December 12, 2023

Through the National Defense Authorization Act for FY2024, Congress Looks to Tighten Controls on Contractors Consulting for "Covered Entities," Further Curtail Contracting with Russia, and Revise Contracting Procedures for Small Businesses

8 min

The end of the calendar year once again sees Congress rapidly approaching the holiday finish line with unresolved business. From most indications, however, members will successfully send a defense authorization bill to President Biden's desk—setting the Pentagon's budget and priorities for next year—prior to leaving town.

Just as in years past, the National Defense Authorization Act (NDAA) for Fiscal Year 2024 includes many provisions that will have noteworthy impacts on (and create compliance risks for) entities that contract with the federal government. Astute contractors, however, can safely navigate and capitalize on these shifting dynamics.

On December 7, 2023, the U.S. Senate and House Armed Services Committees announced the completion of their bipartisan and bicameral negotiations on the NDAA for FY2024 and released the conference report (the agreed-to legislative text) of the measure. While this year's NDAA might not include as many headline-grabbing reforms as adopted in last year's vehicle, the conference report nonetheless reflects Congress's continued desire to tighten controls on, and oversight of, federal contracting—including contractors that perform consulting services for "covered entities," deterring conflicts of interest, further curtail contracting with Russia, and revising certain contracting procedures for small businesses and their affiliates.

For example:

Sec. 804. Prohibition on Contracting with Persons that have Fossil Fuel Operations with the Government of the Russian Federation or the Russian Energy Sector.
  • Section 804 continues Congress's squeeze on the Russian economy in response to Russia's invasion of Ukraine by prohibiting the Secretary of Defense from "enter[ing] into a contract for the procurement of goods or services with any person that is or that has fossil fuel business operations with a person [including corporations or other entities] that is not less than 50 percent owned, individually or collectively" by an authority of the Russian government, or a fossil fuel company that operates in the Russian Federation, "except if the fossil fuel company transports oil or gas … through the Russian Federation for sale outside of the Russian Federation … and that was extracted from a country other than the Russian Federation with respect to the energy sector of which the President has not imposed sanctions as of the date on which the contract is awarded."
  • In addition to certain enumerated exceptions, the provision provides authority to the Secretary of Defense and Secretary of State to waive Section 804 if they determine that a contract is necessary for humanitarian assistance or disaster relief, vital to the military readiness of the United States or NATO, vital to the national security interests of the United States, or "was a business operation with a fossil fuel company in a country other than the Russian Federation that was entered into prior to the date of the enactment of this section." Notwithstanding these exceptions, since they include a reporting requirement to Congress, our expectation is that the Defense Department will be reluctant to rely upon any of these unless absolutely necessary.
  • The prohibition does not apply to persons who have "a valid license to operate in Russia issued by the Office of Foreign Assets Control of the Department of the Treasury or is otherwise authorized to operate in Russia by the Federal Government notwithstanding the imposition of sanctions."
Sec. 812. Preventing Conflicts of Interest for Entities that Provide Certain Consulting Services to the Department of Defense.
  • Section 812 requires the Secretary of Defense (no later than 180 days after enactment of the NDAA for FY2024) to amend the Department of Defense Supplement to the Federal Acquisition Regulation (DFARS) to require any entity that provides consulting services and is assigned a North American Industry Classification System (NAICS) code beginning with 5416 (Management, Scientific, and Technical Consulting Services) to certify before entering into a contract with the Defense Department that "neither the entity nor any subsidiaries or affiliates of the entity … hold a contract for consulting services with one or more covered foreign entities" or that "the entity maintains a Conflict of Interest Mitigation plan … that is auditable by a contract oversight entity."
  • Generally, the provision defines "covered foreign entity" as the government of China (including its security and intelligence services), the government of the Russian Federation and certain entities sanctioned by Treasury as a result of Russia's invasion of Ukraine, governments of any foreign countries that sponsor international terrorism, and various other entities included on certain lists of the Commerce Department and Treasury's Office of Foreign Assets Control.
  • While the Secretary of Defense may waive the provision's requirements on a case-by-case, the provision will generally prohibit the Defense Department from contracting for consulting services with any entity that cannot make the required certification.
Sec. 862. Payment of Subcontractors.
  • Section 862 amends the Small Business Act (and compels additional regulations within 180 days) to tighten the screws on prime government contractors that unjustifiably fail to timely pay their small business subcontractors. Under current law, a prime contractor must notify the contracting officer if it is more than 90 days past due on paying a subcontractor. See 15 U.S.C. 637(d)(13)(B). Section 862 shortens the window to 30 days.
  • The provision authorizes contracting officers to "enter or modify past performance information of the prime contractor in connection with the unjustified failure to make a full or timely payment to a subcontractor … before or after close-out of the covered contract."
  • Section 862 also empowers contracting officers—and the government writ large—with additional oversight authorities, providing that "[o]nce a contracting officer determines … that there was an unjustified failure by the prime contractor on a covered contract to make a full or timely payment to a subcontractor …, the prime contractor is required to cooperate with the contracting officer, who shall consult with the Director of Small Business Programs or the Director of Small and Disadvantaged Business Utilization … and other representatives of the Government, regarding correcting and mitigating the unjustified failure to make a full or timely payment to a subcontractor."
Sec. 864. Eliminating Self-Certification for Service-Disabled Veteran-Owned Small Businesses.
  • Section 864 phases out the heretofore self-certification of Service-Disabled Veteran-Owned Small Businesses (SDVOSB), providing instead that "[e]ach prime contract award and subcontract award that is counted for the purpose of meeting the goals for participation by small business concerns owned and controlled by service disabled veterans in procurement contracts for Federal agencies … shall be entered into with small business concerns certified by the [SBA] Administrator as small business concerns owned and controlled by service-disabled veterans under section 36 of such Act (15 U.S.C. 657f)."
  • The requirement goes into effect "on October 1 of the fiscal year beginning after the [SBA] Administrator promulgates the regulations required under subsection (d)," and such regulations are required within 180 days of enactment.
  • Section 864 provides a phased-in approach that permits small business concerns to maintain their self-certification until SBA makes a determination as to their application for certification, but only "if the small business concern files a certification application with the Administrator before the end of the 1-year period beginning on the date of the enactment of this Act." Thus, and to take advantage of this phase-in period, any self-certifying SDVOSB should move swiftly within the new year to formally apply with SBA for certification.
Sec. 865. Consideration of the Past Performance of Affiliate Companies of Small Business Concerns.
  • Section 865 in full provides that "[n]ot later than July 1, 2024, the Secretary of Defense shall amend section 215.305 of the Defense Federal Acquisition Supplement (or any successor regulation) to require that when small business concerns bid on Department of Defense contracts, the past performance evaluation and source selection processes shall consider, if relevant, the past performance information of affiliate companies of the small business concerns."
  • In simplest terms, this means that small businesses may be judged by the company they keep, and not just how they themselves performed on previous awards. If a small business's affiliate has poor past performance on government contracts, the small business will need to account for that reality as it competes for opportunities.

These are, of course, only a sampling of the procurement- and acquisition-related provisions in the NDAA for FY2024.

This year's conference report is also notable, however, for what was ultimately not included: a "[p]ilot program on payment of costs for denied Government Accountability Office bid protests." The provision, which passed as Sec. 804 of the House's NDAA text in H.R. 2670, would have compelled the Secretary of Defense to "carry out a pilot program to determine the effectiveness of requiring contractors to reimburse the Department of Defense for costs incurred in processing covered protests."

This is not the first time Congress has hinted at a "loser pays" system for bid protests, but it is unclear what specifically compelled inclusion of this language in the House's NDAA text for FY2024.

While the authors take no position as to the policy motivations behind this provision—those motivations are, after all, largely unstated—there can be no question that instituting a "loser pays" system for bid protests would necessarily change the calculation made by all parties (agencies included) when a solicitation or contract award is challenged, significantly altering a core accountability process that has been in place for over a century.

Going forward, Venable will closely watch the anticipated consideration and enactment of the NDAA for FY2024 and provide additional guidance on its key provisions as they come into force. If you have any questions about how these or other sections of the NDAA may affect your business with the federal government in 2024 and beyond, please reach out to these Venable authors.