annual government contracts update - foley & lardner · 2019-04-17 · title & content...

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Government Contracts Annual Update

October 3, 2018

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Cybersecurity Awareness – How Safe is Your Data?

Chanley Howell


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General Concepts and Sources

FAR 52.204-21, Basic Safeguarding of Covered Contractor Information Systems

NIST SP 800-171 (updated 06-07-2018) – Protecting Controlled Unclassified Information in Nonfederal Systems and Organizations

Agency by agency action

DoD DFARS Clause 252.204-7012, Safeguarding Covered Defense Information and Cyber Incident Reporting

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DFARS 252.204-7012 - CDI

Safeguarding Covered Defense Information (CDI) and Cyber Incident Reporting

Covered Defense Information. Unclassified controlled technical information or other information, as described in the Controlled Unclassified Information (CUI) Registry at http://www.archives.gov/cui/registry/category-list.html, that requires safeguarding or dissemination controls pursuant to and consistent with law, regulations, and Governmentwide policies, and is:

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http://www.archives.gov/cui/registry/category-list.html



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DFARS 252.204-7012 CDI

(1) Marked or otherwise identified in the contract, task order, or delivery order and provided to the contractor by or on behalf of DoD in support of the performance of the contract

(2) Collected, developed, received, transmitted, used, or stored by or on behalf of the contractor in support of the performance of the contract

“In support of the performance of the contract” is not meant to include the contractor’s internal information (e.g., human resource or financial) that is incidental to contract performance

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DFARS 252.204-7012 – Requirements

Adequate security

Cloud computing services – 252.239-7010; FedRAMP Moderate baseline

NIST 800-171

Other measures when Contractor determines that additional measures may be required

Request to vary in writing to the Contracting Officer

Not applicable; equally effective

Cyber incident reporting

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DFARS 252.204-7012 Cyber Incident Reporting Actions taken through the use of computer networks

that result in a compromise or an actual or potentially adverse effect on an information system and/or the information residing therein

Conduct review for evidence of compromise of CDI

Rapidly report cyber incidents http://dibnet.dod.mil

Submit malicious software discovered and isolated in connection with a reported cyber incident to the DoD Cyber Crime Center

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http://dibnet.dod.mil/

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DFARS 252.204-7012 Cyber Incident Reporting

If requested, submit media and additional information to DoD

DoD can conduct a cyber incident damage assessment

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DFARS 252.204-7012 Subcontractor Flowdown

Required only when performance will involve operationally critical support or CDI

The contractor shall determine if the information required for subcontractor performance is, or retains its identify as, CDI and requires safeguarding

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DFARS 252.204-7012 Subcontractor Flowdown

DoD’s emphasis is on the deliberate management of information requiring protection

Prime contractors should minimize the flowdown of information requiring protection

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Implementing NIST 800-171

Most requirements in NIST SP 800-171 are about policy, process, and configuring IT securely, but some may require security-related software or hardware

The complexity of the company IT system may determine whether additional software or tools are required

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Examine each of the requirements to determine:

– Policy or process requirements

– Policy/process requirements that require an implementation in IT (typically by either configuring the IT in a certain way or through use of specific software)

– IT configuration requirements

– Any additional software or hardware required

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Determine which requirements can readily be accomplished by in-house IT personnel and which require additional research or assistance

Develop a plan of action and milestones to implement the requirements

Agencies can request System Security Plans (SSPs) and Plans of Action and Milestones (POA&Ms)

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SSP

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POA&M

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DoD will not certify that a contractor is compliant

with the NIST SP 800-171 security requirements

Third party assessments or certifications of

compliance are not required, authorized, or

recognized by DoD

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NIST 800-171 Not Yet Implemented DoD Guidance for Reviewing System Security Plans

and the NIST SP 800-171 Security Requirements Not Yet Implemented

– http://www.aptac-us.org/media/DoD_Guidance_-_NIST_SP_800-171_4-16-2018_002.pdf

Impact

Prioritization

Methods to implement

Provide clarifying information

Policy, process, configuration, software or hardware change, or any combination

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NIST 800-171 Not Yet Implemented

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Resources

DoD FAQs

– https://dodprocurementtoolbox.com/cms/sites/default/files/resources/2018-04/Revision%20to%20Cyber%20DFARS%20FAQs%20-%20April%202%202018.pdf

NIST Manufacturing Extension Partnership - Cybersecurity Self-Assessment Workbook for Assessing NIST SP 800-171

– https://nvlpubs.nist.gov/nistpubs/hb/2017/NIST.HB.162.pdf

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https://dodprocurementtoolbox.com/cms/sites/default/files/resources/2018-04/Revision to Cyber DFARS FAQs - April 2 2018.pdf






https://nvlpubs.nist.gov/nistpubs/hb/2017/NIST.HB.162.pdf

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Resources

Procurement Technical Assistance Program (PTAP) and Procurement Technical Assistance Centers (PTACs)

– http://www.dla.mil/HQ/SmallBusiness/PTAP.aspx

Cybersecurity Evaluation Tool (CSET)

– https://ics-cert.us-cert.gov/Downloading-and-Installing-CSET

Cloud Computing Security Requirements Guide (SRG)

– (http://iasecontent.disa.mil/cloud/SRG/)

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http://iasecontent.disa.mil/cloud/SRG/

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Changes in Government Contracts

Express and Constructive

Marshall J. Doke, Jr.


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Introduction

Right to Make Changes

What Can Be Changed?

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Change Orders

Making a Contract Change

Standard Form 30 (Rev. 1/2016)

Duty to Proceed

Contractors Must Finance the Change

Equitable Adjustments

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Constructive Changes

Meaning of “Constructive”

Contract Interpretation

Defective Specifications

Method or Manner of Performance

Superior Knowledge

Inspection and Testing

Interference With Performance

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Constructive Changes (Cont’d)

Failure to Cooperate

Acceleration

Contract Administration

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Equitable Adjustments

General Considerations

Allowable Costs

Proving Costs

Requests for Equitable Adjustment

Claims

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CLE Announcement

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Q&A

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15 Minute Break

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You Received a Government Contract - Now What?

Micah Tal Zomer


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Introduction

Government contractors must:

– Understand key performance requirements in contracts

– Identify periodic reporting obligations

– Develop and implement compliance and ethics programs

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Introduction

Failure to comply can lead to

– Negative past performance history (CPARS)

– Adverse responsibility determinations

– Termination for default

– Violations of the civil False Claims Act

– Criminal penalties

– Suspension/Debarment

Compliance begins with. . . reading the contract!

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System for Award Management (SAM)

Prime contractors must register in SAM (www.sam.gov) prior to proposal submission

Enter Representations and Certifications into the database once for all federal contracts

Must be updated annually, or when information changes

Registration must be kept active throughout the life of the contract

Register under corporate entity’s DUNS number – each subsidiary/division with a separate tax id number should have a separate DUNS number and a separate SAM registration

Accurate data is important – intentional or fraudulent misrepresentations may subject a contractor to civil or criminal charges under the False Claims Act or False Statements Act

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http://www.sam.gov/

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Code of Business Ethics and Conduct

FAR 52.203-13

Required for contracts over $5.5M with a period of performance longer than 120 days

Written Code required within 30 days after contract award

A copy of the Code must be provided to employees performing work on the government contract

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An Effective Code of Business Ethics and Conduct:

– Is well written with clear language

– Is tailored to the organization and industry

– Addresses the risks the contractor faces

– Includes a strong “tone from the top” and leadership commitment

– Includes a statement of company values

– “Meshes” with employee handbook, company policies, etc.

– Is woven into the operation of the contractor

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Examples of Topics to be Covered in the Code

– Equal Employment Opportunity

– Restrictions on Lobbying

– Trafficking in Persons

– Gratuities

– Anti-Kickback Act

– Mandatory Disclosures

– Cooperation with the Government

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Examples of Topics to be Covered in the Code (cont.)

– Drug-Free Workplace

– Procurement Integrity Act

– Personal Conflicts of Interest

– Organizational Conflicts of Interest

– Export Controls and Sanctions (OFAC)

– Recruiting Current and Former Government Employees

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Compliance Program

FAR 52.203-13

– Within 90 days after contract award, requires implementation of an ongoing business ethics awareness and compliance program and internal control system

Not required for small business concerns and commercial item contractors

– Business ethics awareness and compliance program requires training employees on contractor’s standards and procedures and other aspects of compliance

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Compliance Program

Best Practices in Business Ethics Awareness and Compliance Program

– Written training plan

– Conduct training annually

– Tailor training to an individual’s job/responsibilities

– Special training for managers/”principals”

– Keep records of trainings/acknowledgments from employees

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Compliance Program Internal control system should facilitate timely discovery

of improper conduct and ensure appropriate corrective measures are taken

Minimum requirements include:

– Assign responsibility at a sufficiently high level

– Periodic reviews of company business practices, procedures, policies, and internal controls for compliance with the Code

– Internal reporting mechanism (e.g., hotline) that allows for anonymity or confidentiality

– Internal and/or external audits

– Reasonable efforts to ensure that principals do not include individuals whose conduct is contrary to the Code

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Equal Employment Opportunity Executive Order 11246 (FAR 52.222-26)

– Federal contractors and subcontractors are required to provide equal employment opportunities to all

no discrimination based on protected categories

– Employment advertisements or solicitations must contain a disclaimer stating that all applicants for employment will receive consideration

– An equal opportunity posting must be placed conspicuously to employees and applicants (poster available from Department of Labor)

– File EEO-1 form within 30 days of contract award and annually by September 30

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Equal Employment Opportunity

Equal Opportunity for Veterans (FAR 52.222-35) and Workers with Disabilities (FAR 52.222-36)

– Reporting Requirements (FAR 52.222-37)

File VETS-4212 report within 120 days of contract award and annually by September 30

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Equal Employment Opportunity Affirmative Action Program

– Management tool designed to ensure equal employment opportunity

– Helps identify areas in the contractor’s workforce that reflect underutilization of women and minorities

– Requirements set forth at 41 CFR Part 60-2; 41 CFR 60-4 (construction)

– AAP required for contractors with 50 or more employees and a contract/subcontract of $50,000 or more (or bills of lading that can be expected to total $50,000 or more in a 12-month period)

– AAP must be developed within 120 days of contract award and updated annually

– AAP kept on file and carried out by the contractor

– Submitted to Office of Federal Contract Compliance Programs (OFCCP) only if the agency requests it for the purpose of conducting a compliance review

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Employment Eligibility Verification (E-Verify)

Department of Homeland Security (DHS) website allows businesses to determine the eligibility of their employees, both U.S. or foreign citizens, to work in the United States

A step following I-9 completion for new hires and existing employees assigned to a federal contract

Relies upon information from the I-9 forms

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Employment Eligibility Verification (E-Verify) FAR 52.222-54, Employment Eligibility Verification

– Contractors are required to enroll in E-Verify within 30 days of contract award (https://www.e-verify.gov/)

– Within 90 days of enrollment, must begin initiating verification of all new employees, whether or not assigned to the contract

verification must occur within 3 days of hire

– For employees assigned to the contract, must initiate verification within 90 days of enrollment or 30 days of assignment to contract, whichever is later

– Option to verify employment eligibility of all employees within 180 days of enrollment or notification of decision to exercise this option

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https://www.e-verify.gov/





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Lobbying Restrictions and Disclosures FAR 52.203-12, Limitation on Payments to Influence

Certain Federal Transactions

– Federal law prohibits the use of federal funds to lobby government officials in connection with a federal contract, grant, loan, or cooperative agreement

– Pre-award, contractors must certify compliance with this prohibition as part of their offers and provide disclosures of lobbying occurred in connection with the contract (OMB Form LLL)

– Post-award, contractors must submit updated Form LLLs to reflect any material changes to the disclosure information

Must be submitted within 30 days of the end of the calendar quarter in which the change occurred

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Lobbying Restrictions and Disclosures

FAR 52.203-12, Limitation on Payments to Influence Certain Federal Transactions

– If the contractor did not lobby prior to award but lobbies post-award to obtain a contract extension, additional funding, etc., contractor must submit an OMB Form LLL within 30 days of the end of the calendar quarter in which the lobbying occurred

– For subcontracts over $150,000, must obtain certifications and disclosures from subcontractors

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Trafficking in Persons FAR 52.222-50, Combatting Trafficking in Persons

– U.S. Government has a zero-tolerance policy prohibiting trafficking in persons

– Contractor must notify employees of this policy and actions that will be taken against them for violations, up to and including, termination of employment

– A compliance plan and awareness program is required for supplies acquired or services performed outside the U.S. that have a value over $500,000

Must be posted at workplace and on the contractor’s website prior to initiation of contract performance

Contractors must submit annual certifications regarding compliance plans and must obtain certifications from subcontractors with subcontracts meeting the requirements of the clause

– Contractors must provide immediate notice to the Contracting Officer and agency IG of any credible information alleging violations

Existence of effective compliance plan can be mitigating factor in any penalties

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Anti-Kickback Procedures FAR 52.203-7, Anti-Kickback Procedures

– Anti-Kickback Act prohibits:

Providing or attempting to provide any kickback

Soliciting, accepting, or attempting to accept any kickback; or

Including a kickback in the contract or subcontract price

– Contractors are required to have in place and follow reasonable procedures designed to prevent and detect violations

– If reasonable ground to believe violations occurred, contractor must report violations in writing to the agency Inspector General or Attorney General

– Clause does not apply to commercial item contracts BUT commercial item contractors need to comply with the Anti-Kickback Act (see FAR clause 52.212-4 (r))

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Drug-Free Workplace

FAR 52.223-6, Drug-Free Workplace

– Within 30 days of contract award, contractors must:

Publish statement of drug-free workplace prohibitions and provide all employees working on the contract a copy of the statement

Establish an ongoing drug-free awareness program to inform employees about: (i) dangers of drug abuse in the workplace; (ii) contractor’s drug-free workplace policy; (iii) available drug rehab/counseling programs; and (iv) penalties for violating policy

Provide written notification to employees working on the contract that they are to abide by the drug-free requirements and that they are required to notify the company of criminal drug conviction for a violation occurring in the workplace

– Does not apply to commercial item contracts

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Document Retention Some prime contracts permit the government to audit the contract

up until 3 years after final payment

– Audits and Records Clauses (e.g., FAR 52.214-26 and FAR 52.215-2)

Audit rights under subcontracts are determined by the subcontract

Time Guidelines

– Financial and cost accounting records: 4 years, except labor cost distribution cards (2 years) and petty cash records (2 years)

– Pay administration records: payroll sheets, registers, and tax withholding statements (4 years); clock cards and paid checks, receipts for wages paid in cash, or other payments for services rendered by employees (2 years)

– Acquisition and supply records: 4 years for everything, except requisitions (2 years)

Longer retention periods may apply in some cases

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Mandatory Disclosures Mandatory Disclosure Requirement (FAR 9.4)

– Basis for suspension/debarment for a “knowing” failure by a principal, until 3 years after final payment on any Government contract awarded to a contractor, to timely disclose to the Government, in connection with the award, performance, or closeout of the contract or a subcontract thereunder, credible evidence of:

Violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations

Violation of the civil False Claims Act

Significant overpayment(s) on the contract

– “Principal” defined as “officer, director, owner, partner, or a person having primary management or supervisory responsibilities within a business entity (e.g., general manager; plant manager; head of a division or business segment; and similar positions)”

– Applies to all federal government prime contracts and subcontracts, regardless of contract type, value or duration

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Subcontracting Requirements

FAR 52.209-6, Protecting Government’s Interest When Subcontracting with Contractors Debarred, Suspended, or Proposed for Debarment

– For subcontracts exceeding $35,000, contractors must obtain written representation from subcontractors as to whether the subcontractor or its principals are debarred, suspended or proposed for debarment

– Must be compelling reason to subcontract with suspended/ debarred subcontractor

– Required flowdown in lower-tier subcontracts

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Subcontracting Requirements The use of small business concerns (SBCs) by large

contractors is required in some circumstances

FAR 52.219-9, Small Business Subcontracting Plan

– Requires large businesses awarded prime contracts and non-commercial item subcontracts in excess of $700,000 (or $1.5 million for a contract for construction of a public facility) that offer further subcontracting opportunities to submit a small business subcontracting plan to the appropriate contracting agency

– Contractors required to submit small business subcontracting plans with their proposals and must comply with certain post-award obligations

– Obtain small business certifications from subcontractors; contractors can rely on such certifications

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Small Business Subcontracting Plans

– Subcontracting Plan Requirements:

Separate percentage goals for using SBCs and each category of SBCs

A statement of the total dollars planned to be subcontracted to SBCs

A description of the methods used to develop subcontracting goals

Assurance that the contractor will include requirements in subcontracts

Assurance that contractor will make a good faith effort to acquire goods/services from the SBCs used in preparing proposal or will provide a written explanation as to why such SBCs were not used in performance; explanation must be submitted within 30 days of contract completion

Assurance that the contractor will comply with reporting requirements

– Commercial Plans versus Individual Plans

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Subcontract Requirements

Small Business Subcontracting Plan Reporting

– Reports submitted at www.esrs.gov

– Individual Subcontract Reports (ISRs)

Filed semi-annually for periods ending March 31 and September 30, within 30 days after close of reporting period

Filed within 30 days of contract completion

ISRs not required for commercial plans

– Summary Subcontract Reports (SSRs)

Filed annually by October 30 for 12-month period ending September 30

– DOD reporting requirements (DFARS 252.219-7003)

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http://www.esrs.gov/

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Subcontracting Requirements FAR 52.219-14, Limitations on Subcontracting

Applies to 8(a) contracts and small business set-aside contracts for supplies, services, and construction in excess of $150,000

SBCs must comply with the following limitations in the clause:

– In contracts for services (except construction), the SBC personnel must perform at least 50% of the cost of contract performance

– In contracts for manufactured supplies, the SBC must perform work for at least 50% of the cost of manufacturing the supplies (not including the cost of materials)

– In contracts for general construction, the SBC’s employees must perform at least 15% of the cost of the contract (not including the cost of materials)

– In contracts for construction by special trade contractors, the SBC’s employees must perform at least 25% of the cost of the contract (not including the cost of materials)

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Subcontracting Requirements Limitations on Subcontracting Clause (cont.)

– Change in SBA regulation (13 C.F.R. 125.6) allows SBCs to take credit for work performed by similarly situated subcontractors

– Specifically, the SBA change excludes from the subcontracting percentage calculations the amount the prime contractor spends on subcontracts with similarly situated entities (i.e., entities that have the same small business program status as the prime contractor)

– This change has not yet been adopted in the FAR

– Discrepancy between SBA and FAR clauses has led to confusion:

The VA issued a Class Deviation incorporating the SBA regulation by reference

Other agencies continue to use the current FAR clause

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Subcontracting Requirements Consent to Subcontract (FAR 52.244-2) required for the

following contract types:

– Cost-Reimbursement

– Time-and-Materials

– Labor-Hour

– Letter

– Fixed Price with Unpriced Contract Actions

Consent may also be required by a higher-tiered contractor

If consent is required, the contractor must provide Contracting Officer notification reasonably in advance of placing any subcontract or modification thereof

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Executive Compensation Reporting (FAR 52.204-10)

– Prime contractor must report the names and total compensation of each of the five most highly compensated executives for the first-tier subcontractor’s preceding completed fiscal year if the subcontractor received in the prior fiscal year:

80% or more of annual gross revenues from federal contracts, subcontracts, loans, grants, subgrants, and cooperative agreements; and

$25M or more in annual gross revenues from federal contracts, subcontracts, loans, grants, subgrants, and cooperative agreements; and

The public does not have access to this information through SEC or IRS reports

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– Prime contractors must report this executive compensation information for subcontractors that meet the criteria above at www.fsrs.gov

Report must be submitted at the end of the month following the month of a first-tier subcontract award and annually thereafter

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http://www.fsrs.gov/

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Subcontracting Requirements FAR 52.204-10 Executive Compensation Reporting

(cont.)

– Prime contractors must submit additional information regarding first-tier subcontracts and subcontractors, including:

Unique entity identifier for the subcontractor and subcontractor’s name and physical address

Subcontract number

Date and amount of subcontract award

Description of products/services being provided by the subcontractor

Subcontract primary performance location, including zip code and congressional district

Prime contract information, including prime contract number, awarding agency, funding agency, and applicable NAICS code

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Requirements related to excessive pass-through charges (FAR 52.215-22 and FAR 52.215-23)

– Government will not pay “excessive pass-through charges” (i.e., overhead costs or profits passed to the government by contractors adding negligible value over work done by subcontractors)

– Pre-Award: If a contractor intends to subcontract more than 70% of contract work, the contractor’s proposal must identify: (i) amount of offeror’s indirect costs and profit/fee applicable to the subcontractor’s work; and (ii) value added by the offeror as related to the work to be performed by the subcontractor

– Post-Award: If after award, a contractor makes changes so that the contractor will subcontract more than 70% of the contract work, the contractor must notify the Contracting Officer in writing of such changes

– Prime contractor’s reporting requirement also applies to subcontractors who subcontract more than 70% of the work to lower-tier subcontractors

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Subcontracting Requirements Prime contractors must flowdown the clauses that are

required to be flowed down according to the terms of the flowdown language in the clause

These flowdowns are often required in order for the prime contractor to comply with its obligations to the government

Subcontractors must similarly flowdown clauses in their lower-tier subcontracts, as applicable

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Takeaways Contractors must review and understand the key

compliance requirements in their contracts

Develop a Code of Conduct that covers topics applicable to the contractor’s work and the risks presented

Because non-compliance can result in severe penalties, an effective compliance program is critical and requires training and buy-in from the highest levels of the organization

Compliance requirements are required for some contractors but should be implemented by all

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CLE Announcement

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Commercial Item Contracting

Erin L. Toomey


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Background

Historical Impediments to Contracting with the Federal Government

– Government-unique auditing and accounting requirements (e.g., Cost Accounting Standards, Truth in Negotiations Act, etc.)

– Government-unique specifications and standards

– Technical data and computer software rights

– Government-unique contract requirements (e.g., government specifications, unilateral changes, etc.)

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Background In October 1994, the government enacted the Federal

Acquisition Streamlining Act (FASA)

– Dramatically changed the government’s procurement philosophy

– A key provision in FASA is the government’s stated preference for the purchase of commercial items because the purchase of proven commercial items can:

Reduce the need for government-funded research and development

Minimize acquisition lead time

Reduce the need for detailed design specifications and expensive product testing

– FASA further encourages government agencies to ensure that requirements are defined so that commercial items may be procured to fulfill agency requirements

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Background In 1995, the Federal Acquisition Regulation (FAR) council

implemented FASA by revising FAR Part 12 to:

– Contain policies and procedures applicable only to commercial items

– Create acquisition policies that more closely resemble the commercial marketplace

– Identify exemptions from government contracting laws and regulations for commercial item contracts

Among other things, FAR Part 12 requires government agencies to:

– Conduct market research to determine if commercial items are available to satisfy the agency’s requirements

– Buy commercial items when they are available to meet the agency’s needs

– Require prime contractors and subcontractors at all tiers to incorporate, to the maximum extent practicable, commercial items as components of items supplied to the government

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Preference for Commercial Items

Palantir USG v. United States, Fed. Cir. (Sept. 7, 2018)

– Palantir filed a pre-award protest in the COFC challenging the Army’s solicitation of its Distributed Common Ground System

Followed a denial of Palantir’s protest at GAO

Argued that the Army violated FASA by failing to determine whether the Army’s needs could be met by commercial items

Palantir argued its flagship software product, the Gotham Platform, could satisfy the Army’s requirements

After market research and a series of RFIs, the Army issued a Market Research Report concluding that the development effort can’t be procured as a commercial product

Army issued a solicitation for an IDIQ contract with a cost-reimbursement task order

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– Held the Army’s actions were arbitrary and capricious

Army was on notice of hybrid options that used commercial solutions through market research and Army did not analyze whether those commercial items could meet its requirements, be modified to meet its requirements or if the requirements could be modified

Army’s Market Research Report contained a conclusory statement that 3 items were not commercially available, but no discussion of how it came to that conclusion or if the commercial items could be modified / requirements could be modified

No mandatory documentation requirement, but the record must be sufficient to permit a meaningful judicial review

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– Key Takeaways

Respond to RFIs with commercial offerings

Consider pre-award protest to convert a FAR Part 15 procurement to FAR Part 12

Look for agencies to better document their market research and rationale for procurement decisions

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Benefits of Commercial Item Contracts The government has a stated preference to acquire

commercial items (this includes the acquisition of commercial services) – DoD acquired over $53M in commercial items in FY 2017

Commercial item contracts are “streamlined” to resemble non-government commercial contracts – Fewer FAR/DFARS and other clauses and flowdowns

– Exempt from many onerous government requirements

– Allows companies to propose terms consistent with commercial practices in their industries

– FAR Part 12 takes precedence over any other section of the FAR (see FAR 12.102(c))

Keeps overhead costs lower with less administrative burdens (less risk), which will help contractors to keep their prices competitive – this also benefits the government!

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What is a Commercial Item?

“Commercial Item” means (FAR 2.101) -

(1) Any item, other than real property, that is of a type customarily used by the general public or by non-governmental entities for purposes other than governmental purposes, and-

(i) Has been sold, leased, or licensed to the general public; or

(ii) Has been offered for sale, lease, or license to the general public;

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FAR 2.101 (cont…)

(2) Any item that evolved from an item described in paragraph (1) of this definition through advances in technology or performance and that is not yet available in the commercial marketplace, but will be available in the commercial marketplace in time to satisfy the delivery requirements under a Government solicitation;

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What is a Commercial Item? FAR 2.101 (cont…)

(3) Any item that would satisfy a criterion expressed in paragraphs (1) or (2) of this definition, but for-

(i) Modifications of a type customarily available in the commercial marketplace; or

(ii) Minor modifications of a type not customarily available in the commercial marketplace made to meet Federal Government requirements. Minor modifications means modifications that do not significantly alter the nongovernmental function or essential physical characteristics of an item or component, or change the purpose of a process. Factors to be considered in determining whether a modification is minor include the value and size of the modification and the comparative value and size of the final product. Dollar values and percentages may be used as guideposts, but are not conclusive evidence that a modification is minor;

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FAR 2.101 (cont…)

(4) Any combination of items meeting the requirements of paragraphs (1), (2), (3), or (5) of this definition that are of a type customarily combined and sold in combination to the general public;

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FAR 2.101 (cont…)

(5) Installation services, maintenance services, repair services, training services, and other services if-

(i) Such services are procured for support of an item referred to in paragraphs (1), (2), (3), or (4) of this definition, regardless of whether such services are provided by the same source or at the same time as the item; and

(ii) The source of such services provides similar services contemporaneously to the general public under terms and conditions similar to those offered to the Federal Government;

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FAR 2.101 (cont…)

(6) Services of a type offered and sold competitively in substantial quantities in the commercial marketplace based on established catalog or market prices for specific tasks performed or specific outcomes to be achieved and under standard commercial terms and conditions.

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FAR 2.101 (cont…)

For purposes of these services -

(i) “Catalog price” means a price included in a catalog, price list, schedule, or other form that is regularly maintained by the manufacturer or vendor, is either published or otherwise available for inspection by customers, and states prices at which sales are currently, or were last, made to a significant number of buyers constituting the general public; and

(ii) “Market prices” means current prices that are established in the course of ordinary trade between buyers and sellers free to bargain and that can be substantiated through competition or from sources independent of the offerors.

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FAR 2.101 (cont…)

(7) Any item, combination of items, or service referred to in paragraphs (1) through (6) of this definition, notwithstanding the fact that the item, combination of items, or service is transferred between or among separate divisions, subsidiaries, or affiliates of a contractor; or

(8) A non-developmental item, if the procuring agency determines the item was developed exclusively at private expense and sold in substantial quantities, on a competitive basis, to multiple State and local governments.

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Commercially Available Off-The-Shelf (COTS)

– An item does not need to be a COTS item to be a commercial item

Definition of COTS (see FAR 2.101)

– A commercial item as defined in paragraph (1) of the commercial item definition

– Sold in substantial quantities in the commercial marketplace

– Offered to the government under a prime contract or subcontract at any tier, without modification in the same form in which it is sold in the commercial marketplace

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Commercial Item Contracts Commercial item contracts must be Firm-Fixed-

Price (FFP) or FFP with economic price adjustment (based on fluctuating labor or material costs)

Limited exceptions for labor-hour and time-and-materials contracts requiring various high-level government approvals

GSA Multiple Award Schedule and VA Federal Supply Schedule contracts are commercial item prime contracts

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Commercial Item Contracts

Can have a commercial item subcontract even if the prime contract or higher-tiered contract is noncommercial

– FAR 44.402 and FAR clause 52.244-6, Subcontracts for Commercial Items

Contractors and subcontractors at all tiers shall, to the maximum extent practicable be required to incorporate commercial items or nondevelopmental items as components of items delivered to the Government

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Commercial Item Prime Contracts

Commercial Item Solicitations, Contracts, Orders are issued on Standard Form 1449

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Commercial Item Prime Contracts Solicitations incorporate by reference FAR clauses: – 52.212-1, “Instructions to Offerors – Commercial Items”

– 52.212-3, “Offeror Representations and Certifications-Commercial Items”

– 52.212-4, “Contract Terms and Conditions-Commercial Items”

– 52.212-5, “Contract Terms and Conditions Required to Implement Statutes or Executive Orders-Commercial Items”

Contracts incorporate by reference FAR Clauses: – 52.212-4, “Contract Terms and Conditions-Commercial Items”

– 52.212-5, “Contract Terms and Conditions Required to Implement Statutes or Executive Orders-Commercial Items”

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Commercial Item Prime Contracts FAR 52.212-4 – Addresses the following topics:

Inspection/Acceptance

Assignment

Changes

Disputes

Definitions

Excusable Delays

Invoice

Patent Indemnity

Payment

Risk of Loss

Taxes

Termination for the Government’s

Convenience

Termination for Cause

Title

Warranty

Limitation of Liability

Other Compliances

Compliance With Laws Unique

to Government Contracts

Order of Precedence

System for Award Management (SAM)

Unauthorized Obligations

Incorporation by Reference

• Topics in bold and underlined cannot be tailored – all other clauses can be tailored

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Example, 52.212-4, Paragraph (o), Warranty

– “The Contractor warrants and implies that the items delivered hereunder are merchantable and fit for use for the particular purpose described in this contract.”

Standard implied warranties under Article 2 of the Uniform Commercial Code, which only apply to the sale of goods

Contractors often want to expressly disclaim these implied warranties in favor of an express warranty (e.g., 12 month warranty of no defects in workmanship)

– Revise if the contract requires the performance of services

– FAR 12.404 requires COs to take advantage of commercial warranties

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FAR 52.212-5

– “Check-the-Box” Format

– Only the FAR clauses that have been checked off by the Contracting Officer apply to the prime contract

DFARS 212.301

– List of DFARS clauses that apply to commercial item solicitations and contracts

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Commercial Item Prime Contracts Best Practices

– FAR 52.212-4

Review the government’s clauses

Know what is required and what can be tailored

Don’t waste time trying to negotiate mandatory clauses that cannot be tailored

Identify the clauses you want to target for tailoring and provide a justification to the Contracting Officer

Be prepared to offer new clauses and justify them as the customary commercial practice

– FAR 52.212-5

Review the clauses checked off by the CO and negotiate out unnecessary / inapplicable clauses

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Commercial Item Subcontracts

Government contract statutes, rules, regulations, and clauses apply to the extent they are incorporated into the agreement

– “Christian” doctrine G. L. Christian & Associates v. U.S., 312 F.2d 418 (Ct. Cl., 1963) does not apply to subcontracts

– But see UPMC Braddock v. Harris, 2013 U.S. Dist. LEXIS 45953 (D.D.C. March 30, 2013)

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U.S. Government subcontracts are also governed by commercial law such as the Uniform Commercial Code (U.C.C.), other statutory laws or the common law

– Article 2 of the U.C.C. only applies to the sale of goods

– The U.C.C. has been enacted in all 50 states and the District of Columbia, the Commonwealth of Puerto Rico, Guam and the U.S. Virgin Islands

– The goal behind the U.C.C. is to harmonize state law because most transactions involving the sale of goods extend beyond one state

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Prime Contract is not a Commercial Item Contract

– Prime Contract Contains FAR 52.244-6

Paragraph (c)(1) identifies mandatory FAR flowdown clauses

Paragraph (c)(2) permits the prime contractor to flow down to subcontracts for commercial items a minimal number of additional clauses necessary to satisfy its contractual obligations

e.g., Inspection and Acceptance, Warranty, Termination, Stop Work Order, Data Rights, Patent Indemnity, Changes, Definitions, Taxes, Risk of Loss, DPAS Rating, etc.

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Prime Contract is not a Commercial Item Contract

– Prime Contract Contains DFARS 252.244-7000

Prime contractor is not required to flow down the terms of any DFARS clause in subcontracts for commercial items at any tier under the contract, unless so specified in the particular clause

While not required, the contractor may flow down to subcontracts for commercial items a minimal number of additional clauses necessary to satisfy its contractual obligation

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Prime Contract is a Commercial Item Contract

– Prime Contract Contains FAR 52.212-5

Paragraph (e)(1) identifies mandatory FAR clauses

Paragraph (e)(2) permits the prime contractor to flow down to subcontracts for commercial items a minimal number of additional clauses necessary to satisfy its contractual obligations

– Prime Contract Contains DFARS 252.244-7000

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Commercial Item Subcontracts Prime Contractor’s Perspective

– Prime contractor usually has the most bargaining power

– There are some clauses in the prime contract that must be flowed down, or the prime contractor will be in breach

– But, not all provisions must be or even can be flowed-down

EFT Payment Provisions through the System for Award Management (SAM)

Disputes Clause

– Since the subcontract is likely only for a subset of the prime contractor’s requirements, some provisions are likely not applicable

– There are other clauses which, while not mandatory, should be modified and flowed-down in order to protect the prime contractor’s interests (e.g., changes, termination, stop-work, etc.)

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Subcontractor’s Perspective

– Subcontractor needs to accept the clauses the Prime must include to cover its legitimate risk (e.g., termination, warranty, etc.)

– Subcontractor needs to be able to identify the clauses that are not mandatory flow-downs, that do not cover a Prime’s legitimate risk, or that cause a burden on the subcontractor

– Challenge for the subcontractor is to convince the Prime that these superfluous clauses add unnecessary costs, are overly burdensome to the subcontractor, or are just unfair

– Subcontractor needs to consider whether, once accepted, it will be able to flow-down clauses to its own lower-tier subcontractors

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Exemptions for Commercial Item Contracts Exemptions for Commercial Item Prime Contracts and

Subcontracts

– FAR 12.503 and DFARS 212.503 identify certain laws or portions of laws not applicable to Executive Agency Commercial Item Prime Contracts

– FAR 12.504 and DFARS 212.504 identify certain laws or portions of laws not applicable to Commercial Item Subcontracts at any tier

– FAR 12.505 and DFARS 212.570 identify laws in addition to FAR 12.503/DFARS 212.503 and FAR 12.504/DFARS 212.504 which are not applicable to prime contracts or subcontracts for COTS items

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Exemptions for Commercial Item Contracts Truthful Cost or Pricing Data (f/k/a Truth in Negotiations Act (TINA))

– Provides the government with all significant and relevant cost or pricing data available to contractors during price negotiations

– Disclosure statute

Does not require contractors to use a certain supplier or subcontractor or accounting system

– Defines requirements for the submission of cost or pricing data and exemptions

– Requires certification that data are current, accurate and complete

– Provides the government with the right to examine contractor’s records

– Sets forth rules governing remedies for TINA violations, known as “defective pricing”

Exemptions

– Commercial item as defined in FAR 2.101

– Modifying a commercial item contract

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Exemptions for Commercial Item Contracts

Cost Accounting Standards (CAS)

– Governs the measurement, timing and allocability of costs charged to certain negotiated government contracts

– Imposes major accounting requirements on contractors having contracts subject to them

– Requires the negotiation of impacts of changes to the contractor’s cost accounting practices

– Exemptions:

Firm-fixed-price and fixed-price with economic price adjustment (provided price adjustment is not based on actual costs incurred), time-and-materials, and labor-hour contracts and subcontracts for the acquisition of commercial items

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FAR 52.215-2, “Audit and Records – Negotiation”

– Permits the government to audit a Contractor’s cost records or certified cost or pricing data records for up to 3 years after the Contractor’s receipt of final payment

– Most commercial item contracts are exempt

Only applies if the contract exceeds $150,000 and

Is a cost-reimbursement, time-and-materials, labor-hour, or price-redeterminable contract;

The contractor was required to provide certified cost or pricing data; or

The contractor is required to furnish cost, funding, or performance reports

– Note: The clause will apply to commercial item time-and-materials or labor-hour contracts

– BUT, FAR 52.212-5 includes an Examination of Records provision applicable to commercial item prime contracts over $150,000

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Exemptions for Commercial Item Contracts Changes

– Non-Commercial Item Prime Contracts

Government can unilaterally direct changes

The contractor must proceed with the change as directed, even if the parties have not yet agreed on a corresponding equitable adjustment to the contract price and/or delivery schedule

– Commercial Item Prime Contracts (FAR 52.212-4(c))

Changes may only be made by mutual agreement of the parties

Contractor does not need to perform the change until an agreement is reached

– Commercial Item Subcontracts

Subcontractors should agree to accept unilateral changes directed by the government -- in particular if the prime is a non-commercial item contract, but insist that all other changes be mutually agreed upon by the parties

Subcontractors should limit the scope of changes that can be unilaterally directed by the prime

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Intellectual Property Protection

– Presumption technical data and computer software were developed exclusively at private expense

Does not apply to DoD acquisitions of major systems or subsystems or components

Still applies to DoD acquisitions of major systems or subsystems or components that are COTS

– Relaxed marking requirements

– Ability to negotiate standard commercial licenses

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Small Business Subcontracting Plan – Only Exempt for Commercial Item Subcontracts per paragraph (j) of the clause

– Includes goals expressed in terms of total planned subcontracting dollars for use of each type of small business concern

– Includes total projected sales (in dollars), the total value of projected subcontracts to support the sales, and the total dollars planned to be subcontracted to each type of small business concern

– Includes a description of the principal types of supplies and services to be subcontracted, and identification of the types of supplies and services planned for subcontracting to each type of small business concern

– Includes policies and procedures for implementing the plan

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Key Takeaways The government has a stated preference to purchase commercial

items whenever possible, and have commercial items incorporated into non-commercial deliverables

When selling a commercial item to the government or higher tier contractor

– Be prepared to justify that your product meets the definition of a commercial item in FAR 2.101

– Insist on contract terms consistent with the FAR’s preferential treatment

– Recognize the clauses the customer must or should flow down

When buying a commercial item to support your program

– Enlist the help of the seller in justifying the deliverable meets the FAR’s definition of a commercial item

– Flow down clauses that are required and those that make good business sense, but avoid wholesale flowdowns that are unnecessary and only add cost

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Price Analysis Requirements

For commercial item contracts, a price analysis must be performed to determine whether the price is “fair and reasonable”

– Price analysis performed in accordance with FAR 15.404-1(b)

– Price analysis does not include an analysis of the contractor’s separate cost elements or proposed profit

– For commercial item goods, the price analysis is conducted independent of the commercial item determination

– For some commercial item services, to qualify as a commercial item, the services must be sold at “catalog” or “market” prices

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Price analysis techniques (FAR 15.404-1(b)(2)) - first two techniques are the preferred techniques

– Comparison of proposed prices received in response to the solicitation (i.e., adequate price competition)

– Comparison of proposed prices to historical prices paid, whether by the government or other than the government for the same or similar items

Can be used for commercial items, including those “of a type” or requiring minor modifications

Government resources include Fed Mall and GSA Advantage

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Price analysis techniques (cont…)

– Use of parametric estimating methods/application of rough yardsticks (such as dollars per pound or per horsepower, or other units) to highlight significant inconsistencies that warrant additional pricing inquiry

– Comparison with competitive published price lists, published market prices of commodities, similar indexes, and discount or rebate arrangements

– Comparison of proposed prices with independent government cost estimates

– Comparison of proposed prices with prices obtained through market research for the same or similar items

– Analysis of “data other than certified cost or pricing data” (defined in FAR 2.101) provided by the offeror

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Recent Updates DoD Issued Guidebook for Acquiring Commercial Items

(January 2018)

– Part A: Commercial Item Determinations (CID)

Contains useful examples of prior CIDs

Provides examples of “commercial items” under each section of the definition in FAR 2.101

Identifies procedures for prime contractors to follow when issuing CIDs for subcontractors

– Part B: Pricing Commercial Items

Identifies that market research requires information from (1) the government, (2) public resources, (3) the offeror – as a last resort!

Describes price analysis techniques

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Recent Updates Commercial Item Determinations

– DoD Final Rule (83 FR 4431, 1/31/18)

– CO may presume that a prior commercial item determination made by a military department, a defense agency, or another component of DoD shall serve as a determination for subsequent procurements of such item

– Market research used, where appropriate, to inform price reasonableness determinations

– If market research is insufficient, COs shall consider information submitted by the offeror of recent purchase prices paid by both the government and commercial customers for the same or similar commercial items under comparable terms and conditions

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Recent Updates Commercial Item Determinations (cont.)

– Catalogs must state prices at which sales are currently, or were last made, to a significant number of buyers constituting the general public

– “Relevant Sales Data” means evidence provided by an offeror of sales of the same or similar items that can be used to establish price reasonableness taking into consideration the age, volume, and nature of the transactions (including any related discounts, refunds, rebates, offsets, or other adjustments)

– Evidence of “offers for sale” may include advertisements on websites, sales orders, quotes, or other information that demonstrate that the similar item has been offered for sale in the commercial marketplace

– DoD has a “cadre of experts” in DCMA to provide advice to COs

– Prime contractors are responsible for exercising the same due diligence as DoD COs in making subcontractor commercial item determinations and evaluating subcontractors’ price reasonableness

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Recent Updates

Exclude Application of Certain Laws/Regulations to Commercial Item Contracts

– DoD Proposed Rule (83 FR 30646, 6/29/18)

– Identifies FAR/DFARS clauses that do not apply to commercial item prime contracts and subcontracts and the acquisition of COTS items

Prohibits contractors from flowing down FAR/DFARS clauses to subcontracts for commercial items unless it is specifically required by the FAR/DFARS

Discretion to flowdown clauses not based on statute or Executive Order shall rest with the government, not contractors

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Recent Updates

Exclude Application of Certain Laws/Regulations to Commercial Item Contracts (cont…)

– Adds to the DFARS a narrower definition of “subcontract”

“Does not include agreements entered into by a contractor for the supply of commodities that are intended for use in the performance of multiple contracts with the Department of Defense and other parties and are not identifiable to any particular contract.”

No definition of “commodities”

Still requires the flowdown to all subcontracts (including COTS) of:

o DFARS 252.246-7007, Contractor Counterfeit Electronic Part Detection and Avoidance System

o DFARS 252.246-7008, Sources of Electronic Parts

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Recent Updates Commercial Supplier Agreements

– GSA Final Rule (83 FR 7631, 2/22/18)

– Amends the GSAR to address common commercial supplier agreement terms that are inconsistent with or create ambiguity with federal law

Commercial Supplier Agreement means terms and conditions customarily offered to the public by vendors of supplies or services that meet the definition of “commercial item” in FAR 2.101 and intended to create a legal binding obligation on the end user

Recognizes typically applies to IT acquisitions, including commercial computer software, but it can apply to any supply or service

Regardless of title (e.g., TOS, EULA, etc.)

Regardless of format (e.g., paper or electronic)

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Recent Updates

Commercial Supplier Agreements (cont.)

‾ Clarifies that the Commercial Supplier Agreement – Unenforceable Clauses provisions take precedence over any commercial supplier agreement

‾ Material changes to a commercial supplier agreement after award must be bilaterally modified into the contract to be enforceable against the government

‾ Awarded commercial supplier terms take precedence over terms updated unilaterally

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Recent Updates

Commercial Supplier Agreements (cont.) – Unenforceable Clauses

Can’t bind a government employee or person acting on behalf of the

government in his/her personal capacity

Governed by federal law, federal venues, and federal statute of limitations

No unilateral termination / suspension rights for the contractor

Contractor may unilaterally revise terms only if not material

No automatic renewals

No indemnification

Permits contractor audits of end user compliance, subject to certain

limitations

Non-Assignment

Confidential Information can’t include the agreement or pricing (line item

prices resolved consistent with FOIA)

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Recent Updates

Appeals of CiyaSoft Corp., ASBCA Nos. 59519, 59913 (June 27, 2018)

– CiyaSoft delivered 20 CDs containing the software to the government, with a copy of the license agreement

Long form license agreement in the shipment box

Short form license on a separate sheet of paper within the shrink wrap of each CD

Clickwrap form used during software installation

– CiyaSoft filed a claim against the government for violating the terms of the license agreement

– ASBCA concluded that the government breached the license agreement

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Recent Updates

CiyaSoft Corp. (cont.)

– The contract did not contain FAR 52.227-19, Commercial Computer Software License

– Relied on Executive Order No. 13103, which states that it is government policy to abide by copyright restrictions in software

– “The government can be bound by the terms of a commercial software license it has neither negotiated nor seen prior to the receipt of the software, so long as the terms are consistent with those customarily provided by the vendor to other purchasers and do not otherwise violate federal law.”

– The implied duty of good faith and fair dealing obligated the government to take reasonable measures to protect licensed software from unauthorized copy or release

– Also discussed when modified software is still commercial

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Recent Updates

CiyaSoft Corp. (cont.)

– Key Takeaways

Still a best practice to obtain the government’s express consent to the terms of a license agreement

Referencing the software license agreement in the contract provides more certainty for enforcement

Ensure that similar license agreements are provided to commercial customers

Confirm that the contract does not contain FAR clause 52.227-19

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E-Commerce Portal

Section 846 of FY 2018 NDAA

Required GSA to establish a program to procure commercial products through commercial e-commerce portals

Purpose to:

– Enhance competition

– Enable market research

– Ensure reasonable pricing of commercial products

Program carried out through multiple contracts with multiple commercial e-commerce portal providers

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E-Commerce Portal

“Commercial Product” means a COTS item

– No services

“Commercial e-commerce portal” does not include an online portal managed by the government or for or predominantly used by government agencies

– Excludes Fed Mall and GSA Advantage

Purchases shall:

– Be made, to the maximum extent practicable, under the standard terms and conditions of the portal relating to purchasing on the portal

– Not exceed the simplified acquisition threshold

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E-Commerce Portal

GSA Phase I Implementation Plan (3/16/18)

– FY 2018

Define products / categories of products appropriate to sell on the portal

Begin to understand the impact to existing programs

Explore options for an initial proof of concept

– FY 2019

Identify the government’s data ownership and cybersecurity needs and develop rules

Conduct an acquisition and draft implementation guidance

Initial rollout of the proof of concept with a limited audience

– FY 2020

Expand and scale rollout

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Q&A

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