Given the background, it is not surprising that we are seeing new legislation to provide federal agencies with more flexibility in the use of PLAs. See Government Neutrality in Contracting Act (H.R. 436 and S. 109) (introduced January 29, 2013). Proponents of the legislation cite to studies indicating that government-mandated PLAs increase the cost of construction projects between 12 percent and 18 percent.

Similar bills were introduced last year and did not make it out of committee.  We will see what happens in the current Congress.

The DOL’s action means that all Service Contract Act contracts over the simplified acquisition threshold awarded on or after January 18, 2013 will include a contract clause requiring prime contractors and subcontractors to make good faith offers of employment to SCA-covered employees employed under the predecessor contract.

Here are some of the highlights of the new regulations and the new contract clause:

The right of first refusal is subject to some important limitations. First, a successor contractor may elect to reduce staff or to offer employment under different terms and conditions, including different pay or benefits. Second, a successor contractor has no obligation to extend offers to incumbent employees who will be retained by the predecessor contractor or who have a past record of unsuitable performance.  Third, the successor contractor and subcontractors may continue to employ their own employees who have worked for them for at least 3 months and who otherwise would be laid off. Fourth, the agency can also exempt contracts from the application of the nondisplacement requirements.

The new regulations include provisions for investigating and resolving complaints of non-compliance. They also provide for remedies and sanctions for violations—including payment of back wages, withholding of funds for unpaid wages, and exclusion from federal contracting.

Here are the highlights of the final regulations:

• The new regulations clarify the definition of the term “first-tier subcontract.” A “first-tier subcontract” is now defined as a subcontract awarded directly for purposes of acquiring supplies or services (including construction) for performance of a prime contract. It does not include supplier agreements with vendors that benefit multiple contracts and/or costs normally applied to G&A or other indirect cost accounts.
• The interim regulations stated that the requirements did not apply to classified contracts or contracts with individuals. The new regulations now clarify that the reporting requirements apply to all contracts with a value of $25,000 or more, but that they do not require the disclosure of classified information. In addition, there is no exemption for contracts with individuals, although the regulations maintain the reporting exemption when either the prime or subcontractor has less than $300,000 in gross revenues. This latter exemption should apply to many contracts with individuals.
• The new regulations now expressly prohibit the splitting of subcontract awards to avoid meeting the $25,000 threshold.
• The comments to the new regulations state that there is no exemption from the reporting requirements for prime or subcontract awards for commercial items or for commercial-off-the-shelf items.
• The new regulations define the term “month of the award” as the month in which the contract or subcontract was signed and clarify that a prime contractor is not required to submit additional subcontract data reports after the first-tier subcontract expires.

For additional background on executive compensation and first-tier subcontracting reporting requirements, you can see our previous posts here, here, and here.  You may also want to review our White Paper on Federal Contractor Transparency Rules [pdf].

The new FAR language does not address the apparent conflict between the policy requirement for nondisplacement of qualified workers and the requirement to accept the terms of an existing collective bargaining agreement under the NLRB’s “perfectly clear” doctrine. The “perfectly clear” doctrine states that a successor employer is bound by the terms of a collective bargaining agreement when it is "perfectly clear" that the successor will retain all employees in the bargaining unit without changes to the terms and conditions of employment. This differs from a normal successor employer, which is required to bargain with the union but not to comply with the existing collective bargaining agreement. 

DOL avoided this issue in its own final rule, stating that it was beyond its “departmental authority.” DOL also declined a recommendation that information about incumbent collective bargaining agreements be disclosed to bidders. Since the proposed rules have not been finalized and are not yet effective, the FAR Council still has an opportunity to revise the rules and to comment on their conflict with the “perfectly clear” doctrine. Hopefully the final rules will address the issue directly.

Comments on the proposed FAR Rules can be submitted online at http://www.regulations.gov until July 2, 2012. Cite FAR Case 2011-028.

Related entries—

DOL’s final rule on nondisplacement of qualified workers (Sept. 14, 2011)

Question: Does FAR 52.204-10 apply only to new contracts or does it also apply retroactively to existing contracts?

Answer: Even though the statutory requirement for reporting executive compensation became law in April 2008 when President Bush signed the Government Funding Transparency Act of 2008, the contractual requirement didn’t go into effect until July 8, 2010, when the FAR Councils published FAR 52.204-10 as an “interim rule.” According to the text of the interim rule, FAR 52.204-10 is required in all contracts over $25,000 that are awarded after July 8, 2010. It does not apply to contracts awarded before on or before July 8, 2010.

Answer: No. Our view is that a contractor’s obligations are reflected in the contract. The language of FAR 52.204-10(c)(2) cannot reasonably be read to permit a penalty for a lack of disclosure when it was not in the contract at the time the disclosure would have been required. A penalty cannot properly be assessed for failing to adhere to a requirement that “should have been” in the contract.

Question: Is a contractor that meets the applicable thresholds required to report executive compensation awards if FAR 52.204-10 is not incorporated into the contract?

Answer: There may be valid reasons for the FAR clause to be omitted from the contract. Contracts awarded before the effective date of the clause, for example, would not be subject to the reporting requirement. There is no requirement that existing contracts be amended to require executive compensation reporting. Although the government may assert that the Christian Doctrine has the effect of incorporating the clause if it was improperly omitted, the application of the Christian Doctrine to FAR 52.204-10 is not at all certain. Consult an attorney before making a decision on this one.

Question: How do the $25 million/80-percent revenue thresholds in FAR 52.204-10 work? Is a contractor that meets one but not both thresholds required to report executive compensation? 

Answer: Executive compensation reporting is required only of contractors and first-tier subcontractors that meet both annual revenue thresholds—(1) $25 million or more in annual gross revenues from federal contracts, subcontracts, loans, grants, subgrants, and cooperative agreements; and (2) 80 percent or more of its annual gross revenues from federal contracts, subcontracts, loans, grants, subgrants, and cooperative agreements. Even when both thresholds are met, reporting is required only if the public does not have access to the information about the compensation of the executives through periodic reports filed under section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a), 78o(d)) or section 6104 of the Internal Revenue Code of 1986.

Question: When are the contractor’s revenues calculated for purposes of the thresholds in FAR 52.204-10?

Answer: The contractor’s earnings are reviewed against the revenue thresholds on an annual basis. It is possible that a contractor that is exempt from reporting in the month after contract award because it does not meet the applicable revenue thresholds would be required to report in a later period.

Question: Do sales commissions have to be reported under FAR 52.204-10?

Answer: Yes. Sales commissions earned by one of the contractor’s five most highly compensated executives would have to be reported as part of their “total compensation.” FAR 52.204-10(a) includes a broad definition of total compensation:

“Total compensation” means the cash and noncash dollar value earned by the executive during the Contractor’s preceding fiscal year and includes the following (for more information see 17 CFR 229.402(c)(2)):

(1) Salary and bonus.

(2) Awards of stock, stock options, and stock appreciation rights. Use the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification (FASB ASC) 718, Compensation-Stock Compensation.

(3) Earnings for services under non-equity incentive plans. This does not include group life, health, hospitalization or medical reimbursement plans that do not discriminate in favor of executives, and are available generally to all salaried employees.

(4) Change in pension value. This is the change in present value of defined benefit and actuarial pension plans.

(5) Above-market earnings on deferred compensation which is not tax-qualified.

(6) Other compensation, if the aggregate value of all such other compensation (e.g., severance, termination payments, value of life insurance paid on behalf of the employee, perquisites or property) for the executive exceeds $10,000.

Question: Our company is occasionally awarded contracts with the Department of Energy and the Department Veteran’s Affairs.  Does the executive compensation reporting requirement apply to DOE and VA contracts? 

Answer: Yes. Although there are exceptions for classified contracts and contracts with individuals, the requirement to report executive compensation and first-tier subcontract awards applies to all federal government solicitations and contracts of $25,000 or more. It is not agency specific.  See FAR 4.1403.

More answers to frequently asked questions on executive compensation reporting for federal contractors are available here. Copies of the slides and the audio recording of our webinar on the subject are available from L2 Federal Resources. Thanks!

In addition to imposing the tax, the Act requires federal agencies to make sure that taxes paid under this law are not "reimbursed."

The FAR Councils published a proposed rule implementing this requirement on February 22, 2011. See 77 Fed. Reg. 10461 (Feb. 22, 2011). The proposed rule changes amend FAR 31.205-41 “to inform the Government and contractors that costs of the 2 percent tax are not allowable.” It also proposes changes to four FAR contract clauses “to provide that the costs for the 2 percent tax are not included in foreign fixed-price contracts . . . .”

• The statute and the proposed rule conflict with written policies of the United States such as the “Afghan First” policy, which is intended to assist foreign contractors in Afghanistan develop the capability to build infrastructure in that nation. It also calls into question whether the United States is abiding by the rules and policies of the World Trade Organization.
• It will be difficult for federal agencies to audit fixed-price contracts to determine whether the two percent has been included in the fixed-price bid. 
• A special foreign-contractor tax creates a significant disincentive to contracting with the United States. Many foreign contractors will decide not to participate, creating an anti-competitive effect and increasing the cost of necessary goods and services. 

Comments on the proposed rule can be submitted by mail or through www.regulations.gov. The keyword is “FAR Case 2011-011.”

The accounting systems clause, DFARS 252.242-7006, and the other business systems clauses say that it is the contracting officer who will decide whether the contractor’s accounting or other system has a “significant deficiency.” The question is the extent to which DCAA’s auditors will influence the contracting officer in this determination. DCAA’s Memorandum provides some insight on this point.

DCAA’s memorandum says that DCAA will “opine on the contractor’s compliance with the system criteria in DFARS” but that the contracting officer decides whether a deficiency is a “significant deficiency.” The DFARS clauses define a significant deficiency as a “shortcoming in the system that materially affects the ability of officials of the Department of Defense to rely upon information produced by the system that is needed for management purposes.”

In the past, DCAA’s approach to the adequacy of a contractor’s accounting system had been to label almost any deficiency “significant.” DCAA audits had rated accounting systems as either “acceptable” or “unacceptable.” DCAA once had a middle rating of “acceptable with deficiencies,” but DCAA eliminated that rating several years ago. That change resulted in a situation in which almost any deficiency was significant and therefore llimiting the availability of “acceptable” ratings. Indeed, even minor deficiencies were deemed significant. Since the rating “acceptable with deficiencies” was eliminated, at least some DCAA auditors reasoned that a system with any deficiencies at all could not be rated acceptable.

When DCAA “opine(s) on the contractor’s compliance with the system criteria in DFARS,” the question is whether the DCAA will comment upon the ultimate question:  Whether the contractor’s business system has a “significant deficiency.” As a practical matter, DCAA's opinion on this question may limit the contracting officer’s ability to make the determination. We encourage readers who have recently undergone DCAA system audits to share their comments on DCAA’s approach.

The new Contractor Business Systems requirements apply only to new contracts awarded after the interim rules were issued in May 2011. Unless the contractor agrees to the addition of the new DFARS clauses through a bilateral modification, they do not apply to existing contracts. The DoD comments accompanying the final revisions make this point directly—"Revisions to the DFARS set forth in this rule do not affect existing contracts that do not include the business systems clause unless the contractor and the Government agree to modify the contract bilaterally."

2. The Contractor Business Systems requirements will apply only to contracts that are subject to the Cost Accounting Standards.

The statutory requirement for the new DFARS rules on Contractor Business Systems appeared in section 893(f)(3) of the 2011 National Defense Authorization Act, which defined a "covered contract" as a "cost-reimbursement contract, incentive-type contract, time-and-materials contract, or labor-hour contract that could be affected if the data produced by a contractor business system has a significant deficiency." Section 816 of the 2012 National Defense Authorization Act revised the definition of "covered contract." Under the revised definition, a covered contract is one "that is subject to the cost accounting standards promulgated pursuant [41 U.S.C. § 1502] that could be affected if the data produced by a contractor business system has a significant deficiency."

This limitation is important because many defense contracts fall under the applicable dollar thresholds or are exempt from CAS coverage altogether. Small businesses are exempt from CAS, for example, as are firm-fixed-price contracts for commercial items and firm-fixed-price contracts awarded on the basis of adequate price competition. The full list of CAS exemptions appears at 48 C.F.R. 9903.201-1.

3. Business systems are key elements of contractor responsibility and will be used to determine eligibility for covered contracts.

DoD's commentary on the final rules specifically makes the point that maintaining adequate business systems is a "condition of contracting responsibility and, in some cases, eligibility for award." According to DoD, establishing and maintaining an adequate business system is not merely red tape associated with performing government contracts. Complying with the business systems requirements is an important element of the work that contractors perform and is part of the price that contractors charge for their goods and services. In DoD's view, the business systems requirements are "material terms, performance of which is required to ensure contracts will be performed on time, within cost estimates, and with appropriate standards of quality and accountability." Contractors can expect to have business system compliance considered in connection with the award of DoD contracts, not just as an element of past performance, but as part of a responsibility determination. Even under the interim rules, we have seen DoD agencies include the requirement to pass a business systems review as a condition to the award of a contract.

4. The five-percent withholding authority in the DFARS Contractor Business Systems rules is not the only remedy available for contractor nonconformance.

The Contractor Business Systems clause at DFARS 252.242-7005 requires the contracting officer to withhold five percent of payments whenever the contracting officer makes a "final determination" that the contractor's business system contains a "significant deficiency." Although the clause limits the withholding to a maximum of 10 percent if there is more than one such deficiency, there is no requirement that the government prove monetary damages to justify this withholding.

But there is also no language limiting the government's remedy to the five or ten percent withholding if it can show actual monetary damages. Think defective pricing claims, demands for repayment of unallowable costs, and allegations of fraud or False Claims. DoD's comments on the final rules indicate that contracting officers are expected to assert larger claims if they can be proven. According to DoD, the five-percent withholding required in the business systems is intended as an estimate of the "unquantifiable" impact of unreliable information. "When the financial impact of a deficiency is quantifiable, DoD expects contracting officers to take appropriate actions to reduce fees, recoup unallowable costs, or take action if fraudulent activity is involved."

5. DCAA's assessment of a contractor business system isn't final.

Under the DFARS business system rules, the responsibility for making an initial determination as to the adequacy of a contractor's business systems, as well as the final determination that a system suffers from a "significant deficiency" falls not on DCAA, but on the contracting officer. DCAA's role will be as an auditor, system reviewer, and advisor to the contracting officer rather than the final decision-maker.

The contractor will have a number of opportunities to make its case to the contracting officer following a DCAA report on the adequacy of its business systems. Under the rules, the contracting officer must make "an initial determination that there are one or more significant deficiencies in one or more of the Contractor's business systems."  DFARS 252.242-7005(d)(1). The contractor would then have at least 30 days to respond to the initial determination (the rule does not preclude the contracting officer from extending the deadline). Assuming the contracting officer deems the response insufficient, the contracting officer would make a "final determination" as to the existence of a significant deficiency and in appropriate cases would begin withholding payments. Withholding would continue until the deficiency is corrected or until the contracting officer is satisfied that the contractor is implementing a satisfactory corrective action plan.

6. Contractors are entitled to challenge an improper assessment of their business systems. 

Certainly not all contracting officer decisions are correct, and there will no doubt be some contracting officers who make erroneous determinations that compliant business systems suffer from a significant deficiency. Like other government actions, such erroneous determinations are subject to review under the Contract Disputes Act. Although a government decision announcing its decision to withhold payment from a contractor would normally be considered a government claim subject to immediate appeal, DoD's comments on the final Contractor Business Systems rules indicate its expectation that a separate contractor claim would be required as a precursor to any litigation. In DoD's view, "[f]inal determinations on the adequacy of the contractor’s business systems under the rule are not contracting officer’s final decisions . . . ." Thus, contractors seeking to challenge such a determination in the Court of Federal Claims or the Armed Services Board of Contract Appeals would be required first to submit a claim to the contracting officer. Appeal rights available under the Contract Disputes Act would be available after the contracting officer makes a final decision on the claim.

In addition to the negative financial impact of an improper decision to withhold five percent of a progress payment or cost voucher, it is safe to assume that such a decision would have a negative impact on a contractor's past performance rating. Contractors have the opportunity to review and correct errors in past performance ratings and to include their substantive response to an agency's rating of past performance even if the error itself is not corrected. According to the Federal Circuit's recent decision in Todd Constr., LP v. United States, No. 2010-5156 (Aug. 29, 2011) [pdf], contractors may also challenge an erroneous past performance rating in the Court of Federal Claims.

Submitted by Husch Blackwell Partners Brian Waagner and Dan Donohue.

[For more background on the DFARS Business Systems rules, check out our earlier posts. Our December 23, 2011 entry discusses the definition of "covered contract" in section 816 of the 2012 NDAA. Our June 21, 2011 outlines the payment withholding mechanism in DFARS 252.242-7005.  Our January 28, 2011 entry discusses the original requirements in section 893 of the 2011 NDAA.]

• Although new FAR clause 52.203-16 is a mandatory flowdown, higher tier contractors will not be directly responsible for the employees of their subcontractors.
• Self-employed individuals working as subcontractors will be treated as a covered employee of the prime contractor and the clause will not flow down.
• Not all contractors are considered "covered employees."  Covered employees are limited to those who perform an acquisition function closely associated with governmental functions.
• The final clause expands the list of financial interests that may lead to a PCOI and makes it clear that the list is a series of examples.
• The requirement to notify the contracting officer of a PCOI "as soon as it is identified" is clarified to permit contractors to conduct a reasonable investigation.
• Thoughtless or careless actions resulting in the inappropriate disclosure of confidential information may be a violation, even if it not motivated by a PCOI or personal gain.

The FAR Councils have adopted a final rule [pdf] revising the categories of veterans protected by federal equal opportunity laws. The rule updates the FAR to reflect Department of Labor regulations addressing equal opportunity requirements for veterans. The FAR amendments identify four categories of veterans: disabled veterans, recently separated veterans, armed forces service medal veterans, and other protected veterans.  The category of "Vietnam-era veteran" has been formally removed from the FAR. The revised FAR rule also formally adopts the VETS-100A form, which DOL regulations already require of federal contractors. The final rule makes only technical changes to the interim rule [pdf] published in September 2010.  If you haven’t updated the veteran classifications in your policies and affirmative action plans, now is a good time to do so.

The deletion of FAR 42.1503(b) could eliminate the contractor's role in the assessment of contractor past performance. Nothing in the proposed rule formally permits a contractor to respond to a past performance evaluation or to rebut the conclusions of agency officials. There is no language affirmatively requiring agencies to consider contractor rebuttals or to establish an appeal process for disputes concerning past performance. There is no requirement that contractor responses be included with the past performance evaluation record. The proposed language does not address the confidentiality of contractor past performance evaluations. The only part of FAR 42.1503(b) that would remain is the general requirement that contractors receive a copy of their past performance evaluation when it is complete.

While permitting an agency to ignore a contractor's response to a past performance evaluation might simplify the process in the short run, it would certainly have adverse consequences in the long run. In addition to pushing contractors into litigation challenging erroneous evaluations, it would decrease the value of past performance assessments as tools in predicting future performance. It would also increase the risk of de facto debarment, against which contractors have constitutional protections. See Old Dominion Dairy Products, Inc. v. Secretary of Defense, 631 F.2d 953 (D.C. Cir. 1980). If nothing else, the loss of uniformity resulting from the elimination of FAR 42.1503(b) seems to be inconsistent with the goal of improving uniformity in past performance evaluations.

We'll be watching for commentary and the final version of this rule. Submit comments on the proposed rule by August 29, 2011. Comments can be submitted here. Include a reference to "FAR Case 2009-042."

[UPDATE.  A corrected version of the proposed rule reinstating the contractor protections in FAR 42.1503 was published on August 9, 2011.  We discuss the correction here.]

Under new FAR Subpart 23.1, agencies are required to promote sustainable acquisition by ensuring that 95% of new contract actions require products that are energy-efficient, water-efficient, biobased, environmentally preferable, non-ozone depleting, or contain recycled content. "New contract actions" includes both new contracts (and task or delivery orders placed on those contracts), as well as new task or delivery orders placed on existing contracts.  

Contractors will also face new requirements. Under FAR 23.002, contractors operating government-owned or government-leased facilities, as well as those providing support services at such facilities, will have to comply with the same sustainable acquisition requirements.  FAR subpart 23.9 and FAR 52.223-19 require that all contractors comply with an agency's environmental management system. FAR Part 4 requires (rather than encourages) contractors to submit all paper documents on double-sided 30 percent post-consumer fiber paper, if practicable. 

The interim rule provides limited exceptions for acquisitions by intelligence activities, law enforcement activities, vehicle fleets for law enforcement, protective, emergency response, or military tactical purposes, and any agency activities or facilities in the interest of national security. It also does not apply to contracts for the acquisition of weapons systems and contracts performed outside the United States. Barring these exceptions, the interim rule overrides any other inconsistent contracting policies.    

Green Construction

Contractors also face new green construction obligations.  Under the interim rule, agencies must promote sustainable acquisition by implementing high-performing and sustainable building design, construction, renovation, repair, operation, and management. Agencies must pursue cost-effective, innovative strategies to minimize energy and water consumption and seek out renovation alternatives that will reduce maintenance costs. By the end of 2015, agencies will be required to recycle or recover at least 50% of construction and demolition materials and debris that might be placed in the waste stream. Contractors performing new construction or major renovations will be required to comply with the Guiding Principles for Federal Leadership in High-Performance and Sustainable Buildings [pdf].  

The FAR Councils note that they do not expect the new rules to impose significant economic impacts on contractors because they are "only emphasizing existing requirements" already put in place by agency sustainability programs and previous executive orders. The accuracy of this prediction remains to be seen.

The interim rule creates and modifies six clauses outlining the requirements for contractors' business systems dealing with accounting, cost estimating, earned value management, material management, contractor purchasing, and contractor property management. The "Contractor Business Systems" clause authorizes the CO to withhold five percent from progress and performance-based payments for a significant deficiency in a single contractor business system.  It authorizes withholding of up to ten percent for a significant deficiency in multiple contractor business systems. The new rule defines a "significant deficiency" as one that "materially affects DoD's ability to rely upon information produced by the contractor's system that is needed for management purposes."

Withholding is not automatic.  If the CO makes an initial determination that there is a significant deficiency in the contractor's business system(s), the contractor is notified and has 30 days to respond. The CO will review the response before making a final determination as to whether a significant deficiency exists.  If the final determination concludes that a deficiency does exist, the CO will issue a withholding notice and a directive to the contractor to reduce its billings to implement the withholding. The contractor then has 45 days to correct the deficiency or to submit a corrective action plan outlining the remedial steps and milestone dates. Once an acceptable corrective action plan is in place, the CO is required to reduce the withholding to two percent until the deficiencies are corrected.

Once the contractor has remedied the deficiencies, the CO must issue a final determination eliminating the withholding and directing the contractor to bill for the outstanding amount. If the CO fails to issue the final determination within 90 days, he must reduce the withholding "by at least 50 percent" until the determination is issued.

The Uncertainty

The current interim rule is a revision of two previous proposed rules that received substantial public comment. While the rule purports to address many of the concerns raised during the comment period, there is still substantial uncertainty surrounding its implementation. The rule offers little practical guidance as to what constitutes a "significant deficiency" or when COs will seek to withhold payments.  Because this determination is nominally in the CO's "sole discretion," there is likely to be substantial variation among COs as to which deficiencies are "significant." 

The rule also fails to offer any guidance to the CO for describing a "significant deficiency" when finding that one exists. Insufficient detail in describing the deficiency will place the contractor in the difficult position of trying to remedy a problem that is not entirely clear. In addition to the increased cost of remedying a problem that is not clearly specified, a lack of clarity in describing a deficiency will delay the contractor's receipt of payment.  Even in the best of circumstances, a contractor may have to wait up to 135 days to recover payments withheld under this rule (45 days to correct + 90 days for a determination to end withholding).

Hopefully these uncertainties will be addressed during the current public comment period, which closes on July 18, 2011. Even if the final rule makes changes to resolve these issues, the short term response is clear. Contractors should respond promptly to any CO determination and act quickly to address any identified deficiencies. If the deficiency cannot immediately be remedied, contractors should submit a corrective action plan within the 45-day window to reduce any withholding while implementing the corrective action.