The US National Defense Authorization Act for Fiscal Year 2024: Important Changes to Procurement Laws and Policy

On December 22, 2023, President Joe Biden signed into law the National Defense Authorization Act for Fiscal Year 2024 (“NDAA” or the “Act”). This year’s NDAA authorizes a total of $883.7 billion to address the most significant national security priorities for the United States. Title VIII includes a series of statutory changes to federal acquisition policy, acquisition management and numerous related matters. These new laws cover a broad range of policy reforms and new requirements that will impact the government contracting sector. In addition to several matters of general concern located outside Title VIII, we focus on a number of important acquisition policy reforms in this Legal Update.

Research, Development, Test, and Evaluation – Program Requirements, Restrictions, and Limitations

Section 229 – Rapid Response to Emergent Technology Advancements or Threats

Section 229 allows the Secretary of a military department to use specific authorities—established pursuant to 10 U.S.C. § 3601—to initiate urgent or emerging operational development activities for a period of up to one year. Use of these authorities is limited to the purpose of leveraging an emergent technological advancement of value to the national defense to address a military service-specific need, or to provide a rapid response to an emerging threat identified by a military service.

Acquisition Policy and Management

Section 801 - Commerciality of Defense Systems

Section 801 directs the Department of Defense (“DoD”) to share a contracting officer’s commerciality determination when requested by the “contractor or subcontractor offering the product or service for which such determination is summarized.” Importantly, contractors could rely on such determinations in their assertions of commerciality, in connection with government contracting officers or prime federal contractors.

Section 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 prohibits DoD from entering into a contract for the procurement of goods and services with any person “that has fossil fuel business operations” in the Russian Federation, or that has fossil fuel business operations with a person that is more than 50% owned by “an authority of the Russian Federation,” or a fossil fuel company that operates in the Russian Federation. Exceptions to this statute can be made when the Secretaries of Defense and State jointly determine the transaction is necessary to provide humanitarian assistance to the people of Russia, or otherwise for the provision of disaster relief and other life-saving measures. When exceptions are made, the Secretary of Defense must provide notice to the “appropriate congressional committees.”

Section 805 – Prohibition of the Department of Defense Procurement Related to Entities Identified as Chinese Military Companies Operating in the United States

Under Section 805, DoD may not “enter into, renew, or extend a contract” for “goods, services or technology” with any entity identified in the annual list of “Chinese military companies operating in the United States,” as compiled and maintained pursuant to the FY2021 NDAA (also known as the “1260H” list). The prohibition under Section 805 does not apply to a contract “entering into, renewing, or extending a contract for the procurement of goods, services, or technology to provide a service that connects to facilities of a third party, including backhaul, roaming, or interconnection arrangements.” Nor does this section apply to existing contracts for goods, services, or technology (including when such contracts are modified, extended, or renewed). Notably, the Section 805 restriction on contracting with certain Chinese military companies can be waived by the Secretary of Defense, if the entity requesting the waiver provides “a compelling justification for the additional time [needed] to implement the requirements” of Section 805, and explains a “phase-out plan to eliminate goods, services, or technology produced or developed” by a prohibited Chinese entity.

Section 809 – Pilot Program for Anything-as-a-Service

Section 809 directs the Secretary of Defense to establish a pilot program to explore the use of consumption-based solutions to address DoD needs. In particular, the pilot program is to result in contracts and other agreements for “anything-as-a-service,” which is defined as a model under which a technology-supported capability is provided using any combination of software, hardware or equipment, data, and labor services. Importantly, under this pilot program, the “anything-as-a-service” capability provided to DoD must be metered and billed based on actual usage of fixed-price units. Additionally, no later than June 30, 2024, the Secretary of Defense must provide a briefing to the congressional defense committees on the implementation of the pilot program. As Congress’s Joint Explanatory Statement emphasizes, this pilot program is another effort to promote continuous competition and better business practices at the DoD.

Section 812 – Preventing Conflicts of Interest for Entities that Provide Certain Consulting Services to the Department of Defense

Section 812 exemplifies Congress’s continued focus on strategic competition with near-peer competitors and countries supporting terrorist organizations. This section prohibits the DoD from contracting with consulting firms that, within the last five years, have provided consulting services to certain covered entities, unless the entity providing consulting firm certifies that it has an adequate conflict of interest mitigation plan. Examples of covered foreign entities include foreign adversaries such the Chinese Government, the Chinese Communist Party, the Government of the Russian Federation, and other countries determined to provide support for acts of international terrorism.

To implement this prohibition, Section 812 directs the Secretary of Defense to amend the Defense Federal Acquisition Regulation Supplement (“DFARS”) within 180 days. Specifically, the DFARS, as amended, must require any entity that provides consulting services to the DoD to certify that neither the entity nor any subsidiaries or affiliates hold a contract for consulting services with any covered foreign entity, or that the entity maintains a conflict-of-interest mitigation plan.

Also of note, Section 812 provides that the Secretary of Defense may issue a waiver of the section’s requirements—thereby permitting the award of an otherwise prohibited contract—on a case-by-case basis, as may be necessary in the interest of national security.¹

Takeaways

• Acquisition policy continues to focus on strategic competition with Russia and China.
• Contractors must be cognizant of the country of origin of companies with whom they seek to do business.
• Acquisition policy seeks to promote transparency, better business practices, and continuous competition at the DoD.

Amendments to General Contracting Authorities, Procedures, and Limitations

Section 820 – Amendments to Multiyear Procurement Authority

Section 820 modifies the available justifications under 10 U.S.C. § 2501 for the use of multiyear contracting authority. As a general matter, multiyear contracting is a special procurement mechanism that provides an exception to the default approach of annual contracting. Instead of using annual contracting methods to award one or more contracts for each year’s worth of procurement of an item, using multiyear contracting authority, the DoD can award a single contract for two-to-five years of procurement, obviating the need to exercise contract options.

Congress has established a permanent authorization for multiyear contracting in 10 U.S.C § 1501. The statute previously only provided projected cost savings as a basis for using multiyear contracting authority, but Section 820 amended the statute to include “industrial base stability.”

Section 823 – Extensions and Revisions to Never Contract with the Enemy

Section 823 modifies the “Never Contract with the Enemy” Act, which was part of the FY2015 NDAA, to extend and revise the authority of contracting officers (based on findings of combatant commanders) to take procurement-related actions against persons or companies outside the United States that engage in certain acts that are harmful to or create risks for the United States or its partner allied mission and forces. The “covered activities” that may serve as the basis of such terminations include: engaging in acts of violence against US personnel (or personnel of US allies); providing finance, logistics, training, or intelligence to persons engaging in such acts of violence; engaging in foreign intelligence against the United States or its partner or allies; engaging in transnational organized crime; or engaging in other activities that present a direct or indirect risk to the United States or partner and allied missions. When such activities are found to have occurred, the contracting officer may exclude persons or companies from a contract award or grant, terminate a contract or grant, or void (in whole or in part) a contract, grant, or cooperative agreement.

Section 824 – Modification and Extension of Temporary Authority to Modify Certain Contracts and Options Based on the Impacts of Inflation (Section 822 in FY2023).

Section 824 extends the temporary authority to modify certain contracts and options to counteract the impacts of inflation until December 31, 2024. Like many other businesses, government contractors have experienced substantial difficulties with impacts of the current inflationary environment. Prior to the passage of the FY2024 NDAA, DoD had limited ability to provide relief to its contractors that are necessary to the country’s defense industrial base (“DIB”). Section 822 of the FY2023 NDAA amends 50 U.S.C. § 1431 (Public Law 85-804) and expands the authorization for the President to empower agencies involved with the national defense “to enter into, amend, and modify contracts, without regard to other provisions of law [when] . . . such action would facilitate the national defense.” To protect the DIB, Section 822 allows DoD to provide equitable adjustments to contractors dealing with increased costs “due solely to economic inflation.” This can provide important assistance for contractors that have been negatively affected by high inflation while performing multiyear, fixed-price contracts. The law makes accessing this potential relief easier by increasing the monetary thresholds above which senior agency official approval is required. (Section 822 increases the applicable thresholds for procurements in excess of $500,000 for secretarial level approvals, and $150,000 for congressional notice, up from $150,000 and $25,000, respectively.)

Importantly, as in Section 822 of the FY2023 NDAA, although Section 824 authorizes relief in more circumstances for contractors experiencing difficulties from high inflation, neither this provision nor any other in the NDAA appropriates funding for such relief. Contractors—particularly those experiencing difficulties as a result of fixed-priced contracts that have not been adjusted to address inflation—should track the implementing guidance carefully and (given the likelihood of delay while other requests are processed) seek inflation adjustments to relevant prices as soon as practicable.

Section 825 – Countering Adversary Logistics Information Technologies

Section 825 prohibits the DoD from contracting with any port utilizing the Chinese national transportation logistics public information platform (“LOGINK”), any other Chinese national transportation logistics platform, or any similar system provided by Chinese state-affiliated entities. Section 825 amends Chapter 46 U.S.C. § 503, which prohibits covered entities from using specific covered logistics platforms. These covered entities are port authorities receiving funding; any marine terminal operator located at a port authority or seaport; any U.S. government agency or of a state; or a commercial strategic seaport.

LOGINK is used by 20 ports across the globe and offers users logistics data management. LOGINK is a free platform that is subsidized by the Chinese government. However, LOGINK could provide China with access to the data stored on the platform, potentially providing insight into shipping information, cargo valuations, and destination and routing information. This information could be used to identify supply chain weaknesses and trace the commercial shipping of military cargo.² The effect of Section 825 is to prohibit the DoD from using any seaport in the world that uses LOGINK, and to prohibit any federal funding to any port using the platform. The section directs the Secretary of Defense to inform allies and partners of the risks the platforms pose to US military and strategic interests and to begin negotiations for them to remove LOGINK from their ports. This denial of US taxpayer money seeks to force the innovation of a new platform and to protect US military and strategic interests

Section 826 – Modification of Contracts and Options to Provide Economic Price Adjustments

Section 826 allows the amounts authorized under the NDAA to be used to modify the terms and conditions of a contract to provide for economic price adjustments (“EPAs”) consistent with FAR sections 16.203-1 and 16.203-2. A fixed-price contract with an EPA provides for the upward or downward adjustment of a contract price based on certain contingencies. EPAs consist of three types: adjustments based on established prices; adjustments based on actual costs of labor or material; and adjustments based on cost indexes of labor or material.³ Agencies may use these types of contracts when there is doubt regarding the stability of the market or labor conditions over the contract period, and contingencies that would otherwise be included in the contract price can be covered separately elsewhere in the contract.

As in Section 824, this section is particularly important given the current market and labor instability due to inflation. This specific authorization will help provide additional confidence that businesses will be able to protect against potential inflationary loss.

Takeaway:

• Congress is cognizant of the effects of inflation and has taken steps to protect contractors from loss.
• Congress is using the power of the purse to ensure that opponents of the United States do not benefit from taxpayer largesse.

Domestic Sourcing Requirements and Industrial Base Matters

Section 835 – Enhanced Domestic Content Requirement for Major Defense Acquisition Programs

Section 835 enhances the domestic content provisions of 41 U.S.C. § 83 (“Buy American”) and provides a date-tiered content requirement for manufactured articles, materials, or supplies procured in connection with a major defense acquisition program. For Buy American purposes, manufactured articles, materials, and supplies are considered to have been manufactured in the United States if the cost of components exceeded 60% (until December 31, 2023). For manufactured articles, materials, and supplies to qualify under the Buy American restrictions if supplied between January 1, 2024, and December 31, 2028, the cost of United States components must exceed 65%—and after January 1, 2029, the cost of United States manufactured components must exceed 75%. The requirements of this section do not apply to articles manufactured in countries with a reciprocal defense procurement agreement, or a country that is a member of the national technology and industrial base.

Not Included

“Loser Pays” Provision for Bid Protests at the Government Accountability Office

Not included in the FY2024 NDAA is a proposed “loser pays” provision for bid protests at the Government Accountability Office (“GAO”), which was contained in the House bill. The provision would have required large defense contractors (contractors with revenues in excess of $250 million) to reimburse the DoD for costs incurred from bid protests at GAO. Certain House members claimed that purportedly frivolous bid protests unnecessarily burden the DoD and slow the acquisition process. Similar legislation attempting to limit bid protests has been proposed several times despite detailed studies by the GAO and the RAND Corporation demonstrating that a small percentage of federal procurements are protested—and that protesters are successful more than 40% of the time, i.e., protests result in either corrective action or sustained bid protest grounds. In the FY2018 NDAA, Congress passed a virtually identical pilot program, but that legislation was repealed in the FY2021 NDAA.

¹ Section 812 restricts the Secretary of Defense from delegating this waiver authority to an official who has not been Presidentially appointed and confirmed by the Senate. Additionally, this section requires the Secretary to provide written notification to both the Senate and House Armed Services Committees within 30 days after issuing such a waiver.

² “US Bans Pentagon From Using Chinese Port Logistics Platform”, https://www.voanews.com/a/us-bans-port-logistics-platform-china-offers-free-worldwide-/7408269.html (last visited: Jan. 9, 2023).

³ MARK V. ARENA ET AL., ASSESSING BID PROTESTS OF U.S. DEPARTMENT OF DEFENSE PROCUREMENTS, IDENTIFYING ISSUES, TRENDS, AND DRIVERS, RAND CORP. (2017).