow a grace period of one additional fiscal year for non-Federal entities to implement changes to their procurement policies and procedures in accordance with guidance on procurement standards. Other requirements in the section remain unchanged. For all non-Federal entities, there is an additional one-year grace period for implementation of the procurement standards in 2 CFR 200.317 through 200.326. This means the grace period for non-Federal entities extends through December 25, 2017, and the implementation date for the procurement standards will start for fiscal years beginning on or after December 26, 2017.

Effective: May 17, 2017

FINAL DFARS

AGENCY CAN REASONABLY CONCLUDE TECHNICAL APPROACH HAS MERIT, WHILE REJECTING PROPOSED COST SAVINGS

Key Details: Glacier Technical Solutions LLC protested the Army’s award of a contract for test and evaluation technical services to SAWTST LLC. The Army had rejected SAWTST’s proposed cost savings, but merited a good rating for its technical approach. Glacier argued that the Army could not reasonably reject the cost savings associated with a proposed staffing methodology without rejecting the technical efficacy of that staffing methodology itself, but GAO disagreed. The GAO argued that there is nothing to prohibit the Army from approving the technical approach, while also making an upward cost adjustment to account for any existing concerns.

Effective: March 28, 2017

PROPOSED RULES – AGENCY SUPPLEMENTS TO THE FAR

HOUSE BILL WOULD LIMIT CREDIT FOR SMALL BUSINESSES FALLING INTO MULTIPLE SOCIOECONOMIC CATEGORIES

Key Details: Legislation introduced in the House would amend the Small Business Act to limit the way agencies receive credit for contracting with small businesses in several socioeconomic categories. The Assuring Contracting Equity Act of 2017 would limit the number of categories for which a small business may qualify in order to prevent an agency from taking credit for an award in more than two specified small business categories. The bill also would prevent an agency that contracts with an 8(a) small business from taking credit for that award under any category other than small disadvantaged business. Agencies currently can take credit for an award under all categories for which a vendor qualifies. The bill also would increase the government-wide small business prime contracting goal from 23 to 25 percent, the goals for prime and subcontract awards to small businesses owned and controlled by socially and economically disadvantaged individuals and to WOSBs from 5 to 10 percent, and the goals for prime and subcontract awards to SDVOSBs and HUBZone concerns from 3 to 6 percent.

Effective: May 31, 2017

SMALL BUSINESS SIZE STANDARDS; ADOPTION OF 2017 NORTH AMERICAN INDUSTRY CLASSIFICATION SYSTEM FOR SIZE STANDARDS

Key Details:The U.S. Small Business Administration (SBA) proposes to amend its small business size regulations to incorporate the U.S. Office of Management and Budget’s (OMB) North American Industry Classification System (NAICS) revision for 2017, identified as NAICS 2017, into its table of small business size standards. NAICS 2017 created 21 new industries by reclassifying, combining, or splitting 29 existing industries under changes made to NAICS in 2012. SBA’s proposed size standards for these 21 new industries have resulted in an increase to size standards for six NAICS 2012 industries and part of one industry, a decrease to size standards for two, a change in the size standards measure from average annual receipts to number of employees for one, and no change in size standards for 20 industries and part of one industry. SBA proposes to adopt the updated table of size standards.

Effective: April 18, 2017

FINAL RULES – AGENCY SUPPLEMENTS TO THE FAR

2017 NDAA’S IMPACT ON AUDITS AND COST ACCOUNTING STANDARDS

Key Details: Section 820 of the National Defense Authorization Act for Fiscal Year 2017, Pub. L. No. 114-238, 130 Stat. 2000 (NDAA), makes three significant changes to the federal government’s future use of cost accounting standards (CAS). First, it empowers contractors to avoid Defense Contract Audit Agency (DCAA) audits by employing private auditors to audit their rates. Section 820(b)(1) of the NDAA authorizes defense contractors to present commercial auditors’ findings to the DCAA, which must accept them without performing additional audits so long as indirect costs were audited and the commercial auditor used a relevant accounting standard, e.g., Generally Accepted Accounting Principles (GAAP). This development could be of great significance, and may enable contractors to accelerate the audit process and reduce the risk of protracted and inaccurate audits performed by the DCAA. Next, it creates a new and independent Defense Cost Accounting Standards (DCAS) Board to oversee cost accounting standards across the Department of Defense (DoD). The newly-created Defense Cost Accounting Standards (DCAS) Board will ensure “uniformity and consistency in the standards governing defense contracts.” The DCAS Board will have three primary duties: 1) reviewing cost accounting standards created by, and recommending changes to, the CAS Board; 2) implementing cost accounting standards across the DoD; and 3) developing standards to ensure DoD’s adherence to standards established by the CAS Board or GAAP. Finally, the FY17 NDAA provides direction to the federal government’s existing CAS Board. Although § 820 is titled “Defense Cost Accounting Standards,” its first order of business is to amend the existing CAS Board’s implementing statute, 41 U.S.C. § 1501. Id. at § 820(a). Specifically, it directs the CAS Board to meet at least once per quarter, publish notice of each meeting and the meeting’s agenda in the Federal Register, and report annually to multiple congressional committees regarding how it has conformed its accounting standards to GAAP and minimized the burden on contractors. Moreover, the CAS Board is directed to “ensure that the cost accounting standards used by Federal contractors rely, to the maximum extent practicable, on commercial standards and accounting practices and systems.” Finally, the minimum value of waiver-eligible contracts is increased from $15 million to $100 million, id. at § 820(a)(2), meaning agency heads may waive the CAS Board’s and, presumably, DCAS Board’s standards for contracts valued at less than $100 million.

Effective: March 8, 2017

CONTRACTOR’S ACCOUNTING OF BUILDING LEASE COSTS NOT A VIOLATION OF CAS 404; ASBCA 60131, APPEAL OF EXELIS INC.

Key Details: The government’s request for reconsideration of the partial dismissal of a government claim due to noncompliant accounting for the costs of a building lease is denied, where the contractor did not consider its leased assets a capital lease, and therefore any errors in reporting its lease costs were not a violation of Cost Accounting Standard 404.

Effective: March 22, 2017

GAO RECOMMENDS REIMBURSEMENT OF COSTS PROTESTING AGENCY’S BEST-VALUE TRADEOFF DECISION, WHICH WERE INTERTWINED WITH MERITORIOUS CHALLENGES TO EVALUATION OF EXPERIENCE AND PAST PERFORMANCE; GAO B-413116.38, CHAGS HEALTH INFORMATION TECHNOLOGY LLC, ET AL—COSTS

Key Details: Multiple requests that GAO recommend the agency reimburse the protesters’ reasonable costs of pursing their protests of the agency award decision are denied in part, where the protest grounds were clearly severable from arguments the agency conceded were reasonable, and were not clearly meritorious, and sustained in part, where GAO concluded that challenges to the agency’s best-value trade-off decision were not severable from the clearly meritorious protests challenging the agency’s evaluation of corporate experience and past performance, because the best-value tradeoff decision relied heavily on portions of the evaluation the agency conceded were flawed.

Effective: May 3, 2017

GOVERNMENT-CAUSED DELIVERY DELAYS MAY HAVE BREACHED IMPLIED DUTY OF GOOD FAITH AND FAIR DEALING; CAFC NO. 2016-1265, AGILITY PUBLIC WAREHOUSING CO. KSCP V. JAMES N. MATTIS, SECRETARY OF DEFENSE

Key Details: A contract modification provided that the government would consider claims based on government-caused delivery delays but did not guarantee they would be paid. However, the Armed Services Board of Contract Appeals failed to properly consider whether the government had breached its implied duty of good faith and fair dealing by engaging in conduct that prevented the appellant from making its deliveries in a timely manner. The Board also failed to consider whether the government had constructively changed the contract by its conduct.

Effective: April 20, 2017

GOOGLE’S MOTION TO DISMISS IN THE MATTER OF OFFICE OF FEDERAL CONTRACT COMPLIANCE PROGRAMS, U.S. DEPARTMENT OF LABOR V. GOOGLE INC., WAS DENIED

Key Details: After a compliance review for potential wage discrimination, the US DOL made comments to the press that Google had committed violations upon its award of a GSA contract. Based on a published article where DOL made comments about its determination on Google’s review, Google contended that the US DOL had completed its review and that Google’s was required to provide additional information and that the case should be dismissed. Although concluding comments were made by the US DOL, Google’s motion to dismiss was denied.

Effective: May 2, 2017

EXECUTIVE ORDERS

PRESIDENTIAL EXECUTIVE ORDER ON STRENGTHENING THE CYBERSECURITY OF FEDERAL NETWORKS AND CRITICAL INFRASTRUCTURE

Key Details: President Trump signed the long-awaited EO on “Strengthening the Cybersecurity of Federal Networks and Critical Infrastructure” on May 11, the objective of which is to improve network security of U.S. Government agencies, enhance protection of national infrastructure, and develop a more robust cyber deterrence strategy. The related press release, released by the Office of the Press Secretary on May 11, 2017, cites the following as methods of achieving this objective:

Agency heads have been directed to immediately use the National Institute of Standards and Technology (NIST) Cybersecurity Framework for risk management, and to provide within 90 days a risk management report to DHS and the Office of Management and Budget (OMB) on the implementation of the framework and risk management strategies employed by the department or agency.

DHS and OMB have been directed to assess federal agencies’ cybersecurity risk management strategies in order to determine the adequacy of cyber protections across federal networks and identify any unmet budgetary or policy needs.

DHS and OMB are to provide a plan to the president, within 60 days of receiving the agency reports, on how to protect the executive branch enterprise.

DHS and other agencies are to provide the president with a report within 90 days on the technical feasibility to transition all agencies to one or more consolidated network architectures and shared IT services.

RELEASE: May 11, 2017

PRESIDENTIAL EXECUTIVE ORDER ON IDENTIFYING AND REDUCING TAX REGULATORY BURDENS

Key Details: President Trump’s executive order states that “immediate action is necessary to reduce the burden existing tax regulations impose on American taxpayers and thereby to provide tax relief and useful, simplified tax guidance.” This action is intended to alleviate the impact of regulations that have “increased tax burdens, impeded economic growth, and saddled American businesses with onerous fines, complicated forms, and frustration.”

Release: April 21, 2017

WHITE HOUSE SAYS DOD CONTRACTS SHOULD BE FIXED‑PRICE

Key Details: In a recent interview in Time magazine, the president expressed his preference for the use of fixed-price contracts for Department of Defense programs, and suggested future military contracts could be renegotiated to ensure they have fixed prices. 

Release: May 11, 2017

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