The Contractor's Perspective

Procurement reforms in the FY 2014 National Defense Authorization Act

Posted in Compliance, Contract Administration, Cost Issues, Funding Shortfalls (Sequestration & Shutdown)

It should come as no surprise that the contracting policy changes in the National Defense Authorization Act for 2014 [pdf] reflect a continued focus on reducing spending. But they also encourage collaboration between the government and the private sector and emphasize the need for innovative contracting strategies and greater flexibility in the procurement process, which may benefit contractors in the long run. Here is a breakdown of a few of the highlights:

  • Extension of restrictions on contractor services spending. Section 802 of the 2014 NDAA amends Section 808 of the 2012 NDAA to extend the temporary limit on the amounts obligated for DOD spending on contract services in FY 2014 to the amount requested for contract services in the President’s budget for FY 2010. It also requires that the heads of each Defense Agency continue the 10-percent-per-fiscal-year reductions in spending for staff augmentation contracts and contracts for inherently governmental function for FY 2014, and requires that any unimplemented amounts of the 10 percent reductions for FY 2012 and FY 2013 be implemented in FY 2014.
  • Further restrictions on allowable employee compensation. The limits on allowable compensation costs were extended from “senior executives” to all contractor employees in the 2012 NDAA, which we discussed here. The limit at that time was just under $694,000. Section 811 of the 2014 NDAA further limits that amount to $625,000. This restriction does not preclude contractors from paying employees more than $625,000 per year. It simply amends 10 U.S.C. § 2324(e)(1) to make any amount of compensation in excess of the benchmark an “unallowable cost.” The Secretary of Defense may also establish exceptions to this restriction for positions in fields that require unique areas of expertise (e.g. science, technology, engineering, mathematics, medical, and cybersecurity) if such exceptions are necessary to ensure continued access to needed skills and capabilities.
  • Restrictions on contracting with the “enemy.” Section 831 of the 2014 NDAA requires that the Secretary of Defense establish a program to identify contractors who, either directly or indirectly, provide funds received under a DOD contract, grant, or cooperative agreement to a “covered person or entity,” or who fail to take sufficient precautions to ensure that such funds are not provided to a covered person or entity. For purposes of this section, a “covered person or entity” is a person or entity that actively opposes U.S. or coalition forces in active hostilities. To implement this restriction, the Secretary is required to revise the DFARS to include a new clause that will be included in any DOD contracts, grants, or cooperative agreements that have an estimated value exceeding $50,000, and which will authorize the head of a contracting activity to prohibit or restrict the award of DOD contracts to contractors identified as providing funds to covered persons, and to void or terminate for default the contractor’s existing contracts. The agency must also report such adverse contract actions on FAPIIS. An affected contractor is not without recourse. If the agency decides to take adverse contract action, it must notify the contractor in writing and allow an opportunity to challenge the action via an administrative review within 30 days of the notice of the action. However, if the determination that the contractor has provided funds to the enemy is based on classified information, that information cannot be shared with the contractor until a protective order has been entered by a federal or administrative court. A sunset provision provides that this section of the 2014 NDAA will be effective until December 31, 2018.
  • Review of DOD weapon systems acquisition. Section 824 of the 2014 NDAA requires that GAO undertake a “comprehensive review” of DOD’s procurement process for the acquisition of weapons systems with the objective of identifying all procedures that “provide little or no value added or for which any value added is outweighed by cost or schedule delays without adding commensurate value.” The report, due at the end of January 2015, must identify procedures that GAO recommends for modification or elimination, as well as propose any necessary legislative or administrative action.
  • Licensing of DOD Laboratory computer software. Section 801(b) of the NDAA authorizes the Secretary of Defense and the secretaries of each military department to authorize the heads of DOD laboratories to grant licenses for computer software that is developed at a DOD laboratory, and to do so either on a royalty free basis or in exchange for royalties or for the right to use other intellectual property. The Secretaries must take precautions to protect against unauthorized disclosure of the software, and at least 15 percent of any royalties paid must be divided among the DOD laboratory employees who developed the software. If the remaining balance of royalty payments exceeds 5 percent of the amount received in appropriations for use by the DOD laboratory, 75 percent of the excess must be repaid to the U.S. Treasury and the other 25 percent may be used to reward scientific, engineering, and technical employees of the laboratory, to further scientific exchange with other laboratories, or for education and training of employees or new R&D projects. The authority granted under this provision expires on December 31, 2017.
  • Innovative contracting strategies. The 2014 NDAA also emphasizes the need for enhanced innovation and flexibility in the procurement process in a number of areas. Section 112, for example, notes Congress’s sense that reduced spending levels and budget uncertainty have negatively impacted the Army’s tactical vehicle industrial base and encourages the Army to “consider innovative contracting and acquisition strategies to maximize cost savings.” It also authorizes the Army to conduct a study analyzing the desirability and feasibility of implementing multiyear, multivehicle contracts for tactical vehicle procurement in FY 2015 and beyond. Multiyear contracting authority was also provided for a number of procurement items, including the E-2D (§ 123(a)) and the C-130J (§ 132(a)) aircrafts. Section 913 of the 2014 NDAA reflects a similar emphasis on innovative procurement strategies and multiyear procurement for the acquisition of commercial satellite services.