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GOVERNMENT CONTRACTING IN THE NEW ADMINISTRATION

April 2, 2009

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Richard P. RectorPartnerChair, Government Contracts Practice202 799 4400 [email protected]

Carl L. VackettaPartner202 799 4402 [email protected]

Fernand LavalleePartner202 799 4401 [email protected]

Seamus CurleyAssociate202 799 [email protected]

C. Christopher ParlinOf Counsel202 799 4436 [email protected]

Our Panelists

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America Recovery and Reinvestment Act of 2009 (“ARRA”), Pub.L. 111-5, 123 Stat. 115 (2/17/09) –“Economic Stimulus Package”

President Obama’s Memorandum To Agency/Department Heads on Government Contracting (3/4/09)

President Obama’s Memorandum on Ensuring Responsible Spending of Recovery Act Funds 2/25/09)

President Obama’s Executive Orders Concerning Labor Issues (Jan/Feb 2009)

CONTRACTING OPPORTUNITIES AND CHALLENGES CREATED BY:

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What is Available?Unprecedented Amounts of FundingMassive Contracting Opportunities

When?Goal: Use 50% of Funds on Projects Started Within 120 Days of Enactment (Sec. 1602)Preference for Projects Started and Completed Expeditiously

ARRA – Economic Stimulus Package

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Where Can The Stimulus Money Be Spent?Federal AgenciesState and Local EntitiesOther?

How Can The Money Be Provided?Federal Procurement ContractsFinancial Assistance: Grants & Cooperative AgreementsDirect to States/Local Entities

ARRA – Economic Stimulus Package

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American Recovery and Reinvestment Act of 2009

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Total of $787 billion – 65% spending provisions, 35% tax benefits

Major components include:

Infrastructure ($120b) – Highway construction, public transit, state water projects, federal buildings, broadband deployment

Energy ($43b spending, $22b tax incentives) – Renewable energy research & development, “smart grid” development, solar and wind farms, advanced battery manufacturing

Economic Stimulus Plan – American Recovery and Reinvestment Act of 2009 (ARRA)

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Health Information Technology ($19b) – Provides Medicare/Medicaid incentives for certain physicians and hospitals that meaningfully use qualified electronic health records, extensive privacy provisions

Tax Relief for Businesses – Deferral of the cancellation of debt income (CODI), extension of use of net operating losses (NOLs), reducing the recognition period for built-in gains tax

Tax Relief for Individuals – Incentives for new car buyers and first-time homeowners, Alternative Minimum Tax patch

Broadband Initiative – Provides for the deployment of broadband technologies.

For detailed descriptions regarding stimulus bill see: http://www.dlapiper.com/financial_crisis_updates/)

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Stimulus money will be used on both federal and state/local government projectsContracting landscape for contractors is shaped by two key boundaries:

1. Legislation requires competitive procedures be used to maximum extent practicable . . . opportunities for sole-source contracts at either the federal or state/local levels will be limited

2. Legislation places a premium on rapid implementation . . . federal and state/local agencies likely will use existing contracts(e.g., GWACs, GSA Schedule, IDIQs), to the maximum extent practicable, to avoid the lag time involved in soliciting and awarding new contracts

Federal, State, and Local Contracting –Issues & Strategies

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Pursue prime contracts at the federal and state/local level by:

identifying projects that will be openly competed

assessing whether there is an existing, preferred contract vehicle (or contractor) for such projects

considering whether teaming relationships would be prudent based on preferences of the agency or jurisdiction

bidding on appropriately competitive projects


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Pursue subcontracts at the federal level by teaming with existing federal contractors who hold GWAC, GSA Schedule, and large IDIQ contracts

Typically, new team members and subcontractors can be added to existing contracts in fairly short orderFor large contractors, teaming with small-business or mid-size contractors may be most fruitful, because these companies may not have the size or capacity to take on certain projectsFor small and small disadvantaged businesses, focusing on large contractors may be best, as these contractors may need to meet requirements for small-business and small-disadvantaged-business subcontracting


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ARRA – Key Legal Issues

Heightened Reporting RequirementsIncreased Oversight/Investigatory Authority (“Recovery Accountability & Transparency Board”)New Interim FAR Rules (Applies to Federal Acquisitions)“Buy American” Compliance

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“To Maximum Extent Possible” Contracts Shall Be Fixed Price, Using Competitive Procedures (Sec. 1554)FAR Implementation (3/31/09): Interim Rules Re: (1) Buy American, (2) Whistleblower Protection, (3) Publicizing Contract Actions, (4) Reporting, and (5) GAO/IG AccessAgency Supplements • Some Agencies (DOE, Army, Forest Service) have

Issued New Ts & Cs

Federal Contracting

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1. Reporting Requirements (Sec. 1512)Contractor Must Report Details on Use of Funds.New FAR Subpart 4.15 (“Reporting Requirements”): Information on (1) Amount of Invoices, (2) Supplies Delivered/Services Performed, (3) Program/Project Title and Purpose (4) Completion Status, (5) Number of Jobs Created and Retained, and (6) Names and Compensation of Top 5 Paid Contractor Officers (if (a) 80%+ of Revenues Come from Federal Contracts/Subcontracts and Grants/Subgrants and (b) $25M in Gross Annual Federal Revenues.New FAR Clause 52.204-11. Applies to All Solicitations and Contracts.Quarterly Report, Due within 10 Days of End of Reporting Period.Contractor Reports Will Be Made Available To Public.

Federal Contracts – What Are The New ARRARequirements?

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2. New GAO/IG Audit Access RulesAllows Agency IG Reviews of Concerns Raised by Public (Sec. 1514)Allows GAO/IG: (a) Reviews of Any Contractor/Subcontractor Records Regarding Transactions Using ARRA Funds and (b) Interviewsof Contractor Officers/Employees Concerning Such Transactions (Sec. 902/1515)Allows GAO Only to Interview SubcontractorEmployees (Sec. 902)Provides for New Alternate FAR Clauses to Cover These Access/Audit Rights


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3. Other New Contract Requirements/Actions

Whistleblower Protection – New FAR Sec. 3.907/FAR Clause (52.203-15)

Publicizing Contract Actions – New Posting Requirements for C.O.s Using ARRA Funds

Buy American for Construction Material


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Where Are New Rules to be Implemented?

OMB Circular/Guidance?

Unique Terms & Conditions Of The Procurement Contract/Grant (Recipient/Subrecipient Agreement)

Are The Requirements Different From Federal Contracting?

Yes, but scope of difference is to be determined by OMB guidance

Expect certain key elements (e.g., reporting, oversight) to be very similar

President’s Memorandum on implementing ARRA(2/25/09) makes clear that spending by States will be scrutinized for “imprudent” projects

State and Local Contracting

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Funds may not be used for:

A [1] “project for the construction, alteration, maintenance, or repair of a public building or public work [2] unless all of theiron, steel, and manufactured goods used in the project [3] are produced in the United States.”

This restriction can be waived in three situations:

Inconsistency with public interest – rarely invoked

Goods are not produced in U.S. in sufficient and reasonably available quantities and satisfactory quality

U.S. goods would increase “project” cost by more than 25%

Additionally, the provision must be applied in manner consistentwith U.S. international obligations.

Buy American Restrictions (Sec. 1605)

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U.S. international obligations preclude application of the Buy American provision with respect to procurements of iron, steel and “manufactured goods” from:

Signatories to the WTO Agreement on Government Procurement (GPA);Signatories to NAFTA and other free trade agreements (FTAs); andLeast-developed countries.

By listed federal, state or other government entities engaged inscheduled procurements.

US procuring entities listed in the GPA and FTAs include most federal non-military procurements, some agencies in 37 states and a few government-owned entities.Scope of coverage varies depending on the entity.

Buy American Restrictions

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Where the value of the procurement meets relevant GPA or FTA thresholds.

However, if the procurement involves federal funds for a mass transit or highway project, Buy America provision applies in all instances.

Buy American Restrictions

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Comments due on or before 6/1/09.

Interim Rule only applies to Federal procurements.

OMB guidance will be forthcoming regarding procurements funded with Federal financial assistance (e.g., Federal grants).

Issue: Such guidance should clarify how Sec. 1605 applies—if at all—to State and sub-State procurements.

Interim Rule amends FAR Part 25, “Foreign Acquisition”, and sets forth 2 new provisions and 2 new FAR clauses to be included in Solicitations.

Buy American Restriction Implemented in FAR Through Interim Rule (3/31/09):

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For new contracts: No monetary threshold. Sec. 1605 applies (one FAR clause will be included in the Solicitation), provided ARRA funds are used.

For existing contracts: C.O. to modify on a bilateral basis for future orders using ARRA funds.

Contractor refusal to accept applicable clause will render it ineligible to receive ARRA funds.Issue: FAR 1.108(d)(3) contemplates consideration for contract modifications. (“Contracting officers may, at their discretion, include [FAR] . . . changes in any existing contract with appropriate consideration.”) What will be the measure of appropriate consideration? Issue: Under “Changes” clause, C.O. can issue unilateral change within scope (e.g., change in specifications). Contractor must accept such change, but is entitled to price adjustment. If a C.O. issues a unilateral change, does the contractor have a meaningful right to refuse Sec.1605 obligations?

Covered Contracts

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Existing FAR definition of “public building or work” is incorporated by reference.

FAR 22.401: “public building or work” means “building or work, the construction, prosecution, completion, or repair of which . . . is carried on directly by authority of, or with funds of, a Federalagency to serve the interest of the general public regardless ofwhether title thereof is in a Federal agency.”Potentially limits Sec. 1605 application to traditional heavy-type construction work.

Interim Rule narrows Sec. 1605’s “manufactured good” term to mean “manufactured construction material”.

Term is not clearly defined. Arguably, it means construction material that has been: (1) processed into a specific form and shape; or (2) combined with other raw material to create a material that has different properties than the properties of the individual raw materials.

Key Definitions

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Construction material is any “article, material, or supply brought to the construction site by the Contractor or subcontractor for incorporation into the building or work.” However, “[m]aterials purchased directly by the Government are supplies, not construction material.”

Issue: Can a C.O. limit Sec. 1605 applicability by the manner in which the contract line item numbers (CLINs) are designated in the Solicitation?

Key Definitions

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Pre-award: Contractor may request determination Sec. 1605 does not apply or exception applies.

Post-award: Contractor may request determination Sec. 1605 does not apply or that exception applies.

Absent a justification for failing to make a pre-award request (or if the need for such request was reasonably foreseeable), C.O. may disregard post-award request for a determination.If the unreasonable cost exception is invoked post-award and C.O. permits use of foreign construction material, C.O. must reduce contract price to reflect decreased cost of such foreign materials.

New FAR Clauses and Provisions

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In the Interim Rule, Sec. 1605’s foreign sourcing prohibition is applied to “unmanufactured construction material” in addition to manufacturedconstruction material.

Issue: Sec. 1605 references “manufactured goods”, which the Interim Rule narrows to mean “manufactured construction material”. Sec. 1605 does not reference “unmanufactured goods”. Thus, arguably, the extension to “unmanufactured construction material” goes too far.

Sec. 1605’s prohibition regarding steel or iron does not apply to steel or iron used as components or subcomponents of other manufactured construction material. For such items, the place of manufacture test controls.

Interim Rule permits offerors to furnish alternate offers, where one will include only compliant construction material and the other will include non-compliant construction material. If C.O. does not determine that an exception applies, the non-compliant offers will be rejected as non-responsive or permitted to be revised (to become compliant) during FAR Part 15 discussions.

Under New FAR Clauses and Provisions

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Under $ 7.443 million, FAR 52.225-21 (3/09) applies.Only domestic construction material may be purchased, unless an exception applies. To qualify as domestic, “manufacture” of the construction material must have occurred in the U.S. An analysis of the country of origin of components/subcomponents is not required. (This is a deviation from the country of origin test applied under the Buy American Act of 1933.)

New FAR Clauses

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At or above $7.443 million, the question is whether the procuring agency is subject to a treaty covering procurements.

If yes, FAR 52.225-23 (3/09) applies.Only domestic construction material or signatory nation construction material (termed “Recovery Act designated country construction material”) may be purchased, unless an exception applies.

Same place of “manufacture” test determines whether construction material is domestic. For products of signatory nations, the test is whether the material underwent “substantial transformation” in that country.

New FAR Clauses

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C.O. will give contractor notice of apparent use of unauthorizedforeign construction material and request a response, including proposed corrective action.

If use of prohibited material is confirmed, C.O. can: (1) process a determination that Sec. 1605 does not apply, if

appropriate; (2) require removal of such material; or (3) make written determination that removal would be

“impracticable, cause undue delay, or otherwise detrimental to the interests of the Government . . ..”

A finding under (3) does not constitute a finding that Sec. 1605 is inapplicable, nor does it limit the agency’s ability to pursue other remedies, including a contract price reduction.

Potential default termination.Potential referral to Suspension and Debarment Official.If fraud suspected, C.O. must refer to the agency criminal investigatory unit.

Consequences of Non-Compliance With Sec. 1605/ Contract Clause

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Issued 3/4/09, to heads of executive departments and agencies (not an Executive Order);

Sets forth broad policy statements;

Establishes a timetable for review of federal contracting procedures and issuance of “tough” new guidelines;

President views the procurement system as “broken.”

The Presidential Memorandum on Government Contracting

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1. Preference for firm-fixed-price contracts;2. Prohibition against noncompetitive contracts (unless use can

be fully justified and performance monitored); 3. Limit use of cost-reimbursement contracts (unless an agency

cannot sufficiently allow for a fixed-price contract);4. Increase in the Government’s ability to manage the contracting

process from start to finish; and 5. Ensure inherently governmental functions are performed by

Government employees, and is not outsourced.

Policy Objectives For Federal Procurements

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7/1/09 – OMB to develop and issue guidance on identifying and reviewing contracts that are wasteful, inefficient, or not otherwise likely to “meet Agency needs.

Guidance to also address appropriate “corrective action.”OMB to collaborate with heads of other executive agencies to develop guidance.

Timetable

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9/30/09 – OMB and executive agencies to issue guidance to:

(i) Maximize competition and establish appropriate use and oversight of noncompetitive procurements;

(ii) Govern use and oversight of all contract types; (iii) Assist agencies in assessing capacity and ability of

federal acquisition workforce to develop, manage and oversee acquisitions;

(iv) Clarify outsourcing services rules.

Timetable

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“Command emphasis” on excellence in acquisition;

Increased training of acquisition workforce;

Form of guidance: changes to FAR and Agency Supplements? Executive Orders? Guides, directives, orders, etc.?

Heightened compliance environmentCombined with recent “sea change” in contractor compliance requirementsEmphasis on contractor responsibility and ethical conduct; and

Increased oversight/enforcement activity.

What to Expect

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Presidential Memorandum on Responsible Spending of Recovery Act Funds, 3/20/09

Requires transparent, merit-based decisions for grants and other forms of federal financial assistance

Selection criteria shall be designed to support projects and applicants that have a demonstrated or potential ability to satisfy goals of the Recovery Act

Directs agencies and recipients to avoid funding “imprudent” projects

Specifically includes casinos, aquariums, zoos, golf courses, swimming poolsAlso includes any project that is “imprudent” or does not further the job creation, economic recovery, and other purposes of the Act

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Establishes strict rules on lobbyist communicationsOral communications with “registered lobbyists” are not permitted concerning particular projects, applications, or applicants for funding

When scheduling meetings, and at the beginning of any oral communications, Government official must ask if anyone participating in the communication is a registered lobbyist“If so, the lobbyist may not attend or participate in the telephonic or in-person contact, but may submit a communication in writing”

Oral communications with registered lobbyist are permitted, however, concerning “general Recovery Act policy issues”

But such communications must be immediately documented in writing and posted publicly within 3 business days on the agency’s Recovery website

Written communications from registered lobbyists concerning particular projects are permissible at any time

But must be posted publicly within 3 business days on the agency’s Recovery website

Presidential Memorandum on Responsible Spending of Recovery Act Funds, 3/20/09

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Executive Orders on Labor Matters

Executive Order 13495, Jan. 30, 2009Requires a successor services contractor (and its subcontractors) to offer employment to certain of the predecessor contractor’s employees

Applies to “service employees” (non-managerial and non-supervisory employees) who would otherwise be terminated as a result of the new contractDoesn’t apply to contracts under the Simplified Acquisition Threshold or to certain other protected classes of contracts andsubcontracts

Successor contractor must provide covered employees a right of first refusal “in positions for which they are qualified”

Not required to offer job if employee has failed to perform suitably

Effective upon issuance of regulations – July 2009?

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Executive Order 13496, Jan. 30, 2009Contractors and subcontractors must post a notice advising workers of their rights under federal labor laws, such as the right to unionize and bargain collectively, in all places where notices are customarily posted both physically and electronically

Revokes existing rule (EO 13201) that required contractors to post notice advising employees of their right not to join a union

Flowdown to subcontractors … exemptions …investigations of compliance … remedies

Content and form of notice to be prescribed by DoL in regulations

Effective upon issuance of regulations by DoL – May 2009?

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Executive Order 13494, Feb. 4, 2009Costs of influencing employees’ exercise of their rights to organize and bargain collectively – either supporting or opposing – are unallowable.

Only applies to contracts to which the cost principles apply (e.g., not commercial-item contracts)

Does not affect costs incurred in generally maintaining satisfactory relations with employees (e.g., labor/management committees, employee publications)

Effective upon issuance of regulations – July 2009?

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