On December 23, 2022, President Biden signed into law the National Defense Authorization Act for Fiscal Year 2023 (“NDAA” or “Act”). Title VIII includes a series of statutory changes to federal acquisition policy, acquisition management and numerous related matters. These new laws cover a broad range of policy reforms and new requirements that will impact the government contracting sector. In addition to several matters of general concern that are located outside Title VIII, we focus on a number of acquisition policy reforms below.
General Service Authorities
Section 525 – Rescission of COVID-19 Vaccination Mandate
Section 525 directs the Secretary of Defense to rescind the Department of Defense’s (“DoD”) COVID-19 vaccine mandate as to members of the US Armed Forces. The NDAA provides no such statutory relief to federal government contractors, although federal agencies are not currently enforcing the vaccine mandate against contractors. Notably, the Office of Management and Budget (“OMB”) issued guidance in October 2022 that may lead to the resurrection of the vaccine mandate for contractors. Mayer Brown’s November 20 Legal Update explains this OMB guidance in detail.
Acquisition Policy and Management
Section 803 - Data Requirements for Commercial Products for Major Weapon Systems
Section 803 amends the data requirements involving commercial products related to subsystems, components, and spare parts of major weapons systems under 10 U.S.C § 3455. For subsystems, components, and spare parts proposed as a commercial item, but not previously determined to be commercial, contractors must identify comparable products sold commercially or to nongovernmental entities that will support the contractor’s “of a type” assertion. Further, contractors must also provide the contracting officer with “a comparison necessary to serve as the basis of the ‘of a type’ assertion of the physical characteristics and functionality” between the subsystem, component, or spare part and the comparable commercial product. And if the contractor does not sell such comparable products commercially or to nongovernmental entities, the contractor must notify the contracting officer that no such sales are made and provide the contracting officer a similar comparison to that described above to “the most comparable commercial product in the commercial marketplace, to the extent reasonably known by the offeror.”
Section 803 also amends the uncertified cost and pricing information that offerors must submit under 10 U.S.C § 3455(d) for the contracting officer to determine the reasonableness of the price of subsystems, components, and spare parts of major weapons systems determined to be commercial items. This information includes representative samples of the prices paid for the same or similar commercial products under similar terms and conditions and those terms and conditions. If an offeror cannot provide this information, as determined by the contracting officer, an offeror must then provide similar representative samples that were sold under different terms and conditions and those terms and conditions. If the offeror’s submitted information is insufficient for the contracting officer to determine price reasonableness and if approved by a level above the contracting officer, the offeror must submit other relevant uncertified cost and pricing information to include labor and material costs and overhead rates.
Although Congress’s Joint Explanatory Statement directs the Under Secretary of Defense for Acquisition and Sustainment to continue submitting the annual report of “data denials,” a report detailing instances when offerors have denied contracting officer requests for this information,1 section 803 includes no such direction. However, offerors must take heed of Defense Federal Acquisition Regulation Supplement (“DFARS”) section 252.1502, which requires contracting officers to “include [in Contractor Performance Assessment Reporting System reports] a notation on contractors that have denied multiple requests for submission of data other than certified cost or pricing data over the preceding 3-year period, but nevertheless received an award.”
Section 805 - Treatment of Certain Clauses Implementing Executive Orders
Section 805 amends 10 U.S.C. § 3862 (Requests for equitable adjustment or other relief: certification) and directs that any contract clauses unilaterally inserted into an existing DoD contract by a contracting officer to implement requirements from an executive order “shall be treated as a change directed by the contracting officer pursuant to, and subject to, the Changes clause of the underlying contractual instrument.” Under section 805, the referenced Changes clause is the Federal Acquisition Regulation (“FAR”) contract clause, FAR 52.243-4. Moreover, DoD must conform the DFARS no later than 120 days from the NDAA’s enactment.
- Congress’s Joint Explanatory Statement emphasizes the importance of collecting and assessing commercial item pricing data to making “critical, foundational decisions related to contract actions for firm-fixed price sole source contracts.” Contractors should carefully review section 803’s new requirements and ensure they are in compliance.
- Section 805 clarifies that new contract terms resulting from executive orders constitute contract changes and can be the subject of requests for equitable adjustments regarding increased costs and time required for performance.
Amendments to General Contracting Authorities, Procedures, or Limitations
Section 817 – Modification to Prohibition on Operation or Procurement of Foreign-made Unmanned Aircraft Systems
As part of the FY2020 NDAA, Congress prohibited DoD agencies from “operat[ing] or enter[ing] into a contract for the procurement of” an unmanned aircraft system (UAS)—including the manufacture, flight or ground control systems, or network connectivity related to such systems—from the People’s Republic of China. Section 817 of the NDAA for FY2023 revised and clarified the breadth of the applicable UAS restrictions in several ways. Section 817 appears to focus on UAS production by companies in China, but, notably, the law also expands the restrictions to additional “covered foreign countr[ies]” and adds Russia, Iran, and North Korea to the prohibited list. Finally, section 817 adds a prohibition on DoD entering (or extending) a contract with a specified “covered [UAS] company,” i.e., Da-Jiang Innovations (or any of its subsidiaries or affiliates).
Section 822 – Modification of Contracts to Provide Extraordinary Relief Due to Inflation Impacts
Like many other businesses, government contractors have experienced substantial difficulties with impacts of the current inflationary environment. To date, DoD has had limited ability to provide relief to its contractors that are necessary to the country’s defense industrial base (“DIB”). Section 822 amends 50 U.S.C. § 1431 (Public Law 85-804) and expands the authorization for the President to empower agencies involved with the national defense “to enter into, amend, and modify contracts, without regard to other provisions of law [when] . . . such action would facilitate the national defense.” To protect the DIB, section 882 allows DoD to provide equitable adjustments to contractors dealing with increased costs “due solely to economic inflation.” This can provide important assistance for contractors that have been negatively affected by high inflation while performing multi-year, fixed-price contracts. The law makes accessing this potential relief easier by increasing the monetary thresholds above which senior agency official approval is required. (Section 822 increases the applicable thresholds for procurements in excess of $500,000 for secretarial level approvals and $150,000 for congressional notice, up from $150,000 and $25,000, respectively.)
Importantly, although section 882 authorizes relief in more circumstances for contractors experiencing difficulties from high inflation, neither this provision nor any other in the NDAA appropriates funding for that relief. The statute also does not explain how contractors having difficulty performing without an economic price adjustment to address inflation should seek or will qualify for the aid. Subsection (b) of the act mandates the Under Secretary of Defense for Acquisition and Sustainment to issue the necessary guidance within 90 days. Contractors—particularly those experiencing difficulties as a result of fixed-prices that have not been adjusted to address inflation—should track the implementing guidance carefully and (given the likelihood of delay while other requests are processed) see inflation adjustments to price as soon as practicable.
- Many contractors in the defense sector—particularly those with a large volume of fixed-price contracts—have been harmed by inflation affecting world markets. The NDAA opens the door to providing relief, but important details—i.e., the amount to be appropriated and guidance regarding which types of contractors will qualify—remain to be explained.
Software and Technology
Section 841 – Guidelines and Resources on the Acquisition or Licensing of Intellectual Property
Many companies have become increasingly wary of dealing with the government with respect to protection of contractors’ intellectual property (“IP”) rights. In short, although companies doing business with the US government have opportunities to engage in research and to develop technologies with the government, they bear substantial risk associated with potential failure to take sufficient steps to protect the contractor’s pre-existing IP—and increasingly aggressive positions taken by the government concerning ownership of IP. Contractors must be vigilant to follow the FAR and DFARS requirements and to ascertain that the increasingly complex documentation does not convey to the government any rights beyond those to which it is entitled in a particular circumstance.
This section of the NDAA requires that DoD develop new guidelines and resources to facilitate consistent application of DoD’s IP rules. The guidance is to explain IP strategies and other mechanisms supporting open system approaches, models and best practices for negotiated licenses, and definitions of key terms, examples, and case studies as described in the FAR and DFARS IP provisions.
Section 843 – Other Transaction Authority Clarification
During the past several years, Congress has encouraged and DoD has pursued efforts to streamline procurement of new technologies (often from companies that have not previously contracted with the government) through “Other Transactions” (“OTs”). OTs are frequently defined by what they are not, i.e., an OT is authorized by 10 U.S.C. § 4021 and can take the form of any kind of transaction other than a contract, grant, or cooperative agreement. OTs are developed as prototyping efforts in which agencies work with contractors to develop rapid, less formal agreements under which needed technologies can be efficiently procured. As a result of the substantial public and private efforts, OTs—and particularly the ability of agencies to acquire production as a follow-on to a prototype effort—have come to represent a growing portion of the government’s spending.
The FY2023 NDAA clarifies (and expands) the definition of prototype projects to which the OT authorities apply. It adds efforts related to a “proof of concept, model, or process (including a business process)” or reverse engineering. Section 843 also makes clear that a pilot or novel application of commercial technologies in the defense area, agile development activity, and the creation, design, development or demonstration of operational activity are all within DoD’s prototype authority. Section 843 also expands the possible uses of pilot program authority for almost three years to cover prototyping of the “design, development, or demonstration of new construction techniques or technologies to improve military installations or facilities.” Even with the limits placed on this plan (i.e., “the aggregate value of transactions entered under such a pilot program may not exceed $200,000,000”), it appears that the NDAA’s additional OT authorization will represent an important, additional area for expansion of DoD’s use of OTs.
- OTs have grown dramatically in recent years and become an important part of the way DoD procures important new technology. The FY2023 NDAA indicates that spending through OTs is likely to continue to grow.
Defense Industrial Base and Small Business Restrictions
Section 855 - Codification of Prohibition on Certain Procurements from the Xinjiang
Uyghur Autonomous Region
Section 855 extends the prohibition on certain procurements from the Xinjiang Uyghur Autonomous Region of China (“XUAR”) under section 848 of the FY2022 NDAA (Public Law 117–81). In particular, section 848 of the FY2022 NDAA prohibited the use of funds to knowingly procure any products mined, produced, or manufactured wholly or in part by forced labor from the XUAR. In addition, section 848 required a certification from offerors for contracts with DoD stating the offeror has made a good faith effort to determine that forced labor from the XUAR was not or will not be used in the performance of a contract. Section 855 of the FY2023 NDAA codifies the prohibition by adding a new section to the United States Code, 10 U.S.C. § 4661. Section 855 also requires that, “[n]ot later than 180 days after the date of the enactment of this Act, the Secretary of Defense shall issue a policy to require that an offeror or awardee of a Department of Defense contract shall make a good faith effort to determine that forced labor from XUAR [. . .] will not be used in the performance of such contract.” This is a further example of the trend of the United States promulgating supply chain restrictions aimed at China.
Section 856 - Codification of the Department of Defense Mentor Protégé Program
Section 856 modifies the DoD MentorProtégé Program (“MPP”) in a number of notable ways. Under the MPP, small business protégés are partnered with larger defense contractors, who serve as mentors. The program, originally established during the First Gulf War,2 assists eligible small businesses to expand their involvement in the defense industrial base. To increase mentor participation, section 856 reduces the threshold amount of DoD contract awards a firm is required to receive during the fiscal year before it becomes a mentor (and enters an MPP agreement) from $100 million to $25 million. This section also increased the duration of MPP participation from two to three years. Aimed at strengthening the defense industrial base related to software development, section 856 creates a five-year Protégé Technical Reimbursement Program. Under this program, a protégé firm may receive up to 25 percent of the reimbursement, for which the mentor firm in the agreement is eligible, for engineering and software development that will be ready for integration with a DoD program or system.3
Section 857 - Procurement Requirements Relating to Rare Earth Elements and Strategic
and Critical Materials
Section 857 requires contractors that provide to DoD a system with a permanent magnet that contains rare earth elements or “strategic and critical materials” to disclose the country or countries where those components were mined and where other relevant processes occurred. Of note, contractors are required to undertake a commercially reasonable inquiry before making this disclosure. In the event the contractor cannot make the required disclosure, section 857 directs DoD to require that the contractor establish and implement a supply chain tracking system in order to be able to make the disclosure. Section 857 also provides DoD the authority to waive these requirements if the continued procurement of the system is necessary to meet the demands of a national emergency or if a contractor cannot currently make the required disclosure but is making significant efforts to comply.
Section 860 - Risk Management for Department of Defense Pharmaceutical Supply Chains
Section 860 directs DoD to undertake a series of actions related specifically to pharmaceutical supply chains. In particular, DoD is instructed to identify information gaps and risks in the supply chain management of scarce pharmaceuticals and to develop and issue implementing guidance to mitigate reliance on foreign supply sources.
Section 872 - Modifications to the SBIR and STTR Programs
Section 872 modifies both the Small Business Innovation Research (“SBIR”) program and the Small Business Technology Transfer (“STTR”) program. These two initiatives are considered the largest source of “high risk/high reward” funding for start-ups and small businesses in the United States. Section 872 directs DoD to implement a due diligence program to assess the security risks of companies that are selected to receive awards under the SBIR and STTR programs. This assessment includes an analysis of the firm’s cybersecurity practices as well as any financial ties and obligations the firm may have with foreign entities. Section 872 clarifies that the assessments must take place prior to notifying the small business that it has been selected to receive the contract award.
- As we have seen in prior years, the NDAA continues to focus on safeguarding US companies’ supply chains from foreign influence.
- Continuing a recent trend, DoD will be subject to increasingly restrictive controls on acquisitions involving materials from China, Russia, Iran, and North Korea.
- While focusing on supply chains and foreign powers, the NDAA also strengthens small business participation in the DIB by modifying the MPP, SBIR, and STTR programs.
Other Matters – Improvement to Cybersecurity for the Defense Industrial Base
Section 884 - Incorporation of Controlled Unclassified Information Guidance into
Program Classification Guides and Program Protection Plans
Section 884 requires DoD to ensure that all program classification guides for classified programs and all program protection plans for unclassified programs include guidance for the proper marking of controlled unclassified information (“CUI”). The joint explanatory statement accompanying the NDAA noted Congress’s concern related to DoD’s handling of CUI markings:
We understand the Department of Defense’s uneven application of CUI markings is particularly problematic for industry, which often receives little CUI training or guidance from the Government and is unsure of its responsibilities regarding this marking convention. We are also concerned with the extent and efficacy of the training, guidance, and oversight provided to the Department's Government personnel on the CUI marking convention, which has resulted in the overclassification of entire documents and a lack of clear portion markings within documents.
Section 884 gives DoD some flexibility in executing this mandate, as evidenced by the direction that the Secretary of Defense ensure the updated guidance be completed before January 1, 2029.
Additional Important FY2023 NDAA Changes
Section 5921 - FedRAMP Authorization Act
Section 5921 codifies the Federal Risk and Authorization Management Program (“FedRAMP”) into law and standardizes the current FedRAMP regime. The section, referred to as the “FedRAMP Authorization Act,” generally seeks to reduce unnecessary costs related to certifying cloud technologies through a variety of measures. For instance, the provision establishes a “presumption of adequacy” allowing cloud technologies that achieve authorization with one federal agency to be presumed adequate for use at other agencies with the same security requirements. Similarly, section 5921 requires federal agencies to use the existing security assessments, to the extent practicable, for any cloud technology the agency seeks to authorize that already has received a FedRAMP authorization. Also of note, this section creates the “Federal Secure Cloud Advisory Committee,” a committee composed of not more than 15 qualified members from the public and private sectors, to streamline government and industry collaboration related to the acquisition of cloud services.
- Congress appears to recognize that defense contractors have received inconsistent guidance with respect to CUI protocols and, as a result, has directed DoD to issue guidance for the proper marking of this information.
- Recognizing the ever increasing role of cloud services, and the continuing need for security protocols, the NDAA streamlines the FedRAMP process in several important ways.
Section 5949 - Prohibition on Certain Semiconductor Products and Services
Section 5949 precludes acquisition by US federal agencies of products or services that include certain semiconductors originating in China or other foreign countries of concern.4 Under section 5949(a), agencies will be prohibited from:
- "procur[ing], obtain[ing], or extend[ing] or renew[ing] a contract to procure or obtain, any electronic parts of products, or services that include covered semiconductor products or services,” (Section 5949(a)(1)(A)), and
- entering into a contract “with an entity to procure or obtain electronic parts or products that use any electronic parts or products that include covered semiconductor products or services” (Section 5949(a)(1)(B)). Under the applicable rule of construction (Section 5949(a)(2)(B)), this use prohibition applies when the covered semiconductor products or services are in “critical systems,” which are defined as “national security systems,” i.e., telecommunication or information systems operated by the federal government that involve intelligence and cryptologic activities; command and control of military forces; equipment that is an integral part of a weapon or weapons system; or any other system identified by the Federal Acquisition Security Council or DoD.
Although the prohibitions have five years to take effect, contractors (and their subcontractors and suppliers) must start now to thoroughly analyze their supply chains and identify any products sold to the federal government that contain covered semiconductor products or services. Contractors will then need to take steps to source section 5949-compliant semiconductor products and services.
1 Section 803 of the NDAA for FY2019 directed submission of these “Data Denial” Reports.
2 Congress first authorized the MPP as a pilot program in 1990, and, at that time, the program was scheduled to expire in 1994. See Section 831 of the National Defense Authorization Act for Fiscal Year 1991, Pub. L. No. 101-510, § 831, 104 Stat. 1485, 1607 (1990).
3 As an incentive mechanism, the MPP allows DoD to use its appropriated funding to provide direct reimbursement to mentors for providing developmental assistance to protégés. Section 856 allows the protégé to receive up to 25 percent of the reimbursement that the mentor firm is eligible to receive from the government for qualifying engineering and software development work.
4 See Mayer Brown’s previous Legal Update, which provides an in-depth analysis on section 5949.