Guest:	Dan Ramish
Title:	Partner at Haynes Boone
Summary:	The new law exempts nontraditional defense contractors from FAR cost principles, certified cost or pricing data, and Defense Department business systems requirements, potentially affecting more than 90% of the defense industrial base.

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Interview transcript

Terry Gerton We’ve got the new National Defense Authorization Act. It’s signed into law and there’s a lot in it as we’ve talked on other episodes, 3,000 plus pages. But we’re going to drill in on a particular part today, section 1826. Talk to us about why you think that provision is so important.

Dan Ramish So Terry, this provision, 1826, is titled “Exemptions for Non-Traditional Defense Contractors,” and it includes three important exemptions on defense contracts for companies that qualify as non-traditional defense contractors. Those companies will be exempt from the FAR Part 31 cost principles, certified cost repricing data requirements under the Truth in Negotiations Act, and then contractor business systems requirements. And there are provisions that allow for the head of contracting activity or their delegate to waive exemptions or modify or partially apply them, but those are unlikely to be used that much because there’s a requirement to notify Congress when they use that authority. And notably these exemptions don’t apply to civilian agency contracts, only defense agency contracts. There are some questions about how that’ll be implemented, But this provision is very important because it’s very broad in scope. Non-traditional defense contractors are defined as any contractors that aren’t currently performing a CAS-covered contract, a contract covered by the Cost Accounting Standards, and that haven’t performed a CAS-covered contract in the last year. This is a large percentage of the defense industrial base. It includes all small businesses because contracts and subcontracts with small businesses are exempt. Broader than that, George Mason’s Baroni Center for Government Contracting estimated earlier this year that only 7.5 Percent of the Defense Industrial Base could not qualify as a non-traditional defense contractor. So this is very broad in scope of coverage for Defense Industrial base companies.

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Terry Gerton And the exclusion is actually going to increase with other provisions in the NDA a correct.

Dan Ramish Yes, so there are also threshold increases under the cost accounting standards. There is an increase on the individual contracts that are subject to CAS. It used to be that there was a trigger contract mechanism and some contracts as low in value as $2.5 million would be covered. Now, the new threshold for individual contracts will be $35 million and then there’s a second threshold for full CAS coverage which includes all of the cost accounting standards, and that increased from $50 million to $100 million. So the number of companies that are subject to full CAS coverage will be even lower after these threshold increases go through.

Terry Gerton So pretty clearly, if you’re working in the defense contracting space, you’re going to need to read these provisions in close detail. But let’s take the three exemptions that you talked about and kind of walk through them one at a time. Let’s first talk about the cost principles. What are they and when do they apply?

Dan Ramish So the contract cost principles that are in FAR Part 31 govern the costs that the government will pay under cost reimbursement contracts and other flexibly priced contracts. And the government also looks to the cost principles when they’re negotiating fixed price contracts when cost analysis is required, although for fixed price contracts, the cost principles aren’t binding on the contractor. So really we’re talking about cost reimbursements contracts primarily, and the government in cost reimbursable contract agrees to pay the contractor based on the contractor’s actual incurred costs, typically with an added fee, rather than based on fixed prices. And the government uses cost type contracts when there are significant risks of uncertainty in contract performance, when they can’t define what’s going to be needed under the contract with sufficient certainty. And the Government assumes the risk of cost increases or overruns and in contrast to fixed price contract where the contractor bears the cost risk. But in these scenarios, the government uses the cost principles to tell the contractor what contract costs it will or will not cover. And so as part of this, there are various unallowable costs that the government says as a matter of policy, they won’t pay for. So the most famous of these is alcoholic beverages. Alcohol has been an unallowed cost since 1986. Other common examples are lobbying and political activity expenses or entertainment costs like sports or concert tickets. There are other types of costs like legal costs or compensation costs that aren’t strictly prohibited but have kind of complicated rules for how to recover the costs and when the costs are allowable. So these are complicated rules and challenging to follow. They require complex policies and procedures and training on the part of contractors to make sure that they aren’t charging the government costs that they are allowed to. So being relieved of this burden is significant.

Terry Gerton Sounds like contractors might be wiping their brow here, but are there other pieces of the cost rules that folks should be concerned about?

Dan Ramish Well, so one important caveat to this cost principles exemption is that there are statutory provisions addressing allowability of certain costs, like alcohol, for example. And so it’s unlikely that the Department of Defense will be able to just wipe the slate clean. They’ll need to establish new and presumably vastly streamlined rules that balance the other statutory constraints. It’ll have to be shorter than the about 75 pages of rules that make up the cost principles.

Terry Gerton Dan Ramish is a partner at Haynes Boone. Dan, we’ll continue on this topic here. The next piece up is certified cost or pricing data.

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Dan Ramish Yes, so certified cost or pricing data is a requirement that originates in the Truthful Cost or Pricing Data Act, which is popularly and formally referred to as the Truth in Negotiations Act or TINA. And when the government is buying products or services from a contractor and there isn’t enough competition or commercial market forces for the contracting officer to determine that the price is fair and reasonable, the contracting officers is required to request certified cost of pricing data. So, survey cost pricing data includes all facts that prudent buyers and sellers would reasonably expect to affect price negotiations. So, it’s kind of intended to address those non-competitive scenarios to put the government negotiator on equal footing. The common types of cost pricing data could include anything from vendor quotes to internal data about business prospects or operation costs or information about management decisions that could affect costs. And the contractor is required to identify and provide the cost of pricing data to the government and certify that the data are current, accurate and complete. And as with the cost principles, failure to comply with the current, accurate, complete requirement in certifying certified cost of price data could create liability, liability for defective pricing, or potentially fraud liability under certain circumstances. So this presents risk as well and requires policies and procedures to ensure that the appropriate data is collected and provided to the government and updated appropriately during negotiations.

Terry Gerton The third set of exemptions are from the DoD business systems rules. Tell us more about that.

Dan Ramish DoD business systems rules are another fairly extensive area requiring defense contractors to maintain adequate business systems for accounting, earned value management, estimating material management, property management, and purchasing. And if the Department of Defense determines that a contractor’s business systems have material weaknesses, the government can withhold substantial amounts from contract payments. So this is another area where each these systems requires complex compliance apparatus. And with the withholding risk, this is an important area for contractors who are subject to it and its requirements are prescriptive and burdensome on contractors and so another area where this will provide significant relief.

Terry Gerton You mentioned at the beginning that there’s the potential that the Secretary of Defense can waive these exemptions. Waving exemptions seems like a double negative. It means holding people accountable to the original standards, right? So what would be the circumstances that would warrant a waiver?

Dan Ramish So the language talking about this, you know, there’s a requirement for congressional notice and it gives kind of a sense of where there might be circumstances for a waiver. If a waiver is issued, then the Secretary of Defense is required to provide congressional defense committees a notice of the waiver. And that notice is required include a discussion of efforts made to adapt the acquisition approach for the product or service with respect to which such waiver was granted. So, I think there’s an understanding that there will be circumstances where it’s excessively challenging, for example, the government to have assurances that it’s obtaining fair and reasonable prices or where there are concerns about the types of costs that it is covering. And so there is this kind of escape valve. But the fact that the Secretary of Defense has to notify Congress when they do it will be a significant deterrent for reusing this. So it’s unlikely that this waiver authority will undermine the broader effects of the rule.

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