Whats New in Federal Contracting A Procurement Policy

What’s New in Federal Contracting? A Procurement Policy Update David S. Black Holland & Knight LLP March 7, 2018

Introduction: Who I Am David S. Black • Co-Chair, National Government Contracts Team • Government contracts counseling and dispute resolution • Represent contractors in protests and claims and responding to government investigations, audits, False Claims Act investigations and litigations • Represent subcontractor in negotiating teaming agreements and subcontracts, and in disputes with prime contractors » David Black » Partner » 703 -720 -8680 » david. black@hklaw. com » Tysons, VA Practice • Government Contracts • Litigation and Dispute Resolution • False Claims Act Defense Education • Georgetown University Law Center, JD • University of Virginia, BA Bar Admission • District of Columbia • Virginia 2

GOV CON LAW: Slowly Shifting Sands 2013 2014 2015 2016 3

GOV CON LAW Major Disruption? ? ? 2017 4

GOV CON LAW It was just a mirage…. 2018 5

Today’s Outline • Trump Procurement Policy Update • NDAA of 2018 Update • Protest Update • Small Business Update • False Claims Act Update • Section 809 Panel Update 6

Trump Procurement Policy Update 7

Procurement Policy Under Trump Zzzzzzzz • Vacuum at the White House – Not Much Change – No OFPP Administrator – FAR Regulatory Freeze – Slow Initiative Regarding Domestic Preferences – No Major Rollback of Obama-Era Labor/Employment Rules – No Significant Contract Administration by Tweet • Congress is in Charge of Federal Procurement Policy • Civil Servants are in Charge of Day-to-Day Procurement 8

Procurement Policy Under Trump • FAR Regulatory Freeze • Since Inauguration Day, only two “final rules” published in Federal Register: – 11/06/2017: FAR Case 2017 -015 – Removal of Fair Pay and Safe Work Places Rule – 01/24/2018: FAR Case 2018 -001 - Revised Thresholds for WTOGPA and Free Trade Agreements 9

Procurement Policy Under Trump • FAR Regulatory Freeze • Open Far Cases by Fiscal Year – 2015: 11 – 2016: 6 – 2017: 17 – 2018: 9 10

Buy American Executive Order 1 1

Buy American Executive Order • Policy of the Executive Branch “. . . It shall be the policy of the executive branch to maximize, consistent with law, through terms and conditions of Federal financial assistance awards and Federal procurements, the use of goods, products, and materials produced in the United States. ” 1 2

Buy American Executive Order • Immediate Enforcement of Current Buy American Laws • “Every agency shall scrupulously monitor, enforce, and comply with Buy American Laws, to the extent they apply, and minimize the use of waivers, consistent with applicable law. ” • Waivers are exemptions from or waivers of Buy American Laws, or the procedures and conditions used by an agency in granting exemptions from or waivers of Buy American Laws. 1 3

Overview of the Buy American Executive Order • 220 -Day Process: comprehensive, multi-stakeholder assessment leading to recommendations to the President – Assessment of enforcement, implementation and compliance with existing BAA laws – Assessment of use of waivers – Assessment of impact of current trade agreements on implementation of domestic procurement preferences – Develop policies for Federal agencies that “maximize” use of materials produced in U. S. • Specific recommendations to President to strengthen implementation of Buy American Laws, including domestic preference procurement policies 1 4

Procurement Policy Under Trump • Slow Domestic Preference Initiative • E. O. Portended Possible Re-Write of FAR Part 25 • Current Status Uncertain – Complicating factors: Possible Trade War and NAFTA Negotiations? 15

Buy American Executive Order • Contractor Response: • Risk Mitigation in light of New Enforcement Focus: focus on compliance, compliance • Monitor events: Agency assessments, Presidential recommendations, possible regulatory change • Strategic Planning: Assess possible impacts on supply chain in light of possible future changes 1 6

Status of Obama E. O. ’s re Federal Contracting Labor & Employment EO# Subject FAR Rule Current Status 13494 01/30/09 Treat costs of persuading 76 FR 68040 Currently in Effect employees re union 11/02/11 activities as unallowable 13495 01/30/09 Nondisplacement of Qualified Workers Under Service Contracts 77 FR 75766 Currently in Effect 12/21/12 13627 09/25/12 Anti-Trafficking in Persons in Federal Contracts 80 FR 4967 03/02/15 13658 02/12/14 Minimum Wage for Contractors 80 FR 75915 Currently in Effect 12/04/15 13672 07/21/14 Prohibiting Discrimination 80 FR 75907 Trump will continue to enforce based on Sexual 12/04/15 01/31/2017 Orientation or Gender Identify 13673 07/31/14 Fair Pay and Safe Workplaces 81 FR 58562 Nullified by H. J. Res. 37 10/25/16 13706 09/07/15 Paid Sick Leave for Contractors 81 FR 91627 Currently in Effect 12/16/16 Currently in Effect 17

Contract Administration by Tweet 18

Contract Administration by Tweet • Boeing/Air Force One Update – 02/27/2018: Boeing will produce two planes for $3. 9 B (after candidate Trump asserted the program cost was about $4 B) (Wash. Po, 02/28/2018) • Lockheed/F-35 Update – 01/30/2017: Lockheed agrees to low-rate initial production of a new batch of 90 planes, which reflected an approx. $600 M cost reduction from prior lot. • But Lockheed had previously estimated a comparable cost reduction for this lot (Wash. Po, 01/31/2017) 19

NDAA of FY 2018 Update 20

2018 NDAA: Use of Private Accounting Firms for Incurred Cost Audits 21

2018 NDAA: PRIVATE ACCOUNTING FIRMS • § 803 – Performance of Incurred Cost Audits • DCAA to contract with qualified private accounting firms and delegate review of incurred cost submissions (ICE) audits • Purpose: Eliminate current backlog by 1 Oct 2020 • Specific timelines for Do. D to establish criteria for audits to be performed by qualified private auditors • Re-affirmation of Contracting Officers’ authority to resolve disputes relating to questioned costs 22

2018 NDAA: PRIVATE ACCOUNTING FIRMS • § 803 – Performance of Incurred Cost Audits • Goal: Eliminating Backlog by Oct. 2020 • DCAA to ensure all audits are completed within one year of a “qualified incurred cost submission” • DCAA to notify contractor within 60 days if submission is not “qualified” • In the event an audit is not completed within one year of receipt of a qualified submission, the audit shall be deemed to be complete and no further audit work may be conducted. 23

2018 NDAA: PRIVATE ACCOUNTING FIRMS • § 803 – Performance of Incurred Cost Audits • Use of Qualified Private Auditors • Standards: Auditors must have no conflicts and agree to non-disclosure requirements • 10/01/2018: Do. D to submit plan for selection of qualified private auditors • Audits appropriate for performance by private auditors • Projection of number of incurred cost audits to be performed by private auditors from 2019 -25 • 04/01/2019: Do. D to award contracts to two or more qualified auditors 24

2018 NDAA: PRIVATE ACCOUNTING FIRMS • § 803 – Performance of Incurred Cost Audits • • DCAA Must Pass a Peer Review • Effective Oct. 1, 2022: DCAA may issue unqualified audit findings for incurred cost audits only if DCAA passes a peer reviewed by a commercial auditor • Peer review to be conducted using generally accepted government auditing standards Affirming Contracting Officer Authority • “The contracting officer for a contract that is the subject of an incurred cost audit shall have the sole discretion to determine what action should be taken based on an audit finding on direct costs of the contract” 25

2018 NDAA: Enhanced Debriefings “Why did we lose? ” 26

Enhanced Debriefings • Current Debriefings: FAR 15. 506 1. Debriefed Offeror’s technical ratings, significant weaknesses or deficiencies, past performance information, and evaluated cost/price 2. Successful Offeror’s evaluated cost/price and technical rating 3. Overall ranking of offerors (if applicable) 4. Rationale for the award; 5. Commercial item information of the successful offeror (when applicable) 6. Reasonable responses to relevant questions 27

Enhanced Debriefings • Section 818 – Enhanced Debriefings • Do. D Only (DFARS Amendment Currently Pending) • Awards greater than $100 million: • Do. D will disclose the agency’s written source selection and award decision. • Redacted to exclude confidential and proprietary information for other offerors. • Small business and nontraditional contractors can receive the same briefing for awards greater than $10 million upon request. 28

Enhanced Debriefings • Section 818 – Enhanced Debriefings • Task Orders Above $10 Million: ˗ Do. D must provide “current” debriefings • Mandatory Follow-Up Questions: ˗ Debriefed offerors may ask follow-up questions within two business days ˗ Agency must respond within five business days. ˗ Debriefing “remains open” until questions are answered § Important for protest timing and deadlines 29

Protest Reform – Cost Shifting Pilot Program • Section 827 – Pilot Program for “Loser Pays” ˗ Do. D to implement pilot program to determine effectiveness of requiring contractors to reimburse Do. D for protest costs ˗ Three-Year Pilot: Program to begin by December 2019 and end by December 2022 ˗ Report to Congress assessing feasibility of making permanent such pilot program. 30

Protest Reform – Cost Shifting Pilot Program • Section 827 – Pilot Program for “Loser Pays” ˗ Pilot Program to apply to large contractors • Revenues greater than $250 M ˗ Liability for Do. D “costs incurred in processing covered protests” ˗ Liability arises only if GAO issues an opinion denying the protest 31

2018 NDAA: Use of LPTA 32

Restricting LPTA • Do. D’s 2016 Source Selection Procedures clarified the limited circumstances when LPTA should be used: • “the Government would not place any value on a product or service exceeding the Government’s threshold technical or performance requirements” • Includes commercial or non-complex services/supplies. • Not appropriate when agency will need to compare proposals, not well-defined standards, or SSA desires to conduct a tradeoff analysis. 33

Restricting LPTA • 2017 NDAA institutes further restrictions limiting the use of LPTA when Do. D is purchasing: ˗ IT/cyber services; ˗ Protective equipment; or ˗ Knowledge-based training or logistics in contingency operations outside the U. S. 34

Restricting LPTA • 2017 NDAA directed LPTA be used only when: • Do. D can plainly describe requirements • No value in exceeding requirements • Minimal subjective judgment when evaluating • No benefit from higher priced offerors • Justification in contracting file • LPTA provides lowest cost when considering full life-cycle 35

Restricting LPTA • § 832 of 2018 NDAA adds to the above list: • Minimal innovation would be realized if LPTA was not used • When purchasing goods, they have a short life expectancy and expendable in nature. • Sec. 832 will prohibit use of LPTA in engineering and manufacturing contracts for major defense acquisition programs. 36

OVERVIEW OF THE COMMERCIAL E-COMMERCE PORTALS PROGRAM 37

OVERVIEW OF § 846 OF 2018 NDAA • § 846 OF 2018 NDAA – What Is It? GSA shall establish a program to use commercial ecommerce portals to procure commercial products below the Simplified Acquisition Threshold GSA to award multiple contracts with multiple commercial e-commerce providers (not just Amazon) 38

CONGRESS’ E-COMMERCE VISION • Governmentwide Use of the Portals • Any Federal agency may use the program (not just Do. D) • Agency participation is optional, not mandatory • Other vehicles for COTS procurement remain available (FSS Program) 39

CONGRESS’ E-COMMERCE VISION • A Streamlined, Expeditious Commercial Process • Procurements made “to the maximum extent practicable” under the standard terms and conditions of the portal 40

CONGRESS’ E-COMMERCE VISION Limited to COTS Products (41 USC § 104) • No non-COTS commercial items LIMITS ON USE • No commercial services Limited to Procurements Below the Simplified Acquisition Threshold 41

COMMERCIAL E-COMMERCE PORTAL • Who Can Be a Commercial ECommerce Portal? • “a commercial solution providing for the purchase of commercial products aggregated, distributed, sold, or manufactured via an online portal. ” • Does not include an online portal managed by the Government for, or predominantly for use by, Government agencies. 42

COMMERCIAL E-COMMERCE PORTAL • Who Can Be a Commercial E-Commerce Portal? • widely used in the private sector • Has features that facilitate the execution of program objectives • Supplier and product selection are frequently updated • an assortment of product and supplier reviews • invoicing payment, and • customer service 43

BUT THIS IS STILL FEDERAL PROCUREMENT. . . 44

FEDERAL PROCUREMENT OVERLAY • All Federal procurement laws apply to the Program • “Policies, procedures, requirements, or restrictions for the procurement of property or services by the Federal Government” • “Unless otherwise provided in this section” 45

FEDERAL PROCUREMENT OVERLAY • Portal Provider Must Screen Suppliers • Excluded Parties List (suspended or debarred contractors) • Portal Provider Must Screen Products • Buy American Act & Trade Agreements Act • Berry Amendment • Specialty Metals 46

FEDERAL PROCUREMENT OVERLAY • Small Business Set-Asides • Agencies have same authority to restrict competition to small business concerns. • Small Business Goals • An E-Commerce procurement is deemed an award of a prime contract for purposes of small business goals • E-Commerce purchases count in the computation of the “total value of all prime contract awards” • Current Governmentwide small business goal is 23% of such value 47

FEDERAL PROCUREMENT OVERLAY • Contractors Beware of Void Orders • Anti-Deficiency Act applies to ECommerce Purchases (31 USC § 1341) ü Orders must have adequate appropriations NO SALE? • Only Contracting Officers with “Actual Authority” may bind the Government 48

FEDERAL PROCUREMENT OVERLAY • Restrictions on Disclosure and Use of Information • Portal Provider shall not sell or disclose information about Government orders that identifies the Federal Government as the purchaser • Portal Provider shall safeguard information pertaining to the Federal Government, especially against national security or cybersecurity threats; • Portal Provider shall not use information related to a product from a third-party supplier or the transaction of such product for any purpose other than compliance with Program requirements. L A I T N E D CONFI 49

Implementation Process 50

IMPLEMENTATION PROCESS 51

IMPLEMENTATION PROCESS • OMB (not GSA) is responsible to implement the Program • GSA and other Federal Agencies have a “consultative” role with OMB • Three Phases over 2. 25 Years • Phase I: Implementation Plan (90 days from enactment of § 846) • Phase II: Market Analysis and Consultation (one year from Implementation Plan) • Phase III: Program Implementation Guidance (two years from Implementation Plan) 52

Thoughts and Observations 53

IN A NUTSHELL. . . 1. Potential important new way to sell COTS products across the Federal Government 2. It will supplement (not replace) existing vehicles. 3. Better suited for certain COTS products acquired below the SAT 4. Numerous policy and practical issues remain unresolved 5. It will take several years to establish 54

THOUGHTS & OBSERVATIONS • Unresolved Policy and Bureaucratic Tensions How Congress handled the really difficult issues. . . 55

THOUGHTS & OBSERVATIONS • Unresolved Policy and Bureaucratic Tensions • Commercial Practices vs. Federal Procurement Policy • Efficiency vs. Security • Old FSS Program vs. New E-Commerce Portals • OMB vs. GSA • Established Federal Contractors vs. “Nontraditional” Federal Contractors • GSA/OMB vs. the Federal Acquisition Community 56

THOUGHTS & OBSERVATIONS • Contractor Community Strategy: Stay Tuned and Participate • Once implemented, the Commercial ECommerce Portals could significantly impact the Federal procurement marketplace for COTS products • COTS Contractors should closely monitor developments in the implementation of the Program and participate in the process. 57

REVELATIONS FROM GAO PROTEST STATISTICS 58

GAO PROTEST STATS FY 2017 FY 2016 FY 2015 FY 2014 FY 2013 2, 596 (down 7%) 2789 (up 6%) 2, 639 (up 3%) 2, 561 (up 5%) 2, 429 (down 2%) Cases Closed 2, 672 (256 Task Order Cases) 2734 (375 Task Order Cases) 2647 (335 Task Order Cases) 2, 458 (292 Task Order Cases) 2, 538 (259 Task Order Cases) Merit (Sustain + Deny) Decisions 581 616 587 556 508 Number of Sustains 99 139 One protest counted as 18 “sustains” 68 72 87 Sustain Rate 17% 22. 56% 12% 13% 17% Effectiveness Rate (Reported) 47% 46% 45% 43% 81 69 103 96 145 90% 84% 70% 83% 86% 4. 7% (42 cases) 3. 36% 59 (31 cases) Cases Filed ADR (cases used) ADR Success Rate Hearings 1. 7%From (17 cases) 2. 51% 3. 10% - GAO Annual Report to Congress (27 cases) (31 cases)

GAO PROTEST STATS • Most Prevalent Grounds for Sustaining Protests in FY 2017 • Unreasonable Technical Evaluation • Unreasonable Past Performance Evaluation • Unreasonable Cost or Price evaluation • Inadequate Documentation of the Record • Flawed Selection Decision 60

2017 NDAA Proposals re Protests Losing Protester Pays Costs No Profit for Incumbents Shorten Process to 65 Days Do. D Report on Impact of Protests Debriefings Protest System 61

RAND REPORT • § 885 of 2017 NDAA: Comprehensive study on prevalence and impact of bid protests on Do. D acquisitions • Rand Corporation Report – Delivered to Congress in December 2017 62

RAND REPORT • Summary of Findings and Observations – Substantially different views of Do. D and Private Sector regarding Bid Protests – Increasing protest activity at GAO and COFC between FY 2008 and FY 2016. . –. . but overall very low percentage of Do. D procurements are protested. (Less than 0. 3%!) – Small businesses account for more than half of protest actions. 63

RAND REPORT • Summary of Findings and Observations – Firms are not likely to protest without merit • Based on stability of “Effectiveness Rate” – Do. D uses stay overrides infrequently – Protest filings peak at the end of the fiscal year – The number of protesters and protest actions tends to grow with a contract’s value. 64

RAND REPORT • Summary of Findings and Observations – Small business protests less likely to be effective and more likely to be dismissed – The largest Do. D contractors have slightly higher sustained and effectiveness rates, but these differences are diminishing with time – Cases in which legal counsel represent protesters have higher effectiveness and sustained rates 65

RAND REPORT • Summary of Findings and Observations 66

RAND REPORT • Summary of Findings and Observations 67

RAND REPORT • Summary of Recommendations – Enhance quality of post-award debriefings • “Worst debriefings” were adversarial and skimpy and cause offerors to file protests “in desperation” – Be careful about shortening GAO’s decision timeline below 100 days • Most protests resolved within 30 days • But more complex protests take longer • “Shortening the timeline for GAO might not leave enough time to develop more complex decisions” 68

RAND REPORT • Summary of Recommendations – Be careful about restrictions on task order protests at GAO • Task order protests are generally more likely to be sustained or have corrective action compared with other types of protests. 69

RAND REPORT • Summary of Recommendations – Consider expedited process for contracts under $100 K – Consider approaches to reduce and improve protests by Small Businesses • “Should more than half of protest activity be focused on less than 20 percent of contract dollars? ” • Consider requiring all protests at GAO to be filed through legal counsel. 70

RAND REPORT • Summary of Recommendations – Consider collecting additional data and making changes to protest records to facilitate future research and decision-making. • Data on Agency-Level Protests plus annual report • Data on reasons for corrective action • Better COFC data 71

Small Business Update 72

New “All Small” Mentor-Protégé Program • Background: The Small Business Jobs Act of 2010 and the NDAA for FY 2013 provided authority for SBA to establish mentor-protégé programs for all small businesses. • Final Rule: July 25, 2016 • SBA Began Accepting Applications: October 1, 2016 • Purpose: New program established to develop strong protégé firms through mentor-provided business development assistance, and to help protégés successfully compete for government contracts. 73

New “All Small” Mentor-Protégé Program KEY BENEFITS KEY REQUIREMENTS • Expands the Mentor-Protégé Program from 8(a) Program to ALL categories of small business • Written Mentor-Protégé Agreement approved by SBA • Protégé gets business development assistance from Mentor • SBA approves all changes to agreement • Mentor-Protégé may joint venture as a small business for any government prime contract or subcontract for which the protégé is eligible (no affiliation!) • Annual report by Protégé regarding provision of assistance • To raise capital, Mentor may purchase up to 40% equity in Protégé • Failure to comply with M-P Agreement is grounds for debarment • Mentor can perform up to 59% of work done by the partners. • JV Agreement must comply with § 125. 8(b)(2) • Annual SBA review of the M-P relationship 74

New “All Small” Mentor-Protégé Program KEY LIMITS • Protégé can have up to two mentors in unrelated NAICS codes Current SBA approval process is very efficient • Mentor can have up to three protégés at one time • A Protégé can also be a Mentor if the relationships don’t compete • M-P Agreements limited to two 3 year terms “Too big” and “too small” to compete Key Strategy? Incumbents too large for follow-on avoid the mid-tier squeeze by retaining existing set-aside relationships Protégés expand set-aside business by leveraging past performance of incumbent 75

False Claims Act Update 76

The False Claims Act: The Basics “The government’s premier tool to recovery government money lost to fraud and abuse. ” – Sen. Chuck Grassley Civil statute at 31 U. S. C. §§ 3729 -3733. • The government can sue directly to recover its money lost to fraud. • “Relators” (private plaintiffs) can also sue in the name of the government and get a cut of the money recovered. • Treble damages + penalty per claim ($10, 781. 40 to $21, 562. 80).

The False Claims Act: the basics Summary of FY 2017 – $3. 7 Billion in FY 2017 (4 th highest on record) • $426 million from suits were Do. J declined to intervene (2 nd highest ever) – 799 new cases filed in 2017 (4 th highest on record) • 674 new cases initiated by qui tam whistleblowers – 2017 was eighth straight year with more than $3 B in recovery at more than 700 new cases.

The False Claims Act: the basics • Do. J Statistics: Number of new FCA matters

The False Claims Act: the basics Government Contracting Industry in FY 2017 – $200 million in FY 2017 (up from $122 M in 2016) • $426 million from suits were Do. J declined to intervene (2 nd highest ever) – $45 million settlement for GSA Schedule violations – $16 million settlement based on small business size certifications – $9. 2 million settlement based on overbilling for labor – $5 million settlement based on failure to vet personnel in Afghanistan

Case Law Developments in Implied False Certification • Escobar: 2016 SCOTUS decision recognizing “implied certification theory” • Key Issue: Was the Contractual Requirement “Material” to Payment? • Escobar applies to conduct before enactment of FERA in 2009. U. S. ex rel. Spay v. CVS Caremark Corp, 875 F. 2 d 746 (3 rd Cir. 2017) • Several courts holding that continued payments by Government with knowledge of violation shows immateriality of requirement

Case Law Developments in Implied False Certification • Cases Establish Pleading Theories for Materiality: • Complaint must include more than conclusory statement that Gov’t would have not paid if aware of violation. Examples: • Allegation that Gov’t had terminated for similar violations • Allegation that contractor was informed that compliance was material • Allegation that regulatory language established link between compliance and payment • Allegation that contractor’s conduct showed belief that fraudulent conduct “would be important”

Section 809 Panel Update 83

Section 809 Panel Update • 18 -person panel created by § 809 of 2016 NDAA • Task: Find ways to streamline and improve Do. D acquisition • Organized into Ten Panel Teams • FAR to Statute Baseline • Streamlined Procurement Process • Commercial Buying • Barriers to Entry • Characteristics of Successful Programs • IT Acquisition • Budget, Streamlining Regulations, CAS, Workforce

Section 809 Panel Update • Report 1 of 3 Issued on Jan. 31, 2018 (648 pages) • Topics Addressed • “Dynamic Marketplace” • Commercial Buying • Contract Compliance & Audit • Small Business Goals

Section 809 Panel Update • Commercial Buying • Bifurcating commercial items and services • Eliminating distinction between commercial items and COTS • Shrink the definition of “subcontractor” to reduce compliance requirements • Delete most mandatory flow downs • Revise and clarify Termination for Convenience • Reduce data rights requirements

Section 809 Panel Update • Contract Compliance & Audit • Make DCAA focused on the Contracting Officer as its primary customer • Revise metrics in DCAA annual reports to Congress • Flexibility to use audit and advisory services • Establish statutory time limits for defense oversight activities • Permit DCAA to use independent public accountants

Section 809 Panel Update • Small Business Goals • Create a new Do. D small business strategy that assigns SB programs with agency needs • Build on successes of SBIR/STTR and RIF programs • Enable innovation in the acquisition system among industry partners.

David Black Holland & Knight LLP 703 -720 -8680 David. Black@hklaw. com Questions? www. hklaw. com