Smith Pachter McWhorter constantly tracks current events, issues, and trends in Government Contracts to keep clients on the cutting edge of legal and policy developments. This e-letter highlights the most important issues, and the attached index provides weblinks to the source documents of these and many more developments.

I. Acquisition Policy:  Commercial Items and Services

On January 28, 2008, President Bush signed into law Pub. L. No. 110-181, the “National Defense Authorization Act for Fiscal Year 2008.”  The statute imposes significant restrictions on contractors and the government when doing business with each other.  One area of particular interest is Congress’ discomfort with the concept of “commercial item” contracting.

Section 805, Procurement of Commercial Services, requires DOD to modify its regulations to:

Ensure that commercial services “of a type offered and sold competitively in substantial quantities in the commercial marketplace” are treated as commercial items only if the contracting officer makes a written determination that an offeror has submitted sufficient information to evaluate price reasonableness.

Permit the contracting officer to request that the offeror submit prices paid for the same or similar commercial items under comparable terms and conditions by government and commercial customers, and any “other relevant information regarding the basis for price or cost, including information on labor costs, material costs, and overhead rates.”

Congress apparently wants more support for the treatment of commercial services as commercial items and has required the contracting officer to take an official, written position before making such a determination.  Additionally, Congress appears to expect that contracting officers will request both price and detailed cost information – “information on labor costs, material costs, and overhead rates” – before deciding to treat commercial services as commercial items.  The significance of these requirements is that the definition of “commercial item” was expanded in order to get away from the requirement to submit detailed cost information.           

Section 805 also requires that procedures for time-and-material and labor-hour contracts for commercial items may be used “only for … (A) services procured for support of a commercial item … (B) emergency repair services; (C) any other commercial services only to the extent that the head of the agency concerned approves a determination in writing by the contracting officer” that the services are commercial services; the offeror has submitted sufficient information; such services are commonly sold to the general public through T&M/LH contracts; and the use of a T&M/LH contract is in the government’s best interest.           

Congress’ discomfort with the treatment of commercial services as commercial items arises again in Sections 806 and 807.  In the former, Congress requires DOD to identify “clearly and separately the amounts requested in each budget account for the procurement of contract services.”  In the latter, Congress requires DOD to submit to Congress “an annual inventory of the activities performed during the preceding fiscal year pursuant to contracts for services,” including but not limited to: functions performed by the contractor, contracting organization, funding source, fiscal year the activity started, and the number of full-time contractor employees paid for performance.  The inventory shall be made publicly available.           

Section 807 further requires DOD to review the contracts listed in the inventory to ensure that: each contract “has been entered into, and is being performed, in accordance with applicable statutory and regulatory requirements”; the activities do not include inherently governmental or closely associated with inherently governmental functions; and DOD identifies the activities for conversion to performance by DOD employees.           

In short, Congress distrusts the government’s treatment of commercial services as commercial items, and seeks to convert contractor performance of those activities to performance by government employees.           

In Section 815, Congress further restricted the use of commercial item contracting.  There, Congress inserted a requirement that an offeror submit “sufficient information to evaluate, through price analysis, the reasonableness of the price” before a major weapon system may be treated as a commercial item.  A subsystem of a major weapon system may be treated as a commercial item only if it is intended for a major weapon system that is purchased as a commercial item; or the contracting officer determines in writing that the subsystem is a commercial item, and the offeror has submitted sufficient information to evaluate price reasonableness.  Section 815(c) imposes similar requirements on components and spare parts for a major weapon system.  The information that a contracting officer may request to decide whether to use commercial item treatment includes “other relevant information regarding the basis for price or cost, including information on labor costs, material costs, and overhead rates.”

II. Wartime Contracting           

Congress also passed into law specific oversight functions regarding wartime contracting in Iraq and Afghanistan.  Section 841 establishes a Commission on Wartime Contracting, with members appointed by the majority leader of the Senate, Speaker of the House, and the minority leaders of the Senate and House.  The Commission’s broad duties include a study of contracting for reconstruction in Iraq and Afghanistan; contracting for logistical support of coalition forces; and contracting for performance of security functions.  The Commission will study contracts entered into both in the United States as well as abroad.  Particular duties of the Commission include assessment of:

• Federal government reliance on contractors;                       
• Contractor performance;                       
• Extent of fraud, waste and abuse under contracts;
• Extent to which those responsible for fraud, waste and abuse have been held financially or legally accountable;
• Appropriateness of DOD and Department of State organizational structure, policies, practices, and resources for program management;
• Extent to which contractors have misused force or have used force inconsistently with objectives of the operational field commander; and
• “The extent of potential violations of the laws of war, Federal law, or other applicable legal standards by contractors under such contracts.”

Section 841 also empowers the Commission to hold hearings, take testimony, receive evidence, administer oaths, and “provide for the attendance and testimony of such witnesses and the production of such books, records, correspondence, memoranda, papers, and documents” as the Commission deems advisable. This provision does not explicitly grant subpoena power to the Commission, but it permits the Commission to secure any information or assistance from any government agency the Commission considers necessary. 

Section 841 could be interpreted to mean that the Commission could obtain, for example, information that the DOD Inspector General gathered by subpoena. Section 841 provides the Commission with a huge mandate to examine domestic and foreign contracts relating to wartime contracting and reconstruction activities. Any company that participates in the supply chain would be well advised to monitor the Commission’s activities.

Section 842 commands: “Thorough audits shall be performed … to identify potential waste, fraud, and abuse” in performance of DOD contracts, subcontracts, task and delivery orders for logistical support and security and reconstruction functions in Iraq and Afghanistan.  Section 842 directs the DOD Inspector General, the Special Inspector General for Iraq Reconstruction, and the Special Inspector General for Afghanistan Reconstruction to “develop a comprehensive plan for a series of audits …” The audits must examine:           

• The manner in which contract requirements were developed;
• The procedures under which the contracts, or task or delivery orders, were awarded;           
• Terms and conditions of contracts or task or delivery orders;           
• Staffing and method of performance of contractors, including cost controls;           
• Efficacy of DOD management and oversight;
• Flow of information from contractors to officials responsible for contract management and oversight;
• Federal agency control over contractor performance;
• Extent to which operational field commanders were able to coordinate or direct contractor performance in combat areas;
• Contractor employee screening, selection, training, and equipping;
• Misconduct or unlawful activity by contractor employees; and
• Contractor employee activity that was inconsistent with objectives of operational field commanders.

Clearly, Congress has serious misgivings about the government’s exercise of its discretion and the flexibility in government contracting rules and regulations.  Congress has thus restricted commercial item contracting and embarked on a detailed examination of contractors working in connection with the war and reconstruction efforts.

III. Accountability in Contracting

Section 843 further limits the government’s discretion by imposing affirmative competition requirements for task and delivery order contracts.  These requirements apply to both DOD and civilian agency contracts.  That section forbids the award of a task or delivery order contract in excess of $100 million to a single source unless the agency head determines in writing that: the orders “are so integrally related that only a single source can reasonable perform the work”; the contract provides only for firm, fixed price task or delivery orders with prices established in the contract; only one source is qualified and capable of performance at a reasonable price; or exceptional circumstances require award to the single source for the public interest.

Section 843 also specifies enhanced competition requirements for orders in excess of $5 million.  That provision sets forth minimal requirements for fair competition: a clear statement of the agency’s requirements; a reasonable period to provide a proposal; disclosure of significant factors and subfactors for evaluation of proposals; and opportunity for post-award debriefing.  Most significantly, Section 843(e) states:

A protest is not authorized in connection with the issuance or proposed issuance of a task or delivery order except for –

A protest on the ground that the order increases the scope, period, or maximum value of the contract under which the order is issued; or

A protest of an order valued in excess of $10,000,000.

Section 843 vests exclusive jurisdiction of a protest of a task or delivery order in the General Accountability Office.  This protest provision takes effect 120 days after enactment of the statute (May 27, 2008) and “shall apply with respect to any task or delivery order awarded on or after such date.”  In other words, individual orders in excess of $5 million awarded after May 27 are subject to protest, even though the contract under which the orders are placed were entered into before that date.

Continuing on the themes of enhanced competition and transparency, Congress required in Section 844 that the executive agency head shall make publicly available the justification and approval documents required for non-competitive awards.  Section 844 mandates the availability of such documents on the agency’s website, but “does not require the public availability of information that is exempt from public disclosure” under the Freedom of Information Act.  Even though Section 844 “does not require public availability” of information exempt from disclosure under FOIA, contractors are well advised to mark any confidential information submitted to the government in a prominent fashion, and to monitor the agency’s disclosure pursuant to Section 844.

Contractors should also pay close attention to Section 845, Disclosure of Government Contractor Audit Findings.  There, Congress required every Inspector General to attach to its semiannual report an annex on completed contract audit reports “containing significant findings.”  “Significant findings” includes unsupported, questioned, or disallowed costs in excess of $10 million, or “other findings that the Inspector General of the agency or department concerned determines to be significant." “Contract” includes a task or delivery order or a subcontract.  Section 845 requires the Inspector General to include a list of audit reports, a description of the nature of the audit findings, and the specific amounts of costs identified as unsupported, questioned, or disallowed.  Section 845(b) specifies that DCAA audit reports shall be included in the annex provided by the DOD Inspector General.  Further, Section 845 requires an agency to provide “a full and unredacted copy of any audit” described by that section.

Other provisions that should interest contractors include Section 846, Protection for Contractor Employees from Reprisal for Disclosure of Certain Information (increasing protection for contractor employees who disclose “information that the employee reasonably believes is evidence of gross mismanagement … a gross waste of [DOD] funds … a substantial and specific danger to public health or safety, or a violation of law related to a [DOD] contract (including the competition of or negotiation of a contract) or grant”) and Section 847, Requirements for Senior Department of Defense Officials Seeking Employment with Defense Contractors.

Contractors must also be alert to the fact that Congress continues the pressure on contractor ethics programs in Section 848, Report on Contractor Ethics Programs of Major Defense Contractors.  That section requires GAO to submit a report on the internal ethics programs of major defense contractors, addressing at a minimum the extent to which such programs are in place; availability of hotlines; notification to employees of their right to be free from reprisal; ethics training; internal audit or review programs; self-reporting requirements; disciplinary action; and management oversight to ensure successful implementation of ethics programs.  GAO must also report on advantages and disadvantages “of legislation requiring that defense contractors develop internal ethics programs and requiring that specific elements be included in such ethics programs.”  Section 848 also requires each major defense contractor to provide the GAO with access to “information requested by [GAO] that is within the scope of the report required by this section.”

Section 848 arrives midstream of the new FAR 52.203-13 and -14, and the proposed Department of Justice amendment to those new contract clauses.  Both the legislative and executive branches of government seem intent on making ethics programs contract and subcontract requirements, with affirmative duties of disclosure and cooperation.  For a detailed discussion of these issues, please see our previous e-letter.

IV. Exception to Foreign State Immunity

Finally, companies that perform work internationally should carefully examine Section 1083, Terrorism Exception to Immunity.  That section states that foreign states may be subject to lawsuits in state or federal court, where “money damages are sought against a foreign state for personal injury or death that was caused by an act of torture, extrajudicial killing, aircraft sabotage, hostage taking, or the provision of material support or resources for such an act …”  The reason that companies should be aware of Section 1083 is that the procedural rules for lawsuits are very favorable to plaintiffs seeking to recover.  Thus, a plaintiff seeking to recover money damages for personal injury allegedly caused by a foreign government’s support of a terrorist act may arguably be able to attach or place a lien on money or property given to a contractor for performance of a contract with that foreign government.  Section 1083 permits the president to waive this section with respect to Iraq, and President Bush has done so.  The waiver authority only goes to Iraq, however.  Contractors doing business with other foreign governments may still be at risk.