With little room left on the calendar, this week Congress passed, and sent to President Biden's desk, the National Defense Authorization Act (NDAA) for Fiscal Year 2023. As we previewed in an earlier alert, Congress appeared set to use the NDAA as a vehicle to secure numerous reforms to federal procurement policy. That held true in the final product, which includes over fifty provisions within the "Acquisition Policy [and] Acquisition Management" section alone.
While many are relatively mundane, other provisions—including a late addition prohibiting the procurement of products containing certain Chinese-manufactured semiconductors—raise significant compliance risks (as well as opportunities) for those who do business with the United States government.
New Compliance Risks for Government Contractors
As anticipated, Congress moved to tighten sourcing requirements. While some of the reforms initially proposed appear not to have made the cut—such as a ban on contracting with companies doing business in Russia, or certain adjustments to Buy American Act thresholds—others are now (or will soon be) in effect.
- Added during the final conference procedure of the bill, Sec. 5949 (which many have characterized as an expansion of the Section 889 prohibitions concerning telecommunications and surveillance products and services) provides that federal government agencies may not "procure or obtain, or extend or renew a contract to procure or obtain, any electronic parts, products, or services that include covered semiconductor products or services" or "enter into a contract (or extend or renew a contract) with an entity to procure or obtain electronic parts or products that use any electronic parts or products that include covered semiconductor products or services." The provision defines covered semiconductors as those manufactured by certain Chinese entities, or other entities as determined by the executive branch. Given the ubiquity of Chinese-manufactured semiconductors in the United States (and worldwide), this provision understandably raises questions about its scope, timeline, and applicability. In the coming days, Venable will provide additional analysis and guidance regarding this section.
- Looking ahead, Sec. 858 requires the Secretary of Defense to analyze and review certain items procured by the defense community—including solar components for satellites, naval vessel propulsion system components, carbon fiber, and even "Flags of the United States"—and to submit to Congress by January 2024 legislative proposals or other recommendations for "restricting procurement to . . . suppliers in the United States" or otherwise "prohibiting procurement from selected sources or nations[.]" While these are only recommendations, Congress clearly remains interested in tightening domestic sourcing requirements.
New Opportunities for Contractors
The NDAA for FY2023 also includes a number of provisions that create important opportunities for the contractor community.
- Sec. 805 clarifies that the addition into an existing Defense Department contract of a clause implementing an executive order "shall be treated as a change directed by the contracting officer pursuant to, and subject to, the Changes clause of the underlying contract, order, or other transaction." This important clarification will assist contractors who seek equitable adjustments for added costs when new executive orders trigger new compliance costs under existing contracts.
- Sec. 822 provides potential relief to contractors recently impacted by the cost of inflation. The provision creates a process by which contractors may "submit . . . a request for an amendment or modification to an eligible contract . . . when, due solely to economic inflation, the cost to a covered subcontractor of performing an eligible subcontract is greater than the price of such eligible subcontract." It also increases the executive branch's fiscal authority to pay contractors such additional amounts to facilitate the national defense.
- Sec. 1045 requires the Secretary of Defense and the Director of National Intelligence to establish a process to "expeditiously" review and re-establish a contractor employee's security clearance, if that employee is "a former member of the Armed Forces or a former civilian employee of the Department of Defense" and held a clearance in that former employment. Slated to begin by September 30, 2023, this process could assist contractors in more rapidly onboarding cleared personnel who are critical for performance on a sensitive or classified contract.
Of course, the above is only a small sampling of the coming changes to procurement policy. In the meantime, Venable will continue to review, respond, and advise accordingly.
While there is a lot to unpack in each year's NDAA (this year's bill surpassing 4,400 pages), contractors should not overlook the risks and opportunities that the legislation presents. If you have questions about how these new policies may affect your organization's work with the federal government, please reach out to these Venable authors.