December 2024 Government Contracts Update

For further information, please contact Patrick Burns or Meredith Thielbahr. Be sure to tune into The Essential GovCon Brief podcast for an in-depth discussion of the issues highlighted here.

Agency Regulations:

Interim Rule: DoD, GSA, and NASA Enact Prohibition on Unmanned Aircraft Systems from Covered Foreign Entities

Overview: On November 12, 2024, the Department of Defense (“DoD”), General Services Administration (“GSA”), and National Aeronautics and Space Administration (“NASA”) implemented an interim rule amending the Federal Acquisition Regulation (“FAR”) to enforce the American Security Drone Act of 2023. This rule prohibits federal agencies and contractors from procuring or operating unmanned aircraft systems (“UAS”) manufactured or assembled by foreign entities identified as security risks under the Act. The prohibition aims to safeguard sensitive government data and operations from cybersecurity threats linked to foreign-made drones. The rule will be fully implemented on December 22, 2025.

Key Changes:

• Immediate Procurement Ban: Federal agencies are prohibited from procuring UAS manufactured by prohibited foreign entities, effective November 12, 2024.

• Expanded Prohibitions in 2025: Beginning December 22, 2025, federal agencies are banned from operating prohibited UAS, and federal funds cannot be used for their procurement or operation.

• New FAR Subpart and Clause: A new FAR subpart (40.2) and contract clause (FAR 52.240-1) were introduced to enforce these prohibitions.

• Exceptions and Waivers: The rule includes exemptions for specific agencies and activities, such as national security operations, wildfire management, and transportation safety, alongside provisions for case-by-case waivers.

• Compliance Requirements: Contractors must ensure compliance with the prohibition, disclose relevant UAS usage, and report any new prohibitions that may apply after contract execution.

Impact: This rule is designed to strengthen national security by mitigating risks associated with the use of foreign-made unmanned aircraft systems in federal operations. Contractors and agencies will need to adapt procurement strategies, shifting toward domestic or allied-nation suppliers to comply with the new requirements. While federal agencies may temporarily continue using certain existing UAS, they must phase out prohibited systems by 2025. Overall, the rule is designed to ensure greater protection for sensitive government data and operations.

Relevant Dates: The interim rule went into effect on November 12, 2024, and public comments are open until January 13, 2025.

DoD Expands Evaluation Criteria to Strengthen Small Business Competitiveness in Federal Contracting

Overview: The DoD issued a final rule amending the Defense Federal Acquisition Regulation Supplement (“DFARS”) to implement Section 865 of the National Defense Authorization Act (“NDAA”) for Fiscal Year 2024. This rule requires DoD contracting officers to consider the relevant past performance of affiliate companies of small business concerns when evaluating past performance during competitive solicitations. The rule aims to provide small businesses with greater opportunities by recognizing their broader organizational capabilities.

Key Changes:

• Inclusion of Affiliate Past Performance: Contracting officers must evaluate the past performance of small businesses and their affiliate companies when assessing responses to competitive solicitations.

• No Significant Cost or Administrative Impact: The rule leverages existing processes for submitting and evaluating past performance information, requiring no additional administrative burden on contractors or significant expenditure of funds.

Impact: This rule is designed to enhance opportunities for small businesses by allowing them to leverage the relevant past performance of their affiliate companies, improving their competitiveness in federal contracts. By recognizing the broader capabilities of small businesses, the DoD seeks to promote equitable competition and supports the DoD’s goal of fostering small business participation in the defense procurement process.

Relevant Date: This final rule went into effect on November 15, 2024.

DoD Proposes Rule to Enhance Transparency and Security in IT and Weapon Systems Procurement

Overview: The DoD proposed a rule to amend the DFARS to implement Section 1655 of the NDAA for Fiscal Year 2019. This proposed rule prohibits the DoD from acquiring certain products, services, or systems unless offerors and contractors disclose any obligations to share source code or computer code with foreign governments. The rule aims to mitigate national security risks and ensure transparency in DoD procurements involving information or operational technology, cybersecurity, industrial control systems, or weapon systems.

Key Changes:

• Disclosure Requirement: Offerors and contractors must disclose whether they have shared, or are obligated to share, source code or computer code with foreign governments. Disclosures must be submitted via the Catalog Data Standard in the Electronic Data Access (“EDA”) system.

• Contract Clauses: New DFARS clauses (252.239–70YY and 252.239–70ZZ) are introduced to enforce pre-award and post-award disclosure requirements, including flow-down requirements for subcontractors.

• Application to Commercial and Simplified Purchases: The rule applies to contracts for commercial products, including Commercially Available Off-The-Shelf (“COTS”) items, and acquisitions at or below the Simplified Acquisition Threshold (“SAT”).

• Prohibition Scope: Contracts for covered systems or services will not be awarded or extended unless disclosures are completed and verified, ensuring compliance with the rule.

Relevant Date: Comments must be received by January 14, 2025.

Recent Cases/Decisions:

GAO Sustains Protest: Agency Faulted for Failing to Consider Corporate Merger for Purposes of Proving CMMI Level III Requirement

Background: The Government Accountability Office (“GAO”) recently sustained a protest by DecisionPoint Corporation, formerly EmeSec Inc., regarding the Department of the Air Force’s rejection of its proposal for a defensive cyber realization, integration, and operational support (“DCRIOS”) contract. The Air Force determined that DecisionPoint’s proposal was ineligible due to the lack of proof of a required Capability Maturity Model Integration (“CMMI”) Level III certification at the time of submission. DecisionPoint argued that the certification existed through its parent company, and subsequent corporate restructuring and novation rendered its proposal compliant.

Key Issues:

• Certification Requirements: The Air Force required offerors to submit proof of a CMMI Level III certification for the prime contractor as part of their proposals. DecisionPoint, having merged with EmeSec, claimed its CMMI certification met this requirement.

• Corporate Restructuring and Novation: DecisionPoint argued that the merger and subsequent novation of EmeSec’s contract rights and obligations effectively made DecisionPoint the certified prime contractor. The Air Force did not adequately account for this corporate transaction during its evaluation.

• Agency Evaluation: The GAO found that while the Air Force acknowledged the novation, it failed to properly consider DecisionPoint’s post-merger status and its CMMI certification, leading to an unreasonable determination of ineligibility.

Citation: DecisionPoint Corp., B-422245.5 (November 13, 2024).

Ninth Circuit Strikes Federal Minimum Wage Mandate for Federal Government Contractors

Overview: Several states challenged an executive order issued by President Biden, which required federal contractors to pay employees a $15 minimum wage. The states contended that both the order and the Department of Labor’s (“DOL”) implementing rule violated the Federal Property and Administrative Services Act (“FPASA”), the major questions doctrine, and the Administrative Procedure Act (“APA”). The Ninth Circuit evaluated whether the executive branch acted within its statutory authority and complied with administrative law principles.

Issues Considered: The court examined three primary issues. First, it considered whether the executive order and the DOL’s implementing rule exceeded the authority granted to the President and the Department under FPASA. Second, it analyzed whether the minimum wage mandate represented a significant expansion of federal authority that required clear congressional authorization under the major questions doctrine. Finally, the court assessed whether the DOL violated the APA by failing to consider reasonable alternatives before adopting the final rule.

Allegations: The states alleged that the executive order exceeded statutory authority under FPASA, asserting that the Act neither explicitly nor implicitly authorized the President to impose a federal contractor minimum wage. Additionally, the states claimed that the DOL acted arbitrarily and capriciously in violation of the APA by failing to evaluate alternatives to the $15 minimum wage. Lastly, they argued that the economic and political significance of the mandate required clear congressional authorization under the major questions doctrine, which they contended was lacking.

Key Appellate Court Findings:

• Exceeding FPASA Authority: The court held that the executive order exceeded the authority granted under FPASA. The statute does not allow the President to implement broad procurement policies disconnected from the Act’s operative provisions. The court noted that FPASA’s purpose clause could not serve as a standalone source of authority, and the administrative record failed to demonstrate how the minimum wage rule enhanced economy or efficiency in federal procurement.

• Major Questions Doctrine: The court found that the doctrine did not apply because the executive action did not represent a “transformative expansion” of authority under FPASA. The use of FPASA to regulate federal contractor wages was consistent with prior executive actions.

• Violation of APA: The DOL’s failure to consider alternatives, such as phasing in the minimum wage or adjusting the rate, rendered the rule arbitrary and capricious under the APA. The court emphasized that the agency must engage in reasoned decision-making, even when implementing a presidential directive.

• Relief: The court reversed the district court’s dismissal of the case, vacated the DOL’s implementing rule, and remanded the case for further proceedings. It also found that the district court erred in denying the states’ motion for a preliminary injunction.

Citation: State v. Su, 121 F.4th 1 (2024).

GRSM Government Contracts Practice Group

GRSM’s government contracts team has considerable experience defending and enforcing the rights of our contractor clients in disputes against government entities and private businesses. In addition to litigating claims in state and federal courts, we routinely handle matters before administrative tribunals, such as the Government Accountability Office, the Small Business Administration, and the Armed Services Board of Contract Appeals.

Our team of attorneys is located throughout the United States, which allows the firm to represent contractors, regardless of size, and in a wide variety of industries, including defense, information technology, construction, and aerospace, among others. Please contact the authors with any questions. GRSM would like to acknowledge the significant contributions to this update by Quyen Dang.