Last month, we wrote about a proposed amendment to the FY 2023 National Defense Authorization Act (“NDAA”) that would prohibit contractors from selling certain Chinese semiconductor technologies to federal agencies and from using these same covered products and services. This measure was added through Section 5949 of the NDAA.
On December 6, the House passed a compromise version of the NDAA, which appears to scale back the semiconductor ban by applying it only to federal sales of covered products and services, without also banning contractors from using them. However, the explanatory statement accompanying the NDAA suggests contractors (including their affiliates and subsidiaries) may ultimately be prohibited from using covered semiconductor technologies—which would raise a host of compliance and implementation concerns.
Compromise Version of NDAA Limits Semiconductor Ban to Federal Sales
Section 5949 bans semiconductor products and services from Semiconductor Manufacturing International Corporation, ChangXin Memory Technologies, and Yangtze Memory Technologies Corp., plus their subsidiaries and affiliates. This ban was modeled after the supply chain restrictions from Section 889, which prohibit contractors from selling and using covered telecommunications and video surveillance equipment from five Chinese telecom companies.
Effective January 1, 2023, the certification process for veteran-owned small businesses (“VOSBs”) and service-disabled veteran-owned small businesses (“SDVOSBs”) will be transferred from the Department of Veterans Affairs (“VA”) to the Small Business Administration (“SBA”). Except for implementation transitioning discussed below, to be eligible for sole-source and set-aside acquisitions, VOSBs and SDVOSBs will need to be certified by the SBA.
Previously, VOSB and SDVOSB verifications were made by the VA’s Center for Verification and Evaluation (“CVE”). To be eligible for VA contracts, VOSBs/SDVOSBs had to be verified by the CVE; there was no government-wide certification program, and firms seeking SDVOSB sole-source or set-aside contracts outside the VA only needed to self-certify their status pursuant to Section 36 of the Small Business Act, 15 U.S.C. 657f.
On November 29, 2022, the SBA published a final rule implementing Section 862 of the FY 2021 National Defense Authorization Act (“NDAA”) transferring authority for VOSB/SDVOSB certifications from the VA to the SBA. The final rule consolidates the eligibility requirements for the Veteran Small Business Certification Program, and the SBA is assuming control of VOSB/SDVOSB certification for purposes of nearly all small business federal contracting. SBA also published a Frequently Asked Questions (“FAQ”) page regarding the final rule.
On October 18, 2022, Senate Majority Leader Chuck Schumer (D-NY) issued a press release signaling a potentially significant expansion of Section 889 through a proposed amendment to the 2023 National Defense Authorization Act (“NDAA”). Schumer’s proposal is aimed at extending the telecommunications supply chain prohibitions in Section 889 to the semiconductor manufacturing industry.
Section 889 currently prohibits contractors from providing the federal government or using any products or services that incorporate “covered telecommunications equipment or services” from five Chinese telecom companies and their affiliates and subsidiaries: (1) Huawei Technologies Company, (2) ZTE Corporation, (3) Hytera Communications Corporation, (4) Hangzhou Hikvision Digital Technology Company, and (5) Dahua Technology Company.
Schumer’s 2023 NDAA amendment would expand Section 889 by banning semiconductor products like microchips from the following three Chinese entities: (1) Semiconductor Manufacturing International Corporation (“SMIC”), (2) ChangXin Memory Technologies (“CXMT”), and (3) Yangtze Memory Technologies Corp. (“YMTC”). Schumer noted that these companies have known links to the Chinese state security and intelligence apparatuses. The amendment is aimed at filling a gap in federal procurement restrictions that currently do not include semiconductor technology and services, creating a vulnerability for cyberattacks and data privacy. The amendment would not take effect until three years after the NDAA’s enactment, or until 2025.
Although we do not yet know whether Schumer’s amendment will be incorporated into the final NDAA bill, contractors should nevertheless begin evaluating their supply chains to identify any semiconductor products from any of the three named Chinese manufacturers. Schumer’s amendment signals a continually expansive interpretation and enforcement of Section 889, which may be reflected in the final rulemaking for Section 889. The current FAR docket anticipates a final rule in December 2022, although these deadlines continue to be moving targets.
Effective October 1, 2022, Department of Defense (“DoD”) contractors must comply with Part B of Section 889 of the FY 2019 National Defense Authorization Act (“NDAA”). The approximately two-year long Part B waiver granted to the Director of National Intelligence expired October 1. DoD contractors cannot seek a DoD agency-level waiver as DoD cannot grant waivers under the statute. Thus, as with other agencies, DoD is prohibited from entering into, extending, or renewing contracts with contractors who use covered telecommunications or video surveillance equipment and services from certain Chinese companies in any part of their business.
Compliance with Part A of Section 889 was straightforward. Part A prohibited contractors from selling covered technology to the federal agencies. Comparatively, compliance with Part B is much more complicated. Part B requires a contractor to certify that it does not use “any equipment, system, or service that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system.” The prohibition applies to all contracts at any dollar value. “Covered telecommunications equipment or services” is defined as equipment, services and/or video surveillance products from Huawei Technologies Company, Hangzhou Hikvision Digital Technology Company, Hytera Communications Company, Dahua Technology Company, ZTE Corporation, or any entity controlled by the People’s Republic of China.
Federal government contractors and subcontractors often struggle with flow-down clauses. Fundamentally, prime and subcontractors squabble over flow-down clauses because they involve assumption of risk. A prime contractor has committed to comply with all of the clauses in its prime contract. To the extent a prime contractor does not flow down a clause to its subcontractor, the prime contractor assumes the risk of any subcontractor non-compliance. This is because, if a contracting officer identifies regulatory non-compliance, the government only looks to the party with which it has privity to enforce compliance: the prime contractor. If the prime contractor has not flowed down the applicable clause to its subcontractor, the prime contractor is responsible for its subcontractor’s non-compliance. If the clause has been flowed down, the prime contractor can enforce compliance upon its subcontractor. From a subcontractor perspective, the more flow-down clauses it accepts from its prime contractor, the more compliance risk it assumes.
As a result, prime contractors seek to flow down as many FAR clauses as possible—well beyond the mandatory flow downs discussed below. Subcontractors, meanwhile, seek to keep flow-down clauses to a minimum. Subcontractors must analyze when it is appropriate and productive to resist non-mandatory flow-down clauses, and sometimes the answers to these questions may not be straightforward. Below we address the mandatory flow-down clauses for commercial subcontracts with commercial and non-commercial prime contractors, how subcontractors can handle irrelevant clauses, and best flow-down practices for prime contractors and subcontractors.
The U.S. Small Business Administration (“SBA”) recently issued a final rule that creates new opportunities for small businesses to submit relevant past performance, and new requirements for large/other than small prime contractors to provide past performance reviews to first-tier small business subcontractors.
The final rule is intended to help small businesses overcome the hurdle of having minimal past performance to use in competitive procurements. The rule creates new mechanisms to permit small businesses to use the past performance of a joint venture in which it was a member, or to use its performance as a first-tier subcontractor. The new rule takes effect on August 22, 2022.
Federal government contractors and subcontractors with 50 or more employees and a federal contract or subcontract with a value of $50,000 or more measured during any 12-month period are required to develop a written Affirmative Action Program (“AAP”) within 120 days from the start of the federal contract.
The Office of Federal Contract Compliance Programs (“OFCCP”) has established a Contractor Portal for federal government contractors to register and certify that they have developed and maintained affirmative action programs at each of their establishments or functional units: OFCCP Contractor Portal. Contractors that do not register and certify are more likely to be selected for an OFCCP AAP audit.
The deadline to register and submit AAP certifications is June 30, 2022.
The General Services Administration (“GSA”) Office of Governmentwide Policy recently authorized contracting officers to provide relief to GSA contractors experiencing cost increases due to surging inflation. See Acquisition Letter. To assist struggling contractors, GSA issued a temporary moratorium on the enforcement of certain limitations contained in GSA economic price adjustment (“EPA”) clauses.
GSA issued the moratorium in response to an uptick in contractors’ requests for price increases and removal of items from their Federal Supply Schedule (“FSS”) contracts to avoid selling at a loss. In issuing the moratorium, GSA recognized that inflationary pressures and price volatility, caused by supply chain disruptions, strong demand, and labor shortages, are ongoing concerns unlikely to abate in the near term. GSA acknowledged that it must help contractors weather this “unusual time”—especially small businesses and new market entrants—to ensure a resilient and diverse federal industrial base and the government’s continued access to critical “products, services, and solutions.”
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As the federal government prepares to roll out infrastructure grants and contracts in amounts not seen since the New Deal and the defense industrial base (“DIB”) gears up to support billions in new spending to support Ukraine, a new Department of Defense (“DoD”) report raises serious concerns about the state of competition within the DIB. The report recently released by the Office of the Under Secretary of Defense for Acquisition and Sustainment analyzes the state of competition within the DIB and concluded that it can be summarized in one word: poor. The report discusses the causes for the lack of competition and makes recommendations for improving the solicitation process to increase competition, inspire innovation, reduce prices, and improve quality.
Foremost among the causes for the lack of competition identified by the report is consolidation of the DIB. Of 51 aerospace and defense prime contractors in the 1990s only five exist today. Although the report failed to find significant correlation between this consolidation and increased pricing, the consolidation raises additional concerns for DoD, such as national security, mission risk, and strategic technology innovation. The report notes that “having only a single source or a small number of sources for a defense need can pose mission risk and, particularly in cases where the existing dominant supplier or suppliers are influenced by an adversary nation, pose significant national security risks.” The report recommends that when a merger is likely to harm one of these interests, DoD work closely with the Federal Trade Commission and Department of Justice to take structural or behavioral measures deemed necessary, up to and including blocking the merger.
On January 21, 2022, the General Services Administration (“GSA”) Office of Inspector General (“OIG”) informed the Federal Acquisition Service (“FAS”) that ongoing monitoring by the OIG found that the FAS failed to properly monitor the sale of products for compliance with the Trade Agreements Act (“TAA”) during the COVID-19 response. Previously, in April 2020, GSA relaxed compliance with the TAA for a limited number of Federal Supply Classes (“FSCs”) to aid the government’s response to the COVID-19 pandemic. The applicable FSCs included those covering N95 masks, cleaners and disinfectants, disposable gloves, and hand sanitizers. After several extensions, the TAA exception policy expired on April 30, 2021.
The OIG identified two deficiencies in FAS’ implementation of the TAA exception policy. First, the OIG found that FAS failed to properly track the addition of non-compliant products to contracts. As a result, after expiration of the exception policy, there was no effective way for GSA to remove the non-compliant products from contracts. Second, the OIG found that GSA improperly permitted the addition of non-compliant products to GSA contracts. For example, some products that were added were unrelated to the government’s response to the pandemic; some products were added to GSA contracts prior to the effective date of the TAA exception policy; and, remarkably, in one case, a product was added to a contract that identified North Korea as its country of origin.