Congress recently passed the FY2023 National Defense Authorization Act (NDAA), authorizing $858 billion in defense spending and implementing some significant changes to federal procurement policy. The bill will now be sent to President Biden to be signed into law, which we anticipate will happen any day. PilieroMazza examines key themes and provisions in the FY2023 NDAA that government contractors (small and large) should know to take advantage of contract opportunities and maintain compliance requirements.
Background
The NDAA is annual legislation that authorizes funding and programs for the Department of Defense (DOD). It has the distinction of having been passed annually over the last six decades. The NDAA also sets defense policy and often delves into other policy areas. Of interest to government contractors, the NDAA is consistently used as a vehicle to legislate procurement policy. The FY2023 NDAA is no different.
As in recent years, there was a continued focus on (1) safeguarding foreign supply chains and promoting domestic production and (2) small business programs, including DOD’s Mentor Protégé Program and the Small Business Innovation Research (SBIR) Program. In addition, the NDAA has several other notable provisions for defense contractors, including a provision authorizing inflation relief that PilieroMazza recently highlighted.
Noteworthy Provisions
1. Safeguarding Foreign Supply Chains
Chinese Semiconductors: Section 5949 prohibits executive agencies from procuring semiconductors and related electronics from certain Chinese companies. Unlike most NDAA acquisition provisions, this will apply governmentwide and result in a change to the Federal Acquisition Regulation (FAR). However, the prohibitions will not take effect for five years. Nonetheless, as shown by the long runway needed to implement compliance with the telecommunications ban in Section 889 of the FY2019 NDAA, government and industry will likely need the full five-year window to adjust. This adjustment is somewhat mitigated because this section comes on the heels of the CHIPS and Science Act of 2022, which includes billions of dollars of investment into domestic semiconductor manufacturing.
Rare Earth Elements: Section 857 requires contractors providing DOD with systems that include a “permanent magnet” with rare earth elements to disclose the place of origin and other supply chain information. The section also expands restrictions on the procurement of military and dual-use technologies by Chinese military companies.
Foreign UAS: Section 817 modifies a FY2020 NDAA provision on foreign-made, unmanned aircraft systems (UAS) by prohibiting UAS purchases from China, Russia, Iran, and North Korea.
2. Promoting Small Businesses
SBA Scorecard: Section 871 expands the reporting requirements for the Small Business Administration’s (SBA) annual Small Business Procurement Scorecard (Scorecard). The Scorecard will be expanded to include data from federal agencies on sole-source and set-aside awards made to the 8(a), Women Owned Small Business (WOSB), Historically Underutilized Business Zone (HUBZone) and Service-Disabled Veteran-Owned Small Business (SDVOSB) programs.
Contract Bundling: Section 873 creates a new mandate for federal agencies to share data with SBA on contract bundling, including identifying each bundled contract and providing information on the effects of small businesses displaced as prime contractors.
DOD Mentor Protégé Program: Section 822 modifies the DOD Mentor Protégé Program (MPP) in several ways, including changing the threshold for mentor eligibility to $25 million in defense contracts in the fiscal year prior to a MPP agreement, increasing program participation from two to three years, and creating a pilot program to incentivize protégé participation for engineering and software development.
SBIR/STTR Programs: Section 872 pushes DOD to further implement a due diligence program to assess the security risks of presumptive awardees in the SBIR and Small Business Technology Transfer (STTR) programs, including in terms of cybersecurity practices and financial ties and obligations to foreign entities.
3. Other Provisions Affecting Defense Contractors
Inflation Relief: As PilieroMazza recently highlighted, Section 822 authorizes a novel authority for defense contractors to obtain inflationary relief on fixed-price contracts. While this is welcome news to defense contractors struggling with increased costs due to inflation, many questions remain on how this authority will be implemented, including to what extent Congress is willing to fund this initiative.
Cost Data and Commerciality: Building off a FY2020 NDAA provision on uncertified cost or pricing data, Section 803 requires sole-source contractors providing subsystems or parts for major weapons systems that are newly proposed as commercial items to provide additional comparative and pricing information to support DOD commerciality determinations.
Security Clearances for “Innovative Technology Companies”: Section 882 initiates a five-year pilot program to ease the process for “innovative technology companies” to obtain security clearances for their employees. It would allow the government to sponsor employees’ clearances while the company works towards obtaining their own facility clearance. The pilot will be limited to 75 companies that are small businesses or non-traditional defense contractors.
Contractual Changes Due to Executive Orders: Section 805 clarifies that the inclusion of a contract clause into a DOD contract in response to an executive order is treated the same as if it had been directed by the Contracting Officer pursuant to the Changes clause (FAR 52.243-4). As a result, when contractors are required to incorporate FAR provisions incorporating those executive orders into contracts, this provision confirms that contractors are entitled to recover the cost impacts of compliance.
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Note that the NDAA’s “authorization” process is distinct from the “appropriations” process. The NDAA does not give DOD actual budget authority; funds must be separately appropriated by Congress before they can be spent by federal agencies. That said, the NDAA typically serves as an indicator of the budget that Congress will appropriate to DOD. PilieroMazza continues to monitor Congress’ progress towards a FY2023 Budget.
Government contractors small and large should pay close attention to these NDAA provisions and understand how they will affect their ability to successfully compete in 2023 and beyond. If you have questions about the NDAA, please contact Kevin Barnett or James Rhodes, the authors of this client alert, or another member of PilieroMazza’s Government Contracts Group.