Recent Government Contract Cases and Regulations

Updated February 10, 2021

TABLE OF CONTENTS

I. LEGISLATION TAB

A. National Defense Authorization Act FY 2021, Pub. L. No. 116-283, Title VIII(Jan. 1, 2021) ....................................................................................................... 1

II. REGULATIONS & POLICIES

A. Proposed Rule, DFARS: Commercial Item Determinations, 85 Fed. Reg. 74636(Nov. 23, 2020) .................................................................................................... 2

B. Final Rule, DFARS: Covered Defense Telecommunications Equipment orServices, 86 Fed. Reg. 3832 (Jan. 15, 2021) ......................................................... 3

C. Final Rule, FAR: Maximizing Use of American-Made Goods, Products, andMaterials, 86 Fed. Reg. 6180 (Jan. 19, 2021) ........................................................ 4

D. Final Rule, OUSD I&S: National Industrial Security Program Operating Manual(NISPOM), 85 Fed. Reg. 83300 (Dec. 21, 2020) .................................................. 5

E. Proposed Rule, OUSD A&S: Operational Contract Support (OCS) Outside theUnited States, 86 Fed. Reg. 1063 (Jan. 7, 2021).................................................... 6

F. Final Rule, FAR: Lowest Price Technically Acceptable Source Selection Process,86 Fed. Reg. 3679 (Jan. 14, 2021) ........................................................................ 7

G. Executive Order on Ensuring the Future Is Made in All of America by All ofAmerica’s Workers Exec. Order No. 14005, 86 Fed. Reg. 7475 (Jan. 25, 2021)(SPM’s previous analysis of this Executive Order is available here) .................... 8

H. NDIA Letter to CAS Board, “Advance Notice of Proposed Rulemaking –Conformance of the Cost Accounting Standards to Generally AcceptedAccounting Principles for Operating Revenue and Lease Accounting –Case Number CASB 2020-02” (Jan. 4, 2021) ..................................................... 9

8000 Towers Crescent Drive, Suite 900 | Tysons Corner, VA 22182 | 703.847.6300 | Fax 703.847.6312 | www.smithpachter.com

I. DCAA Memorandum, Audit Alert Coronavirus Legislation and Regulations (Dec. 11, 2020) .................................................................................................. 10

J. DCMA Manual 2201-02, Cost Accounting Standards Administration (Dec. 22, 2020) .................................................................................................. 11

K. OUSD Memorandum, Interim Defense Acquisition Regulation Supplement Rule, 2019-D041, Assessing Contractor Implementation of Cybersecurity Requirements (Nov. 25, 2020)............................................................................ 12

III. CASES

A. BGT Holdings, LLC v. United States, 984 F.3d 1003 (Fed. Cir. 2020) (holding language in FAR 52.245-1 stating that contracting officer “shall consider” equitable adjustment for non-delivery of Government-Furnished Property creates a duty, the exercise of which must be in good faith and reasonable, rejecting government’s contention that contracting officer had absolute discretion) .......... 13

B. Zafer Construction Co. v. United States, 2020 WL 7767509 (Fed. Cl. Dec. 30, 2020) (holding that contractor’s delay claim accrued when the delay first began and was barred by the statute of limitations; rejecting assertions that serial delays fell within the continuing claims theory and that an earlier REA satisfied the requirements of a CDA claim as it did not seek a final decision) ........................ 14

C. Anis Avasta Constr. Co., ASBCA No. 61926, 20-1 BCA ¶ 37743 (Nov. 18, 2020) (granting summary judgment to the USG under statute of limitations, finding that contractor’s claim for payment accrued on the date when it notified the government that the project was completed, not later when the government requested submission of a DD-250) .................................................................... 15

D. DynCorp International, LLC, ASBCA No. 61950, 2021 WL 363045 (Jan. 7, 2021) (granting appellant’s motion to dismiss its motion for reconsideration on the Board’s ruling affirming disallowance of severance costs, leaving decision intact) ................................................................................................................ 16

E. The Boeing Co. v. Sec’y of the Air Force, 983 F.3d 1321 (Fed. Cir. 2020) (holding that, under DFARS 252.227-7013, contractor was entitled to mark technical data with protective rights legend vis-a-vis third parties, even where government had unlimited rights in same technical data) (SPM’s previous analysis of this Executive Order is available here) ...................................................................... 17

F. Raytheon Co. v. United States, 2020 WL 6482175 (Fed. Cl. Nov. 4, 2020) (in litigation involving a dispute vendor lists can be marked with protective rights legends, the court denied Raytheon’s motion for a protective order seeking to bar DCAA from conducting a “walk-through” of its system to collect costs that may have been used to develop vendor lists as audit activity is voluntary, even if it is in parallel to litigation over the same issues; court granted the USG’s motion to compel access, construing the COFD as not limited to years stated) ................... 18

G. Doubleshot, Inc., ASBCA No. 61691, 20-1 BCA ¶ 37677 (July 22, 2020) (rejecting contractor’s motion for summary judgment as contractor did not include in the record documents showing that DCAA was on notice more than six years earlier) ............................................................................................................... 19

H. Advanced Technologies Grp., Inc., ASBCA No. 59986, 20-1 BCA ¶ 37744 (Nov. 18, 2020) (denying contractor’s motion for summary judgment asserting a limitations defense because genuine issue of material fact existed concerning whether DCAA was on notice of questioned costs contained in incurred cost proposals; denying USG’s cross-motion for summary judgment on expressly unallowable grounds because government did not establish factual basis showing that the disputed legal and patent costs were expressly unallowable) .................. 20

I. Mission Support Alliance, LLC v. Dept. of Energy, CBCA No. 6476, 2020 WL 7866679 (Dec. 8, 2020) (granting contractor summary judgment where contract did not require production of “parent organization” records requested by DOE). 21

J. Lockheed Martin Corp., ASBCA No. 62377, 2021 WL 363047 (Jan. 7, 2021) (contractor appeal from COFD on FAR 52.247-63 dismissed without prejudice due to “no live dispute”) ..................................................................................... 22

K. Indictment, United States v. Surgical Care Affiliates, LLC, No. 3-21CR0011-L (N.D. Tex. Jan. 5, 2021) (alleging criminal antitrust violations due to “no poach” agreement) ......................................................................................................... 23

L. Settlement of FCA allegations between USSOCOM and Insitu, Inc. (Dec. 23, 2020) (alleging TINA violations) ....................................................................... 24

IV. REPORTS

A. DOD IG Report No. DODIG-2021-030, “Audit of Department of Defense Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act” (Dec. 9, 2020) .............................................................................. 25

B. DOD IG Report No. DODIG-2021-047, “Evaluation of Department of Defense Contracting Officer Actions on Questioned Direct Costs” (Jan. 21, 2021) .......... 26

TAB 1

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(3) The increase, as compared to the day before the dateof the enactment of this Act, of the annual cost associated with readjustment counseling and outpatient mental health care provided by the Department to members of the reserve components of the Armed Forces.

(4) The changes, as compared to the day before the dateof the enactment of this Act, in staffing, training, organization, and resources required for the Department to offer readjust-ment counseling and outpatient mental health care to members of the reserve components of the Armed Forces.

(5) Any challenges the Department has encountered inproviding readjustment counseling and outpatient mental health care to members of the reserve components of the Armed Forces. (b) VET CENTER DEFINED.—In this section, the term ‘‘Vet

Center’’ has the meaning given that term in section 1712A(h) of title 38, United States Code.

TITLE VIII—ACQUISITION POLICY, AC-QUISITION MANAGEMENT, AND RE-LATED MATTERS

Subtitle A—Acquisition Policy and Management Sec. 801. Report on acquisition risk assessment and mitigation as part of Adaptive

Acquisition Framework implementation. Sec. 802. Improving planning, execution, and oversight of life cycle sustainment ac-

tivities. Sec. 803. Disclosures for offerors for certain shipbuilding major defense acquisition

program contracts. Sec. 804. Implementation of modular open systems approaches. Sec. 805. Congressional notification of termination of a middle tier acquisition pro-

gram. Sec. 806. Definition of material weakness for contractor business systems. Sec. 807. Space system acquisition and the adaptive acquisition framework. Sec. 808. Acquisition authority of the Director of the Joint Artificial Intelligence

Center. Sec. 809. Assessments of the process for developing capability requirements for De-

partment of Defense acquisition programs.

Subtitle B—Amendments to General Contracting Authorities, Procedures, and Limitations

Sec. 811. Sustainment reform for the Department of Defense. Sec. 812. Inclusion of software in Government performance of acquisition functions. Sec. 813. Modifications to Comptroller General assessment of acquisition programs

and related initiatives. Sec. 814. Cost or pricing data reporting requirements for Department of Defense

contracts. Sec. 815. Prompt payment of contractors. Sec. 816. Documentation pertaining to commercial item determinations. Sec. 817. Modification to small purchase threshold exception to sourcing require-

ments for certain articles. Sec. 818. Repeal of program for qualified apprentices for military construction con-

tracts. Sec. 819. Modifications to mitigating risks related to foreign ownership, control, or

influence of Department of Defense contractors and subcontractors. Sec. 820. Contract closeout authority for services contracts. Sec. 821. Revision of proof required when using an evaluation factor for employing

or subcontracting with members of the Selected Reserve.

Subtitle C—Provisions Relating to Software and Technology Sec. 831. Contract authority for development and demonstration of initial or addi-

tional prototype units.

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Sec. 832. Extension of pilot program for streamlined awards for innovative tech-nology programs.

Sec. 833. Listing of other transaction authority consortia. Sec. 834. Pilot program on the use of consumption-based solutions to address soft-

ware-intensive warfighting capability. Sec. 835. Balancing security and innovation in software development and acquisi-

tion. Sec. 836. Digital modernization of analytical and decision-support processes for

managing and overseeing Department of Defense acquisition programs. Sec. 837. Safeguarding defense-sensitive United States intellectual property, tech-

nology, and other data and information. Sec. 838. Comptroller General report on implementation of software acquisition re-

forms. Sec. 839. Comptroller General report on intellectual property acquisition and li-

censing.

Subtitle D—Industrial Base Matters Sec. 841. Additional requirements pertaining to printed circuit boards. Sec. 842. Report on nonavailability determinations and quarterly national tech-

nology and industrial base briefings. Sec. 843. Modification of framework for modernizing acquisition processes to ensure

integrity of industrial base and inclusion of optical transmission compo-nents.

Sec. 844. Expansion on the prohibition on acquiring certain metal products. Sec. 845. Miscellaneous limitations on the procurement of goods other than United

States goods. Sec. 846. Improving implementation of policy pertaining to the national technology

and industrial base. Sec. 847. Report and limitation on the availability of funds relating to eliminating

the gaps and vulnerabilities in the national technology and industrial base.

Sec. 848. Supply of strategic and critical materials for the Department of Defense. Sec. 849. Analyses of certain activities for action to address sourcing and industrial

capacity. Sec. 850. Implementation of recommendations for assessing and strengthening the

manufacturing and defense industrial base and supply chain resiliency. Sec. 851. Report on strategic and critical materials. Sec. 852. Report on aluminum refining, processing, and manufacturing.

Subtitle E—Small Business Matters Sec. 861. Initiatives to support small businesses in the national technology and in-

dustrial base. Sec. 862. Transfer of verification of small business concerns owned and controlled

by veterans or service-disabled veterans to the Small Business Adminis-tration.

Sec. 863. Employment size standard requirements for small business concerns. Sec. 864. Maximum award price for sole source manufacturing contracts. Sec. 865. Reporting requirement on expenditure amounts for the Small Business

Innovation Research Program and the Small Business Technology Transfer Program.

Sec. 866. Small businesses in territories of the United States. Sec. 867. Eligibility of the Commonwealth of the Northern Mariana Islands for cer-

tain Small Business Administration programs. Sec. 868. Past performance ratings of certain small business concerns. Sec. 869. Extension of participation in 8(a) program. Sec. 870. Compliance of Offices of Small Business and Disadvantaged Business Uti-

lization. Sec. 871. Category management training.

Subtitle F—Other Matters Sec. 881. Review of and report on overdue acquisition and cross-servicing agree-

ment transactions. Sec. 882. Domestic comparative testing activities. Sec. 883. Prohibition on awarding of contracts to contractors that require nondisclo-

sure agreements relating to waste, fraud, or abuse. Sec. 884. Program management improvement officers and program management

policy council. Sec. 885. Disclosure of beneficial owners in database for Federal agency contract

and grant officers. Sec. 886. Repeal of pilot program on payment of costs for denied Government Ac-

countability Office bid protests.

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Sec. 887. Amendments to submissions to Congress relating to certain foreign mili-tary sales.

Sec. 888. Revision to requirement to use firm fixed-price contracts for foreign mili-tary sales.

Sec. 889. Assessment and enhancement of national security innovation base. Sec. 890. Identification of certain contracts relating to construction or maintenance

of a border wall. Sec. 891. Waivers of certain conditions for progress payments under certain con-

tracts during the COVID–19 national emergency.

Subtitle A—Acquisition Policy and Management

SEC. 801. REPORT ON ACQUISITION RISK ASSESSMENT AND MITIGA-TION AS PART OF ADAPTIVE ACQUISITION FRAMEWORK IMPLEMENTATION.

(a) IN GENERAL.—Each service acquisition executive shall submit to the Secretary of Defense, the Under Secretary of Defense for Acquisition and Sustainment, the Under Secretary of Defense for Research and Engineering, and the Chief Information Officer of the Department of Defense a report on how such service acquisi-tion executive is, with respect to the risks in acquisition programs described in subsection (b)—

(1) assessing such risks; (2) mitigating such risks; and (3) reporting within the Department of Defense and to

Congress on such risks. (b) ACQUISITION PROGRAM RISKS.—The risks in acquisition pro-

grams described in this subsection are the following: (1) Technical risks in engineering, software, manufacturing

and testing. (2) Integration and interoperability risks, including com-

plications related to systems working across multiple domains while using machine learning and artificial intelligence capabilities to continuously change and optimize system performance.

(3) Operations and sustainment risks, including as miti-gated by appropriate sustainment planning earlier in the lifecycle of a program, access to technical data, and intellectual property rights.

(4) Workforce and training risks, including consideration of the role of contractors as part of the total workforce.

(5) Supply chain risks, including cybersecurity, foreign con-trol and ownership of key elements of supply chains, and the consequences that a fragile and weakening defense industrial base, combined with barriers to industrial cooperation with allies and partners, pose for delivering systems and technologies in a trusted and assured manner. (c) REPORT TO CONGRESS.—Not later than March 31, 2021,

the Under Secretary of Defense for Acquisition and Sustainment shall submit to the congressional defense committees a report including—

(1) the input received from the service acquisition execu-tives pursuant to subsection (a); and

(2) the views of the Under Secretary with respect to the matters described in paragraphs (1) through (5) of subsection (b).

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SEC. 802. IMPROVING PLANNING, EXECUTION, AND OVERSIGHT OF LIFE CYCLE SUSTAINMENT ACTIVITIES.

(a) PLANNING FOR LIFE CYCLE SUSTAINMENT.—Section 2337of title 10, United States Code, is amended—

(1) by striking ‘‘major weapon system’’ each place it appearsand inserting ‘‘covered system’’;

(2) by striking ‘‘major weapon systems’’ each place itappears and inserting ‘‘covered systems’’;

(3) by striking ‘‘weapon system’’ each place it appears andinserting ‘‘covered system’’;

(4) by redesignating subsections (b) and (c) as subsections(c) and (d), respectively;

(5) by inserting after subsection (a) the following new sub-section: ‘‘(b) LIFE CYCLE SUSTAINMENT PLAN.—Before granting Mile-

stone B approval (or the equivalent), the milestone decision authority shall ensure that each covered system has an approved life cycle sustainment plan. The life cycle sustainment plan shall include—

‘‘(1) a comprehensive product support strategy; ‘‘(2) performance goals, including key performance param-

eters for sustainment, key system attributes of the covered system, and other appropriate metrics;

‘‘(3) an approved life-cycle cost estimate for the covered system;

‘‘(4) affordability constraints and key cost factors that could affect the operating and support costs of the covered system;

‘‘(5) sustainment risks and proposed mitigation plans for such risks;

‘‘(6) engineering and design considerations that support cost-effective sustainment of the covered system;

‘‘(7) a technical data and intellectual property management plan for product support; and

‘‘(8) major maintenance and overhaul requirements that will be required during the life cycle of the covered system.’’;

(6) in subsection (c)(2), as so redesignated—(A) by amending subparagraph (A) to read as follows:‘‘(A) develop, update, and implement a life cycle

sustainment plan described in subsection (b);’’; (B) in subparagraph (B), by striking ‘‘use’’ and inserting

‘‘ensure the life cycle sustainment plan is informed by’’; and

(C) in subparagraph (C), by inserting ‘‘and life cyclesustainment plan’’ after ‘‘product support strategy’’;’’; and (7) in subsection (d), as so redesignated—

(A) by amending paragraph (5) to read as follows:‘‘(5) COVERED SYSTEM.—The term ‘covered system’ means—

‘‘(A) a major defense acquisition program as defined in section 2430 of this title; or

‘‘(B) an acquisition program or project that is carried out using the rapid fielding or rapid prototyping acquisition pathway under section 804 of the National Defense Authorization Act for Fiscal Year 2016 (Public Law 114– 92; 10 U.S.C. 2302 note) that is estimated by the Secretary of Defense to require an eventual total expenditure described in section 2430(a)(1)(B).’’; and

(B) by adding at the end the following new paragraphs:

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‘‘(6) MILESTONE B APPROVAL.—The term ‘Milestone B approval’ has the meaning given that term in section 2366(e)(7) of this title.

‘‘(7) MILESTONE DECISION AUTHORITY.—The term ‘milestone decision authority’ has the meaning given in section 2431a(e)(5) of this title.’’. (b) ADDITIONAL REQUIREMENTS BEFORE MILESTONE B

APPROVAL.—Section 2366b of title 10, United States Code is amended—

(1) in subsection (a)(3)— (A) in subparagraph (N), by striking ‘‘and’’ at the end; (B) in subparagraph (O), by striking the period at

the end and inserting ‘‘; and’’; and (C) by adding at the end the following new subpara-

graph: ‘‘(P) has approved the life cycle sustainment plan

required under section 2337(b) of this title.’’; and (2) in subsection (c)(1)—

(A) by redesignating subparagraph (H) as subpara-graph (I); and

(B) by inserting after subparagraph (G) the following new subparagraph:

‘‘(H) A summary of the life cycle sustainment plan required under section 2337 of this title.’’.

(c) RECURRING SUSTAINMENT REVIEWS.—Section 2441 of title 10, United States Code, is amended—

(1) in subsection (a)— (A) in the first sentence—

(i) by striking ‘‘major weapon system’’ and inserting ‘‘covered system’’;

(ii) by striking ‘‘and throughout the life cycle of the weapon system’’ and inserting ‘‘, and every five years thereafter throughout the life cycle of the covered system,’’; and

(iii) by striking ‘‘costs of the weapon system’’ and inserting ‘‘costs of the covered system’’; and (B) by striking the second sentence;

(2) in subsection (b)— (A) in the matter preceding paragraph (1), by inserting

‘‘assess execution of the life cycle sustainment plan of the covered system and’’ before ‘‘include the following ele-ments:’’; and

(B) by adding at the end the following new paragraph: ‘‘(10) As applicable, information regarding any decision to

restructure the life cycle sustainment plan for a covered system or any other action that will lead to critical operating and support cost growth.’’; and

(3) by adding at the end the following new subsections: ‘‘(d) SUBMISSION TO CONGRESS.—(1) Not later than September

30 of each fiscal year, the Secretary of each military department shall annually submit to the congressional defense committees the sustainment reviews required by this section for such fiscal year.

‘‘(2) Each submission under paragraph (1) shall be submitted in unclassified form, but may include a classified annex.

‘‘(3) For a covered system with critical operating and support cost growth, such submission shall include a remediation plan to

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reduce operating and support costs or a certification by the Sec-retary concerned that such critical operating and support cost growth is necessary to meet national security requirements.

‘‘(e) DEFINITIONS.—In this section: ‘‘(1) COVERED SYSTEM.—The term ‘covered system’ shall

have the meaning given in section 2337 of this title. ‘‘(2) CRITICAL OPERATING AND SUPPORT COST GROWTH.—

The term ‘critical operating and support cost growth’ means operating and support cost growth—

‘‘(A) of at least 25 percent more than the estimate documented in the most recent independent cost estimate for the covered system; or

‘‘(B) of at least 50 percent more than the estimate documented in the original Baseline Estimate (as defined in section 2435(d) of this title) for the covered system.’’.

(d) COMPTROLLER GENERAL REVIEW.— (1) IN GENERAL.—The Comptroller General of the United

States shall— (A) annually, select 10 covered systems for which a

sustainment review has been submitted under section 2441(d) of title 10, United States Code; and

(B) submit to the congressional defense committees an assessment of the steps taken by Secretaries concerned to quantify and address critical operating and support cost growth with respect to such covered systems. (2) CONTENTS.—Each assessment described in paragraph

(1) shall include— (A) an evaluation of—

(i) the causes of critical operating and support cost growth for each such covered system;

(ii) the extent to which the Secretary concerned has mitigated critical operating and support cost growth of such covered system; and

(iii) any other issues related to potential critical operating and support cost growth the Comptroller General determines appropriate; and (B) any recommendations, including steps the Secre-

taries concerned could take to reduce critical operating and support cost growth for covered systems and lessons learned to be incorporated in covered system acquisitions. (3) TERMINATION.—The requirement under this subsection

shall terminate on September 30, 2025. (4) DEFINITIONS.—In this subsection, the terms ‘‘covered

system’’ and ‘‘critical operating and support cost growth’’ have the meanings given, respectively, in section 2441 of title 10, United States Code. (e) REPORT ON SUSTAINMENT PLANNING PROCESSES FOR NON-

MAJOR DEFENSE ACQUISITION PROGRAM ACTIVITIES.—Not later than December 31, 2021, the Secretary of Defense shall submit to the congressional defense committees a report on the process for ensuring that timely and robust sustainment planning processes are in place for all acquisition activities. The report shall include a discussion of—

(1) sustainment planning processes for each— (A) acquisition program or project that is carried out

using the rapid fielding or rapid prototyping acquisition pathway under section 804 of the National Defense

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Authorization Act for Fiscal Year 2016 (Public Law 114– 92; 10 U.S.C. 2302 note);

(B) information technology and software program; (C) services contract, including each services contract

for information technologies and systems; and (D) acquisition activity other than major defense

acquisition programs (as defined in section 2430 of title 10, United States Code), as determined by the Secretary of Defense; (2) methods to identify responsible individuals for

sustainment planning; (3) required elements of sustainment planning; (4) timing of sustainment planning activities in the acquisi-

tion process; (5) measures and metrics to assess compliance with

sustainment plans; and (6) actions to continuously monitor, create incentives for,

and ensure compliance with sustainment plans.

SEC. 803. DISCLOSURES FOR OFFERORS FOR CERTAIN SHIPBUILDING MAJOR DEFENSE ACQUISITION PROGRAM CONTRACTS.

(a) IN GENERAL.—Chapter 137 of title 10, United States Code, is amended by adding at the end the following new section:

‘‘§ 2339c. Disclosures for offerors for certain shipbuilding major defense acquisition program contracts

‘‘(a) IN GENERAL.—Any covered offeror seeking to be awarded a shipbuilding construction contract as part of a major defense acquisition program with funds from the Shipbuilding and Conver-sion, Navy account shall disclose along with the offer and any subsequent revisions of the offer (including the final proposal revi-sion offer) if any part of the planned contract performance will or is expected to include foreign government subsidized perform-ance, foreign financing, foreign financial guarantees, or foreign tax concessions.

‘‘(b) REQUIREMENTS.—A disclosure required under subsection (a) shall be made in a form prescribed by the Secretary of the Navy and shall include a specific description of the extent to which the planned contract performance will include, with or without contingencies, any foreign government subsidized performance, for-eign financing, foreign financial guarantees, or foreign tax conces-sions.

‘‘(c) CONGRESSIONAL NOTIFICATION.—Not later than 5 days after awarding a contract described under subsection (a), the Secretary of the Navy shall notify the congressional defense committees and summarize the disclosure provided under such subsection.

‘‘(d) DEFINITIONS.—In this section: ‘‘(1) COVERED OFFEROR.—The term ‘covered offeror’ means

any offeror that requires or may reasonably be expected to require, during the period of performance on a shipbuilding construction contract described in subsection (a), a method to mitigate or negate foreign ownership under section 2004.34(f)(6) of title 32, Code of Federal Regulations.

‘‘(2) FOREIGN GOVERNMENT SUBSIDIZED PERFORMANCE.—The term ‘foreign government subsidized performance’ means any financial support, materiel, services, or guarantees of support,

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services, supply, performance, or intellectual property conces-sions, that may be provided to or for the covered offeror or the customer of the offeror by a foreign government or entity effectively owned or controlled by a foreign government, which may have the effect of supplementing, supplying, servicing, or reducing the cost or price of an end item, or supporting, financing in whole or in part, or guaranteeing contract perform-ance by the offeror.

‘‘(3) MAJOR DEFENSE ACQUISITION PROGRAM.—The term ‘major defense acquisition program’ has the meaning given the term in section 2430 of this title.’’. (b) CLERICAL AMENDMENT.—The table of sections at the begin-

ning of chapter 137 of title 10, United States Code, is amended by inserting after the item relating to section 2339b the following new item:

‘‘2339c. Disclosures for offerors for certain shipbuilding major defense acquisition program contracts.’’.

SEC. 804. IMPLEMENTATION OF MODULAR OPEN SYSTEMS APPROACHES.

(a) REQUIREMENTS FOR INTERFACE DELIVERY.— (1) IN GENERAL.—Not later than one year after the date

of the enactment of this Act, the Under Secretary of Defense for Acquisition and Sustainment, in coordination with the Joint All-Domain Command and Control cross-functional team and the Director for Command, Control, Communications, and Com-puters/Cyber, shall issue regulations and guidance applicable to the military departments, Defense Agencies, Department of Defense Field Activities (as such terms are defined, respec-tively, in section 101 of title 10, United States Code), and combatant commands, as appropriate, to—

(A) facilitate the Department of Defense’s access to and utilization of modular system interfaces;

(B) fully realize the intent of chapter 144B of title 10, United States Code, by facilitating the implementation of modular open system approaches across major defense acquisition programs (as defined in section 2430 of title 10, United States Code) and other relevant acquisition programs, including in the acquisition and sustainment of weapon systems, platforms, and components for which no common interface standard has been established, to enable communication between such weapon systems, plat-forms, and components; and

(C) advance the efforts of the Department to generate diverse and recomposable kill chains. (2) ELEMENTS.—The regulations and guidance required

under paragraph (1) shall include requirements that— (A) the program officer for each weapon system

characterizes, in the acquisition strategy required under section 2431a of title 10, United States Code or in other documentation, the desired modularity of the weapon system for which the program officer is responsible, including—

(i) identification of— (I) the modular systems that comprise the

weapon system;

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(II) the information that should be commu-nicated between individual modular systems (such as tracking and targeting data or command and control instructions); and

(III) the desired function of the communicationbetween modular systems (such as fire control functions); and (ii) a default configuration specifying which mod-

ular systems should communicate with other modular systems, including modular systems of other weapon systems; (B) each relevant Department of Defense contract

entered into after the date on which the regulations and guidance required under paragraph (1) are implemented includes requirements for the delivery of modular system interfaces for modular systems deemed relevant in the acquisition strategy or documentation referred to in subparagraph (A), including—

(i) software-defined interface syntax and prop-erties, specifically governing how values are validly passed and received between major subsystems and components, in machine-readable format;

(ii) a machine-readable definition of the relation-ship between the delivered interface and existing common standards or interfaces available in the inter-face repositories established pursuant to subsection (c); and

(iii) documentation with functional descriptions ofsoftware-defined interfaces, conveying semantic meaning of interface elements, such as the function of a given interface field; (C) the relevant program offices, including those

responsible for maintaining and upgrading legacy sys-tems—

(i) that have not characterized the desiredmodularity of the systems nevertheless meet the requirements of paragraph (2)(A), if the program offi-cers make an effort, to the extent practicable, to update the acquisition strategies required under section 2431a of title 10, United States Code, or to develop or update other relevant documentation; and

(ii) that have awarded contracts that do not includethe requirements specified in subparagraph (B) of para-graph (2) nevertheless acquire, to the extent prac-ticable, the items specified in clauses (i) through (iii) of such subparagraph, either through contractual updates, separate negotiations or contracts, or program management mechanisms; and (D) the relevant program officers deliver modular

system interfaces and the associated documentation to at least one of the repositories established pursuant to sub-section (c). (3) APPLICABILITY OF REGULATIONS AND GUIDANCE.—

(A) APPLICABILITY.—The regulations and guidancerequired under paragraph (1) shall apply to any program office responsible for the prototyping, acquisition, or sustainment of a new or existing weapon system.

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(B) EXTENSION OF SCOPE.—Not earlier than 1 year before, and not later than 2 years after the regulations and guidance required under paragraph (1) are issued for weapon systems, the Under Secretary of Defense for Acquisition and Sustainment may extend such regulations and guidance to apply to software-based non-weapon sys-tems, including business systems and cybersecurity sys-tems. (4) INCLUSION OF COMPONENTS.—For the purposes of para-

graph (2)(A), each component that meets the following require-ments shall be treated as a modular system:

(A) A component that is able to execute without requiring coincident execution of other weapon systems or components and can communicate across component boundaries and through interfaces.

(B) A component that can be separated from and recombined with other weapon systems or components to achieve various effects, missions, or capabilities.

(C) A component that is covered by a unique contract line item. (5) MACHINE-READABLE DEFINITION.—Where appropriate

and available, the requirement in paragraph (2)(B)(ii) for a machine-readable definition may be satisfied by using a covered technology. (b) EXTENSION OF MODULAR OPEN SYSTEMS APPROACH AND

RIGHTS IN INTERFACE SOFTWARE.— (1) REQUIREMENT FOR MODULAR OPEN SYSTEM APPROACH.—

Section 2446a of title 10, United States Code, is amended— (A) in subsection (a), by adding at the end the following:

‘‘Other defense acquisition programs shall also be designed and developed, to the maximum extent practicable, with a modular open system approach to enable incremental development and enhance competition, innovation, and interoperability.’’;

(B) in subsection (b)— (i) in paragraph (1)—

(I) in subparagraph (A), by striking ‘‘major system interfaces’’ and all that follows and inserting ‘‘modular system interfaces between major systems, major system components and mod-ular systems;’’;

(II) in subparagraph (B), by striking ‘‘major system interfaces’’ and all that follows and inserting the following: ‘‘that relevant modular system interfaces— ‘‘(i) comply with, if available and suitable, widely

supported and consensus-based standards; or ‘‘(ii) are delivered pursuant to the requirements

established in subsection (a)(2)(B) of section 804 of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, including the delivery of—

‘‘(I) software-defined interface syntax and properties, specifically governing how values are validly passed and received between major sub-systems and components, in machine-readable for-mat;

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‘‘(II) a machine-readable definition of the rela-tionship between the delivered interface and existing common standards or interfaces available in Department interface repositories; and

‘‘(III) documentation with functional descrip-tions of software-defined interfaces, conveying semantic meaning of interface elements, such as the function of a given interface field;’’; and

(III) in subparagraph (C), by inserting ‘‘andmodular systems’’ after ‘‘severable major system components’’; (ii) in paragraph (3)(A), by striking ‘‘well-defined

major system interfaces’’ and inserting ‘‘modular system interfaces’’;

(iii) by amending paragraph (4) to read as follows:‘‘(4) The term ‘modular system interface’ means a shared

boundary between major systems, major system components, or modular systems, defined by various physical, logical, and functional characteristics, such as electrical, mechanical, fluidic, optical, radio frequency, data, networking, or software ele-ments.’’;

(iv) by redesignating paragraphs (5) through (8)as paragraphs (6) through (9), respectively; and

(v) by inserting after paragraph (4) the followingnew paragraph:

‘‘(5) The term ‘modular system’ refers to a weapon system or weapon system component that—

‘‘(A) is able to execute without requiring coincident execution of other specific weapon systems or components;

‘‘(B) can communicate across component boundaries and through interfaces; and

‘‘(C) functions as a module that can be separated, recombined, and connected with other weapon systems or weapon system components in order to achieve various effects, missions, or capabilities.’’. (2) RIGHTS IN TECHNICAL DATA.—

(A) IN GENERAL.—Section 2320 of title 10, UnitedStates Code, is amended—

(i) in subsection (a)(2), by amending subparagraph(G) to read as follows:

‘‘(G) MODULAR SYSTEM INTERFACES DEVELOPED EXCLU-SIVELY AT PRIVATE EXPENSE OR WITH MIXED FUNDING.—Notwith-standing subparagraphs (B) and (E), the United States shall have government purpose rights in technical data pertaining to a modular system interface developed exclusively at private expense or in part with Federal funds and in part at private expense and used in a modular open system approach pursuant to section 2446a of this title, except in any case in which the Secretary of Defense determines that negotiation of dif-ferent rights in such technical data would be in the best interest of the United States. Such modular system interface shall be identified in the contract solicitation and the contract. For technical data pertaining to a modular system interface devel-oped exclusively at private expense for which the United States asserts government purpose rights, the Secretary of Defense shall negotiate with the contractor the appropriate and reason-able compensation for such technical data.’’; and

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(ii) in subsection (h), by striking ‘‘, ‘major system interface’ ’’ and inserting ‘‘, ‘modular system interface’ ’’. (B) REGULATIONS.—Not later than 180 days after the

date of the enactment of this Act, the Secretary of Defense shall update the regulations required by section 2320(a)(1) of title 10, United States Code, to reflect the amendments made by this paragraph.

(c) INTERFACE REPOSITORIES.— (1) ESTABLISHMENT.—Not later than 90 days after the date

of the enactment of this Act, the Under Secretary of Defense for Acquisition and Sustainment shall—

(A) direct the Secretaries concerned and the heads of other appropriate Department of Defense components to establish and maintain repositories for interfaces, syntax and properties, documentation, and communication implementations delivered pursuant to the requirements established under subsection (a)(2)(B);

(B) establish and maintain a comprehensive index of interfaces, syntax and properties, documentation, and communication implementations delivered pursuant to the requirements established under subsection (a)(2)(B) and maintained in the repositories required under subpara-graph (A); and

(C) if practicable, establish and maintain an alternate reference repository of interfaces, syntax and properties, documentation, and communication implementations deliv-ered pursuant to the requirements established under sub-section (a)(2)(B). (2) DISTRIBUTION OF INTERFACES.—

(A) IN GENERAL.—Consistent with the requirements of section 2320 of title 10, United States Code, the Under Secretary of Defense for Acquisition and Sustainment shall, in coordination with the Director of the Defense Standard-ization Program Office, use the index and repositories established pursuant to paragraph (1) to provide access to interfaces and relevant documentation to authorized Fed-eral Government and non-Governmental entities.

(B) NON-GOVERNMENT RECIPIENT USE LIMITS.—A non- Governmental entity that receives access under subpara-graph (A) may not further release, disclose, or use such data except as authorized.

(d) SYSTEM OF SYSTEMS INTEGRATION TECHNOLOGY AND EXPERIMENTATION.—

(1) DEMONSTRATION AND ASSESSMENT.— (A) IN GENERAL.—Not later than one year after the

date of the enactment of this Act, the Director for Com-mand, Control, Communications, and Computers/Cyber and the Chief Information Officer of the Department of Defense, acting through the Joint All-Domain Command and Control cross-functional team, shall conduct demonstrations and complete an assessment of the technologies developed under the System of Systems Integration Technology and Experimentation program of the Defense Advanced Research Projects Agency, including a covered technology, and the applicability of any such technologies to the Joint All-Domain Command and Control architecture.

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(B) COVERAGE.—The demonstrations and assessment required under subparagraph (A) shall include—

(i) at least three demonstrations of the use of a covered technology to create, under constrained schedules and budgets, novel kill chains involving pre-viously incompatible weapon systems, sensors, and command, control, and communication systems from multiple military services in cooperation with United States Indo-Pacific Command or United States Euro-pean Command;

(ii) an evaluation as to whether the communica-tions enabled via a covered technology are sufficient for military missions and whether such technology results in any substantial performance loss in commu-nication between systems, major subsystems, and major components;

(iii) an evaluation as to whether a covered tech-nology obviates the need to develop, impose, and main-tain strict adherence to common communication and interface standards for weapon systems;

(iv) the appropriate roles and responsibilities of the Chief Information Officer of the Department of Defense, the Under Secretary of Defense for Acquisition and Sustainment, the heads of the combatant com-mands, the Secretaries concerned, the Defense Advanced Research Projects Agency, and the defense industrial base in using and maintaining a covered technology to generate diverse and recomposable kill chains as part of the Joint All-Domain Command and Control architecture;

(v) for at least one of the demonstrations conducted under clause (i), demonstration of the use of technology developed under the High-Assurance Cyber Military Systems program of the Defense Advanced Research Projects Agency to secure legacy weapon systems and command and control capabilities while facilitating interoperability;

(vi) an evaluation of how the technology referred to in clause (v) and covered technology should be used to improve cybersecurity and interoperability across critical weapon systems and command and control capabilities across the joint forces; and

(vii) coordination with the program manager for the Time Sensitive Targeting Defeat program under the Under Secretary of Defense for Research and Engineering and the Under Secretary of Defense for Intelligence and Security.

(2) CHIEF INFORMATION OFFICER ASSESSMENT.— (A) IN GENERAL.—The Chief Information Officer for

the Department of Defense, in coordination with the Prin-cipal Cyber Advisor to the Secretary of Defense and the Director of the Cybersecurity Directorate of the National Security Agency, shall assess the technologies developed under the System of Systems Integration Technology and Experimentation program of the Defense Advanced Research Projects Agency, including the covered technology,

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and applicability of such technology to the business systems and cybersecurity tools of the Department.

(B) COVERAGE.—The assessment required under subparagraph (A) shall include—

(i) an evaluation as to how the technologies referred to in such subparagraph could be used in conjunction with or instead of existing cybersecurity standards, frameworks, and technologies designed to enable communication between, and coordination of, cybersecurity tools;

(ii) as appropriate, demonstrations by the Chief Information Office of the use of such technologies in enabling communication between, and coordination of, previously incompatible cybersecurity tools; and

(iii) as appropriate, demonstrations of the use of such technologies in enabling communication between previously incompatible business systems.

(3) SUSTAINMENT OF CERTAIN ENGINEERING RESOURCES AND CAPABILITIES.—During the period the demonstrations and assessments required under this subsection are conducted, and thereafter to the extent required to execute the activities directed by the Joint All-Domain Command and Control cross- functional team, the Joint All-Domain Command and Control cross-functional team shall sustain the System of Systems Tech-nology Integration Tool Chain for Heterogeneous Electronic Systems engineering resources and capabilities developed by the Defense Advanced Research Projects Agency.

(4) TRANSFER OF RESPONSIBILITY.—Not earlier than 1 year before, and not later than 2 years after the date of the enact-ment of this Act, the Secretary of Defense may transfer respon-sibility for maintaining the engineering resources and capabili-ties described in paragraph (3) to a different organization within the Department. (e) OPEN STANDARDS.—Nothing in this section shall be con-

strued as requiring, preventing, or interfering with the use or application of any given communication standard or interface. The communication described in subsection (a)(2)(A) may be accom-plished by using existing open standards, by the creation and use of new open standards, or through other approaches, provided that such standards meet the requirements of subsection (a)(2)(B).

(f) DEFINITIONS.—In this section: (1) The term ‘‘covered technology’’ means the domain-spe-

cific programming language for interface field transformations and its associated compilation toolchain (commonly known as the ‘‘System of Systems Technology Integration ToolChain for Heterogeneous Electronic Systems’’) developed under the Defense Advanced Research Projects Agency System of Systems Integration Technology and Experimentation program, or any other technology that is functionally equivalent.

(2) The term ‘‘desired modularity’’ means the desired degree to which weapon systems, components within a weapon system, and components across weapon systems can function as modules that can communicate across component boundaries and through interfaces and can be separated and recombined to achieve various effects, missions, or capabilities, as determined by the program officer for such weapon system.

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(3) The term ‘‘machine-readable format’’ means a format that can be easily processed by a computer without human intervention.

(4) The terms ‘‘major system’’, ‘‘major system component’’, ‘‘modular open system approach’’, ‘‘modular system’’, ‘‘modular system interface’’, and ‘‘weapon system’’ have the meanings given such terms, respectively, in section 2446a of title 10, United States Code.

SEC. 805. CONGRESSIONAL NOTIFICATION OF TERMINATION OF A MIDDLE TIER ACQUISITION PROGRAM.

Section 804 of the National Defense Authorization Act for Fiscal Year 2016 (10 U.S.C. 2302 note) is amended by adding at the end the following new subsection:

‘‘(e) REPORT.—Not later than 30 days after the date of termi-nation of an acquisition program commenced using the authority under this section, the Secretary of Defense shall submit to Con-gress a notification of such termination. Such notice shall include—

‘‘(1) the initial amount of a contract awarded under such acquisition program;

‘‘(2) the aggregate amount of funds awarded under such contract; and

‘‘(3) written documentation of the reason for termination of such acquisition program.’’.

SEC. 806. DEFINITION OF MATERIAL WEAKNESS FOR CONTRACTOR BUSINESS SYSTEMS.

Section 893 of the Ike Skelton National Defense Authorization Act for Fiscal Year 2011 (Public Law 111–383; 10 U.S.C. 2302 note) is amended—

(1) by striking ‘‘significant deficiencies’’ both places it appears and inserting ‘‘material weaknesses’’;

(2) by striking ‘‘significant deficiency’’ each place it appears and inserting ‘‘material weakness’’; and

(3) by amending subsection (g)(4) to read as follows: ‘‘(4) The term ‘material weakness’ means a deficiency or

combination of deficiencies in the internal control over informa-tion in contractor business systems, such that there is a reason-able possibility that a material misstatement of such informa-tion will not be prevented, or detected and corrected, on a timely basis. For purposes of this paragraph, a reasonable possibility exists when the likelihood of an event occurring—

‘‘(A) is probable; or ‘‘(B) is more than remote but less than likely.’’.

SEC. 807. SPACE SYSTEM ACQUISITION AND THE ADAPTIVE ACQUISI-TION FRAMEWORK.

(a) SERVICE ACQUISITION EXECUTIVE FOR SPACE SYSTEMS AND PROGRAMS.—Before implementing the application of the adaptive acquisition framework to a Space Systems Acquisition pathway described in subsection (c), there shall be within the Department of the Air Force an individual serving as the Service Acquisition Executive of the Department of the Air Force for Space Systems and Programs as required under section 957 of the National Defense Authorization Act for Fiscal Year 2020 (Public Law 116–92; 133 Stat. 1566; 10 U.S.C. 9016 note).

(b) MILESTONE DECISION AUTHORITY FOR UNITED STATES SPACE FORCE.—

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(1) PROGRAM EXECUTIVE OFFICER.—The Service AcquisitionExecutive for Space Systems and Programs of the United States Space Force may further delegate authority to an appropriate program executive officer to serve as the milestone decision authority for major defense acquisition programs of the United States Space Force.

(2) PROGRAM MANAGER.—The program executive officerassigned under paragraph (1) may further delegate authority over major systems to an appropriate program manager. (c) ADAPTIVE ACQUISITION FRAMEWORK APPLICATION TO SPACE

ACQUISITION.— (1) IN GENERAL.—The Secretary of Defense shall take such

actions necessary to ensure the adaptive acquisition framework (as described in Department of Defense Instruction 5000.02, ‘‘Operation of the Adaptive Acquisition Framework’’) includes one or more pathways specifically tailored for Space Systems Acquisition in order to achieve faster acquisition, improve synchronization and more rapid fielding of critical end-to-end capabilities (including by using new commercial capabilities and services), while maintaining accountability for effective programs that are delivered on time and on budget.

(2) GOAL.—The goal of the application of the adaptiveacquisition framework to a Space Systems Acquisition pathway shall be to quickly and effectively acquire end-to-end space warfighting capabilities needed to address the requirements of the national defense strategy (as defined under section 113(g) of title 10, United States Code). (d) REPORT.—

(1) IN GENERAL.—Not later than May 15, 2021, the Sec-retary of Defense shall submit to the congressional defense committees a report on the application of the adaptive acquisi-tion framework to any Space Systems Acquisition pathway established under subsection (a) that includes the following:

(A) Proposed United States Space Force budget lineitems for fiscal year 2022, including—

(i) a comparison with budget line items for anymajor defense acquisition programs, middle tier acquisition programs, covered software programs, and major systems of the United States Space Force for three previous fiscal years;

(ii) existing and recommended measures to ensuresufficient transparency and accountability related to the performance of the Space Systems Acquisition pathway; and

(iii) proposed mechanisms to enable insight intothe funding prioritization process and significant funding changes, including the independent cost esti-mate basis and full funding considerations for any major defense acquisition programs, middle tier acquisition programs, covered software programs, and major systems procured by the United States Space Force. (B) Proposed revised, flexible, and streamlined options

for joint requirements validation in order to be more responsive and innovative, while ensuring the ability of

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the Joint Chiefs of Staff to ensure top-level system require-ments are properly prioritized to address joint-warfighting needs.

(C) A list of acquisition programs of the United States Space Force for which multiyear contracting authority under sections 2306b or 2306c of title 10, United States Code, is recommended.

(D) A list of space systems acquisition programs for which alternative acquisition pathways may be used.

(E) Policies or procedures for potential new pathways in the application of the adaptive acquisition framework to a Space Systems Acquisition with specific acquisition key decision points and reporting requirements for develop-ment, fielding, and sustainment activities that meet the requirements of the adaptive acquisition framework.

(F) An analysis of the need for updated determination authority for procurement of useable end items that are not weapon systems.

(G) Policies and a governance structure, for both the Office of the Secretary of Defense and each military depart-ment, for a separate United States Space Force budget topline, corporate process, and portfolio management process.

(H) An analysis of the risks and benefits of the delega-tion of the authority of the head of contracting activity authority to the Chief of Space Operations in a manner that would not expand the operations of the United States Space Force. (2) COMPTROLLER GENERAL REVIEW.—Not later than 60

days after the submission of the report required under para-graph (1), the Comptroller General of the United States shall review such report and submit to the congressional defense committees an analysis and recommendations based on such report. (e) DEFINITIONS.—In this section:

(1) COVERED SOFTWARE PROGRAM.—The term ‘‘covered soft-ware program’’ means an acquisition program or project that is carried out using the software acquisition pathway estab-lished under section 800 of the National Defense Authorization Act for Fiscal Year 2020 (Public Law 116–92; 133 Stat. 1478; 10 U.S.C. 2223a note).

(2) MAJOR DEFENSE ACQUISITION PROGRAM.—The term ‘‘major defense acquisition program’’ has the meaning given in section 2430 of title 10, United States Code.

(3) MAJOR SYSTEM.—The term ‘‘major system’’ has the meaning given in section 2302 of title 10, United States Code.

(4) MIDDLE TIER ACQUISITION PROGRAM.—The term ‘‘middle tier acquisition program’’ means an acquisition program or project that is carried out using the rapid fielding or rapid prototyping acquisition pathway under section 804 of the National Defense Authorization Act for Fiscal Year 2016 (Public Law 114–92; 10 U.S.C. 2302 note).

(5) MILESTONE DECISION AUTHORITY.—The term ‘‘milestone decision authority’’ has the meaning given in section 2431a of title 10, United States Code.

(6) PROGRAM EXECUTIVE OFFICER; PROGRAM MANAGER.—The terms ‘‘program executive officer’’ and ‘‘program manager’’ have

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the meanings given those terms, respectively, in section 1737 of title 10, United States Code.

SEC. 808. ACQUISITION AUTHORITY OF THE DIRECTOR OF THE JOINT ARTIFICIAL INTELLIGENCE CENTER.

(a) AUTHORITY.—The Secretary of Defense shall delegate tothe Director of the Joint Artificial Intelligence Center the acquisi-tion authority to exercise the functions of a head of an agency (as defined in section 2302 of title 10, United States Code) with respect to appropriate acquisition activities of the Center.

(b) JAIC ACQUISITION EXECUTIVE.—(1) IN GENERAL.—The staff of the Director shall include

an acquisition executive who shall be responsible for the super-vision of appropriate acquisition activities under subsection (a). Subject to the authority, direction, and control of the Director of the Center, the acquisition executive shall have the authority—

(A) to negotiate memoranda of agreement with anyelement of the Department of Defense to carry out the acquisition of technologies, services, and capabilities devel-oped or identified by the Center;

(B) to supervise the acquisition of technologies, serv-ices, and capabilities to support the mission of the Center;

(C) to represent the Center in discussions with theSecretaries concerned regarding acquisition programs relating to such appropriate acquisition activities for which the Center is involved; and

(D) to work with the Secretaries concerned to ensurethat the Center is appropriately represented in any joint working group or integrated product team regarding acquisition programs relating to such appropriate activities for which the Center is involved. (2) DELIVERY OF ACQUISITION SOLUTIONS.—The acquisition

executive of the Center shall be— (A) responsible to the Director for rapidly delivering

capabilities to meet validated requirements; (B) subordinate to the Under Secretary of Defense

for Acquisition and Sustainment in matters of acquisition; and

(C) included on the distribution list for acquisitiondirectives and instructions of the Department of Defense.

(c) ACQUISITION PERSONNEL.—(1) IN GENERAL.—The Secretary of Defense shall provide

the Center with at least 10 full-time employees to support the Director in carrying out the requirements of this section, including personnel with experience in—

(A) acquisition practices and processes;(B) the Joint Capabilities Integration and Development

System process; (C) program management;(D) software development and systems engineering;

and (E) cost analysis.

(2) EXISTING PERSONNEL.—The personnel provided underthis subsection shall be provided from among the existing per-sonnel of the Department of Defense.

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(d) FUNDING.—In exercising the acquisition authority granted in subsection (a), the Director may not obligate or expend more than $75,000,000 out of the funds made available in each of fiscal years 2021, 2022, 2023, 2024, and 2025 to enter into new contracts to support appropriate acquisition activities carried out under this section.

(e) IMPLEMENTATION PLAN AND DEMONSTRATION REQUIRED.— (1) IN GENERAL.—The Secretary of Defense—

(A) may use the acquisition authority granted under subsection (a) on or after 30 days after the date on which the Secretary provides to the congressional defense commit-tees a plan for implementation of such authority; and

(B) by March 15, 2022, shall provide a demonstration of operational capability delivered under such authority. (2) IMPLEMENTATION PLAN.—The plan shall include the fol-

lowing: (A) Description of the types of activities to be under-

taken using the acquisition authority provided under sub-section (a).

(B) Plan for the negotiation and approval of any such memorandum of agreement with an element of the Depart-ment of Defense to support Center missions and transition of artificial intelligence capabilities into appropriate acquisition programs or into operational use.

(C) Plan for oversight of the position of acquisition executive established in subsection (b).

(D) Assessment of the acquisition workforce, tools, and infrastructure needs of the Center to support the authority under subsection (a) until September 30, 2025.

(E) Other matters as appropriate. (3) DEMONSTRATION.—The capability demonstration shall

include a description of how the acquisition authority enabled the capability, how requirements were established and agreed upon, how testing was conducted, and how the capability was transitioned to the user, as well as any other matters deemed appropriate by the Center.

(4) RELATIONSHIP TO OTHER AUTHORITIES.—The require-ment to submit a plan under this subsection is in addition to the requirements under section 260 of the National Defense Authorization Act for Fiscal Year 2020 (Public Law 116–92; 133 Stat. 1293). (f) SUNSET.—Effective October 1, 2025, the Director may not

exercise the authority under subsection (a) and may not enter into any new contracts under this section. The performance on any contract entered into before such date may continue according to the terms of such contract.

(g) DEFINITIONS.—In this section: (1) CENTER.—The term ‘‘Center’’ has the meaning given

the term ‘‘Joint Artificial Intelligence Center’’ in section 260(c) of National Defense Authorization Act for Fiscal Year 2020 (Public Law 116–92; 133 Stat. 1294).

(3) DIRECTOR.—The term ‘‘Director’’ means the Director of the Center.

(4) ELEMENT.—The term ‘‘element’’ means an element described under section 111(b) of title 10, United States Code.

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(5) SECRETARY CONCERNED.—The term ‘‘Secretary con-cerned’’ has the meaning given in section 101(9) of title 10, United States Code.

SEC. 809. ASSESSMENTS OF THE PROCESS FOR DEVELOPING CAPA-BILITY REQUIREMENTS FOR DEPARTMENT OF DEFENSE ACQUISITION PROGRAMS.

(a) IN GENERAL.—The Secretary of Defense and the individualappointed under section 2361a(c) of title 10, United States Code, (in this section referred to as the ‘‘Director’’) shall each—

(1) conduct an assessment of the processes for developingand approving capability requirements for the acquisition pro-grams of the Department of Defense and each military depart-ment; and

(2) develop recommendations for reforming such processto improve the agility and timeliness of such process. (b) ASSESSMENT ELEMENTS.—Each assessment conducted under

subsection (a) shall include the following: (1) An assessment of the—

(A) adherence of the capability requirements develop-ment and approval processes to statute, regulations, poli-cies, and directives;

(B) alignment and standardization of the capabilityrequirements development, acquisition, and budget proc-esses;

(C) technical feasibility of each approved capabilityrequirement;

(D) training and development of the workforce in capa-bility requirements development and evaluation;

(E) ability of the process for developing capabilityrequirements to address the urgent needs of the Depart-ment of Defense;

(F) capacity to review changes in capability require-ments for programs of record;

(G) validation of decisions made to approve capabilityrequirements and the alignment of each such decision to the national defense strategy required under section 113(g) of title 10, United States Code;

(H) extent to which portfolio management techniquesare used in the process for developing capability require-ments to coordinate decisions and avoid duplication of capabilities across acquisition programs; and

(I) implementation by each military department ofComptroller General of the United States recommendations pertaining to the process for developing and approving capability requirements. (2) A comprehensive analysis of the circumstances and

factors contributing to the length of time between the start of a Capabilities-Based Assessment and the date the Joint Requirements Oversight Council approves the related Capa-bility Development Document.

(3) Identification and comparison of best practices in theprivate sector and the public sector for the development and approval of capability requirements.

(4) Any additional matters that the Secretary or Directordetermine appropriate. (c) REPORTS.—

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(1) ASSESSMENT BY SECRETARY.—Not later than October 1, 2021, the Secretary of Defense shall submit to the congres-sional defense committees a report on the assessment conducted by the Secretary under subsection (a), including—

(A) a description of such assessment; (B) the results of such assessment, including the anal-

ysis described in subsection (b)(2); (C) a plan to reduce, when appropriate, the length

of time between the start of a Capabilities-Based Assess-ment and the date the Joint Requirements Oversight Council approves the related Capability Development Docu-ment; and

(D) any additional recommendations for legislation, regulations, or policies that the Secretary determines appropriate. (2) ASSESSMENT BY DIRECTOR.—

(A) REPORT TO SECRETARY.—Not later than November 30, 2021, the Director shall submit to the Secretary of Defense a report on the assessment conducted by the Director pursuant to subsection (a).

(B) REPORT TO CONGRESS.—Not later than January 1, 2022, the Secretary of Defense shall submit to the congressional defense committees the report described in subparagraph (A) together with such comments as the Sec-retary determines appropriate, including—

(i) a description and the results of the assessment conducted pursuant to subsection (a)(2);

(ii) recommendations on how the Department of Defense can improve the efficiency of developing and approving capability requirements; and

(iii) any additional recommendations for legisla-tion, regulations, or policies that the Secretary deter-mines appropriate.

Subtitle B—Amendments to General Con-tracting Authorities, Procedures, and Limitations

SEC. 811. SUSTAINMENT REFORM FOR THE DEPARTMENT OF DEFENSE.

(a) SUSTAINMENT ACTIVITIES IN THE NATIONAL DEFENSE STRATEGY.—

(1) IN GENERAL.—Section 113(g)(1)(B) of title 10, United States Code, as amended by section 551 of this Act, is further amended by adding at the end the following new clauses:

‘‘(viii) A strategic framework prescribed by the Secretary that guides how the Department will prioritize and integrate activities relating to sustainment of major defense acquisition programs, core logistics capabilities (as described under section 2464 of this title), commercial logistics capabilities, and the national technology and industrial base (as defined in section 2500 of this title).

‘‘(ix) A strategic framework prescribed by the Secretary that guides how the Department will specifically address con-tested logistics, including major investments for related infra-structure, logistics-related authorities, force posture, related

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emergent technology and advanced computing capabilities, operational resilience, and operational energy, over the fol-lowing five-year period to support such strategy.’’.

(2) DUTIES OF THE UNDER SECRETARY OF DEFENSE FORACQUISITION AND SUSTAINMENT.—Section 133b(b) of title 10, United States Code, is amended—

(A) in paragraph (7), by striking ‘‘and’’ at the end;(B) in paragraph (8), by striking the period at the

end and inserting ‘‘; and’’; and (C) by adding at the end the following new paragraph:

‘‘(9) advising the Secretary on all aspects of acquisition and sustainment relating to—

‘‘(A) defense acquisition programs; ‘‘(B) core logistics capabilities (as described under sec-

tion 2464 of this title); and ‘‘(C) the national technology and industrial base (as

defined in section 2500 of this title).’’. (3) INTERIM GUIDANCE.—Not later than October 1, 2021,

the Secretary of Defense shall publish interim guidance to carry out the requirements of this subsection. (b) REPORT.—Not later than February 1, 2021, the Secretary

of Defense shall submit to the congressional defense committees a report on the progress towards publishing the interim guidance required under subsection (a)(3). SEC. 812. INCLUSION OF SOFTWARE IN GOVERNMENT PERFORMANCE

OF ACQUISITION FUNCTIONS.

Section 1706 of title 10, United States Code, is amended— (1) in subsection (a)—

(A) in the matter preceding paragraph (1), by striking‘‘and each major automated information system program’’ and inserting ‘‘(as defined in section 2430 of this title), each acquisition program that is estimated by the Secretary of Defense to require an eventual total expenditure greater than the amount described in section 2430(a)(1)(B) of this title, and any other acquisition program identified by the Secretary’’; and

(B) by adding at the end the following new paragraph:‘‘(14) Program lead software.’’; and (2) by striking subsection (c).

SEC. 813. MODIFICATIONS TO COMPTROLLER GENERAL ASSESSMENT OF ACQUISITION PROGRAMS AND RELATED INITIATIVES.

Section 2229b(b)(2) of title 10, United States Code, is amended by striking ‘‘a summary of’’ and all that follows through ‘‘discussion of the’’ and inserting ‘‘a discussion of selected organizational, policy, and legislative changes, as determined appropriate by the Comp-troller General, and the potential’’. SEC. 814. COST OR PRICING DATA REPORTING REQUIREMENTS FOR

DEPARTMENT OF DEFENSE CONTRACTS.

(a) COST OR PRICING DATA.—(1) IN GENERAL.—Section 2306a(a)(1) of title 10, United

States Code, is amended— (A) in subparagraph (B), by striking ‘‘contract if’’ and

all that follows through the period at the end and inserting ‘‘contract if the price adjustment is expected to exceed $2,000,000.’’;

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(B) in subparagraph (C), by striking ‘‘section and’’ andall that follows through the period at the end and inserting ‘‘section and the price of the subcontract is expected to exceed $2,000,000.’’; and

(C) in subparagraph (D), by striking ‘‘subcontract if’’and all that follows through the period at the end and inserting ‘‘subcontract if the price adjustment is expected to exceed $2,000,000.’’. (2) APPLICABILITY.—The amendments made by this sub-

section shall apply to any contract, or modification or change to a contract, entered into on or after the date of the enactment of this Act. (b) REPORT.—

(1) IN GENERAL.—Not later than July 1, 2022, the Secretaryof Defense, in consultation with the Secretaries of the military departments, shall provide to the congressional defense commit-tees a report analyzing the impact, including any benefits to the Federal Government, of the amendments made by this section.

(2) ELEMENTS.—The report required under paragraph (1)shall include the following elements:

(A) Data to illustrate any efficiencies achieved, costsavoided, and acquisition timelines improved.

(B) Analysis of associated costs to the Federal Govern-ment, if any.

(C) Analysis of underlying causes or factors that limitedthe benefits described in subparagraph (A).

(D) Other matters the Secretary deems appropriate.(3) FORM.—The report required under paragraph (1) shall

be in an unclassified form but may contain a classified annex.

SEC. 815. PROMPT PAYMENT OF CONTRACTORS.

Section 2307(a)(2) of title 10, United States Code, is amended— (1) in subparagraph (A), by striking ‘‘if a specific payment

date is not established by contract’’; and (2) in subparagraph (B), by striking ‘‘if—’’ and all that

follows through ‘‘the prime contractor agrees’’ and inserting ‘‘if the prime contractor agrees or proposes’’.

SEC. 816. DOCUMENTATION PERTAINING TO COMMERCIAL ITEM DETERMINATIONS.

Section 2380 of title 10, United States Code, is amended— (1) by redesignating subsection (b) as subsection (c); and(2) by inserting after subsection (a) the following new sub-

section: ‘‘(b) DETERMINATIONS REGARDING THE COMMERCIAL NATURE OF

PRODUCTS OR SERVICES.— ‘‘(1) IN GENERAL.—In making a determination whether a

particular product or service offered by a contractor meets the definition of a commercial product or commercial service, a contracting officer of the Department of Defense may—

‘‘(A) request support from the Director of the Defense Contract Management Agency, the Director of the Defense Contract Audit Agency, or other appropriate experts in the Department to make a determination whether a product or service is a commercial product or commercial service; and

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‘‘(B) consider the views of appropriate public and pri-vate sector entities. ‘‘(2) MEMORANDUM.—Within 30 days after a contract award,

the contracting officer shall, consistent with the policies and regulations of the Department, submit a written memorandum summarizing the determination referred to in paragraph (1), including a detailed justification for such determination.’’.

SEC. 817. MODIFICATION TO SMALL PURCHASE THRESHOLD EXCEP-TION TO SOURCING REQUIREMENTS FOR CERTAIN ARTI-CLES.

Subsection (h) of section 2533a of title 10, United States Code, is amended to read as follows:

‘‘(h) EXCEPTION FOR SMALL PURCHASES.—(1) Subsection (a) does not apply to purchases for amounts not greater than $150,000. A proposed procurement of an item in an amount greater than $150,000 may not be divided into several purchases or contracts for lesser amounts in order to qualify for this exception.

‘‘(2) On October 1 of each year that is evenly divisible by five, the Secretary of Defense may adjust the dollar threshold in this subsection based on changes in the Consumer Price Index. Any such adjustment shall take effect on the date on which the Secretary publishes notice of such adjustment in the Federal Reg-ister.’’. SEC. 818. REPEAL OF PROGRAM FOR QUALIFIED APPRENTICES FOR

MILITARY CONSTRUCTION CONTRACTS.

(a) IN GENERAL.—Section 2870 of title 10, United States Code, is repealed.

(b) CONFORMING AMENDMENTS.— (1) CLERICAL AMENDMENT.—The table of sections at the

beginning of subchapter III of chapter 169 of title 10, United States Code, is amended by striking the item relating to section 2870.

(2) REPEAL.—Section 865 of the National Defense Authorization Act for Fiscal Year 2020 (Public Law 116–92; 133 Stat. 1523) is repealed.

SEC. 819. MODIFICATIONS TO MITIGATING RISKS RELATED TO FOR-EIGN OWNERSHIP, CONTROL, OR INFLUENCE OF DEPART-MENT OF DEFENSE CONTRACTORS AND SUBCONTRAC-TORS.

(a) ASSESSMENT OF FOCI.—Subparagraph (A) of section 847(b)(2) of the National Defense Authorization Act for Fiscal Year 2020 (Public Law 116–92; 133 Stat. 1505; 10 U.S.C. 2509 note) is amended by adding at the end the following new clause:

‘‘(v) A requirement for the Secretary to require reports and conduct examinations on a periodic basis of covered contractors or subcontractors in order to assess compliance with the requirements of this section.’’.

(b) CONTRACT REQUIREMENTS, ADMINISTRATION, AND OVERSIGHT RELATING TO FOCI.—Subparagraph (C) of such section is amended—

(1) by redesignating clause (iv) as clause (v); and (2) by inserting after clause (iii) the following new clause:

‘‘(iv) Procedures for appropriately responding to changes in covered contractor or subcontractor bene-ficial ownership status based on changes in disclosures of their beneficial ownership and whether they are

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under FOCI and the reports and examinations required by subparagraph (A)(v).’’.

(c) TIMELINES AND MILESTONES FOR IMPLEMENTATION.—(1) IMPLEMENTATION PLAN.—Not later than March 1, 2021,

the Secretary of Defense shall provide to the congressional defense committees a plan and schedule for implementation of the requirements of section 847 of the National Defense Authorization Act for Fiscal Year 2020 (Public Law 116–92; 133 Stat. 1505; 10 U.S.C. 2509 note), as amended by this section, including—

(A) a timeline for issuance of regulations, developmentof training for appropriate officials, and development of systems for reporting of beneficial ownership and FOCI by covered contractors or subcontractors;

(B) the designation of officials and organizationsresponsible for such implementation; and

(C) interim milestones to be met in implementing theplan and schedule. (2) REVISION OF REGULATIONS, DIRECTIVES, GUIDANCE,

TRAINING, AND POLICIES.—Not later than July 1, 2021, the Secretary of Defense shall revise relevant directives, guidance, training, and policies, including revising the Department of Defense Supplement to the Federal Acquisition Regulation, to fully implement the requirements of such section 847.

(3) DEFINITIONS.—In this subsection, the term ‘‘beneficialownership’’, ‘‘FOCI’’, and ‘‘covered contractors or subcontractors’’ have the meanings given, respectively, in section 847 of the National Defense Authorization Act for Fiscal Year 2020 (Public Law 116–92; 133 Stat. 1505; 10 U.S.C. 2509 note). (d) TECHNICAL AMENDMENTS.—Section 847 of the National

Defense Authorization Act for Fiscal Year 2020 (Public Law 116– 92; 133 Stat. 1505; 10 U.S.C. 2509 note), as amended by this section, is further amended—

(1) in subsection (b)—(A) in paragraph (1), by striking ‘‘contractors and sub-

contractors’’ and inserting ‘‘covered contractors or sub-contractors’’; and

(B) in paragraph (2)—(i) by striking ‘‘covered contractors and subcontrac-

tors’’ each place it appears and inserting ‘‘covered con-tractors or subcontractors’’;

(ii) in subparagraph (B)(iii), by striking ‘‘a con-tractor or subcontractor’’ and inserting ‘‘such a covered contractor or subcontractor’’; and

(iii) in subparagraph (C)(ii), by striking ‘‘section831(c)’’ and inserting ‘‘section 2509(c) of title 10, United States Code’’; and

(2) in subsection (c), by striking ‘‘subsection (b)(2)(A) and(b)(2)(C)’’ and inserting ‘‘subsections (b)(2)(A) and (b)(2)(C)’’.

SEC. 820. CONTRACT CLOSEOUT AUTHORITY FOR SERVICES CON-TRACTS.

Section 836(b) of the National Defense Authorization Act for Fiscal Year 2017 (10 U.S.C. 2302 note) is amended—

(1) by amending paragraph (1) to read as follows:‘‘(1) was entered into—

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‘‘(A) with respect to a contract or group of contracts not described in subparagraph (B), at least 7 fiscal years before the current fiscal year; and

‘‘(B) with respect to a contract or group of contracts for military construction (as defined in section 2801 of title 10, United States Code) or shipbuilding, at least 10 fiscal years before the current fiscal year;’’; and (2) by amending paragraph (2) to read as follows: ‘‘(2) the performance or delivery has been completed at

least 4 years before the current fiscal year; and’’. SEC. 821. REVISION OF PROOF REQUIRED WHEN USING AN EVALUA-

TION FACTOR FOR EMPLOYING OR SUBCONTRACTING WITH MEMBERS OF THE SELECTED RESERVE.

Section 819 of the National Defense Authorization Act for Fiscal Year 2006 (Public Law 109–163; 119 Stat. 3385; 10 U.S.C. 2305 note) is amended—

(1) by striking subsection (b); and (2) by redesignating subsection (c) as subsection (b).

Subtitle C—Provisions Relating to Software and Technology

SEC. 831. CONTRACT AUTHORITY FOR DEVELOPMENT AND DEM-ONSTRATION OF INITIAL OR ADDITIONAL PROTOTYPE UNITS.

(a) IN GENERAL.—Section 2302e of title 10, United States Code, is amended—

(1) in the heading, by striking ‘‘advanced development’’ and inserting ‘‘development and demonstration’’;

(2) in subsection (a)(1), by striking ‘‘provision of advanced component development, prototype,’’ and inserting ‘‘develop-ment and demonstration’’; and

(3) by adding at the end the following new subsection: ‘‘(c) PROCEDURES.—The Secretary of Defense shall establish

procedures to collect and analyze information on the use and bene-fits of the authority under this section and related impacts on performance, affordability, and capability delivery.’’.

(b) CLERICAL AMENDMENT.—The table of sections at the begin-ning of chapter 137 of title 10, United States Code, is amended by striking the item relating to section 2302e and inserting the following new item: ‘‘2302e. Contract authority for development and demonstration of initial or addi-

tional prototype units.’’.

SEC. 832. EXTENSION OF PILOT PROGRAM FOR STREAMLINED AWARDS FOR INNOVATIVE TECHNOLOGY PROGRAMS.

Section 873(f) of the National Defense Authorization Act for Fiscal Year 2016 (Public Law 114–92; 10 U.S.C. 2306a note) is amended by striking ‘‘October 1, 2020’’ and inserting ‘‘October 1, 2022’’. SEC. 833. LISTING OF OTHER TRANSACTION AUTHORITY CONSORTIA.

Not later than 90 days after the date of the enactment of this Act, the Secretary of Defense shall maintain on the single Government-wide point of entry described under section 1708 of

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title 41, United States Code, a list of the consortia used by the Secretary to announce or otherwise make available opportunities to enter into a transaction under the authority of section 2371 of title 10, United States Code, or a transaction for a prototype project under section 2371b of such title.

SEC. 834. PILOT PROGRAM ON THE USE OF CONSUMPTION-BASED SOLUTIONS TO ADDRESS SOFTWARE-INTENSIVE WARFIGHTING CAPABILITY.

(a) IN GENERAL.—Subject to the availability of appropriations, the Secretary of Defense is authorized to establish a pilot program to explore the use of consumption-based solutions to address soft-ware-intensive warfighting capability.

(b) SELECTION OF INITIATIVES.—Each Secretary of a military department and each commander of a combatant command with acquisition authority shall propose for selection by the Secretary of Defense for the pilot program at least one and not more than three initiatives that are well-suited to explore consumption-based solutions, to include addressing software-intensive warfighting capability. The initiatives may be new or existing programs of record, and may include applications that—

(1) rapidly analyze sensor data; (2) secure warfighter networks, including multilevel secu-

rity; (3) swiftly transport information across various networks

and network modalities; (4) enable joint all-domain operational concepts, including

in a contested environment; or (5) advance military capabilities and effectiveness.

(c) REQUIREMENTS.—A contract or other agreement for consumption-based solutions entered into under the pilot program shall require—

(1) the effectiveness of the solution to be measurable at regular intervals customary for the type of solution provided under contract or other agreement; and

(2) that the awardee notify the Secretary of Defense when consumption under the contract or other agreement reaches 75 percent and 90 percent of the funded amount, respectively, of the contract or other agreement. (d) EXEMPTION.—A modification to a contract or other agree-

ment entered into under this section to add new features or capabili-ties in an amount less than or equal to 25 percent of the total value of such contract or other agreement shall be exempt from the requirements of full and open competition (as defined in section 2302 of title 10, United States Code).

(e) DURATION.—The duration of a contract or other agreement entered into under this section may not exceed three years.

(f) MONITORING AND EVALUATION OF PILOT PROGRAM.—The Director of Cost Assessment and Program Evaluation shall continu-ously monitor and evaluate the pilot program, including by col-lecting data on cost, schedule, and performance from the program office, the user community, and the awardees involved in the pro-gram.

(g) REPORTS.— (1) INITIAL REPORT.—Not later than May 15, 2021, the

Secretary of Defense shall submit to the congressional defense committees a report on initiatives selected for the pilot program,

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roles, and responsibilities for implementing the program, and the monitoring and evaluation approach that will be used for the program.

(2) PROGRESS REPORT.—Not later than October 15, 2021,the Secretary of Defense shall submit to the congressional defense committees a report on the progress of the initiatives selected for the pilot program.

(3) FINAL REPORT.—Not later than 3 years after the dateof the enactment of this Act, the Secretary of Defense shall submit to the congressional defense committees a report on the cost, schedule, and performance outcomes of the initiatives carried out under the pilot program. The report shall also include lessons learned about the use of consumption-based solutions for software-intensive capabilities and any rec-ommendations for statutory or regulatory changes to facilitate the use of such solutions. (h) CONSUMPTION-BASED SOLUTION DEFINED.—In this section,

the term ‘‘consumption-based solution’’ means any combination of software, hardware or equipment, and labor or services that pro-vides a seamless capability that is metered and billed based on actual usage and predetermined pricing per resource unit, and includes the ability to rapidly scale capacity up or down.

SEC. 835. BALANCING SECURITY AND INNOVATION IN SOFTWARE DEVELOPMENT AND ACQUISITION.

(a) REQUIREMENTS FOR SOLICITATIONS OF COMMERCIAL ANDDEVELOPMENTAL SOLUTIONS.—The Under Secretary of Defense for Acquisition and Sustainment, in coordination with the Chief Information Officer of the Department of Defense, shall develop requirements for appropriate software security criteria to be included in solicitations for commercial and developmental solutions and the evaluation of bids submitted in response to such solicita-tions, including a delineation of what processes were or will be used for a secure software development life cycle. Such requirements shall include—

(1) establishment and enforcement of secure coding prac-tices;

(2) management of supply chain risks and third-party soft-ware sources and component risks;

(3) security of the software development environment;(4) secure deployment, configuration, and installation proc-

esses; and (5) an associated vulnerability management plan and

identification of tools that will be applied to achieve an appro-priate level of security. (b) SECURITY REVIEW OF CODE.—The Under Secretary of

Defense for Acquisition and Sustainment, in coordination with the Chief Information Officer of the Department of Defense, shall develop—

(1) procedures for the security review of code; and(2) other procedures necessary to fully implement the pilot

program required under section 875 of the National Defense Authorization Act for Fiscal Year 2018 (Public Law 115–91; 10 U.S.C. 2223 note). (c) COORDINATION WITH CYBERSECURITY ACQUISITION POLICY

EFFORTS.—The Under Secretary of Defense for Acquisition and Sustainment shall develop the requirements and procedures

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described under subsections (a) and (b) in coordination with the efforts of the Department of Defense to develop new cybersecurity and program protection policies and guidance that are focused on cybersecurity in the context of acquisition and program manage-ment and on safeguarding information.

SEC. 836. DIGITAL MODERNIZATION OF ANALYTICAL AND DECISION- SUPPORT PROCESSES FOR MANAGING AND OVERSEEING DEPARTMENT OF DEFENSE ACQUISITION PROGRAMS.

(a) DIGITAL DATA MANAGEMENT AND ANALYTICS CAPABILITIES.— (1) IN GENERAL.—The Secretary of Defense shall iteratively

develop and integrate advanced digital data management and analytics capabilities, consistent with private sector best prac-tices, that—

(A) integrate all aspects of the defense acquisition system, including the development of capability require-ments, research, design, development, testing, evaluation, acquisition, management, operations, and sustainment of systems;

(B) facilitate the management and analysis of all rel-evant data generated during the development of capability requirements, research, design, development, testing, evaluation, acquisition, operations, and sustainment of sys-tems;

(C) enable the use of such data to inform further development, acquisition, management and oversight of such systems, including portfolio management; and

(D) include software capabilities to collect, transport, organize, manage, make available, and analyze relevant data throughout the life cycle of defense acquisition pro-grams, including any data needed to support individual and portfolio management of acquisition programs. (2) REQUIREMENTS.—The capabilities developed under para-

graph (1) shall— (A) be accessible to, and useable by, individuals

throughout the Department of Defense who have respon-sibilities relating to activities described in clauses (A) through (C) of paragraph (1);

(B) enable the development, use, curation, and mainte-nance of original form and real-time digital systems by—

(i) ensuring shared access to data within the Department;

(ii) supplying data to digital engineering models for use in the defense acquisition, sustainment, and portfolio management processes; and

(iii) supplying data to testing infrastructure and software to support automated approaches for testing, evaluation, and deployment throughout the defense acquisition, sustainment, and portfolio management processes; and (C) feature—

(i) improved data management and sharing proc-esses;

(ii) timely, high-quality, transparent, and action-able analyses; and

(iii) analytical models and simulations.

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(3) ENABLING DATA INFRASTRUCTURE, TOOLS, AND PROC-ESSES.—In developing the capability required under paragraph (1), the Secretary of Defense shall—

(A) move supporting processes and the data associated with such processes from analog to digital format, including planning and reporting processes;

(B) make new and legacy data more accessible to, and usable by, appropriate employees and contractors (at any tier) of the Department of Defense and members of the Armed Forces, including through migration of program and other documentation into digital formats;

(C) modernize the query, collection, storage, retrieval, reporting, and analysis capabilities for stakeholders within the Department, including research entities, Program Management Offices, analytic organizations, oversight staff, and decision makers;

(D) automate data collection and storage to minimize or eliminate manual data entry or manual reporting;

(E) enable employees and other appropriate users to access data from all relevant data sources, including through—

(i) streamlining data access privileges; (ii) sharing of appropriate data between and among

Federal Government and contractor information sys-tems; and

(iii) enabling timely and continuous data collection and sharing from all appropriate personnel, including contractors; (F) modernize existing enterprise information systems

to enable interoperability consistent with technical best practices; and

(G) provide capabilities and platforms to enable contin-uous development and integration of software using public and private sector best practices.

(b) PORTFOLIO MANAGEMENT.—The Secretary of Defense shall establish capabilities for robust, effective, and data-driven portfolio management described in subsection (a)(1)(C), using the capability established in this section, to improve the Department of Defense- wide assessment, management, and optimization of the investments in weapon systems of the Department, including through consolida-tion of duplicate or similar weapon system programs.

(c) DEMONSTRATION ACTIVITIES.— (1) IN GENERAL.—The Secretary of Defense shall carry out

activities to demonstrate the capability required under sub-section (a).

(2) ACTIVITY SELECTION.—Not later than July 15, 2021, the Secretary of Defense shall select decision support processes and individual acquisition programs to participate in the dem-onstration activities under paragraph (1), including—

(A) decision support processes, including— (i) portfolio management as described in subsection

(b); (ii) one or more acquisition data management test

cases; and (iii) one or more development and test modeling

and simulation test cases to demonstrate the ability to collect data from tests and operations in the field,

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and feed the data back into models and simulations for better software development and testing; (B) individual acquisition programs representing—

(i) one or more defense business systems;(ii) one or more command and control systems;(iii) one or more middle tier of acquisition pro-

grams; (iv) programs featuring a cost-plus contract type,

and a fixed-price contract type, and a transaction authorized under section 2371 or 2371b of title 10, United States Code; and

(v) at least one program in each military depart-ment.

(3) EXECUTION OF DEMONSTRATION ACTIVITIES.—As part ofthe demonstration activities under paragraph (1), the Secretary shall—

(A) conduct a comparative analysis that assesses therisks and benefits of the digital management and analytics capability used in each of the programs participating in the demonstration activities relative to the traditional data collection, reporting, exposing, and analysis approaches of the Department;

(B) ensure that the intellectual property strategy foreach of the programs participating in the demonstration activities is best aligned to meet the goals of the program; and

(C) develop a workforce and infrastructure plan tosupport any new policies and guidance implemented in connection with the demonstration activities, including any policies and guidance implemented after the completion of such activities.

(d) POLICIES AND GUIDANCE REQUIRED.—Not later than March15, 2022, based on the results of the demonstration activities carried out under subsection (c), the Secretary of Defense shall issue or modify policies and guidance to—

(1) promote the use of digital data management and ana-lytics capabilities; and

(2) address roles, responsibilities, and procedures relatingto such capabilities. (e) STEERING COMMITTEE.—

(1) IN GENERAL.—The Secretary of Defense shall establisha steering committee to assist the Secretary in carrying out subsections (a) through (c).

(2) MEMBERSHIP.—The steering committee shall be com-posed of the following members or their designees:

(A) The Deputy Secretary of Defense.(B) The Chief Information Officer.(C) The Director of Cost Assessment and Program

Evaluation. (D) The Under Secretary of Defense for Research and

Engineering. (E) The Under Secretary of Defense for Acquisition

and Sustainment. (F) The Director of Operational Test and Evaluation.(G) The Service Acquisition Executives.(H) The Director for Force Structure, Resources, and

Assessment of the Joint Staff.

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(I) The Director of the Defense Digital Service. (J) Such other officials of the Department of Defense

as the Secretary determines appropriate. (f) INDEPENDENT ASSESSMENTS.—

(1) INITIAL ASSESSMENT.— (A) IN GENERAL.—The Defense Innovation Board, in

consultation with the Defense Digital Service, shall conduct an independent assessment and cost-benefits analysis to identify recommended approaches for the implementation of subsections (a) through (c).

(B) ELEMENTS.—The assessment under subparagraph (A) shall include the following:

(i) A plan for the development and implementation of the capabilities required under subsection (a), including a plan for any procurement that may be required as part of such development and implementa-tion.

(ii) An independent cost assessment of the total estimated cost of developing and implementing the capability, as well as an assessment of any potential cost savings.

(iii) An independent estimate of the schedule for the development approach, and order of priorities for implementation of the capability, including a reason-able estimate of the dates on which the capability can be expected to achieve initial operational capability and full operational capability, respectively.

(iv) A recommendation identifying the office or other organization of the Department of Defense that would be most appropriate to manage and execute the capability. (C) REPORT.—Not later than July 15, 2021, the Defense

Innovation Board, in consultation with the Defense Digital Service, shall submit to the Secretary of Defense and the congressional defense committees a report on the findings of the assessment under subparagraph (A), including the findings of the assessment with respect to each element specified in subparagraph (B). (2) SECOND ASSESSMENT.—

(A) IN GENERAL.—Not later than March 15, 2023, the Defense Innovation Board and the Defense Science Board shall jointly complete an independent assessment of the progress of the Secretary in implementing subsections (a) through (c). The Secretary of Defense shall ensure that the Defense Innovation Board and the Defense Science Board have access to the resources, data, and information necessary to complete the assessment.

(B) INFORMATION TO CONGRESS.—Not later than 30 days after the date on which the assessment under subparagraph (A) is completed, the Defense Innovation Board and the Defense Science Board shall jointly provide to the congressional defense committees—

(i) a report summarizing the assessment; and (ii) a briefing on the findings of the assessment.

(g) DEMONSTRATIONS AND BRIEFING.— (1) DEMONSTRATION OF IMPLEMENTATION.—Not later than

October 20, 2021, the Secretary of Defense shall submit to

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the congressional defense committees a demonstration and briefing on the progress of the Secretary in implementing sub-sections (a) through (c). The briefing shall include an expla-nation of how the results of the demonstration activities carried out under subsection (c) will be incorporated into the policy and guidance required under subsection (d), particularly the policy and guidance of the members of the steering committee established under subsection (e).

(2) BRIEFING ON LEGISLATIVE RECOMMENDATIONS.—Not later than February 1, 2022, the Secretary of Defense shall submit to the Committees on Armed Services of the Senate and of the House of Representatives a briefing that identifies any changes to existing law that may be necessary to facilitate the implementation of subsections (a) through (c).

(3) DEMONSTRATION OF PORTFOLIO MANAGEMENT.—In conjunction with the budget of the President for fiscal year 2023 (as submitted to Congress under section 1105(a) of title 21, United States Code), the Deputy Secretary of Defense shall schedule a demonstration of the portfolio management capa-bility developed under subsection (b) with the congressional defense committees.

SEC. 837. SAFEGUARDING DEFENSE-SENSITIVE UNITED STATES INTELLECTUAL PROPERTY, TECHNOLOGY, AND OTHER DATA AND INFORMATION.

(a) IN GENERAL.—The Secretary of Defense shall, in coordina-tion with relevant departments and agencies—

(1) identify policies and procedures protecting defense-sen-sitive United States intellectual property, technology, and other data and information, including hardware and software, from acquisition by the government of China; and

(2) to the extent that the Secretary determines that such policies and procedures are insufficient to provide such protec-tion, develop additional policies and procedures. (b) MATTERS CONSIDERED.—In developing the policies and

procedures under subsection (a), the Secretary shall take the fol-lowing actions:

(1) Establish and maintain a list of critical national security technology that may require certain restrictions on current or former employees, contractors, or subcontractors (at any tier) of the Department of Defense that contribute to such technology.

(2) Review the existing authorities under which employees of the Department of Defense may be subject to post-employ-ment restrictions with foreign governments and with organiza-tions subject to foreign ownership, control, or influence.

(3) Identify additional measures that may be necessary to enhance the authorities described in paragraph (2). (c) POST-EMPLOYMENT MATTERS.—The Secretary shall consider

mechanisms to restrict current or former employees of contractors or subcontractors (at any tier) of the Department of Defense that contribute significantly and materially to a technology referred to in subsection (b)(1) from working directly for companies wholly owned by the government of China, or for companies that have been determined by a cognizant Federal agency to be under the ownership, control, or influence of the government of China.

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SEC. 838. COMPTROLLER GENERAL REPORT ON IMPLEMENTATION OF SOFTWARE ACQUISITION REFORMS.

(a) REPORT REQUIRED.—Not later than March 15, 2021, the Comptroller General of the United States shall brief the congres-sional defense committees on the implementation by the Secretary of Defense of required acquisition reforms with respect to acquiring software for weapon systems, business systems, and other activities that are part of the defense acquisition system, with one or more reports based on such briefing to be submitted to such committees, as jointly determined by such committees and the Comptroller General.

(b) ELEMENTS.—The briefing and any reports required under subsection (a) shall include an assessment of the extent to which the Secretary of Defense has—

(1) implemented the recommendations set forth in— (A) the final report of the Defense Innovation Board

submitted to the congressional defense committees under section 872 of the National Defense Authorization Act for Fiscal Year 2018 (Public Law 115–91; 131 Stat. 1497);

(B) the final report of the Defense Science Board Task Force on the Design and Acquisition of Software for Defense Systems described in section 868 of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (Public Law 115–232; 132 Stat. 1902; 10 U.S.C. 2223a note); and

(C) other relevant studies on software research, development, and acquisition activities of the Department of Defense; (2) carried out software acquisition activities, including

programs required under— (A) section 2322a of title 10, United States Code; and (B) section 875 of the National Defense Authorization

Act for Fiscal Year 2018 (Public Law 115–91; 131 Stat. 1503; 10 U.S.C. 2223 note); (3) used the authority provided under section 800 of the

National Defense Authorization Act for Fiscal Year 2020 (Public Law 116–92; 133 Stat. 1478; 10 U.S.C. 2223a); and

(4) carried out software acquisition pilot programs, including pilot programs required under sections 873 and 874 of the National Defense Authorization Act for Fiscal Year 2018 (Public Law 115–91; 10 U.S.C. 2223a note; 10 U.S.C. 2302 note). (c) ASSESSMENT OF ACQUISITION POLICY, GUIDANCE, AND PRAC-

TICES.—Each report required under subsection (a) shall include an assessment of the extent to which the software acquisition policy, guidance, and practices of the Department of Defense reflect implementation of—

(1) relevant recommendations from software studies and pilot programs; and

(2) directives from the congressional defense committees. (d) DEFENSE ACQUISITION SYSTEM DEFINED.—In this section,

the term ‘‘defense acquisition system’’ has the meaning given that term in section 2545(2) of title 10, United States Code.

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SEC. 839. COMPTROLLER GENERAL REPORT ON INTELLECTUAL PROP-ERTY ACQUISITION AND LICENSING.

(a) IN GENERAL.—Not later than October 1, 2021, the Comp-troller General of the United States shall submit to the congres-sional defense committees a report evaluating the implementation of Department of Defense Instruction 5010.44 relating to Intellec-tual Property Acquisition and Licensing (or successor instruction).

(b) ELEMENTS.—The report required under subsection (a) shallassess the following:

(1) The extent to which the Department of Defense isfulfilling the core principles established in such Instruction.

(2) The extent to which the Defense Acquisition University(established under section 1746 of title 10, United States Code) and elements of the Department of Defense (specified in para-graphs (1) through (10) of section 111(b) of such title) are carrying out the requirements of such Instruction.

(3) The progress of the Secretary of Defense in establishinga cadre of intellectual property experts (as required under section 2322(b) of such title), including the extent to which members of such cadre are executing their roles and responsibil-ities.

(4) The performance of the Secretary of Defense inassessing and demonstrating the implementation of such Instruction, including the effectiveness of the cadre described in paragraph (3).

(5) The effectiveness of the cadre described in paragraph(3) in providing resources on the acquisition and licensing ofintellectual property.

(6) The effect implementation of such Instruction has hadon particular acquisitions.

(7) The extent to which feedback from appropriate stake-holders was incorporated, including large and small businesses, traditional and nontraditional defense contractors (as defined in section 2302(9) of title 10, United States Code), and mainte-nance and repair organizations.

(8) Any other matters the Comptroller General determinesappropriate.

Subtitle D—Industrial Base Matters

SEC. 841. ADDITIONAL REQUIREMENTS PERTAINING TO PRINTED CIR-CUIT BOARDS.

(a) IN GENERAL.—Chapter 148 of title 10, United States Code,is amended by inserting after section 2533c the following section:

‘‘§ 2533d. Additional requirements pertaining to printed cir-cuit boards

‘‘(a) IN GENERAL.— ‘‘(1) Beginning on January 1, 2023, the Secretary of Defense

may not acquire a covered printed circuit board from a covered nation.

‘‘(2) Paragraph (1) shall not apply with respect to any acquisition of supplies or services below the micro-purchase threshold under section 2338 of this title. ‘‘(b) WAIVER.—

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‘‘(1) The Secretary may waive the prohibition under sub-section (a) if the Secretary determines in writing that—

‘‘(A) there are no significant national security concerns regarding counterfeiting, quality, or unauthorized access created by such waiver;

‘‘(B) the waiver is required to support national security; and

‘‘(C) a covered printed circuit board of satisfactory quality and sufficient quantity, in the required form, cannot be procured as and when needed from nations other than a covered nation at reasonable cost, excluding comparisons with non-market economies. ‘‘(2) Not later than 10 days after the Secretary provides

a waiver under paragraph (1), the Secretary shall submit to the Committee on Armed Services of the Senate and the Com-mittee on Armed Services of the House of Representatives a written notice setting forth the reasoning for the waiver, together with a copy of the waiver itself. ‘‘(c) DEFINITIONS.—In this section:

‘‘(1) COVERED NATION.—The term ‘covered nation’ means— ‘‘(A) the Democratic People’s Republic of North Korea; ‘‘(B) the People’s Republic of China; ‘‘(C) the Russian Federation; and ‘‘(D) the Islamic Republic of Iran.

‘‘(2) COVERED PRINTED CIRCUIT BOARD.—The term ‘covered printed circuit board’ means any partially manufactured or complete bare printed circuit board or fully or partially assem-bled printed circuit board that—

‘‘(A) performs a mission critical function in any product or service that is not a commercial product or commercial service (as such terms are defined under sections 103 and 103a of title 41, respectively); or

‘‘(B) the Secretary designates as a covered printed cir-cuit board, after reasonable notice, based on a determina-tion that the designation is required to support national security. ‘‘(3) SECRETARY.—The term ‘Secretary’ means the Secretary

of Defense. ‘‘(d) RULEMAKING.—Not later than May 1, 2022, the Secretary

shall promulgate regulations, after an opportunity for notice and comment, implementing this section.

‘‘(e) APPLICABILITY.—This section shall apply only with respect to contracts entered into after the issuance of a final rule imple-menting this section.

‘‘(f) RULE OF CONSTRUCTION.—Nothing in this section shall be construed to prohibit the Department of Defense from entering into a contract with an entity that connects to the facilities of a third party, for the purposes of backhaul, roaming, or interconnec-tion arrangements, on the basis of the noncompliance by the third party with the provisions of this section or use of equipment or services that do not route or redirect user data traffic or permit visibility into any user data or packets that such equipment trans-mits or otherwise handles.’’.

(b) CLERICAL AMENDMENT.—The table of sections for subchapter V of chapter 148 of title 10, United States Code, is amended by inserting after the item relating to section 2533c the following: ‘‘2533d. Additional requirements pertaining to printed circuit boards.’’.

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(c) TRUSTED SUPPLY.—The Secretary of Defense shall apply the requirements of section 224 of the National Defense Authoriza-tion Act for Fiscal Year 2020 (Public Law 116-92; 10 U.S.C. 2302 note) to the acquisition of covered printed circuit boards (as such term is defined under section 2533d(c) of title 10, United States Code, as added by this section).

(d) INDEPENDENT ASSESSMENT.— (1) IN GENERAL.—Not later than 90 days after the date

of enactment of this Act, the Secretary of Defense shall seek to enter into an agreement with a federally funded research and development center under which the center will conduct an assessment of the benefits and risks of expanding the prohibition in section 2533d(a) and the definitions in section 2533d(c) of title 10, United States Code, each as added by this section, to include printed circuit boards in commercial products or services, or in commercially available off-the-shelf products or services. The assessment shall also include analysis and recommendations regarding the scope of mission critical functions, as such term is used in such section.

(2) SUBMISSION TO DEPARTMENT OF DEFENSE.—Not later than one year after entering into the contract described in paragraph (1), the federally funded research and development center that conducts the assessment described in such para-graph shall submit to the Secretary of Defense a report on the results of the assessment.

(3) SUBMISSION TO CONGRESS.—Not later than 90 days after the date on which the Secretary of Defense receives the report described in paragraph (2), the Secretary shall submit to the congressional defense committees an unaltered copy of the report, together with any comments the Secretary may have with respect to the report, as well as a summary of the rec-ommendations of the report. The comments of the Secretary, if any, and the summary of recommendations shall be in an unclassified form, but the submission may include a classified annex.

SEC. 842. REPORT ON NONAVAILABILITY DETERMINATIONS AND QUAR-TERLY NATIONAL TECHNOLOGY AND INDUSTRIAL BASE BRIEFINGS.

(a) IN GENERAL.—Section 2504 of title 10, United States Code, is amended—

(1) by striking ‘‘The Secretary’’ and inserting the following: ‘‘(a) ANNUAL REPORT.—The Secretary’’;

(2) in subsection (a), as designated by paragraph (1), by adding at the end the following new paragraph: ‘‘(5) A detailed description of any use by the Secretary of

Defense or a Secretary concerned, as applicable, during the prior 12 months of a waiver or exception to the sourcing requirements or prohibitions established by chapter 83 of title 41 or subchapter V of chapter 148 of this title, including—

‘‘(A) the type of waiver or exception used; and ‘‘(B) the reasoning for the use of each such waiver or

exception.’’; and (3) by adding at the end the following new subsection:

‘‘(b) QUARTERLY BRIEFINGS.—(1) The Secretary of Defense shall ensure that the congressional defense committees receive quarterly briefings on the industrial base supporting the Department of

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Defense, describing challenges, gaps, and vulnerabilities in the defense industrial base and commercial sector relevant to execution of defense missions, and describing initiatives to address such chal-lenges.

‘‘(2) Each briefing under paragraph (1) shall include an update on the progress of addressing such gaps or vulnerabilities by the Secretary, the Secretary of the military department concerned, or the appropriate head of a Defense Agency, including an update on—

‘‘(A) actions taken to address such gaps or vulnerabilities; ‘‘(B) policy changes necessary to address such gaps or

vulnerabilities; and ‘‘(C) the proposed timeline for action and resources required

to address such gaps or vulnerabilities.’’. (b) CONFORMING AND CLERICAL AMENDMENTS.—

(1) HEADING AMENDMENT.—The heading of section 2504 of title 10, United States Code, is amended to read as follows:

‘‘§ 2504. National technology and industrial base: annual report and quarterly briefings’’.

(2) CLERICAL AMENDMENT.—The table of sections for sub-chapter II of chapter 148 of such title is amended by striking the item relating to section 2504 and inserting the following new item:

‘‘2504. National technology and industrial base: annual report and quarterly brief-ings.’’.

SEC. 843. MODIFICATION OF FRAMEWORK FOR MODERNIZING ACQUISITION PROCESSES TO ENSURE INTEGRITY OF INDUSTRIAL BASE AND INCLUSION OF OPTICAL TRANS-MISSION COMPONENTS.

(a) IN GENERAL.— Section 2509 of title 10, United States Code, is amended—

(1) in subsection (b)(2)— (A) in subparagraph (A)—

(i) in the matter preceding clause (i), by inserting ‘‘such as those identified through the supply chain risk management process of the Department and by the Federal Acquisition Security Council, and’’ after ‘‘supply chain risks,’’; and

(ii) in clause (ii), by striking ‘‘(other than optical transmission components)’’; (B) in subparagraph (C)—

(i) in clause (x), by striking ‘‘; and’’ and inserting a semicolon;

(ii) by redesignating clause (xi) as clause (xii); and (iii) by inserting after clause (x) the following new

clause: ‘‘(xi) processes and procedures related to supply chain

risk management and processes and procedures imple-mented pursuant to section 2339a of this title; and’’; and

(C) by adding at the end the following new subpara-graph: ‘‘(E) Characterization and assessment of industrial base

support policies, programs, and procedures, including—

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‘‘(i) limitations and acquisition guidance relevant to the national technology and industrial base (as defined in section 2500(1) of this title);

‘‘(ii) limitations and acquisition guidance relevant to section 2533a of this title;

‘‘(iii) the Industrial Base Analysis and Sustainment program of the Department, including direct support and common design activities;

‘‘(iv) the Small Business Innovation Research Program (as defined in section 9(e) of the Small Business Act (15 U.S.C. 638(e));

‘‘(v) the Manufacturing Technology Program estab-lished under section 2521 of this title;

‘‘(vi) programs relating to the Defense Production Act of 1950 (50 U.S.C. 4511 et seq.); and

‘‘(vii) programs operating in each military depart-ment.’’; and (2) in subsection (f)(2), by inserting ‘‘, and supporting poli-

cies, procedures, and guidance relating to such actions’’ after ‘‘subsection (b)’’. (b) CONFORMING AMENDMENT.—Section 806 of the Ike Skelton

National Defense Authorization Act for Fiscal Year 2011 (10 U.S.C. 2304 note) is repealed. SEC. 844. EXPANSION ON THE PROHIBITION ON ACQUIRING CERTAIN

METAL PRODUCTS.

(a) IN GENERAL.—Section 2533c of title 10, United States Code, is amended—

(1) in subsection (a)(1), by striking ‘‘material melted’’ and inserting ‘‘material mined, refined, separated, melted,’’; and

(2) in subsection (c)(3)(A)(i), by striking ‘‘tungsten’’ and inserting ‘‘covered material’’. (b) EFFECTIVE DATE.—The amendments made by subsection

(a) shall take effect on the date that is 5 years after the date of the enactment of this Act. SEC. 845. MISCELLANEOUS LIMITATIONS ON THE PROCUREMENT OF

GOODS OTHER THAN UNITED STATES GOODS.

(a) IN GENERAL.—Section 2534 of title 10, United States Code, is amended—

(1) in subsection (a)— (A) by striking paragraphs (2) through (5) and redesig-

nating paragraph (6) as paragraph (3); (B) by inserting after paragraph (1) the following new

paragraph: ‘‘(2) COMPONENTS FOR NAVAL VESSELS.—The following

components of vessels, to the extent they are unique to marine applications:

‘‘(A) Gyrocompasses. ‘‘(B) Electronic navigation chart systems. ‘‘(C) Steering controls. ‘‘(D) Propulsion and machinery control systems. ‘‘(E) Totally enclosed lifeboats.’’; (C) in paragraph (3), as so redesignated, by striking

‘‘subsection (k)’’ and inserting ‘‘subsection (j)’’; and (D) by adding at the end the following new paragraph:

‘‘(4) COMPONENTS FOR T–AO 205 CLASS VESSELS.—The fol-lowing components of T–AO 205 class vessels:

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‘‘(A) Auxiliary equipment, including pumps, for all ship-board services.

‘‘(B) Propulsion system components, including engines, reduction gears, and propellers.

‘‘(C) Shipboard cranes. ‘‘(D) Spreaders for shipboard cranes.’’;

(2) by amending subsection (b) to read as follows: ‘‘(b) MANUFACTURER IN THE NATIONAL TECHNOLOGY AND INDUS-

TRIAL BASE.—A manufacturer meets the requirements of this sub-section if the manufacturer is part of the national technology and industrial base.’’;

(3) in subsection (c)— (A) by striking ‘‘ITEMS.—’’ and all that follows through

‘‘Subsection (a) does not apply’’ and inserting ‘‘ITEMS.— Subsection (a) does not apply’’; and

(B) by striking paragraphs (2) though (5); (4) in subsection (g)—

(A) by striking ‘‘(1) This section’’ and inserting ‘‘This section’’; and

(B) by striking paragraph (2); (5) in subsection (h), by striking ‘‘subsection (a)(3)(B)’’ and

inserting ‘‘subsection (a)(2)’’; (6) in subsection (i)(3), by striking ‘‘Under Secretary of

Defense for Acquisition, Technology, and Logistics’’ and inserting ‘‘Under Secretary of Defense for Acquisition and Sustainment’’;

(7) by striking subsection (j); (8) by redesignating the first subsection designated sub-

section (k) (relating to ‘‘Limitation on Certain Procurements Application Process’’) as subsection (j); and

(9) in subsection (k) (relating to ‘‘Implementation of Auxil-iary Ship Component Limitation’’), by striking ‘‘Subsection (a)(6)’’ and inserting ‘‘Subsection (a)(3)’’. (b) REVIEW OF SELECT COMPONENTS.—The Secretary of the

Defense shall expedite the review period under paragraph (3)(B) of section 2534(j) of title 10, United States Code, as redesignated by subsection (a), to not more than 60 days for applications sub-mitted pursuant to such section 2534(j) for the following components for auxiliary ships:

(1) Auxiliary equipment, including pumps, for all shipboard services.

(2) Propulsion system components, including engines, reduction gears, and propellers.

(3) Shipboard cranes. (4) Spreaders for shipboard cranes.

SEC. 846. IMPROVING IMPLEMENTATION OF POLICY PERTAINING TO THE NATIONAL TECHNOLOGY AND INDUSTRIAL BASE.

(a) ASSESSMENT OF RESEARCH AND DEVELOPMENT, MANUFAC-TURING, AND PRODUCTION CAPABILITIES.—

(1) IN GENERAL.—In developing the strategy required by section 2501 of title 10, United States Code, carrying out the program for analysis of the national technology and industrial base required by section 2503 of such title, and performing the assessments required under section 2505 of such title, the Secretary of Defense, in consultation with the Under Sec-retary of Defense for Acquisition and Sustainment and the

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Under Secretary of Research and Engineering, shall assess the research and development, manufacturing, and production capabilities of the national technology and industrial base (as defined in section 2500 of such title) and other allies and partner countries.

(2) IDENTIFICATION OF SPECIFIC TECHNOLOGIES, COMPANIES, LABORATORIES, AND FACTORIES.—The map of the industrial base described in section 2504 of title 10, United States Code, shall highlight specific technologies, companies, laboratories, and fac-tories of, or located in, the national technology and industrial base of potential value to current and future Department of Defense plans and programs. (b) POLICY AND GUIDANCE.—

(1) IN GENERAL.—Section 2440 of title 10, United States Code is amended—

(A) by amending the section heading to read as follows: ‘‘National technology and industrial base plans, policy, and guidance’’;

(B) striking ‘‘The Secretary’’ and inserting the fol-lowing:

‘‘(a) IN GENERAL.—The Secretary’’; and (C) by adding at the end the following new subsection:

‘‘(b) ACQUISITION POLICY AND GUIDANCE.—The Secretary of Defense shall develop and promulgate acquisition policy and guid-ance to the service acquisition executives, the heads of the appro-priate Defense Agencies and Department of Defense Field Activities, and relevant program managers. Such policy and guidance shall be germane to the use of the research and development, manufac-turing, and production capabilities identified pursuant to chapter 148 of this title and the technologies, companies, laboratories, and factories in specific Department of Defense research and develop-ment, international cooperative research, procurement, and sustainment activities.’’.

(2) CLERICAL AMENDMENTS.—The table of sections at the beginning of chapter 144 of title 10, United States Code, is amended by striking the item relating to section 2440 and inserting the following new item:

‘‘2440. National technology and industrial base plans, policy, and guidance.’’. (c) RESPONSIBILITIES OF THE NATIONAL DEFENSE TECHNOLOGY

AND INDUSTRIAL BASE COUNCIL.—Section 2502(c) of title 10, United States Code, is amended—

(1) in paragraph (2), by striking ‘‘and’’ at the end; (2) in paragraph (3), by striking the period at the end

and inserting ‘‘; and’’; and (3) by adding at the end the following new paragraph: ‘‘(4) collaboration with government officials of member

countries of the national technology and industrial base in order to strengthen the national technology and industrial base.’’. (d) RECOMMENDATIONS FOR ADDITIONAL MEMBERS OF THE

NATIONAL TECHNOLOGY AND INDUSTRIAL BASE.— (1) IN GENERAL.—The Secretary of Defense, in consultation

with the heads of any relevant Federal agencies, shall establish a process to consider the inclusion of additional member coun-tries in the national technology and industrial base.

(2) ELEMENTS.—The process developed under paragraph (1) shall include an analysis of—

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(A) the national security and foreign policy impacts, costs, and benefits to the United States and allied countries of the inclusion of any such additional member countries in the national technology and industrial base;

(B) the economic impacts, costs, and benefits to entities within the United States and allied countries of the inclu-sion of any such additional member countries into the national technology and industrial base, including an assessment of—

(i) specific shortfalls in the technological and indus-trial capacities of current member countries of the national technology and industrial base that would be addressed by inclusion of such additional member countries;

(ii) specific areas in the industrial bases of current member countries of the national technology and indus-trial base that would likely be impacted by additional competition if such additional member countries were included in the national technology and industrial base; and

(iii) costs to reconstitute capability should such capability be lost to competition; and (C) other factors as determined relevant by the Sec-

retary. (3) CONCURRENCE.—For the purposes of the process devel-

oped under paragraph (1), the Secretary of Defense may rec-ommend the inclusion of an additional member country in the national technology and industrial base only with the concurrence of the Secretary of State.

SEC. 847. REPORT AND LIMITATION ON THE AVAILABILITY OF FUNDS RELATING TO ELIMINATING THE GAPS AND VULNERABILITIES IN THE NATIONAL TECHNOLOGY AND INDUSTRIAL BASE.

(a) IN GENERAL.—Beginning January 1, 2021, if the Secretary of Defense has not submitted to the congressional defense commit-tees the national security strategy for the national technology and industrial base required by section 2501(a) of title 10, United States Code, not more than 75 percent of the funds specified in subsection (b) may be obligated or expended until the date on which the Secretary submits such strategy to such committees.

(b) FUNDS SPECIFIED.—The funds specified in this subsection are the funds authorized to be appropriated by this Act or otherwise made available for fiscal year 2021 for the Department of Defense for the following:

(1) The immediate office of the Secretary of Defense. (2) The Office of the Under Secretary of Defense for Acquisi-

tion and Sustainment. SEC. 848. SUPPLY OF STRATEGIC AND CRITICAL MATERIALS FOR THE

DEPARTMENT OF DEFENSE.

(a) PREFERENCE FOR SOURCING FROM THE NATIONAL TECH-NOLOGY AND INDUSTRIAL BASE.—The Secretary of Defense shall, to the maximum extent practicable, acquire strategic and critical materials required to meet the defense, industrial, and essential civilian needs of the United States in the following order of pref-erence:

(1) From sources located within the United States.

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(2) From sources located within the national technology and industrial base (as defined in section 2500 of title 10, United States Code).

(3) From other sources as appropriate. (b) STATEMENT OF POLICY.—

(1) IN GENERAL.—The Secretary of Defense shall pursue the following goals:

(A) Not later than January 1, 2035, ensuring access to secure sources of supply for strategic and critical mate-rials that will—

(i) fully meet the demands of the domestic defense industrial base;

(ii) eliminate the dependence of the United States on potentially vulnerable sources of supply for strategic and critical materials; and

(iii) ensure that the Department of Defense is not reliant upon potentially vulnerable sources of supply for the processing or manufacturing of any strategic and critical materials deemed essential to national security by the Secretary of Defense. (B) Provide incentives for the defense industrial base

to develop robust processing and manufacturing capabilities in the United States to refine strategic and critical mate-rials for Department of Defense purposes.

(C) Maintain secure sources of supply for strategic and critical materials required to maintain current military requirements in the event that international supply chains are disrupted. (2) METHODS.—The Secretary of Defense shall achieve the

goals described in paragraph (1) through— (A) the development of guidance in consultation with

appropriate officials of the Department of State, the Joint Staff, and the Secretaries of the military departments;

(B) the continued and expanded use of existing pro-grams, such as the National Defense Stockpile;

(C) the continued use of authorities under title III of the Defense Production Act of 1950 (50 U.S.C. 4531 et seq.); and

(D) other methods, as the Secretary of Defense deems appropriate.

SEC. 849. ANALYSES OF CERTAIN ACTIVITIES FOR ACTION TO ADDRESS SOURCING AND INDUSTRIAL CAPACITY.

(a) ANALYSIS REQUIRED.— (1) IN GENERAL.—The Secretary of Defense, acting through

the Undersecretary of Defense for Acquisition and Sustainment and other appropriate officials, shall review the items under subsection (c) to determine and develop appropriate actions, consistent with the policies, programs, and activities required under chapter 148 of title 10, United States Code, chapter 83 of title 41, United States Code, and the Defense Production Act of 1950 (50 U.S.C. 4501 et seq.), including—

(A) restricting procurement, with appropriate waivers for cost, emergency requirements, and non-availability of suppliers, including restricting procurement to—

(i) suppliers in the United States;

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(ii) suppliers in the national technology and indus-trial base (as defined in section 2500 of title 10, United States Code);

(iii) suppliers in other allied nations; or (iv) other suppliers;

(B) increasing investment through use of research and development or procurement activities and acquisition authorities to—

(i) expand production capacity; (ii) diversify sources of supply; or (iii) promote alternative approaches for addressing

military requirements; (C) prohibiting procurement from selected sources or

nations; (D) taking a combination of actions described under

subparagraphs (A),(B), and (C); or (E) taking no action.

(2) CONSIDERATIONS.—The analyses conducted pursuant to paragraph (1) shall consider national security, economic, and treaty implications, as well as impacts on current and potential suppliers of goods and services. (b) REPORTING ON ANALYSES, RECOMMENDATIONS, AND

ACTIONS.— (1) INTERIM BRIEF.—Not later than January 15, 2022, the

Secretary of Defense shall submit to the congressional defense committees—

(A) a summary of the findings of the analyses under-taken for each item pursuant to subsection (a);

(B) relevant recommendations resulting from the anal-yses; and

(C) descriptions of specific activities undertaken as a result of the analyses, including schedule and resources allocated for any planned actions. (2) REPORTING.—The Secretary of Defense shall include

the analyses conducted under subsection (a), and any relevant recommendations and descriptions of activities resulting from such analyses, as appropriate, in each of the following sub-mitted during the 2022 calendar year:

(A) The annual report to Congress required under sec-tion 2504 of title 10, United States Code.

(B) The annual report on unfunded priorities of the national technology and industrial base required under section 2504a of such title.

(C) Department of Defense technology and industrial base policy guidance prescribed under section 2506 of such title.

(D) Activities to modernize acquisition processes to ensure integrity of industrial base pursuant to section 2509 of such title.

(E) Defense memoranda of understanding and related agreements considered in accordance with section 2531 of such title.

(F) Industrial base or acquisition policy changes. (G) Legislative proposals for changes to relevant stat-

utes which the Department shall consider, develop, and submit to the Committees on Armed Services of the Senate

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and House of Representatives not less frequently than once per fiscal year.

(H) Quarterly briefings on the national technology and industrial base required under section 2504 of such title, as amended by section 842 of this Act.

(I) Other actions as the Secretary of Defense deter-mines appropriate.

(c) LIST OF HIGH PRIORITY GOODS AND SERVICES FOR ANALYSES, RECOMMENDATIONS, AND ACTIONS.—The items described in this sub-section are the following:

(1) Goods and services covered under existing restrictions, where a waiver, exception, or domestic non-availability deter-mination has been applied.

(2) Printed circuit boards and other electronics components, consistent with the requirements of other provisions of this Act.

(3) Pharmaceuticals, including active pharmaceutical ingredients.

(4) Medical devices. (5) Therapeutics. (6) Vaccines. (7) Diagnostic medical equipment and consumables,

including reagents and swabs. (8) Ventilators and related products. (9) Personal protective equipment. (10) Strategic and critical materials, including rare earth

materials. (11) Natural or synthetic graphite. (12) Coal-based rayon carbon fibers. (13) Aluminum and aluminum alloys.

SEC. 850. IMPLEMENTATION OF RECOMMENDATIONS FOR ASSESSING AND STRENGTHENING THE MANUFACTURING AND DEFENSE INDUSTRIAL BASE AND SUPPLY CHAIN RESIL-IENCY.

(a) SUBMISSION OF RECOMMENDATIONS TO SECRETARY OF DEFENSE.—In order to fully implement the recommendations of the report of the Interagency Task Force (established by the Depart-ment of Defense pursuant to section 2 of Executive Order 13806 (82 Fed. Reg. 34597; July 21, 2017)) titled ‘‘Assessing and Strength-ening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States: Report to President Donald J. Trump by the Interagency Task Force in Fulfillment of Executive Order 13806’’ (September 2018), not later than 540 days after the date of the enactment of this Act, the Under Secretary of Defense for Acquisition and Sustainment shall submit to the Sec-retary of Defense additional recommendations regarding United States industrial policies. The additional recommendations shall consist of specific executive actions, programmatic changes, regu-latory changes, and legislative proposals and changes, as appro-priate.

(b) SCOPE OF ASSESSMENT.—In developing the additional rec-ommendations required under subsection (a), the Under Secretary shall—

(1) assess the macro forces and risk archetypes identified in the report of the Interagency Task Force described in sub-section (a);

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(2) evaluate the success of responsive actions undertaken; and

(3) identify any such recommendations that may require new legislative authorities. (c) OBJECTIVES.—The additional recommendations made pursu-

ant to subsection (a) shall— (1) aim to expand the defense industrial base to leverage

contributions and capabilities of allies and partner countries; (2) identify and preserve the viability of domestic and

trusted international suppliers; and (3) strengthen the domestic industrial base, especially in

areas subject to the risk archetypes identified in the report of the Interagency Task Force described in subsection (a). (d) CONSULTATION.—In developing the additional recommenda-

tions required under subsection (a), the Under Secretary may engage through appropriate mechanisms with—

(1) the Defense Science Board; (2) the Defense Innovation Board; (3) the Defense Business Board; (4) entities representing industry interests; and (5) entities representing labor interests.

(e) SUBMISSION OF RECOMMENDATIONS TO PRESIDENT.—Not later than 30 days after receiving the additional recommendations required under subsection (a), the Secretary of Defense shall submit such recommendations, together with any supplementary views or recommendations, to the President, the Director of the Office of Management and Budget, the Assistant to the President for National Security Affairs, and the Director of the National Economic Council.

(f) SUBMISSION OF RECOMMENDATIONS TO CONGRESS.—Not later than 30 days after submitting the recommendations under sub-section (e), the Secretary of Defense shall submit to and brief the congressional defense committees on such recommendations.

SEC. 851. REPORT ON STRATEGIC AND CRITICAL MATERIALS.

(a) REPORT REQUIRED.—The Secretary of Defense shall submit to the Committees on Armed Services of the Senate and the House of Representatives an appendix to the annual report required in section 2504 of title 10, United States Code, due on March 1, 2021, describing strategic and critical materials, including the gaps and vulnerabilities in supply chains of such materials.

(b) ELEMENTS.—The Secretary of Defense shall include in the appendix required in subsection (a) the following:

(1) An identification of the strategic and critical materials that are currently used by the Department of Defense.

(2) To the extent practicable, an identification of the overall annual tonnage of each strategic or critical material identified pursuant to paragraph (1) that was used by the Department during the 10-year period ending on December 31, 2020.

(3) An identification of domestic and international sources for the strategic and critical materials identified pursuant to paragraph (1).

(4) An identification of risks relating to access to the stra-tegic and critical materials identified pursuant to paragraph (1) from supply chain disruptions due to geopolitical, economic, and other vulnerabilities.

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(5) An evaluation of the benefits of a robust domestic supply chain for providing strategic and critical materials, as needed, to manufacturers in the defense industrial base.

(6) An evaluation of the effects of the use of waivers by the Strategic Materials Protection Board established under sec-tion 187 of title 10, United States Code, on the domestic supply of strategic and critical materials.

(7) Recommendations for policies and procedures to ensure a capability within the Department of Defense to secure stra-tegic and critical materials necessary for emerging technologies, as well as antimicrobial products, minerals, and metals for use in medical equipment and other technologies.

(8) An identification of improvements required to the National Defense Stockpile in order to ensure the Secretary of Defense has access to the strategic and critical materials identified pursuant to paragraph (1).

(9) An evaluation of the domestic processing and manufac-turing capacity needed to supply the strategic and critical mate-rials identified pursuant to paragraph (1) to the Secretary of Defense in an economic and secure manner.

(10) In consultation with the Director of the United States Geological Survey, an identification of domestic locations with existing commercial manufacturing interest that are already verified to contain large supplies of the strategic and critical materials identified pursuant to paragraph (1).

(11) An assessment of the feasibility of partnerships with institutions of higher education (as defined in section 101 of the Higher Education Act of 1965 (20 U.S.C. 1001)) that receive grants for the purpose of enhancing the security and stability of the supply chain for strategic and critical materials for the National Defense Stockpile, including an identification of barriers to such partnerships and recommendations for improving such partnerships.

(12) Any other matter relating to strategic and critical materials that the Secretary considers appropriate. (c) FORM.—The appendix required in subsection (a) shall be

submitted in unclassified form, but may include a classified annex. (d) STRATEGIC AND CRITICAL MATERIALS DEFINED.—In this sec-

tion, the term ‘‘strategic and critical materials’’ means materials, including rare earth elements, that are necessary to meet national defense and national security requirements, including requirements relating to supply chain resiliency, and for the economic security of the United States.

SEC. 852. REPORT ON ALUMINUM REFINING, PROCESSING, AND MANU-FACTURING.

(a) IN GENERAL.—In preparing the annual report required under section 2504 of title 10, United States Code, due on March 1, 2022, the Secretary of Defense shall include as an appendix to such report information on—

(1) how authorities under the Defense Production Act of 1950 (50 U.S.C. 4501 et seq.) could be used to provide incentives to increase activities relating to refining aluminum and the development of processing and manufacturing capabilities for aluminum; and

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(2) whether a new initiative would further the developmentof such processing and manufacturing capabilities for alu-minum. (b) SUBMISSION.—Not later than March 1, 2022, the Secretary

of Defense shall submit to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate the appendix described in subsection (a).

Subtitle E—Small Business Matters

SEC. 861. INITIATIVES TO SUPPORT SMALL BUSINESSES IN THE NATIONAL TECHNOLOGY AND INDUSTRIAL BASE.

(a) IN GENERAL.—The Secretary of Defense, acting throughthe Assistant Secretary of Defense for Industrial Base Policy (estab-lished under section 903 of this Act) and other appropriate officials, in carrying out the activities described under subchapter II of chapter 148 of title 10, United States Code, shall establish initia-tives to increase the effectiveness of the Department of Defense in specifically leveraging small businesses to eliminate gaps and vulnerabilities in the national technology and industrial base (as defined in section 2500 of title 10, United States Code) and expand the number of small businesses in the national technology and industrial base.

(b) INITIATIVES.—(1) UPDATES FOR SMALL BUSINESS STRATEGY.—Not later

than October 1, 2022, and biennially thereafter, shall update the small business strategy required under section 2283 of title 10, United States Code, and provide such updated strategy to the congressional defense committees.

(2) IMPLEMENTATION PLAN.—(A) IN GENERAL.—Not later than March 1, 2023, and

biennially thereafter, the Secretary of Defense shall develop an implementation plan consistent with the most recent small business strategy developed under such section 2283, and provide such plan to the congressional defense commit-tees.

(B) ELEMENTS.—The implementation plan described insubparagraph (A) shall include an identification of the fol-lowing:

(i) Organizations responsible for implementationactivities.

(ii) Metrics to evaluate progress of implementationactivities.

(iii) Resources to support implementation activi-ties.

(iv) Outcomes achieved as a result of executingthe previous small business strategy developed under such section 2283.

(3) MECHANISMS TO ASSESS AND SUPPORT SMALL BUSINESSESIN NATIONAL TECHNOLOGY AND INDUSTRIAL BASE.—The Sec-retary of Defense shall—

(A) establish policies, procedures, and informationrepositories to identify small businesses in the defense supply chain, including—

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(i) small businesses participating in an acquisition program of a military department or Defense Agency (as defined in section 101(11) of title 10, United States Code);

(ii) small businesses contracting with the Defense Logistics Agency; and

(iii) other small businesses in the national tech-nology and industrial base; (B) establish policies and procedures to assess the

financial status of critical small businesses; and (C) enter into an agreement with the acquisition

research organization within a civilian college or university that is described under section 2361a(a) of title 10, United States Code (commonly referred to as the ‘‘Acquisition Innovation Research Center’’), to analyze mechanisms that could be established to allow the Secretary of Defense to provide direct financial support to critical small businesses that require additional financial assistance, including critical small businesses that are—

(i) contracting with the Defense Logistics Agency; (ii) subcontractors (at any tier); or (iii) in critical technology sectors.

(c) REPORTS.— (1) REPORT ON ACTIVITIES.—Not later than October 1, 2021,

the Assistant Secretary of Defense for Industrial Base Policy shall submit to the appropriate committees a report on activities undertaken pursuant to this section.

(2) IMPLEMENTATION PLAN FOR 2019 SMALL BUSINESS STRATEGY.—Not later than June 1, 2021, the Secretary of Defense shall submit an implementation plan for the small business strategy required under section 2283 of title 10, United States Code, and dated October 1, 2019, including an identifica-tion of specific responsible individuals and organizations, mile-stones and metrics, and resources to support activities identified in the implementation plan. (d) SMALL BUSINESS DEFINED.—In this section, the term ‘‘small

business’’ has the meaning given by the Secretary of Defense, except that such term shall include prime contractors and sub-contractors (at any tier).

SEC. 862. TRANSFER OF VERIFICATION OF SMALL BUSINESS CON-CERNS OWNED AND CONTROLLED BY VETERANS OR SERVICE-DISABLED VETERANS TO THE SMALL BUSINESS ADMINISTRATION.

(a) TRANSFER DATE.—For purposes of this section, the term ‘‘transfer date’’ means the date that is 2 years after the date of enactment of this Act.

(b) AMENDMENT TO AND TRANSFER OF VETERAN-OWNED AND SERVICE-DISABLED VETERAN-OWNED BUSINESS DATABASE.—

(1) AMENDMENT OF VETERAN-OWNED AND SERVICE-DISABLED VETERAN-OWNED BUSINESS DATABASE.—Effective on the transfer date, section 8127 of title 38, United States Code, is amended—

(A) in subsection (e), by striking ‘‘the Secretary under subsection (f)’’ and inserting ‘‘the Administrator under sec-tion 36 of the Small Business Act’’;

(B) in subsection (f)—

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(i) by striking ‘‘the Secretary’’ each place itappears, except in the last place it appears in para-graph (2)(A), and inserting ‘‘the Administrator’’;

(ii) in paragraph (1), by striking ‘‘small businessconcerns owned and controlled by veterans with service-connected disabilities’’ and inserting ‘‘small business concerns owned and controlled by service- disabled veterans’’;

(iii) in paragraph (2)—(I) in subparagraph (A)—

(aa) by striking ‘‘to access’’ and inserting‘‘to obtain from the Secretary of Veterans Affairs’’; and

(bb) by inserting ‘‘, United States Code,’’ after ‘‘title 5’’; and (II) by striking subparagraph (B) and inserting

the following: ‘‘(B) For purposes of this subsection—

‘‘(i) the Secretary of Veterans Affairs shall— ‘‘(I) verify an individual’s status as a veteran or a

service-disabled veteran; and ‘‘(II) establish a system to permit the Administrator

to access, but not alter, the verification of such status; and ‘‘(ii) the Administrator shall verify—

‘‘(I) the status of a business concern as a small business concern; and

‘‘(II) the ownership and control of such business con-cern.

‘‘(C) The Administrator may not certify a concern under sub-section (b) or section 36A if the Secretary of Veterans Affairs cannot provide the verification described under subparagraph (B)(i)(I).’’;

(iv) in paragraph (3), by striking ‘‘such veterans’’and inserting ‘‘a veteran described in paragraph (1)’’;

(v) by striking paragraphs (4) and (7);(vi) by redesignating paragraphs (5) and (6) as

paragraphs (4) and (5), respectively, and redesignating paragraph (8) as paragraph (6);

(vii) in paragraph (4), as so redesignated, bystriking ‘‘The Secretary’’ and inserting ‘‘The Adminis-trator’’; and

(viii) in paragraph (6), as so redesignated—(I) in subparagraph (A)—

(aa) by striking ‘‘verify the status of theconcern as a small business concern or the ownership or control of the concern’’ and inserting ‘‘certify the status of the concern as a small business concern owned and controlled by veterans (under section 36A) or a small business concern owned and controlled by service-disabled veterans (under subsection (g) of this section)’’;

(bb) by striking ‘‘verification’’ and inserting ‘‘certification’’; and

(cc) by striking ‘‘the Small BusinessAdministration (as established under section

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5(i) of the Small Business Act)’’ and inserting ‘‘the Administration (as established under sec-tion 5(i))’’; (II) in subparagraph (B)—

(aa) in clause (i)— (AA) by striking ‘‘small business con-

cern owned and controlled by veterans with service-connected disabilities’’ and inserting ‘‘small business concern owned and controlled by service-disabled vet-erans’’; and

(BB) by striking ‘‘of the Small Busi-ness Administration’’; and (bb) in clause (ii)—

(AA) by amending subclause (I) to read as follows:

‘‘(I) the Secretary of Veterans Affairs or the Adminis-trator; or’’; and

(BB) in subclause (II), by striking ‘‘the contracting officer of the Department’’ and inserting ‘‘the applicable contracting officer’’; and

(III) by striking subparagraph (C); (C) by redesignating subsections (k) (relating to limita-

tions on subcontracting) and (l) (relating to definitions) as subsections (l) and (m), respectively;

(D) by inserting after subsection (j) (relating to annual reports) the following new subsection:

‘‘(k) ANNUAL TRANSFER FOR CERTIFICATION COSTS.—For each fiscal year, the Secretary of Veterans Affairs shall reimburse the Administrator in an amount necessary to cover any cost incurred by the Administrator for certifying small business concerns owned and controlled by veterans that do not qualify as small business concerns owned and controlled by service-disabled veterans for the Secretary for purposes of this section and section 8128 of this title. The Administrator is authorized to accept such reimburse-ment. The amount of any such reimbursement shall be determined jointly by the Secretary and the Administrator and shall be provided from fees collected by the Secretary under multiple-award schedule contracts. Any disagreement about the amount shall be resolved by the Director of the Office of Management and Budget.’’; and

(E) in subsection (m) (relating to definitions), as so redesignated—

(i) by redesignating paragraphs (1), (2), and (3) as paragraphs (2), (3), and (4), respectively; and

(ii) by inserting before paragraph (2), as so redesig-nated, the following new paragraph:

‘‘(1) The term ‘Administrator’ means the Administrator of the Small Business Administration.’’.

(2) TRANSFER OF REQUIREMENTS RELATING TO DATABASE TO THE SMALL BUSINESS ACT.—Effective on the transfer date, subsection (f) of section 8127 of title 38, United States Code (as amended by paragraph (1)), is transferred to section 36 of the Small Business Act (15 U.S.C. 657f), and inserted so as to appear after subsection (e).

(3) CONFORMING AMENDMENTS.—The following amend-ments shall take effect on the transfer date:

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(A) SMALL BUSINESS ACT.—Section 3(q)(2)(C)(i)(III) of the Small Business Act (15 U.S.C. 632(q)(2)(C)(i)(III)) is amended by striking ‘‘section 8127(f) of title 38, United States Code’’ and inserting ‘‘section 36’’.

(B) TITLE 38.—Section 8128 of title 38, United States Code, is amended by striking ‘‘maintained by the Secretary under section 8127(f) of this title’’ and inserting ‘‘main-tained by the Administrator of the Small Business Adminis-tration under section 36 of the Small Business Act’’.

(c) ADDITIONAL REQUIREMENTS FOR DATABASE.— (1) ADMINISTRATOR ACCESS TO DATABASE BEFORE THE

TRANSFER DATE.—During the period between the date of the enactment of this Act and the transfer date, the Secretary of Veterans Affairs shall provide the Administrator of the Small Business Administration with access to the contents of the database described under section 8127(f) of title 38, United States Code.

(2) RULE OF CONSTRUCTION.—Nothing in this section or the amendments made by this section may be construed—

(A) as prohibiting the Administrator of the Small Busi-ness Administration from combining the contents of the database described under section 8127(f) of title 38, United States Code, with other databases maintained by the Administration; or

(B) as requiring the Administrator to use any system or technology related to the database described under sec-tion 8127(f) of title 38, United States Code, on or after the transfer date to comply with the requirement to main-tain a database under subsection (f) of section 36 of the Small Business Act (as transferred pursuant to subsection (b)(2) of this section). (3) RECOGNITION OF THE ISSUANCE OF JOINT REGULA-

TIONS.—The date specified under section 1832(e) of the National Defense Authorization Act for Fiscal Year 2017 (15 U.S.C. 632 note) shall be deemed to be October 1, 2018. (d) PROCUREMENT PROGRAM FOR SMALL BUSINESS CONCERNS

OWNED AND CONTROLLED BY SERVICE-DISABLED VETERANS.— (1) PROCUREMENT PROGRAM FOR SMALL BUSINESS CONCERNS

OWNED AND CONTROLLED BY SERVICE-DISABLED VETERANS.—Sec-tion 36 of the Small Business Act (15 U.S.C. 657f) is amended—

(A) by redesignating subsection (d) as paragraph (3), adjusting the margin accordingly, and transferring such paragraph to subsection (h) of such section, as added by subparagraph (F) of this paragraph, so as to appear after paragraph (2);

(B) by striking subsection (e); (C) by redesignating subsections (a), (b), and (c) as

subsections (c), (d), and (e) respectively; (D) by inserting before subsection (c), as so redesig-

nated, the following new subsections: ‘‘(a) CONTRACTING OFFICER DEFINED.—For purposes of this sec-

tion, the term ‘contracting officer’ has the meaning given such term in section 2101 of title 41, United States Code.

‘‘(b) CERTIFICATION OF SMALL BUSINESS CONCERNS OWNED AND CONTROLLED BY SERVICE-DISABLED VETERANS.—With respect to a procurement program or preference established under this Act that applies to prime contractors, the Administrator shall—

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‘‘(1) certify the status of a concern as a small business concern owned and controlled by service-disabled veterans; and

‘‘(2) require the periodic recertification of such status.’’; (E) in subsection (d), as so redesignated, by inserting

‘‘certified under subsection (b)’’ before ‘‘if the contracting officer’’;

(F) by adding at the end the following new subsections: ‘‘(g) CERTIFICATION REQUIREMENT.—Notwithstanding sub-

section (c), a contracting officer may only award a sole source contract to a small business concern owned and controlled by service-disabled veterans or a contract on the basis of competition restricted to small business concerns owned and controlled by service-disabled veterans if such a concern is certified by the Administrator as a small business concern owned and controlled by service-disabled veterans.

‘‘(h) ENFORCEMENT; PENALTIES.— ‘‘(1) VERIFICATION OF ELIGIBILITY.—In carrying out this

section, the Administrator shall establish procedures relating to—

‘‘(A) the filing, investigation, and disposition by the Administration of any challenge to the eligibility of a small business concern to receive assistance under this section (including a challenge, filed by an interested party, relating to the veracity of a certification made or information pro-vided to the Administration by a small business concern under subsection (b)); and

‘‘(B) verification by the Administrator of the accuracy of any certification made or information provided to the Administration by a small business concern under sub-section (b). ‘‘(2) EXAMINATIONS.—The procedures established under

paragraph (1) shall provide for a program of examinations by the Administrator of any small business concern making a certification or providing information to the Administrator under subsection (b), to determine the veracity of any state-ments or information provided as part of such certification or otherwise provided under subsection (b). ‘‘(i) PROVISION OF DATA.—Upon the request of the Adminis-

trator, the head of any Federal department or agency shall promptly provide to the Administrator such information as the Administrator determines to be necessary to carry out subsection (b) or to be able to certify the status of the concern as a small business concern owned and controlled by veterans under section 36A.’’; and

(G) in paragraph (3) of subsection (h), as redesignated and transferred by subparagraph (A) of this paragraph, by inserting ‘‘and section 36A’’ before the period at the end. (2) PENALTIES FOR MISREPRESENTATION.—Section 16 of the

Small Business Act (15 U.S.C. 645) is amended— (A) in subsection (d)(1)—

(i) in the matter preceding subparagraph (A)— (I) by striking the comma that immediately

follows another comma; and (II) by striking ‘‘, a ‘small’’ and inserting ‘‘,

a ‘small business concern owned and controlled

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by service-disabled veterans’, a ‘small business con-cern owned and controlled by veterans’, a ‘small’’; and (ii) in subparagraph (A), by striking ‘‘9, 15, or

31’’ and inserting ‘‘8, 9, 15, 31, 36, or 36A’’; and (B) in subsection (e)—

(i) by striking the comma that immediately follows another comma; and

(ii) by striking ‘‘, a ‘small’’ and inserting ‘‘, a ‘small business concern owned and controlled by service-dis-abled veterans’, a ‘small business concern owned and controlled by veterans’, a ‘small’’.

(e) CERTIFICATION FOR SMALL BUSINESS CONCERNS OWNED AND CONTROLLED BY VETERANS.—The Small Business Act (15 U.S.C. 631 et seq.) is amended by inserting after section 36 the following new section:

‘‘SEC. 36A. CERTIFICATION OF SMALL BUSINESS CONCERNS OWNED AND CONTROLLED BY VETERANS.

‘‘(a) IN GENERAL.—With respect to the program established under section 8127 of title 38, United States Code, the Adminis-trator shall—

‘‘(1) certify the status of a concern as a small business concern owned and controlled by veterans; and

‘‘(2) require the periodic recertification of such status. ‘‘(b) ENFORCEMENT; PENALTIES.—

‘‘(1) VERIFICATION OF ELIGIBILITY.—In carrying out this section, the Administrator shall establish procedures relating to—

‘‘(A) the filing, investigation, and disposition by the Administration of any challenge to the eligibility of a small business concern to receive assistance under section 36 (including a challenge, filed by an interested party, relating to the veracity of a certification made or information pro-vided to the Administration by a small business concern under subsection (a)); and

‘‘(B) verification by the Administrator of the accuracy of any certification made or information provided to the Administration by a small business concern under sub-section (a). ‘‘(2) EXAMINATION OF APPLICANTS.—The procedures estab-

lished under paragraph (1) shall provide for a program of examinations by the Administrator of any small business con-cern making a certification or providing information to the Administrator under subsection (a), to determine the veracity of any statements or information provided as part of such certification or otherwise provided under subsection (a).’’. (f) STATUS OF SELF-CERTIFIED SMALL BUSINESS CONCERNS

OWNED AND CONTROLLED BY SERVICE-DISABLED VETERANS.— (1) IN GENERAL.—Notwithstanding any other provision of

law, any small business concern (as defined under section 3 of the Small Business Act (15 U.S.C. 632)) that self-certified as a small business concern owned and controlled by service- disabled veterans (as defined in section 36 of such Act (15 U.S.C. 657f)) shall—

(A) if the concern files a certification application with the Administrator of the Small Business Administration

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before the end of the 1-year period beginning on the transfer date, maintain such self-certification until the Administrator makes a determination with respect to such certification; and

(B) if the concern does not file such a certification application before the end of the 1-year period beginning on the transfer date, lose, at the end of such 1-year period, any self-certification of the concern as a small business concern owned and controlled by service-disabled veterans. (2) NON-APPLICABILITY TO DEPARTMENT OF VETERANS

AFFAIRS.—Paragraph (1) shall not apply to participation in contracts (including subcontracts) with the Department of Vet-erans Affairs.

(3) NOTICE.—The Administrator shall notify any small busi-ness concern that self-certified as a small business concern owned and controlled by service-disabled veterans about the requirements of this section and the amendments made by this section, including the transfer date, and make such notice publicly available, on the date of the enactment of this Act. (g) TRANSFER OF THE CENTER FOR VERIFICATION AND EVALUA-

TION OF THE DEPARTMENT OF VETERANS AFFAIRS TO THE SMALL BUSINESS ADMINISTRATION.—

(1) DEFINITION.—In this subsection, the term ‘‘function’’— (A) means any duty, obligation, power, authority,

responsibility, right, privilege, activity, or program; and (B) does not include employees.

(2) ABOLISHMENT.—The Center for Verification and Evalua-tion of the Department of Veterans Affairs, as defined under section 74.1 of title 38, Code of Federal Regulations, is abolished effective on the transfer date.

(3) TRANSFER OF FUNCTIONS.—Effective on the transfer date, all functions that, immediately before the transfer date, were functions of the Center for Verification and Evaluation shall be functions of the Small Business Administration.

(4) TRANSFER OF ASSETS.—So much of the property (including contracts for the procurement of property or services) and records used, held, available, or to be made available in connection with a function transferred under this subsection shall be available to the Small Business Administration at such time or times as the President directs for use in connection with the functions transferred.

(5) SAVINGS PROVISIONS.— (A) CONTINUING EFFECT OF LEGAL DOCUMENTS.—All

orders, determinations, rules, regulations, permits, agree-ments, grants, contracts, certificates, licenses, registrations, privileges, and other administrative actions—

(i) which have been issued, made, granted, or allowed to become effective by the President, any Fed-eral agency or official thereof, or by a court of com-petent jurisdiction, in the performance of functions which are transferred under this subsection; and

(ii) which are in effect on the transfer date, or were final before the transfer date and are to become effective on or after the transfer date,

shall continue in effect according to their terms until modi-fied, terminated, superseded, set aside, or revoked in accordance with law by the President, the Administrator

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of the Small Business Administration or other authorized official, a court of competent jurisdiction, or by operation of law.

(B) PROCEEDINGS NOT AFFECTED.—The provisions of this subsection shall not affect any proceedings, including notices of proposed rulemaking, or any application for any license, permit, certificate, or financial assistance pending before the Department of Veterans Affairs on the transfer date, with respect to functions transferred by this sub-section but such proceedings and applications shall be continued. Orders shall be issued in such proceedings, appeals shall be taken therefrom, and payments shall be made pursuant to such orders, as if this subsection had not been enacted, and orders issued in any such proceedings shall continue in effect until modified, terminated, super-seded, or revoked by a duly authorized official, by a court of competent jurisdiction, or by operation of law. Nothing in this subparagraph shall be deemed to prohibit the dis-continuance or modification of any such proceeding under the same terms and conditions and to the same extent that such proceeding could have been discontinued or modi-fied if this subsection had not been enacted.

(C) SUITS NOT AFFECTED.—The provisions of this sub-section shall not affect suits commenced before the transfer date, and in all such suits, proceedings shall be had, appeals taken, and judgments rendered in the same manner and with the same effect as if this subsection had not been enacted.

(D) NONABATEMENT OF ACTIONS.—No suit, action, or other proceeding commenced by or against the Department of Veterans Affairs, or by or against any individual in the official capacity of such individual as an officer of the Department of Veterans Affairs, shall abate by reason of the enactment of this subsection.

(E) ADMINISTRATIVE ACTIONS RELATING TO PROMULGA-TION OF REGULATIONS.—Any administrative action relating to the preparation or promulgation of a regulation by the Department of Veterans Affairs relating to a function trans-ferred under this subsection may be continued by the Administrator of the Small Business Administration with the same effect as if this subsection had not been enacted.

(F) EFFECT ON PERSONNEL.—The Secretary of Veterans Affairs shall appoint any employee represented by a labor organization accorded exclusive recognition under section 7111 of title 5, United States Code, that is affected by the transfer of functions under this subsection to a position of a continuing nature for which the employee is qualified, at a grade and compensation not lower than the current grade and compensation of the employee. (6) REFERENCES.—Any reference in any other Federal law,

Executive order, rule, regulation, or delegation of authority, or any document of or pertaining to a function of the Center for Verification and Evaluation that is transferred under this subsection is deemed, after the transfer date, to refer to the Small Business Administration. (h) REPORT.—Not later than 1 year after the date of the enact-

ment of this Act, and every 6 months thereafter until the transfer

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date, the Administrator of the Small Business Administration and Secretary of Veterans Affairs shall jointly submit to the Committee on Appropriations, the Committee on Small Business, and the Com-mittee on Veterans’ Affairs of the House of Representatives and the Committee on Appropriations, the Committee on Small Business and Entrepreneurship, and the Committee on Veterans’ Affairs of the Senate a report on the planning for the transfer of functions and property required under this section and the amendments made by this section on the transfer date, which shall include—

(1) a discussion of whether and how the verification data-base and operations of the Center for Verification and Evalua-tion of the Department of Veterans Affairs will be incorporated into the existing certification database of the Small Business Administration;

(2) projections for the numbers and timing, in terms of fiscal year, of—

(A) already verified concerns that will come up for recertification; and

(B) self-certified concerns that are expected to apply for certification; (3) an explanation of how outreach to veteran service

organizations, the service-disabled veteran-owned and veteran- owned small business community, and other stakeholders will be conducted; and

(4) other pertinent information determined by the Adminis-trator and the Secretary.

SEC. 863. EMPLOYMENT SIZE STANDARD REQUIREMENTS FOR SMALL BUSINESS CONCERNS.

(a) IN GENERAL.—Section 3(a)(2) of the Small Business Act (15 U.S.C. 632(a)(2)) is amended—

(1) in subparagraph (A), by inserting ‘‘and subject to the requirements specified under subparagraph (C)’’ after ‘‘para-graph (1)’’; and

(2) in subparagraph (C)— (A) by inserting ‘‘(including the Administration when

acting pursuant to subparagraph (A))’’ after ‘‘no Federal department or agency’’; and

(B) in clause (ii)(I) by striking ‘‘12 months’’ and inserting ‘‘24 months’’.

(b) EFFECTIVE DATE.—This section and the amendments made by this section shall take effect 1 year after the date of the enact-ment of this Act.

SEC. 864. MAXIMUM AWARD PRICE FOR SOLE SOURCE MANUFAC-TURING CONTRACTS.

The Small Business Act (15 U.S.C. 631 et seq.) is amended— (1) in section 8 (15 U.S.C. 637)—

(A) in subsection (a)(1)(D)(i)(II), by striking ‘‘$5,000,000’’ and inserting ‘‘$7,000,000’’; and

(B) in subsection (m)— (i) in paragraph (7)(B)(i), by striking ‘‘$6,500,000’’

and inserting ‘‘$7,000,000’’; and (ii) in paragraph (8)(B)(i), by striking ‘‘$6,500,000’’

and inserting ‘‘$7,000,000’’; (2) in section 31(c)(2)(A)(ii)(I) (15 U.S.C. 657a(c)(2)(A)(ii)(I)),

by striking ‘‘$5,000,000’’ and inserting ‘‘$7,000,000’’; and

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(3) in section 36(c)(2)(A), as so redesignated by section 862(d)(1)(C), by striking ‘‘$5,000,000’’ and inserting ‘‘$7,000,000’’.

SEC. 865. REPORTING REQUIREMENT ON EXPENDITURE AMOUNTS FOR THE SMALL BUSINESS INNOVATION RESEARCH PROGRAM AND THE SMALL BUSINESS TECHNOLOGY TRANSFER PRO-GRAM.

Section 9 of the Small Business Act (15 U.S.C. 638) is amended—

(1) in subsection (b)(7)— (A) in subparagraph (F), by striking ‘‘and’’ at the end; (B) in subparagraph (G), by adding ‘‘and’’ after the

semicolon at the end; and (C) by adding at the end the following: ‘‘(H) with respect to a Federal agency to which sub-

section (f)(1) or (n)(1) applies, whether the Federal agency has complied with the applicable subsection for the year covered by the report;’’; (2) in subsection (g)(10), by inserting ‘‘, which section shall

describe whether or not the Federal agency complied with the requirements of subsection (f) for the year covered by that plan and include a justification for failure to comply (if applicable),’’ after ‘‘a section on its SBIR program’’; and

(3) in subsection (o)(8), by inserting ‘‘, which section shall describe whether or not the Federal agency complied with the requirements of subsection (n) for the year covered by that plan and include a justification for failure to comply (if applicable),’’ after ‘‘a section on its STTR program’’.

SEC. 866. SMALL BUSINESSES IN TERRITORIES OF THE UNITED STATES.

(a) DEFINITION OF COVERED TERRITORY BUSINESS.— (1) IN GENERAL.—Section 3 of the Small Business Act (15

U.S.C. 632) is amended by adding at the end the following new subsection: ‘‘(ff) COVERED TERRITORY BUSINESS.—In this Act, the term ‘cov-

ered territory business’ means a small business concern that has its principal office located in one of the following:

‘‘(1) The United States Virgin Islands. ‘‘(2) American Samoa. ‘‘(3) Guam. ‘‘(4) The Northern Mariana Islands.’’. (2) CONFORMING AMENDMENT.—Section 15(x) of the Small

Business Act (15 U.S.C. 644(x)) is amended by striking para-graph (3). (b) PRIORITY FOR SURPLUS PROPERTY TRANSFERS.—Section

7(j)(13)(F)(iii) of the Small Business Act (15 U.S.C. 636(j)(13)(F)(iii)) is amended—

(1) in subclause (I), by striking ‘‘means’’ and all that follows through the period at the end and inserting the following: ‘‘means—

‘‘(aa) in the case of a Puerto Rico business, the period beginning on August 13, 2018, and ending on the date on which the Oversight Board established under section 2121 of title 48 terminates; and

‘‘(bb) in the case of a covered territory business, the period beginning on the date of the enactment

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of this item and ending on the date that is 4 years after such date of enactment.’’; and

(2) in subclause (II)— (A) by inserting ‘‘or a covered territory business’’ after

‘‘a Puerto Rico business’’; and (B) by striking ‘‘the Puerto Rico business’’ each place

it appears and inserting ‘‘either such business’’. (c) CONTRACTING INCENTIVES FOR PROTEGE FIRMS THAT ARE

COVERED TERRITORY BUSINESSES.— (1) CONTRACTING INCENTIVES.—Section 45(a) of the Small

Business Act (15 U.S.C. 657r(a)) is amended by adding at the end the following new paragraph:

‘‘(4) COVERED TERRITORY BUSINESSES.—During the period beginning on the date of the enactment of this paragraph and ending on the date that is 4 years after such date of enactment, the Administrator shall identify potential incentives to a covered territory mentor that awards a subcontract to its covered territory protege, including—

‘‘(A) positive consideration in any past performance evaluation of the covered territory mentor; and

‘‘(B) the application of costs incurred for providing training to such covered territory protege to the subcon-tracting plan (as required under paragraph (4) or (5) of section 8(d)) of the covered territory mentor.’’. (2) MENTOR-PROTEGE RELATIONSHIPS.—Section 45(b)(3)(A)

of the Small Business Act (15 U.S.C. 657r(b)(3)(A)) is amended by striking ‘‘relationships are’’ and all that follows through the period at the end and inserting the following: ‘‘relation-ships—

‘‘(i) are between a covered protege and a covered mentor; or

‘‘(ii) are between a covered territory protege and a covered territory mentor.’’.

(3) DEFINITIONS.—Section 45(d) of the Small Business Act (15 U.S.C. 657r(d)) is amended by adding at the end the fol-lowing new paragraphs:

‘‘(6) COVERED TERRITORY MENTOR.—The term ‘covered terri-tory mentor’ means a mentor that enters into an agreement under this Act, or under any mentor-protege program approved under subsection (b)(1), with a covered territory protege.

‘‘(7) COVERED TERRITORY PROTEGE.—The term ‘covered territory protege’ means a protege of a covered territory mentor that is a covered territory business.’’.

SEC. 867. ELIGIBILITY OF THE COMMONWEALTH OF THE NORTHERN MARIANA ISLANDS FOR CERTAIN SMALL BUSINESS ADMINISTRATION PROGRAMS.

The Small Business Act (15 U.S.C. 631 et seq.) is amended— (1) in section 21(a)—

(A) in paragraph (1), by inserting before ‘‘The Adminis-tration shall require’’ the following: ‘‘The previous sentence shall not apply to an applicant that has its principal office located in the Commonwealth of the Northern Mariana Islands.’’; and

(B) in paragraph (4)(C)(ix), by striking ‘‘and American Samoa’’ and inserting ‘‘American Samoa, and the Common-wealth of the Northern Mariana Islands’’; and

H. R. 6395—400

(2) in section 34(a)(9), by striking ‘‘and American Samoa’’and inserting ‘‘American Samoa, and the Commonwealth of the Northern Mariana Islands’’.

SEC. 868. PAST PERFORMANCE RATINGS OF CERTAIN SMALL BUSINESS CONCERNS.

(a) PAST PERFORMANCE RATINGS OF JOINT VENTURES FOR SMALLBUSINESS CONCERNS.—Section 15(e) of the Small Business Act (15 U.S.C. 644(e)) is amended by adding at the end the following new paragraph:

‘‘(5) PAST PERFORMANCE RATINGS OF JOINT VENTURES FOR SMALL BUSINESS CONCERNS.—With respect to evaluating an offer for a prime contract made by a small business concern that previously participated in a joint venture with another business concern (whether or not such other business concern was a small business concern), the Administrator shall establish regulations—

‘‘(A) allowing the small business concern to elect to use the past performance of the joint venture if the small business concern has no relevant past performance of its own;

‘‘(B) requiring the small business concern, when making an election under subparagraph (A)—

‘‘(i) to identify to the contracting officer the joint venture of which the small business concern was a member; and

‘‘(ii) to inform the contracting officer what duties and responsibilities the small business concern carried out as part of the joint venture; and ‘‘(C) requiring a contracting officer, if the small busi-

ness concern makes an election under subparagraph (A), to consider the past performance of the joint venture when evaluating the past performance of the small business con-cern, giving due consideration to the information provided under subparagraph (B)(ii).’’.

(b) PAST PERFORMANCE RATINGS OF FIRST-TIER SMALL BUSINESSSUBCONTRACTORS.—Section 8(d)(17) of the Small Business Act (15 U.S.C. 637(d)(l7)) is amended to read as follows:

‘‘(17) PAST PERFORMANCE RATINGS FOR CERTAIN SMALL BUSI-NESS SUBCONTRACTORS.—Upon request by a small business con-cern that performed as a first tier subcontractor on a covered contract (as defined in paragraph (13)(A)), the prime contractor for such covered contract shall submit to such small business concern a record of past performance for such small business concern with respect to such covered contract. If a small busi-ness concern elects to use such record of past performance, a contracting officer shall consider such record of past perform-ance when evaluating an offer for a prime contract made by such small business concern.’’. (c) RULEMAKING.—Not later than 120 days after the date of

the enactment of this Act, the Administrator of the Small Business Administration shall issue rules to carry out this section and the amendments made by this section. SEC. 869. EXTENSION OF PARTICIPATION IN 8(A) PROGRAM.

(a) IN GENERAL.—The Administrator of the Small BusinessAdministration shall ensure that a small business concern partici-pating in the program established under section 8(a) of the Small

H. R. 6395—401

Business Act (15 U.S.C. 637) on or before September 9, 2020, may elect to extend such participation by a period of 1 year, regard-less of whether such concern previously elected to suspend participa-tion in such program pursuant to guidance of the Administrator.

(b) EMERGENCY RULEMAKING AUTHORITY.—Not later than 15 days after the date of enactment of this section, the Administrator shall issue regulations to carry out this section without regard to the notice requirements under section 553(b) of title 5, United States Code.

SEC. 870. COMPLIANCE OF OFFICES OF SMALL BUSINESS AND DIS-ADVANTAGED BUSINESS UTILIZATION.

(a) REPORT.—If the Comptroller General of the United States has determined that a Director of Small and Disadvantaged Busi-ness Utilization of a Federal agency is not in compliance with the requirements of section 15(k) of the Small Business Act (15 U.S.C. 644(k)), such Director shall submit, not later than the speci-fied date, to the Committee on Small Business and Entrepreneur-ship of the Senate and the Committee on Small Business of the House of Representatives a report that includes the reasons for such noncompliance and the specific actions the Director shall take to remedy such noncompliance.

(b) SPECIFIED DATE DEFINED.—In this section, the term ‘‘speci-fied date’’ means the later of—

(1) the date that is 120 days after the date on which a determination is made under subsection (a); and

(2) 120 days after the date of the enactment of this Act.

SEC. 871. CATEGORY MANAGEMENT TRAINING.

(a) IN GENERAL.—Not later than 8 months after the date of the enactment of this section, the Administrator of the Small Busi-ness Administration, in coordination with the Administrator of the Office of Federal Procurement Policy and any other head of a Federal agency (as determined by the Administrator), shall develop a training curriculum on category management for staff of Federal agencies with procurement or acquisition responsibilities. Such training shall include—

(1) best practices for procuring goods and services from small business concerns (as defined under section 3 of the Small Business Act (15 U.S.C. 632)); and

(2) information on avoiding conflicts with the requirements of the Small Business Act (15 U.S.C. 631 et seq.). (b) USE OF CURRICULUM.—The Administrator of the Small Busi-

ness Administration— (1) shall ensure that staff for Federal agencies described

in subsection (a) receive the training described in such sub-section; and

(2) may request the assistance of the relevant Director of Small and Disadvantaged Business Utilization (as described in section 15(k) of the Small Business Act (15 U.S.C. 644(k))) to carry out the requirements of paragraph (1). (c) SUBMISSION TO CONGRESS.—The Administrator of the Small

Business Administration shall provide a copy of the training cur-riculum developed under subsection (a) to the Committee on Small Business of the House of Representatives and the Committee on Small Business and Entrepreneurship of the Senate.

H. R. 6395—402

(d) CATEGORY MANAGEMENT DEFINED.—In this section, the term ‘‘category management’’ has the meaning given by the Director of the Office of Management and Budget.

Subtitle F—Other Matters

SEC. 881. REVIEW OF AND REPORT ON OVERDUE ACQUISITION AND CROSS-SERVICING AGREEMENT TRANSACTIONS.

(a) REVIEW.—The Secretary of Defense, acting through the offi-cial designated to provide oversight of acquisition and cross-serv-icing agreements under section 2342(f) of title 10, United States Code, shall conduct a review of acquisition and cross-servicing agreement transactions for which reimbursement to the United States is overdue under section 2345 of such title.

(b) REPORT.— (1) IN GENERAL.—Not later than March 1, 2021, the des-

ignated official described in subsection (a) shall submit to the congressional defense committees a report on the results of the review of acquisition and cross-servicing agreement trans-actions described in such subsection.

(2) ELEMENTS.—The report required by paragraph (1) shall include the following:

(A) For each such transaction valued at $1,000,000 or more for which reimbursement to the United States was overdue as of October 1, 2020—

(i) the total amount of the transaction; (ii) the unreimbursed balance of the transaction; (iii) the date on which the transaction was origi-

nally made; (iv) the date on which the most recent request

for payment was sent to the relevant foreign govern-ment or international organization; and

(v) a plan for securing reimbursement from the foreign government or international organization. (B) A description of the steps taken to implement the

recommendations made in the March 4, 2020, report of the Government Accountability Office titled ‘‘Defense Logis-tics Agreements: DOD Should Improve Oversight and Seek Payment from Foreign Partners for Thousands of Orders It Identifies as Overdue’’, including efforts to validate data reported under this subsection and in the system of the Department of Defense to record data on acquisition and cross-servicing agreement transactions.

(C) The amount of reimbursement received from a foreign government or international organization, as applicable, for each order—

(i) for which the reimbursement is recorded as overdue in the system of the Department of Defense to record data on acquisition and cross-servicing agree-ment transactions; and

(ii) that was authorized during the period begin-ning on October 1, 2013, and ending on September 30, 2020. (D) A plan for improving recordkeeping of acquisition

and cross-servicing agreement transactions and ensuring

H. R. 6395—403

timely reimbursement by a foreign government or inter-national organization.

(E) Any other matter considered relevant by the des-ignated official described in subsection (a).

SEC. 882. DOMESTIC COMPARATIVE TESTING ACTIVITIES.

Section 2350a(g) of title 10, United States Code, is amended— (1) in paragraph (1)—

(A) in subparagraph (A)— (i) by striking ‘‘conventional defense equipment,

munitions, and technologies manufactured and devel-oped by countries referred to in subsection (a)(2)’’ and inserting ‘‘covered equipment, munitions, and tech-nologies’’; and

(ii) by striking ‘‘such equipment, munitions, and technologies’’ and inserting ‘‘such covered equipment, munitions, and technologies’’; and (B) in subparagraph (B), by inserting ‘‘such covered’’

before ‘‘equipment, munitions, and technologies’’; (2) in paragraph (2), by striking ‘‘equipment, munitions,

and technologies of the type described in paragraph (1)’’ and inserting ‘‘covered equipment, munitions, and technologies’’; and

(3) by adding at the end the following new paragraph: ‘‘(4) COVERED EQUIPMENT, MUNITIONS, AND TECHNOLOGIES

DEFINED.—In this subsection, the term ‘covered equipment, muni-tions, and technologies’ means—

‘‘(A) conventional defense equipment, munitions, and tech-nologies manufactured and developed by countries referred to in subsection (a)(2); and

‘‘(B) conventional defense equipment, munitions, and tech-nologies manufactured and developed domestically.’’.

SEC. 883. PROHIBITION ON AWARDING OF CONTRACTS TO CONTRAC-TORS THAT REQUIRE NONDISCLOSURE AGREEMENTS RELATING TO WASTE, FRAUD, OR ABUSE.

(a) IN GENERAL.—The Secretary of Defense may not award a contract for the procurement of goods or services to a contractor unless the contractor represents that—

(1) it does not require its employees to sign internal con-fidentiality agreements or statements that would prohibit or otherwise restrict such employees from lawfully reporting waste, fraud, or abuse related to the performance of a Depart-ment of Defense contract to a designated investigative or law enforcement representative of the Department of Defense authorized to receive such information; and

(2) it will inform its employees of the limitations on con-fidentiality agreements and other statements described in para-graph (1). (b) RELIANCE ON REPRESENTATION.—A contracting officer of

the Department of Defense may rely on the representation of a contractor as to the requirements described under subsection (a) in awarding a contract unless the officer has reason to question the accuracy of the representation.

SEC. 884. PROGRAM MANAGEMENT IMPROVEMENT OFFICERS AND PROGRAM MANAGEMENT POLICY COUNCIL.

Section 1126 of title 31, United States Code, is amended—

H. R. 6395—404

(1) in subsection (a)(1), by inserting after ‘‘senior executive of the agency’’ the following: ‘‘, who has significant program and project management oversight responsibilities,’’; and

(2) in subsection (b)(4) by striking ‘‘twice’’ and inserting ‘‘four times’’.

SEC. 885. DISCLOSURE OF BENEFICIAL OWNERS IN DATABASE FOR FEDERAL AGENCY CONTRACT AND GRANT OFFICERS.

Section 2313(d) of title 41, United States Code, is amended— (1) in paragraph (3), by inserting ‘‘, and an identification

of any beneficial owner of such corporation,’’ after ‘‘to the cor-poration’’; and

(2) by adding at the end the following new paragraph: ‘‘(4) DEFINITIONS.—In this subsection:

‘‘(A) BENEFICIAL OWNERSHIP.—The term ‘beneficial ownership’ has the meaning given under section 847 of the National Defense Authorization Act for Fiscal Year 2020 (Public Law 116–92; 133 Stat. 1505; 10 U.S.C. 2509 note).

‘‘(B) CORPORATION.—The term ‘corporation’ means any corporation, company, limited liability company, limited partnership, business trust, business association, or other similar entity.’’.

SEC. 886. REPEAL OF PILOT PROGRAM ON PAYMENT OF COSTS FOR DENIED GOVERNMENT ACCOUNTABILITY OFFICE BID PRO-TESTS.

Section 827 of the National Defense Authorization Act for Fiscal Year 2018 (Public Law 115–91; 131 Stat. 1467; 10 U.S.C. 2304 note) is repealed. SEC. 887. AMENDMENTS TO SUBMISSIONS TO CONGRESS RELATING

TO CERTAIN FOREIGN MILITARY SALES.

Section 887(b) of the National Defense Authorization Act for Fiscal Year 2018 (Public Law 115–91; 22 U.S.C. 2761 note) is amended—

(1) by striking ‘‘December 31, 2021’’ each place it appears and inserting ‘‘December 31, 2022’’; and

(2) by adding at the end the following new paragraph: ‘‘(3) APPLICABILITY.—The requirements of this subsection

apply only to foreign military sales processes within the Depart-ment of Defense.’’.

SEC. 888. REVISION TO REQUIREMENT TO USE FIRM FIXED-PRICE CON-TRACTS FOR FOREIGN MILITARY SALES.

Section 830 of the National Defense Authorization Act for Fiscal Year 2017 (22 U.S.C. 2762 note) is repealed. SEC. 889. ASSESSMENT AND ENHANCEMENT OF NATIONAL SECURITY

INNOVATION BASE.

(a) IN GENERAL.—The Secretary of Defense shall assess the economic forces and structures shaping the capacity of the national security innovation base, and develop policies to address such forces and structures.

(b) ELEMENTS.—The assessment required under subsection (a) shall review the following matters as they pertain to the innovative and manufacturing capacity of the national security innovation base:

H. R. 6395—405

(1) A detailed description of the entities comprising the national security innovation base and how they currently inter-act.

(2) Competition and antitrust policy. (3) Immigration policy, including the policies germane to

the attraction and retention of skilled immigrants. (4) Education funding and policy. (5) Demand stabilization and social safety net policies. (6) The structure and incentives of financial markets and

the effects of such on the access of businesses to credit. (7) Trade policy, including export control policy and trade

remedies. (8) The tax code and its effect on investment, including

the Federal research and development tax credit. (9) Regulatory policy, including with respect to land use,

environmental impact, and construction and manufacturing activities.

(10) Economic and manufacturing infrastructure. (11) Intellectual property policy. (12) Federally funded investments in the economy,

including investments in research and development and advanced manufacturing.

(13) Federally funded purchases of goods and services. (14) Federally funded investments to expand domestic

manufacturing capabilities. (15) Coordination and collaboration with allies and part-

ners. (16) Measures to protect technological advantages over

adversaries and to counteract hostile or destabilizing activity by adversaries.

(17) Other matters as the Secretary of Defense deems appropriate. (c) ENGAGEMENT WITH CERTAIN ENTITIES.—In conducting the

assessment required under subsection (a), the Secretary of Defense shall engage through appropriate mechanisms with—

(1) the Defense Science Board; (2) the Defense Innovation Board; (3) the Defense Business Board; (4) entities representing industry interests; and (5) entities representing labor interests.

(d) SUBMISSION OF ASSESSMENT.—Not later than March 1, 2022, the Secretary of Defense shall submit to the President, the Director of the Office of Management and Budget, the Assistant to the President for National Security Affairs, the Director of the National Economic Council, and the congressional defense committees the assessment required under subsection (a), together with rec-ommendations and any additional views of the Secretary.

SEC. 890. IDENTIFICATION OF CERTAIN CONTRACTS RELATING TO CONSTRUCTION OR MAINTENANCE OF A BORDER WALL.

With respect to contract actions reported to the Federal Procurement Data system established pursuant to section 1122(a)(4) of title 41, United States Code (or any successor system), the Secretary of Defense shall identify any contracts (including any task order contract (as defined in section 2304d of title 10, United States Code) and any modifications to a contract) entered into by the Secretary relating to the construction or maintenance of

H. R. 6395—406

a barrier along the international border between the United States and Mexico that have an estimated value greater than or equal to $7,000,000. SEC. 891. WAIVERS OF CERTAIN CONDITIONS FOR PROGRESS PAY-

MENTS UNDER CERTAIN CONTRACTS DURING THE COVID– 19 NATIONAL EMERGENCY.

(a) WAIVER OF PROGRESS PAYMENTS REQUIREMENTS.—The Sec-retary of Defense may waive the requirements of section 2307(e)(2) of title 10, United States Code, with respect to progress payments for any undefinitized contractual action (as defined in section 2326 of title 10, United States Code; in this section referred to as ‘‘UCA’’) if the Secretary determines that the waiver is necessary due to the national emergency for the Coronavirus Disease 2019 (COVID– 19) and—

(1) a contractor performing the contract for which a UCA is entered into has not already received increased progress payments from the Secretary of Defense on contractual actions other than UCAs; or

(2) a contractor performing the contract for which a UCA is entered into, and that has received increased progress pay-ments from the Secretary of Defense on contractual actions other than UCAs, can demonstrate that the contractor has promptly provided the amount of the increase to any sub-contractors (at any tier), small business concerns (as defined under section 3 of the Small Business Act (15 U.S.C. 632)), or suppliers of the contractor. (b) DEFINITIZATION.—With respect to a UCA that not been

definitized for a period of 180 days beginning on the date on which such UCA was entered into, the Secretary of Defense may only use the waiver authority described in subsection (a) if the Secretary (or a designee at a level not below the head of a con-tracting activity) provides a certification to the congressional defense committees that such UCA will be definitized within 60 days after the date on which the waiver is issued.

(c) SUBMISSION.—For each use of the waiver authority under subsection (a), the Secretary of Defense shall submit to the congres-sional defense committees an estimate of the amounts to be provided to subcontractors (at any tier), small business concerns, and sup-pliers, including an identification of the specific entities receiving an amount from an increased progress payment described under such subsection (a).

TITLE IX—DEPARTMENT OF DEFENSE ORGANIZATION AND MANAGEMENT

Subtitle A—Office of the Secretary of Defense and Related Matters Sec. 901. Repeal of position of Chief Management Officer of the Department of De-

fense. Sec. 902. Assistant Secretary of Defense for Special Operations and Low Intensity

Conflict and related matters. Sec. 903. Assistant Secretary of Defense for Industrial Base Policy. Sec. 904. Assistant Secretary of Defense for Energy, Installations, and Environ-

ment. Sec. 905. Office of Local Defense Community Cooperation. Sec. 906. Input from the Vice Chief of the National Guard Bureau to the Joint Re-

quirements Oversight Council. Sec. 907. Assignment of responsibility for the Arctic region within the Office of the

Secretary of Defense.

TAB 2

74636 Federal Register / Vol. 85, No. 226 / Monday, November 23, 2020 / Proposed Rules

(i) Are located in an area designatedby the Federal Emergency Management Agency (FEMA) as a floodplain area having special flood hazards; or

(ii) Are otherwise determined by theCommissioner to be subject to a flood hazard.

(2) No mortgage may be insured thatcovers property improvements located in an area that has been identified by FEMA as an area having special flood hazards, unless the community in which the area is situated is participating in the NFIP and flood insurance is obtained by the borrower. Such flood insurance shall be in the form of the standard policy issued under the National Flood Insurance Program (NFIP) or private flood insurance as defined in § 203.16a. Such requirement for flood insurance shall be effective one year after the date of notification by FEMA to the chief executive officer of a flood prone community that such community has been identified as having special flood hazards. * * * * *

§ 206.134 [Amended]

■ 8. In § 206.134, amend paragraph (b)(3) by adding the phrase ‘‘or obtainequivalent private flood insurancecoverage, as defined in § 203.16a’’ after‘‘National Flood Insurance Program’’.

Dana T. Wade, Assistant Secretary for Housing, Federal Housing Commissioner. [FR Doc. 2020–25105 Filed 11–20–20; 8:45 am]

BILLING CODE 4210–67–P

DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Part 212

[Docket DARS–2020–0044]

RIN 0750–AL19

Defense Federal Acquisition Regulation Supplement: Commercial Item Determinations (DFARS Case 2020–D033)

AGENCY: Defense Acquisition Regulations System, Department of Defense (DoD). ACTION: Proposed rule.

SUMMARY: DoD is proposing to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to further implement a section of the National Defense Authorization Act for Fiscal Year 2018 that provides that a

contract for an item using Federal Acquisition Regulation (FAR) part 12 procedures shall serve as a prior commercial item determination. DATES: Comments on the proposed rule should be submitted in writing to the address shown below on or before January 22, 2021, to be considered in the formation of a final rule. ADDRESSES: Submit comments identified by DFARS Case 2020–D033, using any of the following methods:

Æ Regulations.gov: http://www.regulations.gov. Search for ‘‘DFARS Case 2020–D033’’. Select ‘‘Submit a Comment Now’’ and follow the instructions provided to submit a Comment. Please ‘‘DFARS Case 2020– D033’’ on any attached document.

Æ Email: osd.dfars@mail.mil. Include DFARS Case 2020–D033 in the subject line of the message.

Æ Mail: Defense Acquisition Regulations System, Attn: Ms. Heather Kitchens, OUSD(A&S)DPC/DARS, Room 3B938, 3060 Defense Pentagon, Washington, DC 20301–3060.

Comments received generally will be posted without change to http://www.regulations.gov, including any personal information provided. To confirm receipt of your comment(s), please check www.regulations.gov, approximately two to three days after submission to verify posting (except allow 30 days for posting of comments submitted by mail). FOR FURTHER INFORMATION CONTACT: Ms. Heather Kitchens, telephone 571–372– 6104.

SUPPLEMENTARY INFORMATION:

I. BackgroundDoD published a proposed rule in the

Federal Register at 84 FR 65322 on November 27, 2019, under DFARS Case 2019–D029 to implement sections 877 and 878 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2017 (Pub. L. 114–328) and further implement section 848 of the NDAA for FY 2018 (Pub. L. 115–91). DoD is publishing a second proposed rule under DFARS Case 2020–D033 to further implement section 848, because of substantial changes from the first proposed rule. Section 848 modifies 10 U.S.C. 2380(b) to provide that a contract for an item using FAR part 12 procedures shall serve as a prior commercial item determination, unless the appropriate official determines in writing that the use of such procedures was improper or that it is no longer appropriate to acquire the item using commercial item acquisition procedures. This rule also proposes to remove the procedures at DFARS

subpart 212.70, established pursuant to section 856 of the NDAA for FY 2016 (Pub. L. 114–92), which apply to procurements of more than $1 million previously procured under a prime contract using FAR part 12 procedures. The authority for these procedures expires on November 25, 2020.

II. Discussion and AnalysisOne respondent submitted public

comments with regard to prior use of part 12 procedures and commercial item determinations in response to the first proposed rule. DoD reviewed the public comments in the development of this second proposed rule. A discussion of the comments and the changes made to the rule as a result of those comments is provided, as follows:

A. Summary of Significant ChangesFrom the Proposed Rule

1. Moves to paragraph 212.102(a)(ii)the coverage on prior commercial item determinations proposed originally at paragraph 212.102(a)(iii), in order to precede the paragraph on commercial item determinations.

2. Rewrites the coverage at212.102(a)(ii) to shift emphasis to prior use of commercial item determinations.

3. Changes the applicability of theproposed paragraph on commercial item determinations at 212.102(a)(iii) to apply to acquisitions at any dollar value, not just those that exceed $1 million.

B. Analysis of Public Comments

Comment: One respondentrecommended revision of the proposed rule to direct contracting officers to rely on prior use of FAR part 12 procedures or prior commercial item determinations and only request waivers on a case-by-case basis. The respondent believed that the proposed rule, as written, would undermine this policy objective, and recommended rewrite of proposed DFARS 212.102(a)(ii)(A) and (a)(iii)(B)(2).

Response: DoD has increased the emphasis on the requirement to rely on prior use of FAR part 12 procedures. However, some recommendations were not accepted, such as removal of the limited applicability to acquisition of commercial items pursuant to 212.102(a)(i)(A), and the requirement of higher-level approvals for certain commercial item determinations. The following are responses to specific aspects of the respondent’s comments on the first proposed rule:

1. Applicability to statutoryexceptions (212.102(a)(i)(B)). 10 U.S.C. 2380(b)(1) requirement with regard to prior use of FAR part 12 procedures

VerDate Sep<11>2014 16:27 Nov 20, 2020 Jkt 253001 PO 00000 Frm 00021 Fmt 4702 Sfmt 4702 E:\FR\FM\23NOP1.SGM 23NOP1

74637 Federal Register / Vol. 85, No. 226 / Monday, November 23, 2020 / Proposed Rules

serving as prior commercial item determination does not apply to items purchased using FAR part 12 procedures that are not commercial items, but only treated as commercial items (i.e., 41 U.S.C. 1903 and 10 U.S.C. 2380a). It does not make sense to infer a commercial item determination for acquisitions of items that may not be commercial items, and do not require a commercial item determination. Further, applicability of these statutory exceptions to treat certain items as commercial items is not dependent on the particular items being purchased, but on circumstances peculiar to a particular acquisition, that cannot be extrapolated to other acquisitions of the same item. DoD concluded that the 10 U.S.C. 2380(b)(1) statement ‘‘shall serve as a prior commercial item determinations for such item for purposes of this chapter’’ is applicable only if a commercial item determination is applicable to the item.

2. Applicability at all dollar values.According to 10 U.S.C. 2380, as amended by section 848 of the NDAA for FY 2018, unless certain determinations are made, a contract for an item acquired using commercial item acquisition procedures under part 12 of the Federal Acquisition Regulation shall serve as a prior commercial item determination with respect to such item for purposes of this chapter. This law does not distinguish between acquisitions above or below $1 million. DoD concluded that it, therefore, applies regardless of dollar value.

3. Prior use of FAR part 12 procedures(212.102(a)(ii)). Due to amendment of 10 U.S.C. 2380 by section 848 of the NDAA for FY 2019, the consideration of whether FAR part 12 procedures have been previously used should be the next step in the decision-making process (after determining that a statutory exception does not apply). Therefore, these paragraphs have been relocated from 212.102(a)(iii) to 212.102(a)(ii), because prior use of part 12 procedures needs to be considered prior to the need for a new commercial item determination. In order to determine whether part 12 procedures have been previously used, the contracting officer shall review the Commercial Item Determination Database, or may utilize other available evidence. The contracting officer shall document the file accordingly.

This proposed rule limits to DoD contracts the requirement that prior use of part 12 procedures shall serve as a commercial item determination, because this is a DoD statute, implemented in the DFARS, and DoD does not control how civilian agencies make commercial

item determinations and use FAR part 12 procedures, nor does it have the data on civilian agency commercial item determinations in its commercial item determination database.

DoD has not accepted all of the recommended changes to the prior use of FAR part 12 procedures, because there are nuances relating to other statutes that need to be addressed; this rule also addresses 10 U.S.C. 2306a(b)(4) and 10 U.S.C. 2380b. This rule also retains the delegation to the head of the contracting activity of the function assigned in the statute to the senior procurement executive.

4. Million dollar threshold forcommercial item determinations (when there is no evidence of prior use of FAR part 12 procedures for the acquisition of commercial items (212.102(a)(iii)). The million dollar threshold was based on policy, to avoid overly burdensome requirements on lower dollar value acquisitions. If contracting officers are accepting prior use of part 12 procedures, even below $1 million, as commercial item determinations for subsequent buys, then it is necessary to apply the same standards at any dollar value, since these determinations can form the basis for much larger acquisitions.

C. Other ChangesThe rule proposes to delete, add, or

amend some of the pointers to DFARS Procedures, Guidance, and Information (PGI) to conform to the current PGI.

III. Applicability to Contracts at orBelow the Simplified AcquisitionThreshold and for Commercial Items,Including Commercially Available Off- the-Shelf Items

This rule does not create any new solicitation provisions or contract clauses, or amend any existing provisions or clauses.

IV. Executive Orders 12866 and 13563Executive Orders (E.O.s) 12866 and

13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This is not a significant regulatory action and, therefore, was not subject to review under section 6(b) of E.O. 12866, Regulatory Planning and Review, dated September 30, 1993. This

rule is not a major rule under 5 U.S.C. 804.

V. Executive Order 13771

This rule is not expected to be subjectto E.O. 13771, because this rule is not a significant regulatory action under E.O. 12866.

VI. Regulatory Flexibility Act

DoD does not expect this proposedrule to have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. However, an initial regulatory flexibility analysis has been performed and is summarized as follows:

This proposed rule is necessary in order to further implement section 848 of the National Defense Authorization Act (NDAA) for Fiscal Fear (FY) 2018 (10 U.S.C. 2380(b)).

The objective of this rule is to address the use of FAR part 12 procedures and commercial item determinations. If the Commercial Item Determination Database contains a prior commerciality determination, or the contracting officer has other evidence that an item has previously been acquired by DoD using commercial item acquisition procedures under FAR part 12, the prior contract shall serve as a prior determination that an item is a commercial item, as defined in FAR 2.101. The legal basis for the rule is the NDAA section cited as the reason for the action.

DoD awarded contracts to an average of 40,689 unique entities (including 30,806 small businesses) each year from FY 2016 through FY 2018. This rule impacts the procedures for commercial item determinations for products and services offered to the Government.

This rule does not impose any new reporting, recordkeeping, or other compliance requirements.

The rule does not duplicate, overlap, or conflict with any other Federal rules.

DoD did not identify any significant alternatives that would minimize or reduce the significant economic impact on small entities, because there is no significant impact on small entities. Any impact is expected to be beneficial.

DoD invites comments from small business concerns and other interested parties on the expected impact of this rule on small entities.

DoD will also consider comments from small entities concerning the existing regulations in subparts affected by this rule in accordance with 5 U.S.C. 610. Interested parties must submit suchcomments separately and should cite 5U.S.C. 610 (DFARS Case 2020–D033), incorrespondence.

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74638 Federal Register / Vol. 85, No. 226 / Monday, November 23, 2020 / Proposed Rules

VII. Paperwork Reduction Act

The rule does not contain any newinformation collection requirements that require the approval of the Office of Management and Budget under the Paperwork Reduction Act (44 U.S.C. chapter 35).

List of Subjects in 48 CFR Part 212

Government procurement.

Jennifer D. Johnson, Regulatory Control Officer, Defense Acquisition Regulations System.

Therefore, 48 CFR part 212 is proposed to be amended as follows:

PART 212—ACQUISITION OF COMMERCIAL ITEMS

■ 1. The authority citation for part 212 continues to read as follows:

Authority: 41 U.S.C. 1303 and 48 chapter 1.

■ 2. Revise section 212.102 to read as follows:

212.102 Applicability.

(a)(i) Use of FAR part 12 procedures. Use of FAR part 12 procedures is based on—

(A) A determination that an item is acommercial item, as defined in FAR 2.101 (see paragraph (a)(iii) of this section); or

(B) Applicability of one of thefollowing statutes that provide for treatment as a commercial item and use of part 12 procedures, even though the item may not meet the definition of ‘‘commercial item’’ at FAR 2.101 and does not require a commercial item determination:

(1) 41 U.S.C. 1903—Supplies orservices to be used to facilitate defense against or recovery from cyber, nuclear, biological, chemical, or radiological attack pursuant to FAR 12.102(f); or

(2) 10 U.S.C. 2380a—Supplies orservices from nontraditional defense contractors pursuant to 212.102(a)(iv).

(ii) Prior use of FAR part 12procedures. (A) Pursuant to 10 U.S.C. 2380(b), except as provided in paragraph (a)(ii)(B) of this section or unless the item was acquired pursuant to paragraph (a)(i)(B) of this section, if the Commercial Item Determination (CID) Database (for website see PGI 212.102(a)(iii)(3)) contains a prior commerciality determination, or the contracting officer has other evidence that an item has been acquired previously by DoD using commercial item acquisition procedures under FAR part 12, then the prior contract shall serve as a determination that an item is a commercial item, as defined in FAR

2.101. The contracting officer shall document the file accordingly.

(B)(1) If the item to be acquired meets the criteria in paragraph (a)(ii)(A) of this section the item may not be acquired using other than FAR part 12 procedures unless the head of a contracting activity issues a determination as specified in paragraph (a)(ii)(B)(2)(ii) of this section.

(2) Pursuant to 10 U.S.C.2306a(b)(4)(A), the contracting officer may presume that a prior commercial item determination made by a military department, a defense agency, or another component of DoD shall serve as a determination for subsequent procurements of such item. In accordance with 10 U.S.C. 2306a(b)(4) and 10 U.S.C. 2380(b), if the contracting officer questions a prior determination to use part 12 procedures and instead chooses to proceed with a procurement of an item previously determined to be a commercial item using procedures other than FAR part 12 procedures, the contracting officer shall request a review by the head of the contracting activity that will conduct the procurement. Not later than 30 days after receiving a request for review, the head of a contracting activity shall—

(i) Confirm that the prior use of FARpart 12 procedures was appropriate and still applicable; or

(ii) Issue a determination that theprior use of FAR part 12 procedures was improper or that it is no longer appropriate to acquire the item using FAR part 12 procedures, with a written explanation of the basis for the determination.

(iii) Commercial item determination.Unless the procedures in paragraph (a)(ii) of this section are applicable, when using FAR part 12 procedures for acquisitions of commercial items pursuant to 212.102(a)(i)(A), the contracting officer shall—

(A) Determine in writing that theacquisition meets the commercial item definition in FAR 2.101;

(B) Include the written determinationin the contract file;

(C) Obtain approval at one level abovethe contracting officer when a commercial item determination relies on paragraphs (1)(ii), (3), (4), or (6) of the ‘‘commercial item’’ definition at FAR 2.101; and

(D) Follow the procedures andguidance at PGI 212.102(a)(iii) regarding file documentation and commercial item determinations.

(iv) Nontraditional defensecontractors. In accordance with 10 U.S.C. 2380a, contracting officers—

(A) Except as provided in paragraph(a)(iii)(B) of this section, may treat

supplies and services provided by nontraditional defense contractors as commercial items. This permissive authority is intended to enhance defense innovation and investment, enable DoD to acquire items that otherwise might not have been available, and create incentives for nontraditional defense contractors to do business with DoD. It is not intended to recategorize current noncommercial items; however, when appropriate, contracting officers may consider applying commercial item procedures to the procurement of supplies and services from business segments that meet the definition of ‘‘nontraditional defense contractor’’ even though they have been established under traditional defense contractors. The decision to apply commercial item procedures to the procurement of supplies and services from nontraditional defense contractors does not require a commercial item determination and does not mean the item is commercial;

(B) Shall treat services provided by abusiness unit that is a nontraditional defense contractor as commercial items, to the extent that such services use the same pool of employees as used for commercial customers and are priced using methodology similar to methodology used for commercial pricing; and

(C) Shall document the file whentreating supplies or services from a nontraditional defense contractor as commercial items in accordance with paragraph (a)(iii)(A) or (B) of this section.

(v) Commercial item guidebook. For alink to the commercial item guidebook, see PGI 212.102(a)(iii)(4).

Subpart 212.70 [Removed and reserved]

■ 3. Remove and reserve subpart 212.70, consisting of sections 212.7000 and212.7001.[FR Doc. 2020–25430 Filed 11–20–20; 8:45 am]

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Violation Statutory amount after 2021 annual inflation adjustment

Sec. 227(e) Caller Identification ............................................................... $11,905/violation. *$35,715/day for each day of continuing violation, up to $1,190,546 for

any single act or failure to act Sec. 364(a) Forfeitures (Ships) ................................................................ $10,366/day (owner). Sec. 364(b) Forfeitures (Ships) ................................................................ $2,074 (vessel master). Sec. 386(a) Forfeitures (Ships) ................................................................ $10,366/day (owner). Sec. 386(b) Forfeitures (Ships) ................................................................ $2,074 (vessel master). Sec. 511 Pirate Radio Broadcasting ........................................................ $2,023,640, $101,182/day. Sec. 634 Cable EEO ................................................................................ $919/day.

(10) * * * (ii) The application of the annual

inflation adjustment required by the foregoing Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 results in the following adjusted statutory maximum forfeitures authorized by the Communications Act:

TABLE 4 TO PARAGRAPH (B)(10)(II)

U.S. Code citation

Maximum pen-alty after 2021 annual inflation

adjustment

47 U.S.C. 202(c) .................. $12,439 622

47 U.S.C. 203(e) .................. 12,439 622

47 U.S.C. 205(b) .................. 24,877 47 U.S.C. 214(d) .................. 2,487 47 U.S.C. 219(b) .................. 2,487 47 U.S.C. 220(d) .................. 12,439 47 U.S.C. 223(b) .................. 128,904 47 U.S.C. 227(e) .................. 11,905

35,715 1,190,546

47 U.S.C. 362(a) .................. 10,366 47 U.S.C. 362(b) .................. 2,074 47 U.S.C. 386(a) .................. 10,366 47 U.S.C. 386(b) .................. 2,074 47 U.S.C. 503(b)(2)(A) ........ 51,827

518,283 47 U.S.C. 503(b)(2)(B) ........ 207,314

2,073,133 47 U.S.C. 503(b)(2)(C) ........ 419,353

3,870,946 47 U.S.C. 503(b)(2)(D) ........

20,731 155,485

47 U.S.C. 503(b)(2)(F) ......... 119,055 1,190,546

47 U.S.C. 507(a) .................. 2,053 47 U.S.C. 507(b) .................. 301 47 U.S.C. 511 ...................... 2,023,640

101,182 47 U.S.C. 554 ...................... 919

* * * * * [FR Doc. 2021–00432 Filed 1–14–21; 8:45 am]

BILLING CODE 6712–01–P

DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 204, 212, 213, and 252

[Docket DARS–2019–0063]

RIN 0750–AJ84

Defense Federal Acquisition Regulation Supplement: Covered Defense Telecommunications Equipment or Services (DFARS Case 2018–D022)

AGENCY: Defense Acquisition Regulations System, Department of Defense (DoD). ACTION: Final rule.

SUMMARY: DoD is adopting as final, with changes, an interim rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to implement sections of the National Defense Authorization Acts for Fiscal Years 2018 and 2019 related to the procurement of covered telecommunications equipment or services. Specifically, the rule prohibits the use of telecommunications equipment or services from certain Chinese entities and from any other entities that the Secretary of Defense reasonably believes to be owned or controlled by, or otherwise connected to, the government of the People’s Republic of China or the Russian Federation, as a substantial or essential component of any system, or as a critical technology as a part of any system.

DATES: Effective January 15, 2021. FOR FURTHER INFORMATION CONTACT: Ms. Heather Kitchens, telephone 571–372– 6104.

SUPPLEMENTARY INFORMATION:

I. Background

DoD published an interim rule in theFederal Register at 84 FR 72231 on December 31, 2019, to implement section 1656 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2018 (Pub. L. 115–91). This

final DFARS rule implements the section 1656 prohibition, partially implements section 889(a)(1)(A) of the NDAA for FY 2019 prohibitions for DoD, and is structured to align with the Federal Acquisition Regulation implementation of the section 889(a)(1)(A) Governmentwide prohibition. The final rule should increase security of systems and critical technology that is part of any system used to carry out the nuclear deterrence and homeland defense missions of DoD by prohibiting the use of telecommunications equipment or services from certain Chinese entities, and from any other entities that the Secretary of Defense reasonably believes to be owned or controlled by, or otherwise connected to, the government of the People’s Republic of China or the Russian Federation. Three respondents submitted comments on the interim rule.

II. Discussion and Analysis

DoD reviewed the public comments inthe development of the final rule. Two changes were made to the rule as a result of those comments. A respondent expressed support for the rule. Some respondents expressed concern over the underlying intent of the statute and recommended changes to the rule text to provide specific examples related to definitions. While DoD recognizes the concerns identified by the respondents, most of the recommendations are not within the scope of the statute. The ability to provide examples within the rule text is limited by the statute, which does not provide examples. A discussion of the public comments is provided as follows:

A. Summary of Significant ChangesFrom Interim Rule

There are two changes from the interim rule. The changes amend DFARS clause 252.204–7018, Prohibition on the Acquisition of Covered Defense Telecommunications Equipment or Services, by extending: (1) The reporting timeframe for the discovery of covered defense

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telecommunications equipment or services from one day to three days, and (2) the reporting timeframe to submitinformation about mitigation actionsundertaken from ten days to thirty days.

B. Analysis of Public Comments

1. Cost to the Public and GovernmentComment: A respondent stated that

the representation adds administration costs to the public and Government and will make it difficult for small businesses to work with the Government.

Response: The interim rule imposed the least amount of burden necessary to implement the statutory requirements by including an annual representation that may be relied upon if a negative representation (i.e., ‘‘does not’’) is provided in lieu of an offer-by-offer representation.

2. Reporting TimelinesComment: Respondents

recommended that the reporting timeline for the discovery of covered defense telecommunications equipment or services be extended beyond one business day and that the reporting timeline for the mitigation actions undertaken by the contractor be extended beyond ten days.

Response: Concur. The one-day and ten-day requirements for reporting to DIBNet are extended in the final rule to three days and thirty days, respectively.

3. Subcontract ReportingComment: Respondents

recommended that contractors only report subcontractor’s discovery of covered defense telecommunications equipment or services that have ‘‘credible information’’.

Response: The clause flow down requires that entities at all tiers report the discovery of covered defense telecommunications equipment or services to the higher tier subcontractor or prime contractor. If the higher tier subcontractor or prime contractor does not report lower tier notifications of the discovery of covered defense telecommunications equipment or services, the higher tier subcontractor and prime contractor are at risk of being in violation of the prohibition.

4. Flowdown RequirementsComment: Respondents

recommended that the subcontract flow down to ‘‘all subcontracts’’ instead of ‘‘all subcontracts and other contractual instruments’’.

Response: The statutory authority does not provide an exception for vendor agreements or suppliers that are not considered subcontractors;

therefore, the flow down to ‘‘other contractual instruments’’ is required by the statute.

5. List of Subsidiaries and AffiliatesComment: Respondents

recommended that DoD provide a publicly available list of the subsidiaries and affiliates against which to evaluate compliance. A respondent recommended that the list of subsidiaries and affiliates be included in DIBNet in coordination with the Office of Federal Contract Compliance Programs and recommended this list use the Department of Commerce list of affiliates and subsidiaries for Huawei. Another respondent recommended DoD provide and update, as necessary, a comprehensive list of all of the subsidiaries and affiliates on SAM.gov.

Response: The statute does not give the Secretary of Defense the mission to maintain such a list.

6. Definitions

a. ‘‘Covered defensetelecommunications equipment orservices’’

Comment: Respondents stated that the definition of ‘‘covered defense telecommunications equipment or services’’ should provide examples of what is ‘‘covered defense telecommunications equipment or services’’.

Response: The text of the rule aligns with the statutory language. These terms are not defined in the statute.

b. ‘‘Defense’’Comment: A respondent

recommended defining the term ‘‘defense’’.

Response: The term ‘‘defense’’ is used in the term ‘‘covered defense telecommunications equipment or services’’ to clarify that the covered telecommunications equipment or services prohibited by section 1656 are only prohibited for DoD, therefore, a definition is not necessary.

c. ‘‘Substantial or essential component’’Comment: A respondent stated that

there should be a new definition of ‘‘substantial or essential component’’ or that examples of what is and is not a ‘‘substantial or essential component’’ should be provided.

Response: The text of the rule aligns with the statutory language. These terms are not defined in the statute.

d. ‘‘Critical technologies’’

Comment: A respondent stated thatthe definition of ‘‘critical technology’’ should include the list of 27 emerging and foundational technologies

developed pursuant to section 1758 of the Export Control Reform Act of 2018.

Response: To ensure consistency in the event of future changes to the list, the technologies are referenced by a citation, within the definition, to section 1758 of the Export Control Reform Act of 2018.

e. ‘‘Owned or controlled by’’

Comment: A respondent stated thatthere should be clarifications or definitions provided for ‘‘an entity owned or controlled by, or otherwise connected to, the government of a covered foreign country’’.

Response: The text of the rule aligns with the statutory language, which does not clarify these terms.

f. ‘‘Covered missions’’

Comment: A respondent stated thatthe prescription is not limited to covered missions and that examples of covered missions should be provided.

Response: The prescription is not limited to covered missions as a matter of national security. Covered missions include the examples provided in the statutory definition. The statute does not provide additional examples of covered missions.

g. ‘‘Equipment’’, ‘‘produce’’, and‘‘component’’

Comment: A respondent stated that the terms ‘‘equipment,’’ ‘‘produce,’’ and ‘‘component’’ should be more clearly defined, consistent with definitions existing in current regulations (such as export control regulations in ITAR, etc.).

Response: The text of the rule aligns with the statutory language. These terms are not defined in the statute.

7. Waiver Process

Comment: A respondent stated thatthere should be clarification for the public on the waiver process.

Response: The waiver process is an internal Government operating procedure. By submission of an offer containing the prohibited equipment or services, an entity is by default requesting a waiver. Waivers are a limited exception to the prohibition, and questions regarding the waiver process may be directed to the contracting officer. The contracting officer, working with the requiring activity, will review the representations and disclosures and make a determination to process the formal waiver. At that time, a contracting officer will request the additional information required by the statute for processing a waiver; this does not preclude an offeror from providing this information with its offer. The time to

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process the information for a waiver is prior to award because the award is prohibited unless and until a waiver is granted.

8. DIBNet Process

Comment: A respondentrecommended that the DIBNet homepage clarify how DIBNet would work and who has access to the reported data such as contractors or agencies.

Response: DIBNet provides information on its website to clarify who has access to the data. The data is shared with the contracting officer so the contracting officer may work with legal counsel to enforce contractual remedies for violating the terms of the contract.

9. Risk Mitigation Process

Comment: A respondentrecommended that DoD provide the steps to mitigate supply chain risk related to the requirement for the contractor to provide additional information about mitigation actions undertaken or recommended after the presence of covered defense telecommunications equipment or services is identified.

Response: The steps to mitigate supply chain risk are unique to the contractor, and the contractor is required to provide the mitigation actions undertaken.

10. Consistent Application

Comment: A respondent stated thatthere should be consistent inter- department interpretations and that the term ‘‘use’’ should be clarified and used in the same way in all rules.

Response: The text of the rule aligns with the statutory language. This term is not defined in the statute. The FAR and DFARS rules on the section 889 prohibition are intended to be complementary.

III. Applicability to Contracts At orBelow the Simplified AcquisitionThreshold and for Commercial Items,Including Commercially Available Off- the-Shelf Items

A. New Solicitation Provisions andContract Clause

The interim rule added two new solicitation provisions and a new contract clause as follows:

• The provision at DFARS 252.204–7016, Covered Defense Telecommunications Equipment or Services—Representation.

• The provision at DFARS 252.204–7017, Prohibition on Acquisition of Covered Defense Telecommunications Equipment or Services—Representation.

• The clause at DFARS 252.204–7018,Prohibition on the Acquisition of Covered Defense Telecommunications Equipment or Services.

B. DeterminationsConsistent with the determinations

that DoD made on December 19, 2019, with regard to the application of the requirements of section 1656 of the NDAA for FY 2018, the two provisions and the clause listed above apply to all solicitations and contracts, including solicitations and contracts below the simplified acquisition threshold and for the acquisition of commercial items (including commercially available off- the-shelf items). It is important to apply the statutory prohibitions to all acquisitions in order to protect the security of nuclear command, control, and communications systems and ballistic missile defense from commercial dependencies on equipment and services from certain companies or certain foreign countries that are considered to create a risk to our national security.

IV. Executive Orders 12866 and 13563Executive Orders (E.O.s) 12866 and

13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This is a significant regulatory action and, therefore, was subject to review under section 6(b) of E.O. 12866, Regulatory Planning and Review, dated September 30, 1993. This rule is not a major rule under 5 U.S.C. 804.

V. Executive Order 13771This rule is not subject to the

requirements of E.O. 13771, because the rule is issued with respect to a national security function of the United States.

VI. Regulatory Flexibility ActThis final rule will have a significant

economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. A final regulatory flexibility analysis has been performed and is summarized as follows:

DoD is converting to a final rule, with two minor changes, an interim rule that amended the DFARS to implement

section 1656 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2018. This rule also partially implements section 889(a)(1)(A) of the NDAA for FY 2019 prohibitions for DoD, and is structured to align with the Federal Acquisition Regulation implementation of the section 889(a)(1)(A) Governmentwide prohibition. The changes to the interim rule do not change the economic impact on the public. The changes provide additional time to complete the reporting requirements required by the clause at DFARS 252.204–7018, Prohibition on the Acquisition of Covered Defense Telecommunications Equipment or Services.

The objective of this rule is to increase security of systems and critical technology which is part of any system used to carry out the nuclear deterrence and homeland defense missions of DoD by prohibiting the use of telecommunications equipment or services from certain Chinese entities, and from any other entities that the Secretary of Defense reasonably believes to be owned or controlled by or otherwise connected to, the government of the People’s Republic of China or the Russian Federation. Section 1656 of the NDAA for FY 2018 and section 889(a)(1)(A) of the NDAA for FY 2019 are the legal basis for the rule.

There were no public comments in response to the initial regulatory flexibility analysis.

This rule includes a burden for two representations and a reporting requirement. Data from the Federal Procurement Data System (FPDS) for Fiscal Year (FY) 2016 through FY 2018 and data from the System for Award Management (SAM) was used to estimate the number of small businesses affected by this rule.

The provision at DFARS 252.204– 7016, Covered Defense Telecommunications Equipment or Services—Representation, requires the offeror to represent whether it does or does not provide covered defense telecommunications equipment or services as a part of its offered products or services to the Government in the performance of any contract, subcontract, or other contractual instrument. This provision is estimated to affect 145,955 unique small businesses, which is the estimated number of unique small businesses required to complete DoD representations in SAM.

As of July 15, 2019, there were 424,927 active registrants in SAM for contracts. DoD extrapolated the estimated number of SAM registrants that are required to fill out DoD

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representations to be 211,529 unique entities by dividing the average number of DoD unique awardees in the Federal Procurement Data System (FPDS) by the average number of Federal unique awardees in FPDS for FY 2016 through FY 2018 to obtain a percentage of 49.78 percent of all Federal unique awardees that receive DoD awards. Applying 49.78 percent to the total number of active SAM registrants results in 211,529 estimated respondents. To further calculate the number of estimated respondents that are small businesses, this analysis multiplies the 211,529 estimated respondents for DoD by 69 percent, which is the percentage of unique DoD awardees on average for FY 2016 through FY 2018 in FPDS that are small businesses, to estimate 145,955 unique small entities impacted by DFARS 252.204–7016.

The provision at DFARS 252.204– 7017, Prohibition on Acquisition of Covered Defense Telecommunications Equipment or Services—Representation, requires that if an offeror provides an affirmative representation under the provision at 252.204–7016, Covered Defense Telecommunications Equipment or Services—Representation, that offeror is required to represent whether it will or will not provide under the contract, covered defense telecommunications equipment or services. If the offeror responds affirmatively, the offeror is required to further disclose information about the covered defense telecommunications equipment or services.

DFARS provision 252.204–7017 is estimated to affect a total of only 3,054 unique small business entities. Although DoD has no factual basis on which to estimate at this time what percentage of offerors will respond affirmatively to this representation, to be conservative DoD estimates 10 percent of the 44,277 DoD unique awardees on average in FPDS for FY 2016 through FY 2018 (4,428) will respond affirmatively, which triggers the disclosure requirement of the representation. Applying the estimated 69 percent factor for small businesses to the estimate of 4,428 results in 3,054. To calculate the additional disclosure impact within 252.204–7017, DoD estimates 10 percent of the offerors filling out this representation will have to complete the additional disclosure (443 total, of which 306 are small entities).

The clause at DFARS 252.204–7018, Prohibition on the Acquisition of Covered Defense Telecommunications Equipment or Services, requires contractors and subcontractors to report through https://dibnet.dod.mil, any

discovery of covered telecommunications equipment or services during the course of contract performance. Although DoD has no factual basis on which to estimate at this time what percentage of awardees will be required to submit a report, the clause is estimated to affect 443 unique entities, which is 1 percent of the number of unique entities that received DoD awards on average for FY 2016 through FY 2018 in FPDS (44,277). Of the 443 impacted entities 306 entities (69 percent) are estimated to be DoD unique small entities.

Because of the nature of the prohibition enacted by section 1656, it is not possible to establish different compliance or reporting requirements or timetables that take into account the resources available to small entities or to exempt small entities from coverage of the rule, or any part thereof. DoD was unable to identify any alternatives that would reduce the burden on small entities and still meet the objectives of section 1656.

VII. Paperwork Reduction Act

The rule contains information collection requirements that have been approved by the Office of Management and Budget under the Paperwork Reduction Act (44 U.S.C. chapter 35). This information collection requirement has been assigned OMB Control Number 0750–0002, titled: Covered Defense Telecommunications Equipment or Services.

List of Subjects in 48 CFR Parts 204, 212, 213, and 252

Government procurement.

Jennifer D. Johnson, Regulatory Control Officer, Defense Acquisition Regulations System.

Accordingly, the interim rule amending 48 CFR parts 204, 212, 213, and 252 published at 84 FR 72231 on December 31, 2019, is adopted as a final rule with the following changes.

PART 252—SOLICITATION PROVISIONS AND CONTRACT CLAUSES

■ 1. The authority citation for part 252 continues to read as follows:

Authority: 41 U.S.C. 1303 and 48 CFR chapter 1.

252.204–7018 [Amended]

■ 2. Amend section 252.204–7018 by— ■ a. Removing the clause date of ‘‘(DEC 2019)’’ and adding ‘‘(JAN 2021)’’ in itsplace;

■ b. In paragraph (d)(2)(i), removing ‘‘one business day’’ and adding ‘‘3business days’’ in its place; and■ c. In paragraph (d)(2)(ii), removing ‘‘10 business days’’ and adding ‘‘30business days’’ in its place.[FR Doc. 2021–00612 Filed 1–14–21; 8:45 am]

BILLING CODE 5001–06–P

DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 212 and 252

[Docket DARS–2021–0001]

Defense Federal Acquisition Regulation Supplement: Technical Amendments

AGENCY: Defense Acquisition Regulations System, Department of Defense (DoD). ACTION: Final rule.

SUMMARY: DoD is making technical amendments to the Defense Federal Acquisition Regulation Supplement (DFARS) to provide needed editorial changes.

DATES: Effective January 15, 2021. FOR FURTHER INFORMATION CONTACT: Ms. Jennifer D. Johnson, Defense Acquisition Regulations System, OUSD(A&S)DPC(DARS), Room 3B938, 3060 Defense Pentagon, Washington, DC 20301–3060. Telephone 571–372–6100. SUPPLEMENTARY INFORMATION: This final rule amends the DFARS as follows:

1. Corrects the numbering ofparagraphs at section 212.301(f)(ii). On December 31, 2019, DoD published in the Federal Register at 84 FR 72231 an interim rule titled ‘‘Covered Defense Telecommunications Equipment or Services (DFARS Case 2018–D022)’’. The rule added paragraphs (f)(ii)(H), (I), and (J); however the correct paragraph numbers should have reflected (f)(ii)(G), (H), and (I). A prior change to this section on October 31, 2019, published at 84 FR 58332, had redesignated paragraphs (f)(ii)(F) and (G) as paragraphs (f)(ii)(E) and (F); however, this redesignation was not reflected in the paragraph numbering in the December 19, 2019, publication. This sequence of events resulted in the current electronic Code of Federal Regulations (eCFR) not reflecting a paragraph (f)(ii)(G) in the numbering sequence, which this amendment corrects.

2. Corrects DFARS clause 252.244–7000 in paragraph (d) by removing ‘‘(c)’’ and adding ‘‘(d)’’ in its place. On

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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Chapter 1

[Docket No. FAR–2021–0051, Sequence No. 1]

Federal Acquisition Regulation; Federal Acquisition Circular 2021–04; Introduction

AGENCY: Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Summary presentation of final rule.

SUMMARY: This document summarizes the Federal Acquisition Regulation (FAR) rule agreed to by the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (Councils) in this Federal Acquisition Circular (FAC) 2021–04. A companion document, the Small Entity Compliance Guide (SECG), follows this FAC.

DATES: For effective dates see the separate documents, which follow.

FOR FURTHER INFORMATION CONTACT: Ms. Zenaida Delgado, Procurement Analyst, at 202–969–7207 or zenaida.delgado@gsa.gov for clarification of content. For information pertaining to status or publication schedules, contact the Regulatory Secretariat Division at 202– 501–4755 or GSARegSec@gsa.gov. Please cite FAC 2021–04, FAR Case 2019–016.

RULES LISTED IN FAC 2021–04

Subject FAR case

Maximizing Use of American- Made Goods, Products and Ma-terials ......................................... 2019–016

ADDRESSES: The FAC, including the SECG, is available via the internet at https://www.regulations.gov.

SUPPLEMENTARY INFORMATION: A summary for the FAR rule follows. For the actual revisions and/or amendments by this FAR rule, refer to the specific item numbers and subjects set forth in the documents following this summary. FAC 2021–04 amends the FAR as follows:

Maximizing Use of American-Made Goods, Products, and Materials (FAR Case 2019–016)

This final rule strengthens domestic preferences under the Buy American statute by making adjustments to the required percentage of domestic content and the existing percentages for the price evaluation preferences in an effort to decrease the amount of foreign- sourced content in a U.S. manufactured product to promote economic and national security, help stimulate economic growth, and create jobs. The price evaluation preferences increase from 6 percent to 20 percent for large business and from 12 percent to 30 percent for small business; for DoD procurements there is no change to the DoD 50 percent amount. The domestic content requirement for iron and steel increases from 50 percent to 95 percent; for other end products and construction materials, the domestic content requirement increases from 50 percent to 55 percent. Foreign iron and steel is iron or steel products that are not produced in the United States. The rule implements E.O. 13881, Maximizing Use of American-Made Goods, Products, and Materials. This final rule will not have a significant economic impact on a substantial number of small entities.

William F. Clark, Director, Office of Government-wide Acquisition Policy, Office of Acquisition Policy, Office of Government-wide Policy.

Federal Acquisition Circular (FAC) 2021–04 is issued under the authority of the Secretary of Defense, the Administrator of General Services, and the Administrator of National Aeronautics and Space Administration.

Unless otherwise specified, all Federal Acquisition Regulation (FAR) and other directive material contained in FAC 2021–04 is effective January 19, 2021.

John M. Tenaglia, Principal Director, Defense Pricing and Contracting, Department of Defense. Jeffrey A. Koses, Senior Procurement Executive/Deputy CAO, Office of Acquisition Policy, U.S. General Services Administration.

William G. Roets, II, Acting Assistant Administrator, Office of Procurement, National Aeronautics and Space Administration. [FR Doc. 2021–00708 Filed 1–15–21; 8:45 am]

BILLING CODE 6820–EP–P

DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 12, 25, and 52

[FAC 2021–04; FAR Case 2019–016; Docket No. FAR–2019–0016, Sequence No. 1]

RIN 9000–AN99

Federal Acquisition Regulation: Maximizing Use of American-Made Goods, Products, and Materials

AGENCY: Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA). ACTION: Final rule.

SUMMARY: DoD, GSA, and NASA are issuing a final rule amending the Federal Acquisition Regulation (FAR) to implement an Executive order (E.O.) addressing domestic preferences in Government procurement. DATES: Effective: January 21, 2021.

Applicability: The changes in this rule apply to solicitations issued on or after February 22, 2021 and resultant contracts.

FOR FURTHER INFORMATION CONTACT: Ms. Zenaida Delgado, Procurement Analyst, at 202–969–7207 or zenaida.delgado@gsa.gov for clarification of content. For information pertaining to status or publication schedules, contact the Regulatory Secretariat Division at 202– 501–4755 or GSARegSec@gsa.gov. Please cite FAC 2021–04, FAR Case 2019–016. SUPPLEMENTARY INFORMATION:

I. Background

DoD, GSA, and NASA published aproposed rule at 85 FR 56558 on September 14, 2020, to implement E.O. 13881, Maximizing Use of American- Made Goods, Products, and Materials (84 FR 34257, July 18, 2019). In order to implement the E.O., this final rule changes FAR clauses implementing the Buy American statute by increasing the—

1. Domestic content requirements;and

2. Price preference for domesticproducts.

Increased Domestic Content Requirements

Under E.O. 13881, and this final rule, in order to meet the definition of ‘‘domestic construction material’’ or ‘‘domestic end product,’’ the cost of

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foreign iron and steel for iron and steel products must be less than 5 percent of the cost of all components in the product. For everything else, the domestic content requirement increases from 50 percent to more than 55 percent of the cost of all components. E.O. 13881 creates a new separate higher standard for iron and steel products. This distinction has existed for many years in domestic preference requirements governing certain Federal grant programs, such as the Federal Transit Administration’s Buy America regulations applicable to grantees. Also, DoD procurements are affected by the increased domestic content requirements of E.O. 13881; the changes will be implemented in the Defense Federal Acquisition Regulation Supplement (DFARS) through DFARS Case 2019–D045, Maximizing Use of American-Made Goods.

Increased Price Preference for Domestic Offers

The Buy American statute does not prohibit the purchase of foreign end products or use of foreign construction material. Instead, it encourages the use of domestic end products and construction material by imposing a price preference for domestic end products and construction material. E.O. 13881 and this final rule increase the price preference from 6 percent to 20 percent for large businesses, and from 12 percent to 30 percent for small businesses. The E.O. does not impact the price preference for end products for DoD procurements, which is 50 percent for both large and small businesses, because the DoD percentage exceeds the requirements of the E.O.

Thirty-five respondents submitted comments on the proposed rule.

II. Discussion and AnalysisThe Civilian Agency Acquisition

Council and the Defense Acquisition Regulations Council (the Councils) reviewed the public comments in the development of the final rule. A discussion of the comments and the changes made to the rule as a result of those comments are provided as follows:

A. Summary of Significant ChangesThis final rule makes the following

significant changes from the proposed rule:

• Definitions. At FAR 25.003, thedefinitions of ‘‘domestic construction material,’’ ‘‘domestic end product,’’ and ‘‘predominantly of iron or steel or a combination of both’’ are revised; and a definition of ‘‘foreign iron and steel’’ is added.

Æ The definitions of ‘‘domestic construction material’’ and ‘‘domestic end product’’ now specify that the cost of foreign iron and steel includes but is not limited to the cost of foreign iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the product and a good faith estimate of the cost of all foreign iron or steel components excluding commercially available off-the-shelf (COTS) fasteners. The definition specifies that the iron or steel components of unknown origin are treated as foreign. Also, the definition explains that if the construction material contains multiple components, the cost of all the materials used in the construction material is calculated in accordance with the definition of ‘‘cost of components’’ in FAR 25.003.

Æ A definition of ‘‘foreign iron and steel’’ which includes language explaining ‘‘produced in the United States’’ is added to clarify the term as it is used in the revised definitions of ‘‘domestic construction material’’ and ‘‘domestic end product’’.

Æ The definition of ‘‘predominantly of iron or steel or a combination of both’’ now clarifies what is meant by the phrase ‘‘the cost of iron and steel.’’

Æ Conforming changes are made at FAR 25.101(a)(2)(ii) and 25.201(b)(2)(ii), as well as to FAR clauses 52.225–1, Buy American—Supplies; 52.225–3, Buy American—Free Trade Agreements— Israeli Trade Act; 52.225–9, Buy American—Construction Materials; and 52.225–11, Buy American— Construction Materials Under Trade Agreement.

• COTS fasteners. Revisions havebeen made throughout the FAR to clarify that the domestic content test does not apply to COTS fasteners. These revisions are made at FAR 25.001, 25.003, 25.101, 25.201, as well as in FAR clauses 52.225–1, Buy American- Supplies; 52.225–3, Buy American— Free Trade Agreements—Israeli Trade Act, and its alternates; 52.225–9, Buy American—Construction Materials; and 52.225–11, Buy American— Construction Materials Under Trade Agreement, and its alternate.

B. Analysis of Public Comments

1. Strong Support for the Rule

Comment: Most of the respondentsstrongly supported the proposed rule. One respondent noted positive factors regarding this rule as follows:

• Improves America’s position froman economic standpoint.

• Helps increase jobs.• Improves relationships with

companies within our country.

• Interests other countries to do moretrades and business with companies that have American-made products, goods, and materials.

• Improves our national image.Response: Noted.

2. Domestic Content Test for COTSItems

2a. Remove the COTS Waiver for All Construction Materials

Comment: A few respondents stated that the rule should restore the domestic content test for all COTS construction material, not just for COTS construction iron and steel products. The respondents pointed out that there are instances where ‘‘nonferrous’’ construction materials compete with iron and steel products and in these instances, the rule provides an advantage to foreign nonferrous producers when they compete with U.S. producers of iron and steel products by not applying the domestic content test to the ‘‘nonferrous’’ construction material.

Response: This FAR change is required to implement E.O. 13881.

2b. Remove the COTS Waiver for Fasteners

Comment: Many respondents (using an essentially identical form letter) urged the Councils to remove the waiver of the domestic content test of the Buy American statute for the acquisition of COTS fasteners. These respondents stated that not doing so would not provide U.S. fastener manufacturers the same protection being offered to manufacturers of other iron and steel products.

Response: The Councils determined that requiring offerors to keep track of the origin of all fasteners could have a significant negative impact by creating an administrative burden on offerors that would outweigh any benefit to the American iron and steel industrial base. However, a clarification is made in FAR 25.001 to exclude only COTS fasteners.

2c. No Changes to Current COTS Waiver Comment: A few respondents stated

that the COTS waiver should remain as is and not subject iron and steel products to the additional rigor of the domestic content test. These respondents commented that contractors for COTS items have built their supply chains to comply with the existing COTS waiver and changing this paradigm will impede projects around the country, adversely impact these contractors, be administratively burdensome for them, and increase compliance costs that will eventually be borne by the Government. One of the

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respondents stated that waiving some COTS items, but not others, would create a dissimilar application of the domestic content rule that is not in the public interest and should not be implemented in the FAR.

Response: As explained in the proposed rule, roll-back of the COTS waiver is necessary to give full effect to the E.O. 13881 requirement.

3. DefinitionsComment: One respondent stated that

it was not clear why the longstanding practice of using cost of ‘‘components’’ has been replaced with ‘‘content’’ when determining whether an end product is a steel end product and the implications of this change. The respondent recommended defining the word ‘‘content’’ and providing examples of application of this new standard.

Response: The Councils note that the domestic content test is not applied to determine whether an item is wholly or predominantly of iron or steel or a combination of both, but to determine whether such a product is foreign or domestic. As explained in paragraph II.B.2.i of the proposed rule preamble,the term ‘‘component test’’ was replacedwith ‘‘domestic content test’’ because ofthe wording of the E.O. regarding ironand steel. Per FAR 25.001(c)(1), thisdomestic content test is one of the two- part test elements used by the BuyAmerican statute to define a ‘‘domesticconstruction material’’ or ‘‘domestic endproduct.’’ Regarding iron and steel endproducts, the E.O. states that thematerials shall be considered to be offoreign origin if ‘‘the cost of foreign ironand steel used in such iron and steelend products constitutes 5 percent ormore of the cost of all the products usedin such iron and steel end products.’’‘‘All the products used’’ in an itemwould be the common meaning of‘‘content.’’ The Councils do not considerit necessary to define ‘‘content’’.

However, the Councils added the explanation that the cost of all the materials used in a product is to be calculated consistent with the definition of ‘‘cost of components’’ at FAR 25.003, if the product contains multiple components. The Councils also specified that the cost of foreign iron and steel includes but is not limited to the cost of foreign iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the product and a good faith estimate of the cost of all foreign iron or steel components excluding COTS fasteners, both in the definitions of ‘‘domestic construction material,’’ and ‘‘domestic end product.’’

To determine whether a product that is wholly or predominantly of iron or steel or a combination of both is foreign or domestic, it is necessary to determine the following:

(i) Does the product consist wholly or‘‘predominantly of iron or steel or a combination of both’’ (as defined in FAR 25.003)?

(ii) Is any of the iron or steel contentnot produced in the United States?

(iii) Is the cost of foreign iron or steelmill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the product, and a good faith estimate of the cost of all foreign iron or steel components (excluding COTS fasteners), less than 5 percent of the cost of all the components used in the end product (or construction material)? If the product contains multiple components, the cost is to be calculated consistent with the definition of ‘‘cost of components’’ at FAR 25.003.

See the following examples: • A steel beam. For purposes of this

example, this steel beam consists wholly of steel. The cost of all material in the beam, excluding final manufacture, overhead costs, and profit, is $50. If the steel beam is rolled from steel bloom, then the steel beam probably contains either all domestic steel, or all foreign steel. However, if the beam is welded or riveted from separate steel plates, then it is conceivable that some of the steel plates could have been formed from steel not produced in the United States. If the cost of the foreign steel plates used to make the beam equals or exceeds $2.50 (i.e., 5 percent of the cost of all the components used in the product), then the entire beam is a foreign construction material.

• A steel safe. The steel safe mayinclude other components such as a combination lock, a dehumidifier, or drawers. The safe costs $1,000 and the cost of all components in the safe is $500. If the cost of the steel plates or other steel mill products (excluding COTS fasteners) utilized in the manufacture of the safe exceeds $250 (i.e., 50 percent of the total cost of all the components as defined in FAR 25.003), then the safe consists predominantly of steel. If the cost of foreign iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the safe and a good faith estimate of the cost of all foreign iron or steel components (excluding COTS fasteners) is less than $25 (i.e., 5 percent of the cost of all the components used in the product), then the safe is a domestic end product.

• A refrigerator. The refrigeratorconsists of many components and materials. The exterior cabinet and door and the inner cabinet of this refrigerator are steel. The refrigerator also includes insulation, cooling system, refrigerant, and fixtures. The refrigerator costs $2,000 and the cost of all components in the refrigerator is $1,000. If the cost of the steel plates or other steel mill products (excluding COTS fasteners) utilized in the manufacture of the refrigerator does not exceed $500 (i.e., 50 percent of the total cost of all the components as defined in FAR 25.003), then the refrigerator does not consist predominantly of steel.

Comment: One respondent recommended clarifying the meaning of ‘‘metallurgical processes’’ and providing a list of representative metallurgical functions such as smelting, melting, pouring, rolling, casting, and other similar processes. The respondent based the recommendation on their interpretation of the existing guidance and the proposed rule, suggesting that raw steel and iron material for a steel end product may enter the United States and after undergoing all manufacturing processes for its intended final use, it would then be considered ‘‘produced in the U.S.’’ both for purposes of being a domestic component (if it is a component in an end product) or a domestic end product itself (if solely from one foreign material). The respondent’s interpretation also suggested that if ‘‘the steel came with any foreign manufacturing outside the original metallurgical process, the item would be considered foreign, even if all subsequent manufacturing occurred in the U.S.’’ One respondent suggested defining ‘‘manufactured in the United States’’ under the Buy American statute’s two-part test using a more stringent standard where all steelmaking processes, including the melting and pouring of the steel (i.e., the actual steelmaking), occur in the United States. Other respondents requested the rule provide a clear, explicit definition of ‘‘foreign iron and steel’’ to prevent any adverse or unintended consequences.

Response: The exception relating to metallurgical processes involving refinement of steel additives does not apply to any of the metallurgical processes involved in the making of the steel itself. Steel is defined in FAR 25.003 as an alloy that includes at least 50 percent iron, between 0.02 and 2 percent carbon, and may include other elements. These other elements (e.g., manganese, silicon, copper, aluminum, chromium, cobalt, molybdenum, nickel, niobium, titanium, tungsten, vanadium) are termed steel additives, and as such,

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are added to the steel alloy to create steel with different properties (e.g., stainless steel). Therefore, whatever metallurgical processes are used to separate and concentrate and reduce the ore to metal, then refine to increase the grade or purity of a steel additive (such as titanium or tungsten) can occur anywhere, prior to adding these other metals to produce the steel alloy in the United States. As stated in the proposed rule, in order to be domestic, all manufacturing processes of the iron or steel (other than the additives) must take place in the United States. In the final rule, language is added from the definition of ‘‘produced in the United States’’ from E.O. 13788, Buy American and Hire American (82 FR 18837) to better explain how the iron or steel is considered domestic. For clarity, the final rule moves the explanation of what it means to produce iron or steel in the United States from the definition of ‘‘domestic construction material’’ and ‘‘domestic end product’’ to a new, separate definition in FAR 25.003 for the term ‘‘foreign iron and steel.’’ The definition of ‘‘foreign iron and steel’’ is based on the existing description of ‘‘iron or steel components’’ at FAR 25.602–1(a)(1)(ii), consistent with the intent articulated in the proposed rule.

Comment: One respondent recommended that ‘‘good faith’’ be further defined to include a subjective and objective standard for a ‘‘reasonable business person without legal knowledge or training’’.

Response: The term ‘‘good faith’’ is used in many instances in the FAR and other agency regulations. The Councils concluded that ‘‘a good faith estimate’’ should be sufficient; and that adding the suggested language will not make the standard any clearer.

Comment: One respondent stated that requiring nothing more than a ‘‘good faith assurance’’ to calculate the cost of foreign components could lead to abuse or fraud in calculating the cost of foreign components, which would undermine the purpose of E.O. 13881. The respondent commented that because the origin of the iron and steel products should be readily discernible, the final rule should require suppliers to track the domestic content in iron and steel products and subject this accounting to periodic audit. Another respondent submitted a similar comment.

Response: The Councils agree that the origin of the iron and steel components should be readily discernible. As such, the final rule has been revised to clarify that contractors are to make a ‘‘good faith estimate’’ only for the cost of all foreign iron or steel components, other

than the cost of foreign iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the product. It is highly likely that current procedures will yield the needed information for the offeror to make the required determinations in this rule. The cost of the iron and steel items are included in invoices and already used to determine whether an end product or construction material is foreign.

Comment: A few respondents stated that defining ‘‘predominantly of iron or steel’’ based on cost of the components, as opposed to weight, volume, and cost, opens a loophole that will allow manufacturers and contractors to evade the domestic content requirements through creative accounting practices.

Response: The Councils reiterate that basing the predominance on cost, rather than weight or volume, is consistent with the requirement of the E.O. that the ‘‘cost’’ of foreign iron and steel be limited to less than 5 percent of the ‘‘cost’’ of all components. Therefore, the final rule remains unchanged regarding the basis for determining whether an item is predominantly of iron or steel.

Comment: One respondent stated that the proposed rule’s definition of ‘‘fasteners’’ was overly broad and by exempting fasteners from the domestic content requirements, the rule creates an opportunity for abuse of this ‘‘loophole.’’ The respondent requested the definition of ‘‘fasteners’’ be modified to reflect the qualifiers the Councils provided in the proposed rule, i.e., that the fasteners being exempted were those that were ‘‘small’’ or ‘‘inexpensive.’’

Response: The Councils have clarified the text in the final rule to state that the fasteners being exempted from the domestic content requirement are those that are COTS items.

Comment: One respondent stated that requiring iron and steel products to contain 95 percent domestic content is too onerous and burdensome on manufacturers. The respondent commented that the 95 percent requirement should be reduced or phased in over time. Alternatively, the respondent also suggested that in determining whether a predominantly of iron or steel product is domestic, manufacturers should be allowed to use the cost of non-iron and non-steel components of the item; this way, manufacturers can mitigate the 95 percent requirement, while still incentivizing domestic purchase of non- steel components. Another respondent had a similar comment, pointing out that the Environmental Protection Agency allows for 5 percent of the total ‘‘project’’ cost to be foreign iron and

steel products instead of 5 percent of the total cost of the individual product.

Response: This FAR change is required to implement E.O. 13881, which increased the domestic content requirement for iron and steel end products to 95 percent. However, the Councils note that the proposed rule presented the requirement as whether 5 percent of the cost of all the components was foreign iron or steel, not whether 5 percent of the cost of only the iron or steel components were foreign iron or steel; thereby, giving credit to the non- iron and non-steel components of the end item as requested by the respondent.

Comment: One respondent stated their interpretation that the proposed rule encompassed steel subcomponents, not just steel components. Due to lack of visibility into the cost of these steel subcomponents by manufacturers, the respondent requested the rule consider exempting the cost of subcomponents from the calculations. Another respondent had a similar comment, pointing out that the Federal Transit Administration’s policy explicitly exempts subcomponents from country- of-origin consideration, including iron and steel components.

Response: The Councils confirm that the intent of the proposed rule was to include the cost of subcomponents in the domestic content calculations. However, the Councils did not add ‘‘subcomponents’’ in the FAR text because the definition of ‘‘components’’ at FAR 25.003 is written broadly enough to already cover subcomponents. In acknowledging the difficulty contractors may have to know, definitively, the cost of all subcomponents in iron or steel items, the Councils clarify in the final rule that contractors are to make a ‘‘good faith estimate’’ of the cost of all foreign iron or steel components, other than the cost of foreign iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the product.

4. Outside the Scope of This RuleComment: Two respondents provided

comments regarding marketing their specific businesses, and two respondents provided comments of a political nature.

Response: These comments did not address the rule and, as such, are outside the scope of this rule.

Comment: One respondent recommended that if no domestic offers are received on an acquisition conducted using full and open competition, then the procurement officer should confirm with at least two

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other manufacturers within the same NAICS code their non-interest in the procurement.

Response: The Councils concluded the recommendation would add a significant burden on contracting officers, and is not necessary for implementation of the E.O.

Comment: One respondent recommended defining ‘‘manufactured’’ and adopting a clear non-shift approach to the items specified in the procurement document for all purchases (aside from systems).

Response: This recommendation is not necessary for implementation of the E.O. The Councils note that definitions of ‘‘manufacture’’ have been considered in the past and rejected. Although the FAR does not define ‘‘manufacture,’’ it does define ‘‘place of manufacture,’’ at FAR 52.225–18, as ‘‘the place where an end product is assembled out of components, or otherwise made or processed from raw materials into the finished product that is to be provided to the Government.’’

Comment: One respondent recommended removing the Buy American statute’s exception for ‘‘Goods for Use Outside the United States’’ and using an evaluation factor instead.

Response: The exception for articles, materials, or supplies for use outside the United States is included in the Buy American statute (41 U.S.C. 8302(a)(2)(A) and 8303(b)(1)(A)).

The Balance of Payments Program provided a preference for U.S. products and services for overseas use, and its restrictions were similar to the restrictions of the Buy American statute, which apply only within the United States. Purchases of supplies for use outside the United States, and construction materials for construction contracts performed outside the United States, were covered by the Balance of Payments Program in FAR subpart 25.3, as a matter of policy, until it was removed in 2002. Only a few civilian agencies make purchases for use outside the United States. Furthermore, even fewer civilian agencies award construction contracts that are performed outside the United States. The Balance of Payments Program applied to purchases valued at more than the simplified acquisition threshold and had little impact for civilian agency acquisitions of supplies in excess of the Trade Agreements Act threshold, because the civilian agencies do not apply the Balance of Payments Program when the Trade Agreements Act applies. Therefore, because there was no statutory requirement for the Balance of Payments Program, and because elimination of this Program for

civilian agencies would reduce administrative burdens on both the Government and the public, without significant impact on the Government’s international balance of payments, the Balance of Payments Program was eliminated for civilian agencies. The rationale for elimination of this Program for civilian agencies has not changed. Note that DoD has retained the Balance of Payments Program for acquisitions of supplies for use outside the United States or construction projects to be performed overseas.

5. Oppose the RuleComment: Some respondents urged

the Councils not to increase the iron and steel content requirements beyond their current levels because of the limited availability of U.S. sources for components, which will result in increased costs and a decrease in competition. Some of these respondents also stated that Buying American should be an incentive, not a requirement.

Response: This FAR change implements the content requirements established in E.O. 13881.

III. Applicability to Contracts at orBelow the Simplified AcquisitionThreshold (SAT) and for CommercialItems, Including CommerciallyAvailable Off-the-Shelf (COTS) Items

This final rule does not add any new provisions or clauses, nor change the applicability of existing provisions or clauses, to contracts at or below the SAT and contracts for the acquisition of commercial items, including COTS items.

However, this rule applies the domestic content test of the Buy American statute, as implemented by E.O. 13881, to COTS items that consist wholly or predominantly of iron or steel (excluding COTS fasteners). In accordance with 41 U.S.C. 1907, since 2008, the domestic content test of the Buy American statute has been waived for COTS items, in part due to the complexity and cost of keeping track of components in a world of global sourcing where the Government is not a market driver. But absent restoration of the domestic content test, the E.O. 13881 requirement regarding iron and steel construction material would have very little effect. As such, the Administrator for Federal Procurement Policy has determined that it would not be in the best interest of the Federal Government to exempt iron and steel products (excluding COTS fasteners) that are COTS items from the applicability of the content test for foreign iron and steel under the Buy American statute.

The domestic content waiver for COTS items would continue to apply to COTS iron and steel fasteners, such as nuts, bolts, pins, rivets, nails, clips, and screws, which are generally so small, inexpensive, and comingled that trying to keep track of the origin of all fasteners would create an administrative burden on offerors that would outweigh any benefit to the American iron and steel industrial base.

IV. Executive Orders 12866 and 13563Executive Orders (E.O.s) 12866 and

13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This rule is not a significant regulatory action and, therefore, was not subject to the review of the Office of Information and Regulatory Affairs under section 6(b) of E.O. 12866. This rule is not a major rule under 5 U.S.C. 804.

V. Expected Impact of the Final RuleThe FAR clauses implementing the

Buy American statute apply to a narrow set of procurements. Also, because the FAR Council is leaving the COTS items exception in place for most COTS items, the heightened domestic content requirements will not be applicable to those procurements.

With this rule’s implementation, domestic industries supplying domestic end products are likely to benefit from a competitive advantage. Based on the E.O., it is unclear if the pool of qualifiedsuppliers would be reduced, resulting inless competition (and a possibleincrease in prices that the Governmentwill pay to procure these products).

At least three arguments point to the possibility that any increased burden, on contractors in particular, could be small if not de minimis: (1) Familiarization costs should be low; (2) some, if not many, contractors may already be able to meet the more stringent threshold; and (3) costs incurred by contractors that adjust their supply chains so that their end products qualify as domestic will enjoy a larger price preference that should help to offset these costs over time. Each of these arguments is explained below.

First, DoD, GSA, and NASA do not anticipate significant costs from contractors’ familiarization with this

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rule given the history of rulemaking and E.O.s in this area. The basic mechanics of the Buy American statute (e.g., definitions, how and when the price preference is used to favor domestic end products, certifications required of offerors to demonstrate end products are domestic) remain unchanged and continue to reflect processes that are decades old.

Second, some, if not many, contractors may already be able to comply with the lower foreign content requirement needed to meet the definition of ‘‘domestic end product’’ under E.O. 13881 and this rule. Laws such as the SECURE Technology Act, Public Law 115–390, which requires a series of actions to strengthen the Federal infrastructure for managing supply chain risks, are placing a significantly increased emphasis on Federal agencies and Federal Government contractors to identify and reduce risk in their supply chains. One way to reduce supply chain risk is to increase domestic sourcing of content. In addition, in the context of iron and steel, many existing laws already require more stringent content. For example, the Recovery Act required that all construction material for a project for the construction, alteration, maintenance, or repair of a public building or a public work in the United States, consisting wholly or predominantly of iron or steel, had to be produced in the United States when using Recovery Act funds, to the extent consistent with trade agreements (see FAR 25.602–1, implementing section 1605 of the Recovery Act). In addition, Federal contractors who also work on subawards funded under Federal grants may, in some cases, find that the steel, iron, and manufactured goods used in the project be produced in the United States, as is the case for certain funding administrated by the Federal Transit Administration for public transportation projects (see 49 U.S.C. 5323(j)). Accordingly, it is possible that the Federal market for iron and steel has

already done significant retooling and could meet the requirements of E.O. 13881 with minor additional effort.

Third, it is anticipated that some contractors’ products and construction materials may not meet the definitions of ‘‘domestic construction material,’’ and ‘‘domestic end product’’ unless the contractors take steps to adjust their supply chains to increase the domestic content. Contractors that make a business decision not to modify their supply chains will still be able to propose in response to Federal contract solicitations but will no longer enjoy a price preference. Contractors that sell to civilian agencies and retool their supply sources to meet the more stringent threshold will have a more generous price preference applied to their products. These stronger preferences, which are designed as an incentive to encourage more domestic sourcing, may help to offset costs of meeting the new standards.

This rule has the potential to slightly increase the estimated percentage of foreign offers. It can only impact products that are made in the United States as follows: Iron or steel products where the cost of foreign iron and steel is 5 percent or more of the cost of all components in the product; or other products, other than COTS items, that have a content of 45 to 50 percent foreign components. Offerors of such products have an option to increase the domestic content and continue to offer domestic products, in which case they may benefit from the increased preference for domestic products, or they may continue to offer the same product, which will now be evaluated as foreign. The Councils do not have any data on how many currently domestic products would fall into this category. Nor do the Councils have any knowledge as to which option an offeror of such products would select since this is a business decision for each offeror to make. Regarding the increased price preference for domestic offers, the Councils note that robust competition

among vendors offering domestic products will decrease the extent to which the Government could pay an additional 20 to 30 percent for domestic products above and beyond the cost of otherwise equivalent foreign products.

Therefore, based on public comments received, DoD, GSA, and NASA have concluded that the initial assessment is correct that the cost impact of this rule is not significant, and any impact is predominantly positive.

VI. Executive Order 13771

This rule is not subject to E.O. 13771,Reducing Regulation and Controlling Regulatory Costs, because this rule has a de minimis impact on the public (see section V. of this preamble).

VII. Regulatory Flexibility Act

DoD, GSA, and NASA have prepareda Final Regulatory Flexibility Analysis (FRFA) consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. The FRFA is summarized as follows:

This rule strengthens domestic preferences under the Buy American statute by making adjustments to the required percentage of domestic content and the existing percentages for the price evaluation preferences in an effort to decrease the amount of foreign-sourced content in a U.S. manufactured product to promote economic and national security, help stimulate economic growth, and create jobs. The objective of this rule is to implement E.O. 13881, Maximizing Use of American-Made Goods, Products, and Materials (84 FR 34257, July 18, 2019).

There were no significant issues raised by the public comments in response to the initial regulatory flexibility analysis.

DoD, GSA, and NASA examined data from the Federal Procurement Data System for fiscal years (FY) 2017, 2018, and 2019, for new awards with a foreign place of performance for construction valued over the micro-purchase threshold and awards for supplies to unique small businesses. This rule will apply to only the 8 percent of foreign construction awards that were made to small businesses, and only 14 percent of foreign supply awards were made to small businesses.

Buy american statute

FY 2017 FY 2018 FY 2019 Median

SB/total SB/total SB/total SB (%)

Construction ............................................................................. 18/217 = 8% 13/223 = 6% 15/199 = 8% 8 Supplies ................................................................................... 153/1,200 = 13% 164/1,161 = 14% 164/1,048 = 16% 14

This rule is covered under the existing information collection requirements associated with the Buy American statute. The rule will strengthen domestic preferences under the Buy American statute and provide small businesses the opportunity and incentive to deliver U.S. manufactured

products from domestic suppliers. It is expected that this rule will benefit U.S. small business manufacturers, including those of iron or steel.

There are no available alternatives to the rule to accomplish the desired objective of the statute.

Interested parties may obtain a copy of the FRFA from the Regulatory Secretariat Division. The Regulatory

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Secretariat Division has submitted a copy of the FRFA to the Chief Counsel for Advocacy of the Small Business Administration.

VIII. Paperwork Reduction Act

The Paperwork Reduction Act (44U.S.C. chapter 35) does apply; however, these changes to the FAR do not impose additional information collection requirements to the paperwork burden previously approved under the Office of Management and Budget Control Number 9000–0024, Buy American, Trade Agreements, and Duty-Free Entry.

List of Subjects in 48 CFR Parts 12, 25, and 52

Government procurement.

William F. Clark, Director, Office of Government-wide Acquisition Policy, Office of Acquisition Policy, Office of Government-wide Policy.

Therefore, DoD, GSA, and NASA amend 48 CFR parts 12, 25, and 52 as set forth below:

■ 1. The authority citation for 48 CFR parts 12, 25, and 52 continues to readas follows:

Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 51 U.S.C. 20113.

PART 12—ACQUISITION OF COMMERCIAL ITEMS

■ 2. Amend section 12.505 by revising paragraph (a) to read as follows:

12.505 Applicability of certain laws to contracts for the acquisition of COTS items.

* * * * * (a)(1) The portion of 41 U.S.C. 8302,

American Materials Required for Public Use, paragraph (a)(1) that reads ‘‘substantially all from articles, materials, or supplies mined, produced, or manufactured in the United States,’’ Buy American—Supplies, domestic content test, except as provided in 25.101(a)(2)(ii) (see 52.225–1 and 52.225–3).

(2) The portion of 41 U.S.C. 8303,Contracts for Public Works, paragraph (a)(2) that reads ‘‘substantially all from articles, materials, or supplies mined, produced, or manufactured in the United States,’’ Buy American— Construction Materials, domestic content test, except as provided in 25.201(b)(2)(ii)(see 52.225–9 and 52.225–11). * * * * *

PART 25—FOREIGN ACQUISITION

■ 3. Amend section 25.001 by revising paragraph (c)(1) to read as follows:

25.001 General.

* * * * * (c) * * *(1) The Buy American statute uses a

two-part test to define a ‘‘domestic end product’’ or ‘‘domestic construction material’’ (manufactured in the United States and a domestic content test). The domestic content test has been waived for acquisition of commercially available off-the-shelf (COTS) items, except a product that consists wholly or predominantly of iron or steel or a combination of both (excluding COTS fasteners) (see 25.101(a) and 25.201(b)). * * * * * ■ 4. Amend section 25.003 by— ■ a. Revising the definitions ‘‘Domestic construction material’’ and ‘‘Domesticend product’’; and■ b. Adding in alphabetical order the definitions ‘‘Fastener’’, ‘‘Foreign ironand steel’’, ‘‘Predominantly of iron orsteel or a combination of both’’, and‘‘Steel’’.

The revisions and additions read as follows:

25.003 Definitions.

* * * * *Domestic construction material

means— (1) For use in subparts other than

25.6— (i) For construction material that does

not consist wholly or predominantly of iron or steel or a combination of both—

(A) An unmanufactured constructionmaterial mined or produced in the United States; or

(B) A construction materialmanufactured in the United States, if—

(1) The cost of the components mined,produced, or manufactured in the United States exceeds 55 percent of the cost of all its components. Components of foreign origin of the same class or kind for which nonavailability determinations have been made are treated as domestic. Components of unknown origin are treated as foreign; or

(2) The construction material is acommercially available off-the-shelf (COTS) item; or

(ii) For construction material thatconsists wholly or predominantly of iron or steel or a combination of both, a construction material manufactured in the United States if the cost of foreign iron and steel constitutes less than 5 percent of the cost of all the components used in such construction material. The cost of foreign iron and steel includes but is not limited to the cost of foreign iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the

manufacture of the construction material and a good faith estimate of the cost of all foreign iron or steel components excluding COTS fasteners. Iron or steel components of unknown origin are treated as foreign. If the construction material contains multiple components, the cost of all the materials used in such construction material is calculated in accordance with the definition of ‘‘cost of components’’ in this section; or

(2) For use in subpart 25.6, see thedefinition in 25.601.

Domestic end product means— (1) For an end product that does not

consist wholly or predominantly of iron or steel or a combination of both—

(i) An unmanufactured end productmined or produced in the United States;

(ii) An end product manufactured inthe United States, if—

(A) The cost of its components mined,produced, or manufactured in the United States exceeds 55 percent of the cost of all its components. Components of foreign origin of the same class or kind as those that the agency determines are not mined, produced, or manufactured in sufficient and reasonably available commercial quantities of a satisfactory quality are treated as domestic. Components of unknown origin are treated as foreign. Scrap generated, collected, and prepared for processing in the United States is considered domestic; or

(B) The end product is a COTS item;or

(2) For an end product that consistswholly or predominantly of iron or steel or a combination of both, an end product manufactured in the United States, if the cost of foreign iron and steel constitutes less than 5 percent of the cost of all the components used in the end product. The cost of foreign iron and steel includes but is not limited to the cost of foreign iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the end product and a good faith estimate of the cost of all foreign iron or steel components excluding COTS fasteners. Iron or steel components of unknown origin are treated as foreign. If the end product contains multiple components, the cost of all the materials used in such end product is calculated in accordance with the definition of ‘‘cost of components’’ in this section. * * * * *

Fastener means a hardware device that mechanically joins or affixes two or more objects together. Examples of fasteners are nuts, bolts, pins, rivets, nails, clips, and screws. * * * * *

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Foreign iron and steel means iron or steel products not produced in the United States. Produced in the United States means that all manufacturing processes of the iron or steel must take place in the United States, from the initial melting stage through the application of coatings, except metallurgical processes involving refinement of steel additives. The origin of the elements of the iron or steel is not relevant to the determination of whether it is domestic or foreign. * * * * *

Predominantly of iron or steel or a combination of both means that the cost of the iron and steel content exceeds 50 percent of the total cost of all its components. The cost of iron and steel is the cost of the iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the product and a good faith estimate of the cost of iron or steel components excluding COTS fasteners.

Steel means an alloy that includes at least 50 percent iron, between 0.02 and 2 percent carbon, and may include other elements. * * * * * ■ 5. Amend section 25.100 by— ■ a. Removing from the end of paragraph (a)(2) ‘‘and’’;■ b. Redesignating paragraph (a)(3) as paragraph (a)(4); ■ c. Adding a new paragraph (a)(3); and ■ d. Revising the newly redesignated paragraph (a)(4).

The addition and revision read as follows:

25.100 Scope of subpart. (a) * * * (3) Executive Order 13881, July 15,

2019; and (4) Waiver of the domestic content

test of the Buy American statute for acquisition of commercially available off-the-shelf (COTS) items in accordance with 41 U.S.C. 1907, but see 25.101(a)(2)(ii). * * * * * ■ 6. Amend section 25.101 by— ■ a. Removing from paragraph (a) introductory text ‘‘statute uses’’ andadding ‘‘statute and E.O. 13881 use’’ inits place;■ b. Revising paragraph (a)(2); ■ c. Removing from paragraph (b) ‘‘component test’’ and adding ‘‘domesticcontent test’’ in its place; and■ d. Removing from paragraph (c) ‘‘Subpart 25.5’’ and adding ‘‘subpart 25.5’’ in its place.

The revision reads as follows:

25.101 General. (a) * * *

(2)(i) Except for an end product that consists wholly or predominantly of iron or steel or a combination of both, the cost of domestic components must exceed 55 percent of the cost of all the components. In accordance with 41 U.S.C. 1907, this domestic content test of the Buy American statute has been waived for acquisitions of COTS items (see 12.505(a)) (but see paragraph (a)(2)(ii) of this section).

(ii) For an end product that consistswholly or predominantly of iron or steel or a combination of both, the cost of foreign iron and steel must constitute less than 5 percent of the cost of all the components used in the end product (see the definition of ‘‘foreign iron and steel’’ at 25.003). The cost of foreign iron and steel includes but is not limited to the cost of foreign iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the end product and a good faith estimate of the cost of all foreign iron or steel components excluding COTS fasteners. This domestic content test of the Buy American statute has not been waived for acquisitions of COTS items in this category, except for COTS fasteners. * * * * *

25.105 [Amended]

■ 7. Amend section 25.105 by— ■ a. Removing from paragraph (b)(1) ‘‘6 percent’’ and adding ‘‘20 percent’’ in itsplace; and■ b. Removing from paragraph (b)(2) ‘‘12 percent’’ and ‘‘Subpart 19.5’’ and adding‘‘30 percent’’ and ‘‘subpart 19.5’’ in theirplaces, respectively.■ 8. Amend section 25.200 by— ■ a. Removing from the end of paragraph (a)(2) ‘‘and’’;■ b. Redesignating paragraph (a)(3) as paragraph (a)(4); ■ c. Adding a new paragraph (a)(3); and ■ d. Revising the newly redesignated paragraph (a)(4).

The addition and revision read as follows:

25.200 Scope of subpart.

(a) * * * (3) Executive Order 13881, July 15,

2019; and (4) Waiver of the domestic content

test of the Buy American statute for acquisitions of commercially available off-the-shelf (COTS) items in accordance with 41 U.S.C. 1907, but see 25.201(b)(2)(ii). * * * * * ■ 9. Revise section 25.201 to read as follows:

25.201 Policy. (a) Except as provided in 25.202, use

only domestic construction materials in construction contracts performed in the United States.

(b) The Buy American statute restrictsthe purchase of construction materials that are not domestic construction materials. For manufactured construction materials, the Buy American statute and E.O. 13881 use a two-part test to define domestic construction materials.

(1) The article must be manufacturedin the United States; and

(2)(i) Except for construction material that consists wholly or predominantly of iron or steel or a combination of both, the cost of domestic components must exceed 55 percent of the cost of all the components. In accordance with 41 U.S.C. 1907, this domestic content test of the Buy American statute has been waived for acquisitions of COTS items (see 12.505(a)).

(ii) For construction material thatconsists wholly or predominantly of iron or steel or a combination of both, the cost of foreign iron and steel must constitute less than 5 percent of the cost of all the components used in such construction material (see the definition of ‘‘foreign iron and steel’’ at 25.003). The cost of foreign iron and steel includes but is not limited to the cost of foreign iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the construction material and a good faith estimate of the cost of all foreign iron or steel components excluding COTS fasteners. This domestic content test of the Buy American statute has not been waived for acquisitions of COTS items in this category, except for COTS fasteners.

25.204 [Amended]

■ 10. Amend section 25.204 in paragraph (b) by removing ‘‘6 percent’’and adding ‘‘20 percent’’ in its place.■ 11. Amend section 25.504–1 by— ■ a. Revising the table in paragraph (a)(1);■ b. Removing from paragraph (a)(2) ‘‘12 percent’’ and ‘‘$11,200’’ and adding ‘‘30 percent’’ and ‘‘$13,000’’ in their places, respectively; and ■ c. Removing from paragraph (b)(2) ‘‘12 percent’’ and ‘‘$11,424’’ and adding ‘‘30percent’’ and ‘‘$13,260’’ in their places,respectively.

The revision reads as follows:

25.504–1 Buy American statute. (a)(1) * * *

Offer A $16,000 Domestic end product, small business.

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Offer B $15,700 Domestic end product, small business.

Offer C $10,000 U.S.-made end product(not domestic), smallbusiness.

* * * * * ■ 12. Amend section 25.504–2 by revising the table to read as follows:

25.504–2 WTO GPA/Caribbean Basin Trade Initiative/FTAs. * * * * *

Offer A $304,000 U.S.-made end product(not domestic).

Offer B $303,000 U.S.-made end product(domestic), smallbusiness.

Offer C $300,000 Eligible product. Offer D $295,000 Noneligible product (not

U.S.-made).

* * * * *

■ 13. Amend section 25.504–3 by— ■ a. Revising the entry ‘‘Offer B’’ in the table in paragraph (a);■ b. Revising the entry ‘‘Offer B’’ in the table in paragraph (b); and■ c. Revising entries ‘‘Offer B’’ and ‘‘Offer C’’ in the table in paragraph (c).

The revisions read as follows:

25.504–3 FTA/Israeli Trade Act.

(a) * * *

* * * * *Offer B $100,000 Eligible product.

* * * * * (b) * * *

* * * * * Offer B $103,000 Noneligible product.

* * * * * (c) * * *

* * * * * Offer B $103,000 Eligible product. Offer C 100,000 Noneligible product.

* * * * *

■ 14. Amend section 25.504–4 by— ■ a. In paragraph (a)— ■ i. Revising the table; ■ ii. In STEP 1, Items 3 and 5, removing ‘‘6 percent’’ and adding ‘‘20 percent’’ intheir places, respectively; and■ iii. Revising STEP 2 and 3. ■ b. Revising paragraph (b).

The revisions read as follows:

25.504–4 Group award basis.

(a) * * *

Item Offers

A B C

1 ........................................................................................................................... DO = $55,000 EL = $56,000 NEL = $50,000 2 ........................................................................................................................... NEL = 13,000 EL = 10,000 EL = 13,000 3 ........................................................................................................................... NEL = 11,500 DO = 12,000 DO = 10,000 4 ........................................................................................................................... NEL = 24,000 EL = 28,000 NEL = 22,000 5 ........................................................................................................................... DO = 18,000 NEL = 10,000 DO = 14,000

Total .............................................................................................................. 121,500 116,000 109,000

* * * * * STEP 2: Evaluate Offer C against the tentative award pattern for Offers A and B:

Item

Offers

Low offer Tentative award

pattern from A and B

C

1 ............................................................................ A ........................................................................... DO = $55,000 * NEL = $60,0002 ............................................................................ B ........................................................................... EL = 10,000 EL = 13,0003 ............................................................................ B ........................................................................... DO = 12,000 DO = 10,0004 ............................................................................ A ........................................................................... NEL = 24,000 NEL = 22,0005 ............................................................................ B ........................................................................... *NEL = 12,000 DO = 14,000

Total ............................................................... ............................................................................... 113,000 119,000

* Offer + 20 percent.

On a line item basis, apply a factor to any noneligible offer if the other offer for that line item is domestic.

For Item 1, apply a factor to Offer C because Offer A is domestic and the acquisition was not covered by the WTO GPA. The evaluated price of Offer C, Item 1, becomes $60,000 ($50,000 plus 20 percent). Apply a factor to Offer B,

Item 5, because it is a noneligible product and Offer C is domestic. The evaluated price of Offer B is $12,000 ($10,000 plus 20 percent). Evaluate the remaining items without applying a factor.

STEP 3: The tentative unrestricted award pattern from Offers A and B is lower than the evaluated price of Offer

C. Award the combination of Offers Aand B. Note that if Offer C had notspecified all-or-none award, awardwould be made on Offer C for line items3 and 4, totaling an award of $32,000.

(b) Example 2.

Item Offers

A B C

1 ........................................................................................................................... DO = $50,000 EL = $50,500 NEL = $50,000

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Item Offers

A B C

2 ........................................................................................................................... NEL = 10,300 NEL = 10,000 EL = 10,200 3 ........................................................................................................................... EL = 20,400 EL = 21,000 NEL = 20,200 4 ........................................................................................................................... DO = 10,500 DO = 10,300 DO = 10,400

Total .............................................................................................................. 91,200 91,800 90,800

Problem: The solicitation specifies award on a group basis. Assume the Buy American statute applies and the

acquisition cannot be set aside for small business concerns. All offerors are large businesses.

Analysis: (see 25.503(c)) STEP 1: Determine which of the offers

are domestic (see 25.503(c)(1)):

Domestic (percent) Determination

A .............. $50,000 (Offer A1) + $10,500 (Offer A4) = $60,500 ............................................................................$60,500/$91,200 (Offer A Total) = 66.3% .............................................................................................

Domestic.

B .............. $10,300 (Offer B4)/$91,800 (Offer B Total) $ = 11.2% ........................................................................ Foreign. C .............. $10,400 (Offer C4)/$90,800 (Offer C Total) = 11.5% ........................................................................... Foreign.

STEP 2: Determine whether foreign offers are eligible or noneligible offers (see 25.503(c)(2)):

Domestic + eligible (percent) Determination

A .............. N/A (Both Domestic) ............................................................................................................................. Domestic. B .............. $50,500 (Offer B1) + $21,000 (Offer B3) + $10,300 (Offer B4) = $81,800 ..........................................

$81,800/$91,800 (Offer B Total) = 89.1% .............................................................................................Eligible.

C .............. $10,200 (Offer C2) + $10,400 (Offer C4) = $20,600 ............................................................................$20,600/$90,800 (Offer C Total) = 22.7% ............................................................................................

Noneligible.

STEP 3: Determine whether to apply an evaluation factor (see 25.503(c)(3)). The low offer (Offer C) is a foreign offer. There is no eligible offer lower than the domestic offer. Therefore, apply the factor to the low offer. Addition of the 20 percent factor (use 30 percent if Offer A is a small business) to Offer C yields an evaluated price of $108,960 ($90,800 + 20 percent). Award on Offer A (see25.502(c)(4)(ii)). Note that, if Offer A were greater than Offer B, an evaluation factor would not be applied, and award would be on Offer C (see 25.502(c)(3)).

25.601 [Amended]

■ 15. Amend section 25.601 by removing the definition ‘‘Steel’’.

25.604 [Amended]

■ 16. Amend section 25.604 in paragraph (c)(2) by removing ‘‘6percent’’ and adding ‘‘20 percent’’ in itsplace.

25.605 [Amended]

■ 17. Amend section 25.605 by— ■ a. Removing from paragraph (a)(2) ‘‘6 percent’’ and adding ‘‘20 percent’’ in itsplace; and■ b. Removing from paragraph (a)(3) ‘‘.06’’ and adding ‘‘.20’’ in its place.

PART 52—SOLICITATION PROVISIONS AND CONTRACT CLAUSES

■ 18. Amend section 52.212–3 by— ■ a. Revising the date of the provision; and■ b. Revising paragraphs (f)(1), (g)(1)(i), the first sentence of (g)(1)(ii), and(g)(1)(iii) introductory text.

The revisions read as follows:

52.212–3 Offeror Representations and Certifications—Commercial Items.

* * * * *

Offeror Representations and Certifications—Commercial Items (Jan 2021)

* * * * * (f) * * * (1)(i) The Offeror certifies that each end

product, except those listed in paragraph (f)(2) of this provision, is a domestic end product.

(ii) The Offeror shall list as foreign endproducts those end products manufactured in the United States that do not qualify as domestic end products.

(iii) The terms ‘‘domestic end product,’’‘‘end product,’’ ‘‘foreign end product,’’ and ‘‘United States’’ are defined in the clause of this solicitation entitled ‘‘Buy American- Supplies.’’

* * * * *

(g)(1) * * * (i)(A) The Offeror certifies that each end

product, except those listed in paragraph (g)(1)(ii) or (iii) of this provision, is a domestic end product.

(B) The terms ‘‘Bahrainian, Moroccan,Omani, Panamanian, or Peruvian end product,’’ ‘‘domestic end product,’’ ‘‘end product,’’ ‘‘foreign end product,’’ ‘‘Free Trade Agreement country,’’ ‘‘Free Trade Agreement country end product,’’ ‘‘Israeli end product,’’ and ‘‘United States’’ are defined in the clause of this solicitation entitled ‘‘Buy American— Free Trade Agreements—Israeli Trade Act.’’

(ii) The Offeror certifies that the followingsupplies are Free Trade Agreement country end products (other than Bahrainian, Moroccan, Omani, Panamanian, or Peruvian end products) or Israeli end products as defined in the clause of this solicitation entitled ‘‘Buy American—Free Trade Agreements—Israeli Trade Act.’’

* * * * * (iii) The Offeror shall list those supplies

that are foreign end products (other than those listed in paragraph (g)(1)(ii) of this provision) as defined in the clause of this solicitation entitled ‘‘Buy American—Free Trade Agreements—Israeli Trade Act.’’ The Offeror shall list as other foreign end products those end products manufactured in the United States that do not qualify as domestic end products.

* * * * * ■ 19. Amend section 52.212–5 by—

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■ a. Revising the date of the clause; and ■ b. Removing from paragraphs (b)(48) and (b)(49)(i) through (iv) ‘‘(MAY2014)’’ and adding ‘‘(JAN 2021)’’ in theirplaces, respectively.

The revision reads as follows:

52.212–5 Contract Terms and Conditions Required To Implement Statutes or Executive Orders—Commercial Items.

* * * * *

Contract Terms and Conditions Required To Implement Statutes or Executive Orders—Commercial Items (Jan 2021)

* * * * * ■ 20. Amend section 52.213–4 by— ■ a. Revising the date of the clause; and ■ b. Removing from paragraph (b)(1)(xvii) introductory text ‘‘(MAY2014)’’ and adding ‘‘(JAN 2021)’’ in itsplace.

The revision reads as follows:

52.213–4 Terms and Conditions— Simplified Acquisitions (Other Than Commercial Items).

* * * * *

Terms and Conditions—Simplified Acquisitions (Other Than Commercial Items) (Jan 2021)

* * * * * ■ 21. Amend section 52.225–1 by— ■ a. Revising the date of the clause; ■ b. In paragraph (a): ■ i. Removing from paragraph (1)(i) in the definition ‘‘Commercially availableoff-the-shelf (COTS) item’’ ‘‘FAR’’ andadding ‘‘Federal Acquisition Regulation(FAR)’’ in its place;■ ii. Revising the definition ‘‘Domesticend product’’;■ iii. Adding in alphabetical order the definitions ‘‘Fastener’’ ‘‘Foreign ironand steel’’ ‘‘Predominantly of iron orsteel or a combination of both’’ and‘‘Steel’’; and■ c. Revising paragraph (b).

The revisions and additions read asfollows:

52.225–1 Buy American—Supplies.

* * * * *

Buy American—Supplies (Jan 2021)

(a) * * * Domestic end product means— (1) For an end product that does not

consist wholly or predominantly of iron or steel or a combination of both—

(i) An unmanufactured end product minedor produced in the United States;

(ii) An end product manufactured in theUnited States, if—

(A) The cost of its components mined,produced, or manufactured in the United States exceeds 55 percent of the cost of all its components. Components of foreign origin of the same class or kind as those that the

agency determines are not mined, produced, or manufactured in sufficient and reasonably available commercial quantities of a satisfactory quality are treated as domestic. Components of unknown origin are treated as foreign. Scrap generated, collected, and prepared for processing in the United States is considered domestic; or

(B) The end product is a COTS item; or(2) For an end product that consists wholly

or predominantly of iron or steel or a combination of both, an end product manufactured in the United States, if the cost of foreign iron and steel constitutes less than 5 percent of the cost of all the components used in the end product. The cost of foreign iron and steel includes but is not limited to the cost of foreign iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the end product and a good faith estimate of the cost of all foreign iron or steel components excluding COTS fasteners. Iron or steel components of unknown origin are treated as foreign. If the end product contains multiple components, the cost of all the materials used in such end product is calculated in accordance with the definition of ‘‘cost of components’’.

* * * * * Fastener means a hardware device that

mechanically joins or affixes two or more objects together. Examples of fasteners are nuts, bolts, pins, rivets, nails, clips, and screws.

* * * * * Foreign iron and steel means iron or steel

products not produced in the United States. Produced in the United States means that all manufacturing processes of the iron or steel must take place in the United States, from the initial melting stage through the application of coatings, except metallurgical processes involving refinement of steel additives. The origin of the elements of the iron or steel is not relevant to the determination of whether it is domestic or foreign.

Predominantly of iron or steel or a combination of both means that the cost of the iron and steel content exceeds 50 percent of the total cost of all its components. The cost of iron and steel is the cost of the iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the product and a good faith estimate of the cost of iron or steel components excluding COTS fasteners.

Steel means an alloy that includes at least 50 percent iron, between 0.02 and 2 percent carbon, and may include other elements.

* * * * * (b) 41 U.S.C. chapter 83, Buy American,

provides a preference for domestic end products for supplies acquired for use in the United States. In accordance with 41 U.S.C. 1907, the domestic content test of the Buy American statute is waived for an end product that is a COTS item (see 12.505(a)(1)), except that for an end product that consists wholly or predominantly of iron or steel or a combination of both, the domestic content test is applied only to the iron and steel content of the end product, excluding COTS fasteners.

* * * * *

■ 22. Amend section 52.225–2 by— ■ a. Revising the date of the provision and paragraphs (a) and (b);■ b. Removing from paragraph (c) ‘‘Part’’ and adding ‘‘part’’ in its place.

The revisions read as follows:

52.225–2 Buy American Certificate.

* * * * *

Buy American Certificate (Jan 2021)

(a)(1) The Offeror certifies that each end product, except those listed in paragraph (b) of this provision, is a domestic end product.

(2) The Offeror shall list as foreign endproducts those end products manufactured in the United States that do not qualify as domestic end products.

(3) The terms ‘‘domestic end product,’’‘‘end product,’’ and ‘‘foreign end product’’ are defined in the clause of this solicitation entitled ‘‘Buy American—Supplies.’’

(b) Foreign End Products:

Line item No. Country of origin llllllll llllllll

llllllll llllllll

llllllll llllllll

[List as necessary.]

* * * * * ■ 23. Amend section 52.225–3 by— ■ a. Revising the date of the clause; ■ b. In paragraph (a): ■ i. Removing from paragraph (1)(i) in the definition ‘‘Commercially availableoff-the-shelf (COTS) item’’ ‘‘FAR’’ andadding ‘‘Federal Acquisition Regulation(FAR)’’ in its place;■ ii. Revising the definition ‘‘Domesticend product’’; and■ iii. Adding in alphabetical order the definitions ‘‘Fastener’’ ‘‘Foreign ironand steel’’ ‘‘Predominantly of iron orsteel or a combination of both’’ and‘‘Steel’’;■ c. Revising the second sentence of paragraph (c);■ d. Revising the date in the introductory text and the secondsentence of paragraph (c) of Alternate I;■ e. Revising the date in the introductory text and the second sentence of paragraph (c) of Alternate II and adding a period to the end of paragraph (c); and ■ f. Revising the date in the introductory text and the second sentence ofparagraph (c) of Alternate III.

The revisions and additions read as follows:

52.225–3 Buy American—Free Trade Agreements—Israeli Trade Act.

* * * * *

Buy American—Free Trade Agreements—Israeli Trade Act (Jan 2021)

(a) * * * Domestic end product means—

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(1) For an end product that does notconsist wholly or predominantly of iron or steel or a combination of both—

(i) An unmanufactured end product minedor produced in the United States;

(ii) An end product manufactured in theUnited States, if—

(A) The cost of its components mined,produced, or manufactured in the United States exceeds 55 percent of the cost of all its components. Components of foreign origin of the same class or kind as those that the agency determines are not mined, produced, or manufactured in sufficient and reasonably available commercial quantities of a satisfactory quality are treated as domestic. Components of unknown origin are treated as foreign. Scrap generated, collected, and prepared for processing in the United States is considered domestic; or

(B) The end product is a COTS item; or(2) For an end product that consists wholly

or predominantly of iron or steel or a combination of both, an end product manufactured in the United States, if the cost of foreign iron and steel constitutes less than 5 percent of the cost of all the components used in the end product. The cost of foreign iron and steel includes but is not limited to the cost of foreign iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the end product and a good faith estimate of the cost of all foreign iron or steel components excluding COTS fasteners. Iron or steel components of unknown origin are treated as foreign. If the end product contains multiple components, the cost of all the materials used in such end product is calculated in accordance with the definition of ‘‘cost of components’’.

* * * * * Fastener means a hardware device that

mechanically joins or affixes two or more objects together. Examples of fasteners are nuts, bolts, pins, rivets, nails, clips, and screws.

* * * * * Foreign iron and steel means iron or steel

products not produced in the United States. Produced in the United States means that all manufacturing processes of the iron or steel must take place in the United States, from the initial melting stage through the application of coatings, except metallurgical processes involving refinement of steel additives. The origin of the elements of the iron or steel is not relevant to the determination of whether it is domestic or foreign.

* * * * *Predominantly of iron or steel or a

combination of both means that the cost of the iron and steel content exceeds 50 percent of the total cost of all its components. The cost of iron and steel is the cost of the iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the product and a good faith estimate of the cost of iron or steel components excluding COTS fasteners.

Steel means an alloy that includes at least 50 percent iron, between 0.02 and 2 percent carbon, and may include other elements.

* * * * *

(c) * * * In accordance with 41 U.S.C.1907, the domestic content test of the Buy American statute is waived for an end product that is a COTS item (see 12.505(a)(1)), except that for an end product that consists wholly or predominantly of iron or steel or a combination of both, the domestic content test is applied only to the iron and steel content of the end product, excluding COTS fasteners. * * *

Alternate I (Jan 2021) * * *

(c) * * * In accordance with 41 U.S.C.1907, the domestic content test of the Buy American statute is waived for an end product that is a COTS item (see 12.505(a)(1)), except that for an end product that consists wholly or predominantly of iron or steel or a combination of both, the domestic content test is applied only to the iron and steel content of the end product, excluding COTS fasteners. * * *

Alternate II (Jan 2021) * * *

(c) * * * In accordance with 41 U.S.C.1907, the domestic content test of the Buy American statute is waived for an end product that is a COTS item (see 12.505(a)(1)), except that for an end product that consists wholly or predominantly of iron or steel or a combination of both, the domestic content test is applied only to the iron and steel content of the end product, excluding COTS fasteners. * * *

Alternate III (Jan 2021) * * *

(c) * * * In accordance with 41 U.S.C.1907, the domestic content test of the Buy American statute is waived for an end product that is a COTS item (see 12.505(a)(1)), except that for an end product that consists wholly or predominantly of iron or steel or a combination of both, the domestic content test is applied only to the iron and steel content of the end product, excluding COTS fasteners. * * * ■ 24. Amend section 52.225–4 by— ■ a. Revising the date of the provision; ■ b. Revising paragraph (a); ■ c. In paragraph (b) introductory text removing ‘‘offeror’’ and adding‘‘Offeror’’ in its place;■ d. Revising the first and second sentences of paragraph (c);■ e. Removing from paragraph (d) ‘‘Part’’ and adding ‘‘part’’ in its place;■ f. In Alternate I by— ■ i. Revising the date of the Alternate; and■ ii. Removing from paragraph (b) introductory text ‘‘offeror’’ and adding ‘‘Offeror’’ in its place; ■ g. In Alternate II by— ■ i. Revising the date of the Alternate; and■ ii. Removing from paragraph (b) introductory text ‘‘offeror’’ and adding‘‘Offeror’’ in its place; and■ h. In Alternate III by— ■ i. Revising the date of the Alternate; and■ ii. Removing from paragraph (b) introductory text ‘‘offeror’’ and adding

‘‘Offeror’’ in its place, and removing from the second paragraph of (b) ‘‘Products (Other’’ and adding ‘‘Products (other’’ in its place.

The revisions read as follows:

52.225–4 Buy American—Free Trade Agreements—Israeli Trade Act Certificate.

* * * * *

Buy American—Free Trade Agreements—Israeli Trade Act Certificate (Jan 2021)

(a)(1) The Offeror certifies that each end product, except those listed in paragraph (b) or (c) of this provision, is a domestic end product.

(2) The terms ‘‘Bahrainian, Moroccan,Omani, Panamanian, or Peruvian end product,’’ ‘‘domestic end product,’’ ‘‘end product,’’ ‘‘foreign end product,’’ ‘‘Free Trade Agreement country,’’ ‘‘Free Trade Agreement country end product,’’ ‘‘Israeli end product,’’ and ‘‘United States’’ are defined in the clause of this solicitation entitled ‘‘Buy American— Free Trade Agreements—Israeli Trade Act.’’

* * * * * (c) The Offeror shall list those supplies that

are foreign end products (other than those listed in paragraph (b) of this provision) as defined in the clause of this solicitation entitled ‘‘Buy American—Free Trade Agreements—Israeli Trade Act.’’ The Offeror shall list as other foreign end products those end products manufactured in the United States that do not qualify as domestic end products.

* * * * *

Alternate I (Jan 2021) * * *

Alternate II (Jan 2021) * * *

Alternate III (Jan 2021) * * *

■ 25. Amend section 52.225–9 by— ■ a. Revising the date of the clause; ■ b. In paragraph (a): ■ i. Removing from paragraph (1)(i) in the definition ‘‘Commercially availableoff-the-shelf (COTS) item’’ ‘‘FAR’’ andadding ‘‘Federal Acquisition Regulation(FAR)’’ in its place;■ ii. Revising the definition ‘‘Domesticconstruction material’’; and■ iii. Adding in alphabetical order the definitions ‘‘Fastener’’ ‘‘Foreign ironand steel’’ ‘‘Predominantly of iron orsteel or a combination of both’’ and‘‘Steel’’;■ c. Revising paragraph (b)(1); ■ d. Removing from paragraph (b)(3)(i) ‘‘6 percent’’ and adding ‘‘20 percent’’ inits place; and■ e. Revising paragraph (d).

The revisions and additions read asfollows:

52.225–9 Buy American—Construction Materials.

* * * * *

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Buy American—Construction Materials (Jan 2021)

(a) * * * Domestic construction material means— (1) For construction material that does not

consist wholly or predominantly of iron or steel or a combination of both—

(i) An unmanufactured constructionmaterial mined or produced in the United States; or

(ii) A construction material manufacturedin the United States, if—

(A) The cost of its components mined,produced, or manufactured in the United States exceeds 55 percent of the cost of all its components. Components of foreign origin of the same class or kind for which nonavailability determinations have been made are treated as domestic. Components of unknown origin are treated as foreign; or

(B) The construction material is a COTSitem; or

(2) For construction material that consistswholly or predominantly of iron or steel or a combination of both, a construction material manufactured in the United States if the cost of foreign iron and steel constitutes less than 5 percent of the cost of all components used in such construction material. The cost of foreign iron and steel includes but is not limited to the cost of foreign iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet),

castings, or forgings utilized in the manufacture of the construction material and a good faith estimate of the cost of all foreign iron or steel components excluding COTS fasteners. Iron or steel components of unknown origin are treated as foreign. If the construction material contains multiple components, the cost of all the materials used in such construction material is calculated in accordance with the definition of ‘‘cost of components’’.

Fastener means a hardware device that mechanically joins or affixes two or more objects together. Examples of fasteners are nuts, bolts, pins, rivets, nails, clips, and screws.

* * * * * Foreign iron and steel means iron or steel

products not produced in the United States. Produced in the United States means that all manufacturing processes of the iron or steel must take place in the United States, from the initial melting stage through the application of coatings, except metallurgical processes involving refinement of steel additives. The origin of the elements of the iron or steel is not relevant to the determination of whether it is domestic or foreign.

Predominantly of iron or steel or a combination of both means that the cost of the iron and steel content exceeds 50 percent of the total cost of all its components. The cost of iron and steel is the cost of the iron or steel mill products (such as bar, billet,

slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the product and a good faith estimate of the cost of iron or steel components excluding COTS fasteners.

Steel means an alloy that includes at least 50 percent iron, between 0.02 and 2 percent carbon, and may include other elements.

* * * * * (b) * * * (1) This clause implements 41

U.S.C. chapter 83, Buy American, by providing a preference for domestic construction material. In accordance with 41 U.S.C. 1907, the domestic content test of the Buy American statute is waived for construction material that is a COTS item, except that for construction material that consists wholly or predominantly of iron or steel or a combination of both, the domestic content test is applied only to the iron and steel content of the construction materials, excluding COTS fasteners. (See FAR 12.505(a)(2)). The Contractor shall use only domestic construction material in performing this contract, except as provided in paragraphs (b)(2) and (b)(3) of this clause.

* * * * * (d) Data. To permit evaluation of requests

under paragraph (c) of this clause based on unreasonable cost, the Contractor shall include the following information and any applicable supporting data based on the survey of suppliers:

FOREIGN AND DOMESTIC CONSTRUCTION MATERIALS PRICE COMPARISON

Construction material description Unit of measure Quantity Price

(dollars) *

Item 1: Foreign construction material. Domestic construction material.

Item 2: Foreign construction material. Domestic construction material.

[* Include all delivery costs to the construction site and any applicable duty (whether or not a duty-free entry certificate is issued)]. [List name, address, telephone number, and contact for suppliers surveyed. Attach copy of response; if oral, attach summary.] [Include other applicable supporting information.]

(End of clause) ■ 26. Amend section 52.225–11 by— ■ a. Revising the date of the clause; ■ b. In paragraph (a): ■ i. Removing from paragraph (1)(i) in the definition ‘‘Commercially availableoff-the-shelf (COTS) item’’ ‘‘FAR’’ andadding ‘‘Federal Acquisition Regulation(FAR)’’ in its place;■ ii. Revising the definition ‘‘Domesticconstruction material’’;■ iii. Adding in alphabetical order the definitions ‘‘Fastener’’ ‘‘Foreign iron and steel’’ ‘‘Predominantly of iron or steel or a combination of both’’ and ‘‘Steel’’; ■ c. Revising paragraph (b)(1); ■ d. Removing from paragraph (b)(4)(i) ‘‘6 percent’’ and adding ‘‘20 percent’’ in its place; ■ e. Revising paragraph (d); ■ f. In Alternate I—

■ i. Revising the date of the Alternate; and■ ii. Revising paragraph (b)(1).

The revisions and additions read asfollows:

52.225–11 Buy American—Construction Materials Under Trade Agreements. * * * * *

Buy American—Construction Materials Under Trade Agreements (Jan 2021)

(a) * * *Domestic construction material means—(1) For construction material that does not

consist wholly or predominantly of iron or steel or a combination of both—

(i) An unmanufactured constructionmaterial mined or produced in the United States; or

(ii) A construction material manufacturedin the United States, if—

(A) The cost of its components mined,produced, or manufactured in the United

States exceeds 55 percent of the cost of all its components. Components of foreign origin of the same class or kind for which nonavailability determinations have been made are treated as domestic. Components of unknown origin are treated as foreign; or

(B) The construction material is a COTSitem; or

(2) For construction material that consistswholly or predominantly of iron or steel or a combination of both, a construction material manufactured in the United States if the cost of foreign iron and steel constitutes less than 5 percent of the cost of all components used in such construction material. The cost of foreign iron and steel includes but is not limited to the cost of foreign iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the construction material and a good faith estimate of the cost of all foreign iron or steel components excluding COTS fasteners. Iron or steel components of unknown origin are treated as foreign. If the

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construction material contains multiple components, the cost of all the materials used in such construction material is calculated in accordance with the definition of ‘‘cost of components’’.

Fastener means a hardware device that mechanically joins or affixes two or more objects together. Examples of fasteners are nuts, bolts, pins, rivets, nails, clips, and screws.

* * * * * Foreign iron and steel means iron or steel

products not produced in the United States. Produced in the United States means that all manufacturing processes of the iron or steel must take place in the United States, from the initial melting stage through the application of coatings, except metallurgical processes involving refinement of steel additives. The origin of the elements of the iron or steel is

not relevant to the determination of whether it is domestic or foreign.

* * * * * Predominantly of iron or steel or a

combination of both means that the cost of the iron and steel content exceeds 50 percent of the total cost of all its components. The cost of iron and steel is the cost of the iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the product and a good faith estimate of the cost of iron or steel components excluding COTS fasteners.

Steel means an alloy that includes at least 50 percent iron, between 0.02 and 2 percent carbon, and may include other elements.

* * * * * (b) * * * (1) This clause implements 41

U.S.C. chapter 83, Buy American, by providing a preference for domestic construction material. In accordance with 41

U.S.C. 1907, the domestic content test of the Buy American statute is waived for construction material that is a COTS item, except that for construction material that consists wholly or predominantly of iron or steel or a combination of both, the domestic content test is applied only to the iron and steel content of the construction material, excluding COTS fasteners. (See FAR 12.505(a)(2)). In addition, the Contracting Officer has determined that the WTO GPA and Free Trade Agreements (FTAs) apply to this acquisition. Therefore, the Buy American restrictions are waived for designated country construction materials.

* * * * * (d) Data. To permit evaluation of requests

under paragraph (c) of this clause based on unreasonable cost, the Contractor shall include the following information and any applicable supporting data based on the survey of suppliers:

FOREIGN AND DOMESTIC CONSTRUCTION MATERIALS PRICE COMPARISON

Construction material description Unit of measure Quantity Price

(dollars) *

Item 1: Foreign construction material. Domestic construction material.

Item 2: Foreign construction material. Domestic construction material.

[* Include all delivery costs to the construction site and any applicable duty (whether or not a duty-free entry certificate is issued)]. [List name, address, telephone number, and contact for suppliers surveyed. Attach copy of response; if oral, attach summary.] [Include other applicable supporting information.]

(End of clause)

Alternate I (Jan 2021) * * *

(b) * * * (1) This clause implements 41U.S.C. chapter 83, Buy American, by providing a preference for domestic construction material. In accordance with 41 U.S.C. 1907, the domestic content test of the Buy American statute is waived for construction material that is a COTS item, except that for construction material that consists wholly or predominantly of iron or steel or a combination of both, the domestic content test is applied only to the iron and steel content of the construction material, excluding COTS fasteners. (See FAR 12.505(a)(2)). In addition, the Contracting Officer has determined that the WTO GPA and all the Free Trade Agreements except the Bahrain FTA, NAFTA, and the Oman FTA apply to this acquisition. Therefore, the Buy American statute restrictions are waived for designated country construction materials other than Bahrainian, Mexican, or Omani construction materials.

* * * * * ■ 27. Amend section 52.225–21 by— ■ a. Revising the date of the clause; ■ b. In paragraph (a) in the definition ‘‘Steel’’ removing ‘‘.02’’ and adding‘‘0.02’’ in its place;■ c. Removing from paragraph (b)(4)(i)(B) ‘‘6 percent’’ and adding ‘‘20percent’’ in its place;

■ d. Removing from paragraph (c) heading ‘‘Section’’ and adding ‘‘section’’in its place; and■ e. In paragraph (d): ■ i. Removing from the first undesignated paragraph following thetable ‘‘reponse’’ and adding ‘‘response’’in its place; and■ ii Removing from the second undesignated paragraph following the table ‘‘*Include’’ and adding ‘‘[*Include’’ in its place.

The revision reads as follows:

52.225–21 Required Use of American Iron, Steel, and Manufactured Goods—Buy American Statute—Construction Materials.

* * * * *

Required Use of American Iron, Steel, and Manufactured Goods—Buy American Statute—Construction Materials (Jan 2021)

* * * * * ■ 28. Amend section 52.225–22 by— ■ a. Revising the date of the provision; ■ b. Removing from paragraph (b) ‘‘offeror’’ and adding ‘‘Offeror’’ in itsplace wherever it appears;■ c. Removing from paragraph (c)(1)(ii) ‘‘6 percent’’ and adding ‘‘20 percent’’ inits place;

■ d. Removing from paragraph (c)(3) ‘‘offeror’’ and adding ‘‘Offeror’’ in itsplace; and■ e. Removing from paragraphs (d)(1), (2), and (3) introductory text ‘‘offeror’’and adding ‘‘Offeror’’ in their places,respectively.

The revision reads as follows:

52.225–22 Notice of Required Use of American Iron, Steel, and Manufactured Goods—Buy American Statute— Construction Materials.

* * * * *

Notice of Required Use of American Iron, Steel, and Manufactured Goods— Buy American Statute—Construction Materials (Jan 2021)

* * * * *

■ 29. Amend section 52.225–23 by— ■ a. Revising the date of the clause; ■ b. In paragraph (a), in the definition ‘‘Steel’’ removing ‘‘.02’’ and adding‘‘0.02’’ in its place; and■ c. Removing from paragraph (b)(4)(i)(B) ‘‘6 percent’’ and adding ‘‘20percent’’ in its place.

The revision reads as follows:

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52.225–23 Required Use of American Iron, Steel, and Manufactured Goods—Buy American Statute—Construction Materials Under Trade Agreements.

* * * * *

Required Use of American Iron, Steel, and Manufactured Goods—Buy American Statute—Construction Materials Under Trade Agreements (Jan 2021)

* * * * *

■ 30. Amend section 52.225–24 by— ■ a. Revising the date of the provision; ■ b. Removing from paragraph (b) ‘‘offeror’’ and adding ‘‘Offeror’’ in itsplace wherever it appears;■ c. Removing from paragraph (c)(1)(ii) ‘‘6 percent’’ and adding ‘‘20 percent’’ inits place;■ d. Removing from paragraph (c)(3) ‘‘offeror’’ and adding ‘‘Offeror’’ in itsplace; and■ e. Removing from paragraphs (d)(1), (2), and (3) introductory text ‘‘offeror’’and adding ‘‘Offeror’’ in their places,respectively.

The revision reads as follows:

52.225–24 Notice of Required Use of American Iron, Steel, and Manufactured Goods—Buy American Statute— Construction Materials Under Trade Agreements.

* * * * *

Notice of Required Use of American Iron, Steel, and Manufactured Goods— Buy American Statute—Construction Materials Under Trade Agreements (Jan 2021)

* * * * * [FR Doc. 2021–00710 Filed 1–15–21; 8:45 am]

BILLING CODE 6820–EP–P

DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Chapter 1

[Docket No. FAR–2021–0051, Sequence No. 1]

Federal Acquisition Regulation; Federal Acquisition Circular 2021–04; Small Entity Compliance Guide

AGENCY: Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Small Entity Compliance Guide.

SUMMARY: This document is issued under the joint authority of DOD, GSA, and NASA. This Small Entity Compliance Guide has been prepared in accordance with section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996. It consists of a summary of the rule appearing in Federal Acquisition Circular (FAC) 2021–04, which amends the Federal Acquisition Regulation (FAR). Interested parties may obtain further information regarding this rule by referring to FAC 2021–04, which precedes this document.

DATES: January 19, 2021.

ADDRESSES: The FAC, including the SECG, is available via the internet at https://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Ms. Zenaida Delgado, Procurement Analyst, at 202–969–7207 or zenaida.delgado@gsa.gov for clarification of content. For information pertaining to status or publication schedules, contact the Regulatory Secretariat Division at 202– 501–4755 or GSARegSec@gsa.gov. Please cite FAC 2021–04, FAR Case 2019–016. An asterisk (*) next to a rule indicates that a regulatory flexibility analysis has been prepared.

RULES LISTED IN FAC 2021–04

Subject FAR case

* Maximizing Use of American-Made Goods, Products and Ma-terials ......................................... 2019–016

ADDRESSES: The FAC, including the SECG, is available via the internet at https://www.regulations.gov. SUPPLEMENTARY INFORMATION: A summary for the FAR rule follows. For the actual revisions and/or amendments made by this FAR rule, refer to the specific subject set forth in the document following this summary. FAC 2021–04 amends the FAR as follows:

Maximizing Use of American-Made Goods, Products, and Materials (FAR Case 2019–016)

This final rule strengthens domestic preferences under the Buy American statute by making adjustments to the required percentage of domestic content and the existing percentages for the price evaluation preferences in an effort to decrease the amount of foreign- sourced content in a U.S. manufactured product to promote economic and national security, help stimulate economic growth, and create jobs. The price evaluation preferences increase from 6 percent to 20 percent for large business and from 12 percent to 30 percent for small business; for DoD procurements there is no change to the DoD 50 percent amount. The domestic content requirement for iron and steel increases from 50 percent to 95 percent; for other end products and construction materials, the domestic content requirement increases from 50 percent to 55 percent. Foreign iron and steel is iron or steel products that are not produced in the United States. The rule implements E.O. 13881, Maximizing Use of American-Made Goods, Products, and Materials. This final rule will not have a significant economic impact on a substantial number of small entities.

William F. Clark, Director, Office of Government-wide Acquisition Policy, Office of Acquisition Policy, Office of Government-wide Policy. [FR Doc. 2021–00711 Filed 1–15–21; 8:45 am]

BILLING CODE 6820–EP–P

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DEPARTMENT OF DEFENSE

Office of the Secretary

32 CFR Part 117

[Docket ID: DOD–2020–OS–0045]

RIN 0790–AK85

National Industrial Security Program Operating Manual (NISPOM)

AGENCY: Office of the Under Secretary of Defense for Intelligence & Security, Department of Defense (DoD). ACTION: Final rule with request for comment.

SUMMARY: The Department of Defense (DoD) is codifying the National Industrial Security Program Operating Manual (NISPOM) in regulation. The NISPOM establishes requirements for the protection of classified information disclosed to or developed by contractors, licensees, grantees, or certificate holders (hereinafter referred to as contractors) to prevent unauthorized disclosure. In addition to adding the NISPOM to the Code of Federal Regulations (CFR), this rule incorporates the requirements of Security Executive Agent Directive (SEAD) 3, ‘‘Reporting Requirements for Personnel with Access to Classified Information or Who Hold a Sensitive Position.’’ SEAD 3 requires reporting by all contractor cleared personnel who have been granted eligibility for access to classified information. This NISPOM rule provides for a single nation-wide implementation plan which will, with this rule, include SEAD 3 reporting by all contractor cleared personnel to report specific activities that may adversely impact their continued national security eligibility, such as reporting of foreign travel and foreign contacts. NISP Cognizant Security Agencies (CSAs) shall conduct an analysis of such reported activities to determine whether they pose a potential threat to national security and take appropriate action. Finally, the rule also implements the provisions of Section 842 of Public Law 115–232, which removes the requirement for a covered National Technology and Industrial Base (NTIB) entity operating under a special security agreement pursuant to the NISP to obtain a national interest determination as a condition for access to proscribed information. DATES: Effective date: This rule is effective February 24, 2021. Comments must be received by February 19, 2021. ADDRESSES: You may submit comments, identified by docket number and/or Regulatory Information Number (RIN)

and title, by any of the following methods:

• Federal Rulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.

• Mail: DoD cannot receive writtencomments at this time due to the COVID–19 pandemic. Comments should be sent electronically to the docket listed above.

Instructions: All submissions received must include the agency name and docket number or RIN for this Federal Register document. The general policy for comments and other submissions from members of the public is to make these submissions available for public viewing at http://www.regulations.gov as they are received without change, including any personal identifiers or contact information. FOR FURTHER INFORMATION CONTACT: Valerie Heil, 703–692–3754. SUPPLEMENTARY INFORMATION:

I. Overview of the NISP and NISPOM

In April 1990, President George Bushdirected the National Security Council to explore the creation of a single, integrated industrial security program to improve security protection and provide cost savings. Prior to this, contractors doing business with different U.S. Government (USG) agencies which required access to classified information had to meet different requirements to protect the same levels of classified information, e.g., the type of safe to protect a specific classified item could vary across both contracts and agencies. The diversity of industrial security requirements levied on contractors by an estimated 21 USG agencies created a significant burden on both industry and government and increased the cost of the goods and services provided to the USG.

Representatives from government and industry participated in an initiative which led to the creation of Executive Order (E.O.) 12829 ‘‘National Industrial Security Program (NISP)’’ (available at https://www.archives.gov/files/isoo/ policy-documents/eo-12829-with-eo- 13691-amendments.pdf). With the National Security Council providing overall policy direction, this E.O. established the NISP as the single integrated program to protect classified information and preserve our Nation’s economic and technological interests. Nothing in the E.O. shall supersede the authority of the Secretary of Energy or the Nuclear Regulatory Commission under the Atomic Energy Act of 1954, as amended, or the authority of the Director of National Intelligence (or any Intelligence Community element) under

the Intelligence Reform and Terrorism Prevention Act of 2004, the National Security Act of 1947, as amended, or Executive Order No. 12333 of December 8, 1981, as amended, or the authority of the Secretary of Homeland Security, as the Executive Agent for the Classified National Security Information Program established under Executive Order 13549 of August 18, 2010 (Classified National Security Information Program for State, Local, Tribal, and Private Sector Entities). The Information Security Oversight Office (ISOO), a component of the National Archives and Records Administration (NARA), was tasked with overseeing overall implementation of the NISP with the goal of:

• Holding classification activity to theminimum necessary to protect the national security;

• ensuring the safeguarding ofclassified national security information in both USG and industry in a cost- effective and efficient manner; and

• promoting declassification andpublic access to information as soon as national security considerations permit.

ISOO issues implementing directives and produces an annual report to the President on the NISP. E.O. 12829 also established the National Industrial Security Program Policy Advisory Committee (NISPPAC), a federal advisory committee comprised of both Government and industry representatives, which is responsible for recommending changes in industrial security policy. The NISPPAC, chaired by the Director of the ISOO, also advises ISOO on all issues concerning the policies of the NISP, including recommended changes to those policies, and serves as a forum to discuss policy issues in dispute. The NISPPAC industry members represent all types and sizes of NISP cleared entities, whose scope of operations range from a one person entity, having a single classified contract to some of the largest U.S. entities, having numerous classified contracts. All NISPPAC industry members have expertise comprising the primary functions of an industrial security program, to include information, personnel, physical, and information system security.

Five USG executive branch agencies— DoD, DOE, the Nuclear Regulatory Commission (NRC), the Office of the Director of National Intelligence (ODNI), and the Department of Homeland Security (DHS)—have been designated as Cognizant Security Agencies (CSAs) and have specific responsibilities within the NISP. For DoD, the Defense Counterintelligence and Security Agency (DCSA) is the Cognizant

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Security Office (CSO) for DoD Components and non-DoD agencies where an industrial security agreement is in place. DCSA, as the DoD CSO, DOE, and NRC each has the following responsibilities:

• Administers the NISP.• provides security oversight.• conducts security review actions.• provides security education and

training. • provides supplementary procedures

for unique mission requirements (e.g. DoD publishes industrial security letters (ISLs), which provide DoD-specific guidance and clarification on NISP policies and supplementary procedures to its unique CSO mission requirements (available at: https://www.dcsa.mil/mc/ ctp/tools/)).

• assesses, authorizes and overseescontractor information systems used to process classified information.

• makes temporary national securityeligibility determinations pursuant to SEAD 8, Temporary Eligibility (available at: https://www.dni.gov/files/ NCSC/documents/Regulations/SEAD-8_Temporary_Eligibility_U.pdf), for contractor personnel who require access to classified information.

DHS receives NISP industrial security services from DoD due to its industrial security services agreement and also has the following responsibilities:

• Prescribes procedures for theportions of this rule that pertain to the CCIPP.

• retains authority over access toinformation under the CCIPP.

• inspects and monitors contractor,licensee, certificate holder, and grantee programs and facilities that involve access to CCIPP.

ODNI has the following responsibilities:

• Prescribes procedures for theportions of this rule pertaining to intelligence sources, methods, and activities, including, but not limited to, SCI.

• retains authority over access tointelligence sources, methods, and activities, including SCI.

• provides guidance on the securityrequirements for intelligence sources and methods of information, including, but not limited to, SCI.

DOE and NRC provide similar industrial security oversight actions, including national security eligibility determinations for contractor personnel, authorization of contractor information systems to process classified information, as well as monitoring and inspecting those contractors under DOE or NRC security cognizance, respectively. In 2004, the Intelligence Reform and Terrorism Prevention Act

(IRTPA) (Pub. L. 108–458) created the position of the Director of National Intelligence (DNI) and recognized the ODNI as a CSA. E.O. 13691 ‘‘Promoting Private Sector Cybersecurity Information Sharing,’’ February 13, 2015 (available at https://obamawhitehouse.archives.gov/the- press-office/2015/02/13/executive- order-promoting-private-sector- cybersecurity-information-sharing), amended E.O. 12829 to make DHS the fifth CSA in 2015.

II. NISP ImplementationDoD is the Executive Agent of the

NISP and has the largest NISP contractor population of the five CSAs. DCSA inspects and monitors cleared entities, also referred to as contractors, who require access to classified information during all phases of the contracting, licensing, and grant (hereinafter referred to as contracting or contract) process to include the preparation and submission of bids and proposals, negotiation, award, performance, and termination. It also determines eligibility for access to classified information for contractors performing on classified contracts with DoD and with those USG agencies which have an industrial security agreement with DoD. The Department currently has industrial security agreements with 33 agencies (list available at: https://www.dcsa.mil/mc/ ctp/nisp/). DCSA field elements provide oversight of contractor compliance, authorize contractor information systems to process classified information, and conduct security review actions for approximately 12,500 cleared contractor entities which includes headquarters, divisions, subsidiaries and branch offices of industrial, educational, commercial, or other non-USG entities which are performing on classified contracts.

Under the NISP, the USG establishes requirements for the protection of classified information to be safeguarded in a manner equivalent to its protection within the executive branch of USG, where practicable. When bound by contract, industry must comply with the NISPOM and any CSA-specific supplementary guidance for unique CSA mission requirements. Industry implements those requirements for the protection of classified information with advice, assistance, and oversight from the applicable CSA.

When a Government Contracting Activity (GCA), an element of an agency that has authority regarding acquisition or grant functions, awards a contract that has been determined to require access to classified information, the

contract is considered to be a ‘‘classified contract.’’ The GCA checks with its applicable CSA to determine if the awarded legal entity already has an entity eligibility determination (also referred to as a facility security clearance (FCL)). GCAs will ordinarily include enough lead-time in the acquisition cycle to accomplish all required security actions. In many instances, advanced planning can ensure that access to classified information will not be required in the pre-award process. This would preclude processing an entire bidder list for FCLs. When access to classified information is not a factor in the pre-award phase, but will be required for contract performance, only the successful bidder or offeror will be processed for an FCL.

Before an entity can have access to classified information during its contract performance, it must have an FCL. If the legal entity does not already have an FCL when awarded a classified contract, a GCA must sponsor the entity for an FCL. Or, an entity already part of the NISP (i.e., a prime contractor) may sponsor another entity in order to subcontract part of its classified business. To sponsor an entity, the GCA or prime contractor puts in a request, often referred to as a sponsorship letter, to the appropriate CSA for the entity to access classified information in connection with a legitimate government requirement, which may include a foreign government requirement.

With an approved FCL, an entity is then eligible for access to information classified at the level of the FCL (i.e., TOP SECRET, SECRET or CONFIDENTIAL) when competing for a classified contract. Among other requirements, an entity must have sponsorship based on a valid government requirement for access to classified information. The USG agency sponsoring an entity for an FCL must include the applicable security requirements clause or equivalent in the contract (e.g., for DoD this is the Federal Acquisition Regulation (FAR) 52.204–2 ‘‘Security Requirements,’’ or the terms and conditions of a grant award under 2 CFR part 200.210) to require compliance with the NISPOM.

A GCA provides the security requirements for a classified contract in a contract security classification specification as part of the contract. For DoD, the DD form 254, ‘‘Department of Defense Contract Security Classification Specification,’’ OMB Control number 0704–0567, is part of the classified contract and provides the contractor (or a subcontractor) with security requirements and the classification

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guidance necessary to execute a specific classified contract. See https://www.esd.whs.mil/Portals/54/ Documents/DD/forms/dd/dd0254.pdf and available at https://www.dcsa.mil/ is/nccs/) for the current version of this collection. A contract security classification specification with its attachments, supplements, and incorporated references, provides security classification guidance (lists the applicable security classification guides for a contractor to use) to a contractor in connection with a classified contract. It is designed to identify the classified areas of information involved in the classified effort and, particularly, to identify the specific items of information within these areas that require protection. This rule provides NISP contractors security requirements which align to 32 CFR part 2001, in a manner equivalent to the protection of classified information within the executive branch of the USG. If a GCA determines that additional safeguards are essential in specific contracts, the GCA can impose more operational security provisions above the requirements of this rule. The GCA can also determine that additional physical or technical security requirements are needed in a contract above the requirements of this rule. Even though the contract security classification is contract-specific, it is not always all- inclusive. Additional security requirements are sometimes included in other parts of a contract. All related materials for approved information collection are available at: https://www.reginfo.gov/public/do/PRAMain. In addition, specific locations for finalized collection instruments, to include the designated OMB Control Number is included where information collections are cited in this rule.

In addition, depending upon the CSA with security cognizance, an entity’s legal headquarters may need to implement additional information collections, such as:

• DD Form 441, ‘‘DoD SecurityAgreement’’ for DoD is an agreement between DCSA and the cleared legal entity for the entity to comply with the NISPOM security requirements, to be subject to inspections and to allow for a 30 day notice by the entity or DCSA to terminate the agreement (e.g., if there is no longer a valid USG requirement for access to classified information (available at https://www.esd.whs.mil/ Portals/54/Documents/DD/forms/dd/dd0441_2020.pdf);

• NRC Form 441, ‘‘SecurityAgreement’’ for NRC, the provisions of the NRC Form 441 are similar to those included in the DD Form 441 (available

at https://www.nrc.gov/reading-rm/doc- collections/forms/nrc441info.html).

• DOE does not have a separate Form441, but instead, binds the contractor to the FCL (and security requirements) via the contract, along with meeting all other requirements in this rule.

As part of FCL processing, an entity must complete a Standard Form (SF) 328, ‘‘Certificate Pertaining to Foreign Interest,’’ OMB Control number 0704– 0579, (available at https://www.gsa.gov/ forms-library/certificate-pertaining- foreign-interests, for a CSA to review and make a determination whether the entity is under foreign ownership, control or influence (FOCI) to a degree that renders it ineligible for an FCL. The CSA will consider a U.S. entity to be under FOCI when a foreign interest has the power to direct or decide issues affecting the entity’s management or operations in a manner that could either result in unauthorized access to classified information; or adversely affect performance of a classified contract or agreement. The U.S. entity may also be considered to be under FOCI when a foreign interest or government is currently exercising, or could exercise, that power, whether directly or indirectly, such as through ownership of the U.S. entity’s securities, by contractual arrangements, or other means. Further, if a foreign interest or government has the ability to control or influence the election or appointment of members of the entity’s governing board, the entity may be considered to be under FOCI. When a CSA has determined that an entity is under FOCI, the primary consideration will be the protection of classified information. The CSA will take whatever action is necessary to protect classified information, in coordination with other affected agencies as appropriate. A U.S. entity that is in process for an FCL for access to classified information and subsequently determined to be under FOCI, is ineligible for access to classified information unless and until effective security measures have been put in place to negate or mitigate FOCI to the satisfaction of the CSA.

Once an entity becomes a contractor in the NISP with an existing FCL, a GCA can select and award a classified contract to the entity as part of the acquisition process. The GCA attaches the ‘‘Contract Security Classification Specification: (e.g., for DoD, it is the DD Form 254, available at https://www.esd.whs.mil/Portals/54/Documents/DD/forms/dd/dd0254.pdf and available at https://www.dcsa.mil/ is/nccs/), to all such contracts requiring access to classified information.

II. SEAD 3 Requirements and theNISPOM

In 2008, with the publication of E.O. 13467, ‘‘Reforming Processes Related to Suitability for Government Employment, Fitness for Contractor Employees, and Eligibility for Access to Classified National Security Information’’ (available at https://obamawhitehouse.archives.gov/the- press-office/2016/09/29/executive- order-amending-executive-order-13467- establish-roles-and), the DNI was assigned the role of the Security Executive Agent (SecEA), for the development, implementation, and oversight of effective, efficient, and uniform policies and procedures governing the conduct of investigations and adjudications for eligibility for access to classified information and eligibility to hold a sensitive position.

In December 2016, the SecEA issued SEAD 3, ‘‘Reporting Requirements for Personnel with Access to Classified Information or Who Hold a Sensitive Position’’ (available at https://www.dni.gov/files/NCSC/documents/ Regulations/SEAD-3-Reporting-U.pdf), to executive branch agencies or covered individuals with an effective date of June 12, 2017. SEAD 3 defines covered individuals as:

• A person who performs work for oron behalf of the executive branch who has been granted access to classified information or holds a sensitive positions, but does not include the President or the Vice President.

• a person who performs work for oron behalf of a state, local, tribal, or private sector entity, as defined in E.O. 13549, who has been granted access to classified information or holds a sensitive position, but does not include duly elected or appointed governors of a state or territory, or an official who has succeeded to that office under applicable law; and

• a person working in or for thelegislative or judicial branches who has been granted access to classified information or holds a sensitive position and the investigation or determination was conducted by the executive branch, but does not include members of Congress, Justices of the Supreme Court, or Federal judges appointed by the President.

• covered individuals are not limitedto government employees and include all persons, not excluded under paragraphs D.5(a), (b), or (c) of SEAD 3, who have access to classified information or who hold sensitive positions, including, but not limited to, contractors, subcontractors, licensees, certificate holders, grantees, experts,

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consultants, and government employees.

SEAD 3 identifies required reporting of data elements that are contained in the Standard Form-86, ‘‘Questionnaire for National Security Positions’’ (available at https://www.opm.gov/ forms/pdf_fill/sf86.pdf), which applicants and clearance holders complete during the initial and periodic reinvestigation processes, respectively. SEAD 3 requires these elements to be reported prior to participation in such activities or otherwise as soon as possible following the start of their involvement. Most notably, SEAD 3 requires covered individuals to obtain prior agency approval before conducting unofficial foreign travel.

For this rule, SEAD 3 applies only for those contractor personnel who have been granted eligibility for access to classified information through the NISP. In accordance with paragraph E.4 of SEAD 3, NISP CSAs, acting on behalf of Heads of agencies or designees, for the NISP contractors under their security cognizance may determine that operational and mission needs preclude strict adherence to these reporting requirements. In those instances, a NISP CSA may provide CSA guidance to supplement unique CSA mission requirements to the contractors under its security cognizance of equivalent notification, briefing and reporting to be accomplished.

III. Requirements From Section 842 ofPublic Law 115–232

Currently, the NISPOM and 32 CFR part 2004 require that GCAs, in coordination with the applicable CSAs and controlling agencies (ODNI for Sensitive Compartmented Information (SCI), DOE for Restricted Data (RD) or NSA for Communications Security (COMSEC)), complete a National Interest Determination (NID) before granting access to proscribed information to an entity that is owned or controlled by a foreign interest and cleared under a Special Security Agreement (SSA). The term ‘‘proscribed information’’ means information that is—

(A) classified at the level of top secret;(B) communications security

information (excluding controlled cryptographic items when un-keyed or utilized with unclassified keys);

(C) Restricted Data (as defined insection 11 of the Atomic Energy Act of 1954, as amended (42 United States Code (U.S.C.) 2014));

(D) special access programinformation under section 4.3 of E.O. 13526 (75 FR 707; 50 U.S.C. 3161 note) or successor order; or

(E) designated as sensitivecompartmented information, as defined in Intelligence Community Directive 703, ‘‘Protection of National Intelligence, Including Sensitive Compartmented Information’’ (available at https://www.dni.gov/files/documents/ ICD/ICD%20703.pdf).

An SSA is one of the mechanisms used by the USG to mitigate FOCI to an acceptable level as determined by the CSA. A company is considered to be operating under FOCI whenever a foreign interest has the power, direct or indirect, whether or not exercised, and whether or not exercisable, to direct or decide matters affecting the management or operations of that company in a manner which may result in unauthorized access to classified information or may adversely affect the performance of classified contracts. The following factors relating to a company, the foreign interest, and the government of the foreign interest are reviewed in the aggregate in determining whether a company is under FOCI: D Record of economic and government

espionage against U.S. targets D Record of enforcement and/or

engagement in unauthorized technology transfer

D The type and sensitivity of the information that shall be accessed

D The source, nature and extent of FOCI D Record of compliance with pertinent

U.S. laws, regulations and contracts D The nature of any bilateral and

multilateral security and information exchange agreements that may pertain

D Ownership or control, in whole or in part, by a foreign government. Section 842 of Public Law 115–232

and this final rule provide that a covered NTIB entity operating under an SSA pursuant to the NISP, shall not be required to obtain a NID as a condition for access to proscribed information, effective October 1, 2020. DoD notified the DoD components and 33 non-DoD agencies with which DoD has industrial security agreements that NIDs pursuant to the provisions of Section 842 of Public Law 115–232 are no longer required as of October 1, 2020. DCSA is no longer submitting NID requests to ODNI for SCI, DOE for RD, or NSA for COMSEC, respectively that fall within the provisions of Section 842 of Public Law 115–232.

As provided for in the law, the Under Secretary of Defense for Intelligence and Security, on behalf of the Secretary, granted waivers of NIDs for those categories of proscribed information under the control of the Secretary of Defense, to 20 contractors that met the criteria in summer 2019 with the

waivers expiring as of October 1, 2020, since the statute went into effect. Those contractors, pursuant to Section 842 of Public Law 115–232 had to meet the following criteria as part of the waiver determination:

(1) A demonstrated successful recordof compliance with the NISP assessed by the CSA; and

(2) previously been approved foraccess to proscribed information as indicated in CSA FCL records.

The law is limited to ‘‘a person that is a subsidiary located in the United States—

(A) for which the ultimate parententity and any intermediate parent entities of such subsidiary are located in a country that is part of the national technology and industrial base (as defined in section 2500 of title 10, United States Code); and

(B) that is subject to the FOCIrequirements of the NISP.’’

Legal Authority for the NISP

In addition to E.O. 12829, which, establishes the NISP and requires the Secretary of Defense to issue and maintain the NISPOM, the following are other relevant authorities for the program.

• E.O. 10865 ‘‘Safeguarding ClassifiedInformation within Industry,’’ February 20, 1960, as amended (available at https://www.archives.gov/federal- register/codification/executive-order/ 10865.html), addresses the protection of classified information that is disclosed to, or developed by contractors.

• E.O. 12968, ‘‘Access to ClassifiedInformation,’’ August 2, 1995, as amended (available at https://www.govinfo.gov/content/pkg/FR-1995- 08-07/pdf/95-19654.pdf), establishes auniform personnel security program forindividuals who will be considered forinitial or continued access to classifiedinformation.

• E.O. 13526, ‘‘Classified NationalSecurity Information,’’ December 29, 2009 (available at https://www.archives.gov/files/isoo/pdf/cnsi- eo.pdf), prescribes a uniform system for classifying, safeguarding and declassifying national security information.

• E.O. 13587, ‘‘Structural Reforms toImprove the Security of Classified Networks and the Responsible Sharing and Safeguarding of Classified Information,’’ October 7, 2011 (available at https://www.govinfo.gov/app/details/ CFR-2012-title3-vol1/CFR-2012-title3- vol1-eo13587), directs structural reforms to ensure responsible sharing and safeguarding of classified information on computer networks consistent with

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appropriate protection for privacy and civil liberties.

• E.O. 13691; Promoting PrivateSector Cybersecurity Information Sharing,’’ February 13, 2015 (available at https://obamawhitehouse.archives.gov/the- press-office/2015/02/13/executive- order-promoting-private-sector- cybersecurity-information-sharing), encourages the voluntary formation of organizations engaged in the sharing of information related to cybersecurity risks and incidents to establish mechanisms to continually improve their capabilities and functions as well as to better allow them to partner with the Federal government on a voluntary basis.

• E.O. 12333; ‘‘United StatesIntelligence Activities,’’ December 4, 1981, as amended (available at https:// www.archives.gov/federal-register/ codification/executive-order/ 12333.html, provides general principles that in addition to and consistent with applicable laws are intended to achieve the proper balance between the acquisition of essential information and the protection of individual interests.

• Title 42 U.S.C. 2011 et seq. (alsoknown as and referred to in this rule as ‘‘The Atomic Energy Act of 1954,’’ as amended (AEA));

• Title 50 U.S.C. chapter 44 (alsoknown as ‘‘The National Security Act of 1947, as amended);

• Title 50 U.S.C. 3501 et seq. (alsoknown as ‘‘The Central Intelligence Agency Act of 1949,’’ as amended);

• Public Law 108–458 (also known asthe ‘‘Intelligence Reform and Terrorism Prevention Act of 2004’’), which includes development of uniform and consistent policies and procedures to ensure effective, efficient and timely completion of security clearances.

• Finally, 32 CFR part 2004 ‘‘NationalIndustrial Security Program,’’ May 7, 2018, establishes uniform standards for the NISP, and helps agencies implement requirements in E.O. 12829, and establishes agency responsibilities for implementing the insider threat provisions of E.O. 13587.

III. Changes Made by This Rule andExpected Impact

The NISPOM was first published in 1995 as DoD Manual 5220.22. Updates to the NISPOM have included Conforming Change 1, March 28, 2013 and NISPOM Change 2 in May 21, 2016. The most current version of the NISPOM (Change 2) is available at https://www.esd.whs.mil/Portals/54/ Documents/DD/issuances/dodm/ 522022M.pdf?ver=2019-06-06-145530- 170. In addition to codifying the

NISPOM in the CFR and adding the requirements of SEAD 3 and Section 842 of Public Law 115–232, DoD is also removing 32 CFR part 117, subpart C, ‘‘National Industrial Security Program’’ because it is duplicative of 32 CFR part 2004, ‘‘National Industrial Security Program’’ and removing 32 CFR part 117, subpart B, because it is also duplicative of other industrial security provisions set forth in 32 CFR part 2004. These administrative removals support a recommendation from the DoD Regulatory Reform Task Force created under E.O. 13777, Enforcing the Regulatory Reform Agenda (available at https://www.govinfo.gov/content/pkg/ FR-2017-03-01/pdf/2017-04107.pdf), and by themselves create no changes in current DoD policy. Upon the effective date of 32 CFR part 117, DoD will no longer publish the DoD Manual 5220.22, NISPOM as a DoD policy issuance.

Specific changes in this rule that are not in the current NISPOM, include the following.

• § 117.8: Reporting Requirements.§ 117.8(a) General includes thatcontractors must submit reportspursuant to this rule, SEAD 3 and CSAguidance to supplement unique CSAmission requirements. SEAD 3 reportingestablishes a single nationwideimplementation plan for coveredindividuals, which for this rule providesreporting by contractors and theiremployees eligible for access toclassified information. SEAD 3requirements will be implemented forall contractor cleared personnel toreport specific activities that mayadversely impact their continuednational security eligibility. Contractorcleared personnel must be aware of risksassociated with foreign intelligenceoperations and/or possible terroristactivities directed against them in theUnited States and abroad, and have aresponsibility to recognize and avoidpersonal behaviors and activities thatadversely affect their national securityeligibility. NISP CSAs shall conduct ananalysis of such reported activities, suchas foreign travel or foreign contacts, todetermine whether they pose a potentialthreat to national security and takeappropriate action. Contractors will beresponsible for collecting the foreigntravel data from cleared employees,providing pre- and post-travel briefingsto those cleared employees whennecessary, and tracking and reportingthose foreign travel activities of itscleared employees through the CSAdesignated system of record forpersonnel security clearance data.

• § 117.9(m) Limited entity eligibilitydetermination (Non-FOCI) and, § 117.11(e) Limited entity eligibility

determination due to FOCI. In accordance with 32 CFR part 2004, ‘‘NISP Directive,’’ provisions for granting two new types of limited entity facility clearance eligibility determinations (FCLs) to meet government requirements for narrowly scoped requirements for a companies to access classified information.

• § 117.11(d)(2)(iii)(A) Requirementfor National Interest Determinations (NIDs): This paragraph provides for the implementation of the provisions of Section 842 of Public Law 115–232, which was effective on October 1, 2020, and eliminates requirements for a covered NTIB entity operating under an SSA to obtain a NID for access to proscribed information: Top Secret, Special Access Program, Communications Security, Sensitive Compartmented Information, and Restricted Data. This provision will allow covered NTIB entities to begin performing on contracts that require access to proscribed information without having to wait on a NID, and thus removing costly contract performance delays.

• § 117.15(e)(2) TOP SECRETInformation: Permits specific determinations by a CSA with respect to requirements for TOP SECRET accountability (e.g., the CSA can determine that TOP SECRET material stored in an electronic format on an authorized classified information system does not need to be individually numbered in series provided the contractor has in place controls in place to address accountability, need to know and retention). As stated in this paragraph: ‘‘. . . Contractors will establish controls for TOP SECRET information and material to validate procedures are in place to address accountability, need to know and retention, e.g., demonstrating that TOP SECRET material stored in an electronic format on an authorized classified information system does not need to be individually numbered in series. These controls are in addition to the information management system and must be applied, unless otherwise directed by the applicable CSA, regardless of the media of the TOP SECRET information, to include information processed and stored on authorized information systems. Unless otherwise directed by the applicable CSA, the contractor will establish the following additional controls . . .’’

• § 117.15(d)(4) Installation: Clarifiesthat an Intrusion Detection System (IDS) shall be installed by a Nationally Recognized Testing Laboratory (NRTL)- approved entity to make it clear that any NRTL-approved entity may do such

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installations. ‘‘The IDS will be installed by a NRTL-approved entity or by an entity approved in writing by the CSA . . .’’

• § 117.7(b)(2) Senior ManagementOfficial: Clarifies responsibilities of the Senior Management Official of each cleared entity to better reflect the critical role and accountability of this position for entity compliance with the NISPOM. This change further emphasizes the essential role of the Senior Management Official with the entity’s security staff to ensure NISPOM compliance.

• § 117.13(d)(5) Clarifies to thecontractor that upon completion of a classified contract, the ‘‘contractor must return all government provided or deliverable information to the custody of the government. Such clarification ensures the contractor is not retaining official government records without specific authorization from the government customer. ‘‘(i) If the GCA does not advise to the contrary, the contractor may retain copies of the government material for a period of 2 years following the completion of the contract. The contract security classification specification, or equivalent, will continue in effect for this 2-year period. (ii) If the GCA determines the contractor has a continuing need for the copies of the government material beyond the 2-year period, the GCA will issue a final contract security classification specification, or equivalent, for the classified contract and will include disposition instructions for the copies.’’

Costs The DoD invites comment from the

members of the public on the costs estimated to implement this rule.

A. BaselineThe Defense Counterintelligence and

Security Agency (DCSA), as the DoD designated NISP cognizant security office, has collected information about baseline costs using an OMB-approved information collection process employing statistical methods for contractors’ NISP implementation (OMB Control Number 0704–0458, ‘‘Industry Cost Collection Report Survey.’’ The most recent data collected by DCSA on contractors’ NISP implementation costs are for fiscal year (FY) 2017 and reported in the ISOO 2017 annual report to the President. DCSA has used this survey collection methodology for contractors’ NISP implementation under DoD security cognizance for over 11 years. A NISP government and industry working group developed the survey in 1995 and predecessor office to the OUSD(I&S) initially ran the annual survey. The Information Security Oversight Office (ISOO) placed a moratorium on conducting this survey after 2017 until a new NISP survey methodology is developed.

DCSA began the costs analysis for the baseline costs for fiscal year 2017 by randomly selecting active NISP contractor facilities that have existing DoD approval for classified storage at their own physical locations and having those facilities submit security costs. The randomly selected contractor facilities also have an active facility security clearance and a permanent Commercial and Government Entity

(CAGE) Code. In addition to the randomly selected cleared facilities having approved classified storage, DCSA categorizes these contractor facilities for the survey based on the size, scope, and complexity of each contractor’s security program.

The general methodology used to estimate security costs incurred by contractor cleared facilities with approved storage of classified information is based on the costs incurred by respondent contractors for the protection of classified information. The methodology captures the most significant portion of industry’s costs, which is labor. Security labor in the survey is defined as personnel whose positions exist to support operations and staff in the implementation of government security requirements for the protection of classified information. Guards who are required as supplemental controls are included in security labor. The respondent contractors are requested to compile their cleared facility’s current annual security labor cost in burdened, current year dollars with the most recent data being from the 2017 survey. The labor cost, when identified as an estimated percent of each contractor’s total security costs, enables the respondent contractors to calculate their total security costs.

Information collected is compiled to create an aggregate estimated cost of NISP classification-related activities. Only the aggregate data is reported. There is a 95% confidence that the full enterprise industrial security total baseline cost does not exceed $1.486 billion for fiscal year 2017.

NISP cost estimates (2017) Benefits of NISP rule

Number of Facilities with Approved Classified Storage (Of Over 12,000 NISP Cleared Facilities):

3658 ................................................................................................... A single, integrated, cohesive industrial security program to protect classified information and to preserve our Nation’s economic and technological interests.

Facilities Randomly Selected and Responding to Data Collection: 1038 ................................................................................................... Maximum uniformity and consistency by contractors who support the

Executive branch to effectively protect and safeguard classified infor-mation through all phases of the contracting process for any classi-fied information an Agency releases to a contractor.

Estimated Total NISP Security Costs for Facilities with Approved Clas-sified Storage (With 95% Margin of Error to give 95% Upper Con-fidence Limit):

$1,413,150,249 + $72,968,977 = $1,486,119,226 ............................ Contractors must comply, when levied by the FAR security require-ments clause or equivalent clauses in contracts involving access to classified information, with uniform procedures for the proper safe-guarding of classified information to reduce the risk of unauthorized disclosure of classified information.

Based on the data collected from the survey, we can be 95% confident the true 2017 total NISP security cost for contractor facilities with ap-proved classified storage is less than $1.486B.

Assumptions and Notes: • Of over 12,000 NISP cleared facilities, 3,658 facilities are approved for classified storage and 1,038 responded to the survey.

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• Companies were selected at random according to survey methodology.• The applicable NISP CSA, based on a valid requirement for access to classified information (e.g., contract or bid), funds the costs for

evaluating and processing a contractor for an entity eligibility determination (facility clearance) and the costs of personnel security vettingrequirements for required access to classified information by any contractor employees.

• The security cost profile for non-responding companies is assumed to be similar to that of responding companies.• Outlying survey data points were removed from data analysis.• Overall DoD contract spending for 2017 was $331 billion; but DoD does not have such data for these contractor cleared facilities in the

NISP for performance on contracts requiring access to classified information.• DoD has not collected security costs from those contractor cleared facilities that are not authorized to store classified information at their

own contractor locations.

DoD noted that the largest contractor cleared facilities account for the highest security costs, and skew the average security costs for non-small businesses much higher. The average security cost for the largest contractor cleared facilities is approximately $4.8 million per facility. If the largest facilities are removed from the cost estimate, then the average security cost for a non-small business with approval for storage of classified information is reduced to $432,312 from $864,662. Of the approximately 1,000 facilities selected for the small entities analysis described in section 4 of this initial regulatory flexibility analysis, about 68% were contractor cleared facilities that were not included in the 2017 NISP cost estimate because they don’t have approval to store classified information or process classified information on an information system or network at the contractors’ own cleared facilities. DoD estimated the costs impacting small entities from the approximately 32% of the remaining small businesses, as those would have approval to store classified information or process classified information on an information system or network at one of the contractor’s own cleared facilities. Those security costs are estimated to be approximately $316 million or 21% of the $1.486 billion of the estimated NISP costs to contractors in 2017. When contractor cleared facilities’ responses to the ISOO cost collection survey were cross referenced with the DoD small business analysis (using the Small Business Administration (SBA) Dynamic Small Business Search), DoD estimated an average security cost for a small business with approved storage of classified information of $133,612. One of the requirements for a facility security clearance is a security agreement between the applicable NISP CSA and the contractor legal entity. Such a security agreement sets forth compliance, oversight and administration termination provisions. The agreement also indicates that it does not obligate USG funds and the USG shall not be liable for any costs or claims of the contractor arising out of the security agreement. It is recognized,

however, the parties may provide in other written contracts with GCAs for security costs, which may be properly chargeable, if so determined by the applicable GCA. This rule provides that a contractor must implement changes no later than 6 months from the date of a published change to this rule to allow the contractor to discuss what impact, if any, the changes have on existing classified contracts with the applicable GCAs.

B. Public Cost Analysis of the Changesto the Baseline From This Rule

1. Projected Public Costs. In summary,the estimated public costs are presentvalue costs of 150.26 million andannualized costs estimated to be $10.52million.

2. Cost Analysis. Throughout, laborrates are adjusted upward by 100% to account for overhead and benefits.

a. Regulatory Familiarization. Therewill be an initial step to become familiar with the format of the rule, the changed requirements and what actions the cleared entities must take to comply with the changes in this rule. To become familiar with the rule format and the new requirements, cleared entities will review the Federal Register notice with the new 32 CFR part 117. It is estimated that 12,400 cleared entities will need to become familiar with the rule. Of those approximately 12,400 cleared entities, an estimated 8,036 are small business entities and 4,348 are large business entities. The FSO at each entity (small or large) must become familiar with the rule to be able to use it on a daily basis in the FSO role to supervise and direct security measures necessary for implementing the applicable security requirements to ensure the protection of classified information. Using the published Office of Personnel Management General Schedule (GS) salary schedule for fiscal year (FY) 2020, the estimated labor rate for an FSO of a small business entity firm is the equivalent of a GS11 step 5 and for an FSO of a large business entity as the equivalent of a GS13, step 5. It is estimated that it will take 10 hours in the first year, 5 hours in years 2 and 3, 3 hours in years 4 to 7, and then 2 hours

annually up to year 20 for an FSO to become familiar with the rule, as this will be the first time that the NISPOM is in a rule format instead of as a DoD policy issuance, as well as familiarization with the changes. These assumptions imply costs of $9.89 million in year one; $4.95 million in years 2 and 3; $2.97 million in each year 4 through 7; and, $1.98 million in each year 8 through 20.

b. Evaluation of Existing ClassifiedContracts To Implement Changes No Later than Six Months from Effective Date.

Each of the legal U.S. cleared entities must comply no more than six months from the effective date of this NISPOM rule. During that six months, each legal cleared entity has the opportunity to review existing classified contracts to determine if there is any impact that they want to discuss with the applicable GCAs about possible equitable adjustment. Decisions on any requests for equitable adjustment will be made by the applicable contracting officer. Legal entities enter into contracts, licenses or grants; it is estimated that the average of 8,036 small business cleared entities are each a legal entity. It is estimated that each of those small business cleared legal entities will review an average of 3 existing classified contracts for possible equitable adjustment for a total of 24,108 contracts requiring 3 hours each for review in 2021. Using the published Office of Personnel Management GS salary schedule for FY20, the estimated labor rate for an FSO of a small business entity firm is the equivalent of a GS11 step 5 and for an FSO of a large business entity as the equivalent of a GS13, step 5. Of the large business entities, it isestimated that 2,100 large businesscleared entities are legal entities, whilethe remaining large business entities aredivisions or branch offices. It isestimated that each of those largebusiness cleared legal entities willreview an average of 30 existingclassified contracts for possibleequitable adjustment for a total of63,000 contracts requiring 8 hours eachfor review in 2021. It is estimated thatit will take more time for review by the

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large business cleared entities due to more complicated contracts. These assumptions imply costs of $54.96 million in year one and no further costs as this action is taken only in the first year.

c. Train SECRET cleared employeeson requirements to submit foreign travel reports. The FSO at each entity (small or large) must ensure that its SECRET cleared employees are trained on the requirements. Such training by the FSO is estimated to take 1 hour in 2021 and a half an hour in each of the following years up to year 20. Using the published Office of Personnel Management GS salary schedule for FY20, the estimated labor rate for an FSO of a small business entity firm is the equivalent of a GS11 step 5 and for an FSO of a large business entity as the equivalent of a GS13, step 5. These assumptions imply total costsof $0.99 million in 2021 as year one;and, $0.49 million in each year 2through 20.

d. Submit foreign travel reports andreceive any pre-travel threat briefings or post travel briefings based on the threat. All cleared employees must submit foreign travel reports and receive any pre-travel briefings or post travel briefings from the FSO-based on threat according to this rule, SEAD 3 and CSA- provided guidance for unique mission requirements. It is estimated that the number of foreign travel reports submitted annually will be 483,681 to comply with this rule. That estimate is based on analysis of calendar year 2019 unofficial foreign travel reported by DoD civilians and military in the DoD Aircraft and Personnel Automated Clearance System (APACS), a web-based tool for the creation, submission and approval of aircraft diplomatic clearances and personnel travel clearances (i.e. Country, Theater and Special Area, as applicable with individual DoD Foreign Clearance Guide (FCG), https://www.fcg.pentagon.mil country pages) designed to aid USG travelers on official government and unofficial (i.e., leave) travel. For calendar year 2019, there were 126,131 travelers and 113,214 travel requests submitted into APACS. APACS requirements are published on the DoD Foreign Clearance Guide (FCG), https://www.fcg.pentagon.mil. Thus an annual estimate of .89 expected foreign travel trips by traveler (113,214 divided by 126,131). In the small business analysis, there were a total of 18,242 cleared employees in the 658 small entities sampled and 63,598 cleared employees in the remaining 356 non- small businesses. Of the total cleared employees in the small business analysis (as reported in the National

Industrial Security System), approximately 22.3% were at small entities and 77.7% were at non-small businesses. Known number of new travelers expected to be effected by this rule is 543,462 SECRET cleared contractor personnel under DoD security cognizance and the estimated trips at .89 per traveler is (543,462 × .89 = 483,681 estimated trips). Assuming the ratio for those employees reporting foreign travel into APACS is the same as SECRET cleared employees would report, of the estimated 483,681 foreign trips by SECRET cleared employees, it can be estimated that approximately 107,812 (22.3% of 483,681) will be taken by contractors at small entities, and 375,869 (77.7% of 483,681) by contractors at non-small businesses. It is estimated that it will take a half an hour for a SECRET cleared employee to report foreign travel in 2021 and in each of the following years up to year 20 to report foreign travel and receive any pre-travel or post-travel briefings. The estimated average labor rate for a SECRET cleared employee to report foreign travel is the equivalent of a GS11 step 5. These assumptions imply costs of $16.81 million in each year one through 20.

e. Fewer contract performance delaysby the small number of U.S. contractors with NTIB ownership operating under an SSA. Section 842 of Public Law 115– 232, is limited to a small number of U.S. cleared legal entities in the NISP for which the ultimate parent entity and any intermediate parent entities of such subsidiary are located in a country that is part of the NTIB; and that is subject to the FOCI requirements of the NISP. There are currently 20 U.S. cleared legal entities with their associated cleared divisions, subsidiaries or branch (estimated to be another 100 cleared entities) to whom Section 842 of Public Law 115–232 applies. Section 881 of Public Law 114–328 expanded the legal definition of the NTIB to include the United Kingdom and Australia. The NTIB is comprised of the United States, the United Kingdom of Great Britain and Northern Ireland, Canada and Australia. NTIB is based on the principle that defense trade between the United States and its closest allies enables a host of benefits, including increased access to innovation, economies of scale, and interoperability (10 U.S.C. 2500).

Section 842 of Public Law 115–232 is deregulatory by statute and this rule. There are no estimated costs to the small number of entities impacted because they are required already to submit any new or change to FOCI information for their initial and

continued FCL, respectively, via the SF 328, Certificate Pertaining to Foreign Interests in the NISP as do all other U.S. cleared legal entities. 32 CFR part 2004 provides a CSA up to 30 days to assess the submitted NID and then another 30 days for a controlling agency to make a NID for the type of proscribed information under the purview of each (ODNI for SCI, DOE for RD or NSA for COMSEC). Thus, with Section 842 of Public Law 115–232, there has been minimum 60 day delay for a NID involving an NTIB covered entity which has impacted the timeliness of contract performance. There are estimated costs savings as this small number of cleared entities and their entity cleared employees designated to work on specific classified contracts involving proscribed information will no longer have to wait at least 60 days for NIDs after contract award for access to proscribed information when all other requirements have been met for access to classified information and contract performance. Using the published Office of Personnel Management GS salary schedule for FY20, the labor rate for an FSO and an estimated 8 cleared employees in each of the 2 small business entities impacted is the equivalent of a GS11 step 5 with a time savings of 320 hours for each year 1 through 20. The labor rate for an FSO and an estimated 19 cleared employees in each of the 18 large business entities impacted is the equivalent of a GS13 step 5 with a time savings of 320 hours for each year 1 through 20. These assumptions imply cost savings of $11.81 million in each year.

C. USG Cost Analysis of the Changes tothe Baseline From This Rule

1. Projected USG Cost/Cost Savings.In summary, the estimated USG cost/ cost savings are present value costs of $10.82 million and annualized costs of $0.76 million. Throughout, labor rates are adjusted upward by 100% to account for overhead and benefits.

2. Cost analysis.a. Regulatory Familiarization. There

will be an initial step to become familiar with the clause requirements and what actions the USG executive branch agencies must take to comply with the changes in this rule. To become familiar with the new requirements, USG executive branch agencies may review the Federal Register notice with the new 32 CFR part 117. It is estimated that 38 USG executive branch agencies will become familiar with the rule (i.e., the five Cognizant Security Agencies (DoD, DOE, NRC, ODNI, DHS) and the 33 USG agencies which currently have an industrial security services agreement

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with DoD pursuant to 32 CFR part 2004). The estimated labor rate used for the cost calculation is the equivalent of a GS12 step 5 for the designated NISP lead at each of those 38 agencies. It is estimated that it will take 8 hours in the first year as well as in each of the following through year 20 to become familiar and remain familiar with the rule, as this will be the first time that the NISPOM is in a rule format instead of as a DoD policy issuance, as well as familiarization with the changes. These assumptions imply costs of approximately $25 thousand each year.

b. Training the USG civilianemployees of NISP CSAs who provide oversight of contractor compliance with this rule. It is estimated that the NISP CSAs (i.e., DoD, DOE, NRC, ODNI and DHS) must train a total of 800 personnel who provide oversight of contractor compliance with this rule in the first year with annual refresher training in subsequent years. The largest number of personnel would be trained by DoD. The initial training is estimated to take 24 hours in 2021 to ensure those government personnel conducting oversight are versed in the changed requirements to assess compliance by cleared entities. The second year refresher training will be 16 hours with 8 hours of refresher training in each of years 3 through 20. The average labor rate for these 800 government headquarters and field personnel is estimated to be a GS13 step 5. These assumptions imply costs of $1.90 million in year one; $1.27 million in year 2; and, $0.63 million in each year 3 through 20.

c. Accepting submissions of foreigntravel reports by SECRET cleared entity personnel. DoD, with the largest population of cleared entity personnel, already has the data fields for foreign travel reporting in the Defense Information System for Security and will not have to make more changes to that automated system to accept submission of these reports. There are no expected costs or costs savings.

d. No longer draft, coordinate andsubmit proposed national interest determinations (NIDs) for access to proscribed information for the small number of U.S. contractors with NTIB ownership operating under an SSA. There will be a small cost savings because DoD Components (i.e., Departments of the Army, Navy and Air Force, DARPA, DIA, NGA, NRO, NSA and assorted smaller organizations) will no longer have to take an estimated 40 hours a year to draft, coordinate and submit NIDs for the small number of U.S. contractors with NTIB ownership operating under an SSA. There will be

minimal administrative changes to the DoD information system to remove the NID requirement for the small number of NTIB covered entities. DoD already must evaluate any changes submitted to FOCI information for U.S. cleared legal entities under its security cognizance which would include a determination if one of these cleared legal entities remains a covered NTIB entity. On average, DoD receives an estimated one FOCI changed condition report annually from an NTIB covered cleared legal entity. An estimated 10 government personnel with an estimated labor rate of a GS11 step 5 would save 40 hours in year 1 through year 20. These assumptions imply costs saving of approximately $28 thousand each year.

e. Update training materials, job aidsand associated tools for U.S. cleared legal entities and USG agencies on these changes to the NISPOM. CSAs will have to update existing training materials and products used by U.S. cleared legal entities and USG agencies so that they have all needed information on the changes being implemented in this NISPOM rule. Examples of those training materials and products range from online or in person training, job aids and web tools. DoD provides NISP training materials to the largest population, to include USG agencies and U.S. cleared legal entities, and estimates the time impact in year one is 1,128 hours for each of six individuals to update all the training materials with 564 hours in year two and 282 hours each year for maintenance of those materials in year 3 through year 20. The labor rate for those 6 personnel is estimated to be a GS13 step 5. These assumptions imply costs of $0.67 million in year one; $0.34 million in year 2; and $0.17 million in each year 3 through 20.

C. Total Costs/Cost SavingsIn summary the estimated public and

USG costs/cost savings are (1) present value costs of $150.26 million and annualized costs of $10.52 million for the public; and, (2) present value cost of $10.82 million and annualized costs of $0.76 million for the USG. Throughout, labor rates are adjusted upward by 100% to account for overhead and benefits.

Benefits Following the September 2013 Navy

Yard shooting, the President directed the Office of Management and Budget (OMB) to lead a review of suitability and security clearance procedures for Federal employees and contractors (see https://www.archives.gov/files/isoo/ oversight-groups/nisp/2014-suitability-

and-processes-report.pdf). This review assessed USG policies, programs, processes, and procedures involving determinations of federal employee suitability, contractor fitness, and personnel security. The interagency working group also evaluated the collection, sharing, processing, and storage of information used to make suitability, credentialing, and security decisions. It found the need for

• better information sharing,• increased oversight over

background investigations, and • consistent application of standards

and policies for both Federal employees and contractors.

The report identified 13 recommendations to improve how the Government performed suitability determinations and security clearances and the creation of SEAD 3 is a partial response to recommendation A.2. SEAD–3 requires enhanced additional reporting of foreign travel, foreign contacts and conduct/behavior that might jeopardize an individual from maintaining access or eligibility to access classified information. Many of the requirements are a direct result of recent national security breaches by trusted insiders who have disclosed classified information to news media or foreign entities causing significant harm to the interests of the United States.

SEAD 3 was designed to strengthen the safeguarding of national security equities, such as national security information, personnel, facilities, and technologies. These reporting requirements are important because individuals who incur a continuing security obligation need to be aware of the risks associated with foreign intelligence operations and/or possible terrorist activities directed against them in the U.S. and abroad, and to be aware they possess or have access to information that is highly sought after by foreign adversaries and competitors, including, but not limited to: • Classified or sensitive information

vital to national and economicsecurity

• Emerging technologies and pioneeringresearch and development

• Information relating to criticalinfrastructure sectors

• Proprietary secrets• Security or counterintelligence

information

In particular, the risk of becoming anintelligence target increases greatly during foreign travel, be it for official or unofficial purposes. NISP Contractor cleared personnel can become the target of a foreign intelligence or security service at any time in any country.

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Collecting additional information on travel will help ensure basic counterintelligence awareness is implemented to effectively protect both the individual and the USG against foreign attempts to collect sensitive, proprietary, or classified information. Such measures could include arranging a pre-travel briefing from the entity Facility Security Officer. Reminders include, but are not limited to the following, which can be provided to:

• Do not leave items that would be ofvalue to a foreign intelligence service unattended in hotel rooms or stored in hotel safes.

• Limit sensitive discussions—hotelrooms or other public places are not suitable locations to discuss sensitive information.

• Not use computer or facsimileequipment at foreign hotels or business centers for sensitive matters.

• Not divulge information to anyoneunauthorized to hear it.

• Ignore or deflect intrusive inquiriesor conversation about business or personal matters.

• Keep a laptop computer as carry-onbaggage—never check it with other luggage and, if possible, remove or control storage media. Confirm before the foreign travel whether it is necessary or even advisable to take a laptop computer.

• Report any suspicious contacts orincidents to the entity FSO to report to the applicable CSA.

Contractors in the NISP also have a responsibility for recognizing and avoiding personal behaviors and activities that may impact their continued eligibility for access to classified information. This includes, but is not limited to the following activities which may be of potential security, insider threat, or counterintelligence concern • An unwillingness to comply with

rules, regulations, or securityrequirements

• Unexplained affluence or excessiveindebtedness

• Alcohol abuse• Illegal use or misuse of drugs or drug

activity• Apparent or suspected mental health

issues where there is reason to believeit may impact the individual’s abilityto protect classified information orother information prohibited by lawfrom disclosure

• Criminal conduct• Any activity that raises doubts as to

whether the individual’s continuednational security eligibility is clearlyconsistent with national securityinterests

• Misuse of U.S. Government propertyor information systemsThis rule will result in fewer contract

performance delays by the small number of U.S. contractors with NTIB ownership operating under an SSA. With Section 842 of Public Law 115– 232 implemented there will no longer be at least a 60 day minimum delay for USG contracting activities and NTIB covered entities to wait for NIDs after contract award for access to proscribed information when all other requirements have been met. When a GCA submits a NID to the applicable CSA, there is an initial 30 days to process the request, which includes verification of the NID requirement. If the NID also includes a requirement for controlling agency concurrence (i.e., ODNI for SCI, DOE for RD or NSA for COMSEC), the CSA submits the request to the applicable controlling agencies who then have 30 more days for its analysis and decision. Section 842 of Public Law 115–232 is deregulatory by statute as reflected in this rule. Congress required that the NTIB policy framework foster a defense free-trade area among the defense-related research and development sectors of the United States, Canada, Australia and the United Kingdom. Section 881 of Public Law 114–328 (the National Defense Authorization Act for Fiscal Year 2017) expanded the legal definition of the NTIB to include the United Kingdom and Australia. Congress expanded the NTIB in 2017 based on the principle that defense trade between the United States and its closest allies enables a host of benefits, including increased access to innovation, economies of scale, interoperability, and to reduce the barriers to the seamless integration between the NTIB which supplies defense articles to the Armed Forces and enhances allied interoperability of forces. Section 842 of Public Law 115– 232 also continues the congressional intent to remove barriers to the seamless integration of the transfer of knowledge, goods, and services among the persons and organizations of the NTIB for national security challenges across a variety of technology areas.

Alternatives

No action. If there were no action (i.e., no NISPOM rule nor DoD Manual 5220.22), USG agencies would not have single set of requirements to be levied on contractors through a FAR security requirements clause or equivalent to protect classified information in contracts. Without that single set of requirements consistently levied for classified contracts by USG agencies,

there would be a loss of classified information to adversaries. There would not be a streamlined process for clearing contractors to work on contracts involving classified information. This would leave each USG agency to clear its own contractors, which could take months or years. The ability for the USG to fill crucial mission gaps using contractors would be severely impacted. There would be no standardized way under which contractors would be required to physically store classified information. The USG would have no insight into insider threats from contractor personnel who have access to the USG’s most sensitive and critical programs. There would be an adverse impact on national security. The results of this alternative are not preferred.

Next Best Alternative. Each USG agency would establish a rule for contractor protection of classified information disclosed or released to contractors. Differing standards will result in inconsistent standards, confusion, and higher costs for compliance if a contractor has contracts requiring access to classified information with multiple USG agencies and has to comply with different agency requirements. Further, such an alternative would result in additional time needed for contractors to put in place mechanisms to meet multiple and differing sets of requirements. This inconsistency and confusion due to differing standards also increases the likelihood of loss of classified information and insider threats going undetected. The results of this alternative are not preferred.

The Preferred Alternative. This final rule provides a single statement of requirements for contractors to comply with for maximum uniformity and consistency, for the protection of classified information, to include the reporting of foreign travel and foreign contacts by cleared contractor personnel in accordance with Security Executive Agent policies. This final rule provides for the proper protection of classified information disclosed or released by U.S. agencies in all phases of the contracting, license or grant processes. This rule will prevent the theft of classified national security assets and information by adversaries and insider threats. This is the preferred alternative.

IV. Exception to Notice and CommentThis rule directly involves matters

relating to public grants or contracts, and is therefore expressly exempt from notice and comment procedures under 5 U.S.C. 553(a)(2). Compliance with this rule is levied by a Federal Acquisition Regulation security requirements clause

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or equivalent. It establishes requirements for the protection of classified information disclosed to or developed by contractors, licensees, grantees, or certificate holders. Industry implements these requirements to protect national security interests, cleared persons, and the integrity of the classified information. Although DoD has determined that an exception to the notice and comment requirements of § 553 applies, it still seeks publiccomments on this rule. Thereafter, DoDwill consider comments received on thisrule in determining whether to makeany changes in a subsequent rule.

V. Regulatory Analysis

Executive Order 12866, ‘‘Regulatory Planning and Review’’ and E.O. 13563, ‘‘Improving Regulation and Regulatory Review’’

E.O.s 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distribute impacts, and equity). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. Accordingly, the rule has been reviewed by the Office of Management and Budget (OMB) under the requirements of these E.O.s. This rule has been designated a significant regulatory action and determined to be economically significant, under section 3(f) of E.O. 12866 as it has an annual effect on the economy of $100 million or more or affects in a material way the economy or a sector of the economy. Security costs relate specifically to protection of classified information by cleared U.S. entities.

Executive Order 13771, ‘‘Reducing Regulation and Controlling Regulatory Costs’’

This rule is not subject to the requirements of E.O. 13771, because the rule is issued with respect to a national security function of the United States.

Public Law 96–354, ‘‘Regulatory Flexibility Act’’ (5 U.S.C. 601)

The DoD certifies that this final rule would not, if promulgated, have a significant economic impact on a substantial number of small business entities in accordance with the Regulatory Flexibility Act (5 U.S.C. 601) requirements since a contractor cleared legal entity may, in entering into contracts requiring access to classified information, negotiate for security costs determined to be properly chargeable by a GCA. The DoD invites comment from members of the public who believe there will be a significant impact.

Small entities to which this rule will apply provide products and services to the executive branch, e.g., in the areas of administration, consulting, information security and technology, cybersecurity, research and development, design, production and manufacturing, including circumstances where physical security measures cannot preclude aural or visual access to classified information. These small business entities, as well as non-small business entities, have entered into a contract, license or grant for which access to classified information is required. Compliance with this rule, also referred to as the NISPOM, is levied by a FAR security requirements clause or equivalent. The requirements for an entity eligibility determination do not include USG collection of applicable North American Industry Classification System (NAICS) codes. While this type of information is available in the

Federal Procurement Data System (FPDS), entity eligibility determinations (often referred to as facility clearances) are not available in FPDS. DoD has no efficient mechanism to cross check NAICS codes from FPDS with facility clearance data. DoD assesses there are a wide variety of NAICS codes associated with contracts requiring access to classified information. For example, the following NAICS codes may be associated with contracts requiring access to classified information: 561720 janitorial services; 561210 facility support services; 541611 administrative management and general management services; 561110 office administrative services; 541690 other scientific and technical consulting services; 541330 engineering services; 561611 investigation services; and likely many others, since contracts that require a facility clearance for access to classified information are not industry specific.

Based on the number of small businesses registered within the SBA Dynamic Small Business Search, the overall industrial base of federal government small businesses is 313,651. Approximately 1,000 facilities were randomly selected from the NISP to determine if the selected facilities were registered within the SBA Dynamic Small Business Search. With 95% confidence, it can be estimated that there are between 7,672 and 8,400 small entities impacted by this rule. The general methodology to determine a random sample and the estimated number of small business entities impacted by this rule is outlined in the following table. The random selection is dependent on the contractor facility having an active facility security clearance and permanent CAGE Code.

NISP small entities estimate

Total cleared contractor facilities enrolled in the DoD National Industrial Security System (NISS) as of May 14, 2020:

12,384.Randomly Selected facilities from the current cleared contractor popu-

lation: 1,014.

The proportion of cleared contractor facilities in the simple random sample enrolled in the SBA Database:

658/1,014 = 64.89% .......................................................................... Equates to 8,036 facilities as small business entities. Margin of Error for proportion enrolled in SBA database (95% con-

fidence): ±2.94% .............................................................................................. Equates to ±364 facilities cleared contractor facilities.

The interval estimate for the number of small businesses in the NISP: 8,036 ±364 = ..................................................................................... 7,672 to 8,400 cleared contractor facilities.

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Based on the simple random sample, we can be 95% confident that the true proportion of active cleared contractor facilities enrolled in the SBA database is between 62.0% and 67.8%. Based on cleared contractor enrollment as of May 14, 2020, the percentages equate to an interval estimate between 7,672 and 8,400 small business entities which are cleared contractor facilities and impacted by this rule.

Assumptions and Notes: • Facilities self-enrolled in the SBA database are, in fact, small businesses. The following link was used to determine if a facility was a

small business by searching CAGE codes showing all NAICS for which a business is a small business: https://web.sba.gov/pro-net/search/dsp_dsbs.cfm.

• The SBA database is generally a self-certifying database. The SBA does not make any representation as to the accuracy of any of thedata included, other than certifications relating to 8(a) Business Development, HUBZone or Small Disadvantaged Business status. TheSBA strongly recommends that contracting officers diligently review a bidder’s small business self-certification before awarding a contract.

• Facilities were selected from the active NISS population using a simple random sample (1,014 selected of 12,384 enrolled facilities).• Selection of each facility is independent of all other facilities selected (N * .10 >n).• The sample is large enough (n = 1014) that we can assume the sampling distribution of sample proportions is approximately normal (n *

p>10 and n * (1¥p) >10).

Congressional Review Act The Congressional Review Act, 5

U.S.C. 801 et seq., as amended by the Small Business Regulatory Enforcement Fairness Act of 1996, generally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report, which includes a copy of the rule, to each House of the Congress and to the Comptroller General of the United States. We will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States. A major rule cannot take effect until 60 days after it is published in the Federal Register. This final rule is a ‘‘major rule’’ as defined by 5 U.S.C. 804(2) because it is also economically significant under section 3(f) of E.O. 12866 with an annual effect on the economy of $100 million or more.

Sec. 202, Public Law 104–4, ‘‘Unfunded Mandates Reform Act’’

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532) requires agencies to assess anticipated costs and benefits before issuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation. This final rule will not mandate any requirements for State, local, or tribal governments, nor will it affect private sector costs.

Public Law 96–511, ‘‘Paperwork Reduction Act’’ (44 U.S.C. Chapter 35)

It has been determined that 32 CFR part 117 does impose reporting or recordkeeping requirements under the Paperwork Reduction Act of 1995. DoD is not proposing changes to the DoD collections based on this final rule, nor have any of the other NISP CSAs indicated proposed changes based on this rule. The DOE and NRC have collections based on their respective authorities as a NISP CSA; but neither has a collection for a Contract Security Classification Specification because

DOE and NRC each complete that specification for both prime contracts and subcontracts. By accepting the contract, the contractor obligates itself to fulfill the requirements specified in applicable DOE Acquisition Regulation (DEAR) clauses (available at https://www.energy.gov/management/ downloads/searchable-electronic- department-energy-acquisition- regulation) and identified DOE Directives. The DOE Directives contain a contractor requirements document that conveys security obligations and the statutes for civil penalties for security violations. The Nuclear Regulatory Commission Acquisition Regulation part 2052.204–70 includes the security requirements levied on the contractor (available at https://www.acquisition.gov/nrcar/nrcar-part- 2052-solicitation-provisions-and- contract-clauses#P41_1774). For ease of review of this rule, the collections are discussed below. Materials associated with all of the collections can reviewed at www.reginfo.gov.

• OMB Control Number 0704–0194,DD Form 441, DoD Security Agreement.

• OMB Control Number: 0704–0571,National Industrial Security System, is a DoD information collection used to conduct its monitoring and oversight of contractors.

• OMB Control Number 0704–0567,DoD Contract Security Classification Specification, this collection is used by both DoD and agencies which have an industrial security agreement with DoD.

• OMB Control Number 0704–0573,Defense Information System for Security, is a DoD automated system for personnel security, providing a common, comprehensive medium to record, document, and identify personal security actions within DoD including submitting adverse information, verification of security clearance status, requesting investigations, and supporting continuous evaluation activities. It requires personal data collection to facilitate the initiation, investigation and adjudication of

information relevant to DoD security clearances and employment suitability determinations for active duty military, civilian employees and contractors seeking such credentials.

• OMB Control Number 0704–0496,Joint Personnel Adjudication System, an information system which requires personal data collection to facilitate the initiation, investigation and adjudication of information relevant to DoD security clearances and employment suitability determinations for active duty military, civilian employees and contractors seeking such credentials.

• OMB Control Number 0704–0579,Certificate Pertaining to Foreign Interests SF (328) which is a common form which can be used by all CSAs.

• OMB Control Number 3150–0047,10 CFR part 95, Facility Security Clearance and Safeguarding of National Security Information and Restricted Data, is an NRC information collection used to obtain an FCL and for safeguarding Secret and Confidential National Security Information and Restricted Data. Licensees under 10 CFR part 95 fall within two categories, those who possess, use or transmit classified matter at their site or a cleared contractor site, and those licensees and contractors who only need access to classified matter at a government or appropriately cleared non-government site.

• OMB Control Number 1910–1800,Security Package, is a DOE information collection used by DOE to conduct its monitoring and oversight of contractors under its security cognizance and to provide a platform for other CSAs, GCAs or prime contractors to verify whether a contractor has a DOE-granted FCL.

Executive Order 13132, ‘‘Federalism’’

E.O. 13132 establishes certain requirements that an agency must meet when it promulgates an final rule (and subsequent final rule) that imposes substantial direct requirement costs on

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State and local governments, preempts State law, or otherwise has Federalism implications. This final rule will not have a substantial effect on State and local governments.

List of Subjects in 32 CFR Part 117 Classified information; Government

contracts; USG contracts, National Industrial Program (NISP); Prime contractor, Subcontractor. ■ Accordingly, the Department of Defense amends chapter I of title 32 ofthe CFR by adding part 117 to read asfollows:

PART 117—NATIONAL INDUSTRIAL SECURITY PROGRAM OPERATING MANUAL (NISPOM)

Sec. 117.1 Purpose. 117.2 Applicability. 117.3 Definitions. 117.4 Policy. 117.5 Information collections. 117.6 Responsibilities. 117.7 Procedures. 117.8 Reporting requirements. 117.9 Entity eligibility determination for

access to classified information. 117.10 Determination of eligibility for

access to classified information for contractor employees.

117.11 Foreign Ownership, Control, or Influence (FOCI).

117.12 Security training and briefings. 117.13 Classification. 117.14 Marking requirements. 117.15 Safeguarding classified information. 117.16 Visits and meetings. 117.17 Subcontracting. 117.18 Information system security. 117.19 International security requirements. 117.20 Critical Nuclear Weapon Design

Information (CNWDI). 117.21 COMSEC. 117.22 DHS CCIPP. 117.23 Supplement to this rule: Security

Requirements for Alternative Compensatory Control Measures (ACCM), Special Access Programs (SAPs), SCI, RD, Formerly Restricted Data (FRD), Transclassified Foreign Nuclear Information (TFNI), and Naval Nuclear Propulsion Information (NNPI).

117.24 Cognizant Security Office information.

Authority: 32 CFR part 2004; E.O. 10865; E.O. 12333; E.O. 12829; E.O. 12866; E.O. 12968; E.O. 13526; E.O. 13563; E.O. 13587; E.O. 13691; Public Law 108–458; Title 42 U.S.C. 2011 et seq.; Title 50 U.S.C. Chapter 44; Title 50 U.S.C. 3501 et seq.

§ 117.1 Purpose.(a) This rule implements policy,

assigns responsibilities, establishes requirements, and provides procedures, consistent with E.O. 12829, ‘‘National Industrial Security Program’’; E.O. 10865, ‘‘Safeguarding Classified Information within Industry’’; 32 CFR

part 2004; and DoD Instruction (DoDI) 5220.22, ‘‘National Industrial Security Program (NISP)’’ (available at https://www.esd.whs.mil/Portals/54/ Documents/DD/issuances/dodi/ 522022p.pdf?ver=2018-05-01-073158- 710) for the protection of classifiedinformation that is disclosed to, ordeveloped by contractors of the U.S.Government (USG) (hereinafter referredto in this rule as contractors).

(b) This rule, also in accordance withE.O. 12829, E.O. 13587,’’Structural Reforms To Improve the Security of Classified Networks and the Responsible Sharing and Safeguarding of Classified Information’’; E.O. 13691, ‘‘Promoting Private Sector Cybersecurity Information Sharing’’; E.O. 12333, ‘‘United States Intelligence Activities’’; 42 U.S.C. 2011 et seq. (also known as and referred to in this rule as the ‘‘AEA of 1954,’’ as amended); ’’ 50 U.S.C. Ch. 44 (also known as the ‘‘National Security Act of 1947,’’ as amended); 50 U.S.C. 3501 et seq. (also known as the ‘‘Central Intelligence Agency Act of 1949,’’ as amended); Public Law 108– 458 (also known as the ‘‘Intelligence Reform and Terrorism Prevention Act of 2004’’); and 32 CFR part 2004:

(1) Prescribes industrial securityprocedures and practices, under E.O. 12829 or successor orders, to safeguard USG classified information that is developed by or disclosed to contractors of the USG.

(2) Prescribes requirements,restrictions, and other safeguards to prevent unauthorized disclosure of classified information and protect special classes of classified information.

(3) Prescribes that contractors willimplement the provisions of this rule no later than 6 months from the effective date of this rule.

§ 117.2 Applicability.

(a) This rule applies to:(1) The Office of the Secretary of

Defense, the Military Departments, the Office of the Chairman of the Joint Chiefs of Staff and the Joint Staff, the Combatant Commands, the Office of the Inspector General of the Department of Defense, the Defense Agencies, the DoD Field Activities, and all other organizational entities within the DoD (referred to collectively in this rule as the ‘‘DoD Components’’).

(2) All executive branch departmentsand agencies.

(3) All industrial, educational,commercial, or other non-USG entities granted access to classified information by the USG executive branch departments and agencies or by foreign governments.

(4) The release of classifiedinformation by the USG to contractors, who are required to safeguard classified information released during all phases of the contracting, agreement (including cooperative research and development agreements), licensing, and grant processes, i.e., the preparation and submission of bids and proposals, negotiation, award, performance, and termination. Also, it applies in situations involving a contract, agreement, license, or grant when actual knowledge of classified information is not required, but reasonable physical security measures cannot be employed to prevent aural or visual access to classified information, because there is the ability and opportunity to gain knowledge of classified information. It also applies to any other situation in which classified information or FGI that is furnished to a contractor requires protection in the interest of national security, but which is not released under a contract, license, certificate or grant.

(b) This rule does not:(1) Limit in any manner the authority

of USG executive branch departments and agencies to grant access to classified information under the cognizance of their department or agency to any individual designated by them. The granting of such access is outside the scope of the NISP and is accomplished pursuant to E.O. 12968, E.O. 13526, E.O. 13691, the AEA, and applicable disclosure policies.

(2) Apply to criminal proceedings inthe courts or authorize contractors or their employees to disclose classified information in connection with any criminal proceedings. Defendants and their representative in criminal proceedings in U.S. District Courts, Courts of Appeal, and the U.S. Supreme Court may gain access to classified information in accordance with 18 U.S.C. Appendix 3, Section 1, also known as and referred to in this rule as the ‘‘Classified Information Procedures Act,’’ as amended.

§ 117.3 Acronyms and Definitions.(a) Acronyms. Unless otherwise

noted, these acronyms and their terms are for the purposes of this rule. ACCM alternative compensatory control

measures AEA Atomic Energy Act of 1954, as

amended AUS Australia CAGE commercial and government entity CCIPP classified critical infrastructure

protection program CDC cleared defense contractor CFIUS Committee on Foreign Investment in

the United States CFR Code of Federal Regulations

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CI Counterintelligence CIA Central Intelligence Agency CNSS Committee on National Security

Systems CNWDI critical nuclear weapons design

information COMSEC communications security COR central office of record CSA cognizant security agency CSO cognizant security office CUSR Central United States Registry DCSA Defense Counterintelligence and

Security Agency DD Department of Defense (forms only) DDTC Directorate of Defense Trade Controls DGR designated government representative DHS Department of Homeland Security DNI Director of National Intelligence DoD Department of Defense DoDD Department of Defense Directive DoDI Department of Defense Instruction DoDM Department of Defense Manual DOE Department of Energy ECP electronic communications plan E.O. Executive order FBI Federal Bureau of Investigation FCL facility (security) clearance FGI foreign government information FOCI foreign ownership, control, or

influence FRD Formerly Restricted Data FSCC Facility Security Clearance Certificate

(NATO) FSO facility security officer GCA government contracting activity GCMS government contractor monitoring

station GSA General Services Administration GSC government security committee IDE intrusion detection equipment IDS intrusion detection system IFB invitation for bid ISOO Information Security Oversight Office ISSM information system security manager ISSO information systems security officer ITAR International Traffic in Arms

Regulations ITPSO insider threat program senior official KMP key management personnel LAA limited access authorization MFO multiple facility organization NATO North Atlantic Treaty Organization NDA nondisclosure agreement NIAG NATO Industrial Advisory Group NID national interest determination NISP National Industrial Security Program NISPOM National Industrial Security

Program Operating Manual NIST National Institute for Standards and

Technology NNPI Naval Nuclear Propulsion

Information NNSA National Nuclear Security

Administration NPLO NATO Production Logistics

Organization NRC Nuclear Regulatory Commission NRTL nationally recognized testing

laboratory NSA National Security Agency NSI national security information NTIB National Technology and Industrial

Base OCA original classification authority OMB Office of Management and Budget PA proxy agreement

PCL personnel (security) clearance RD Restricted Data RFP request for proposal RFQ request for quotation SAP special access program SCA security control agreement SCI sensitive compartmented information SD Secretary of Defense (forms only) SEAD Security Executive Agent directive SF standard form SMO senior management official SSA special security agreement SSP systems security plan TCP technology control plan TFNI Transclassified Foreign Nuclear

Information TP transportation plan UK United Kingdom UL Underwriters’ Laboratories U.S.C. United States Code USD (I&S) Under Secretary of Defense for

Intelligence and Security USG United States Government USML United States Munitions List VAL visit authorization letter VT voting trust

(b) Definitions. Unless otherwisenoted, these terms and their definitions are for the purposes of this rule.

Access means the ability and opportunity to gain knowledge of classified information.

Access Permittee means the holder of an Access Permit issued pursuant to the regulations set forth in 10 CFR part 725, ‘‘Permits For Access to Restricted Data.’’

ACCM are security measures used by USG agencies to safeguard classified intelligence or operations when normal measures are insufficient to achieve strict need-to-know controls and where SAP controls are not required.

Adverse information means any information that adversely reflects on the integrity or character of a cleared employee, that suggests that his or her ability to safeguard classified information may be impaired, that his or her access to classified information clearly may not be in the interest of national security, or that the individual constitutes an insider threat.

Affiliate means each entity that directly or indirectly controls, is directly or indirectly controlled by, or is under common control with, the ultimate parent entity.

Agency(ies) means any ‘‘Executive agency’’ as defined in 5 U.S.C. 105; any ‘‘Military department’’ as defined in 5 U.S.C. 102; and any other entity within the executive branch that releases classified information to private sector entities. This includes component agencies under another agency or under a cross-agency oversight office (such as ODNI with CIA), which are also agencies for purposes of this rule.

Alarm service company means an entity or branch office from which all of the installation, service, and

maintenance of alarm systems are provided, and the monitoring and investigation of such systems are either provided by its own personnel or with personnel assigned by this location.

Alarm system description form means a form describing an alarm system and monitoring information.

Approved security container means a GSA approved security container originally procured through the Federal Supply system. The security containers bear the GSA Approval label on the front face of the container, which identifies them as meeting the testing requirements of the assigned federal specification and having been maintained according to Federal Standard 809.

Approved vault means a vault built to Federal Standard 832 and approved by the CSA.

AUS community consists of the Government of Australia entities and Australian non-governmental facilities identified on the DDTC website (https:// pmddtc.state.gov/) at the time of export or transfer.

Authorized person means a person who has a favorable determination of eligibility for access to classified information, has signed an approved nondisclosure agreement, and has a need-to-know.

Branch office means an office of an entity which is located somewhere other than the entity’s main office location. A branch office is simply another location of the same legal business entity, and is still involved in the business activities of the entity.

CCIPP means security sharing of classified information under a designated critical infrastructure protection program with such authorized individuals and organizations as determined by the Secretary of Homeland Security.

CDC means a subset of contractors cleared under the NISP who have classified contracts with the DoD.

Certification means comprehensive evaluation of an information system component that establishes the extent to which a particular design and implementation meets a set of specified security requirements.

Classification guide means a document issued by an authorized original classifier that identifies the elements of information regarding a specific subject that must be classified and prescribes the level and duration of classification and appropriate declassification instructions.

Classified contract means any contract, license, agreement, or grant requiring access to classified information by a contractor and its

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employees for performance. A contract is referred to in this rule as a ‘‘classified contract’’ even when the contract document and the contract provisions are not classified. The requirements prescribed for a ‘‘classified contract’’ also are applicable to all phases of precontract, license or grant activity, including solicitations (bids, quotations, and proposals), precontract negotiations, post-contract activity, or other government contracting activity (GCA) programs or projects which require access to classified information by a contractor.

Classified covered information system means an information system that is owned or operated by or for a cleared defense contractor and that processes, stores, or transmits information created by or for the DoD with respect to which such contractor is required to apply enhanced protection (e.g., classified information). A classified covered information system is a type of covered network consistent with the requirements of Section 941 of Public Law 112–239 and 10 U.S.C. 391.

Classified information means information that has been determined, pursuant to E.O. 13526, or any predecessor or successor order, and the AEA of 1954, as amended, to require protection against unauthorized disclosure in the interest of national security and which has been so designated. The term includes NSI, RD, and FRD.

Classified meetings means a conference, seminar, symposium, exhibit, convention, training course, or other such gathering during which classified information is disclosed.

Classified visit means a visit during which a visitor will require, or is expected to require, access to classified information.

Classifier means any person who makes a classification determination and applies a classification category to information or material. The determination may be an original classification action or it may be a derivative classification action. Contractors make derivative classification determinations based on classified source material, a security classification guide, or a contract security classification specification, or equivalent.

Cleared commercial carrier means a carrier that is authorized by law, regulatory body, or regulation to transport SECRET and CONFIDENTIAL material and has been granted a SECRET facility clearance in accordance with the NISP.

Cleared employees means all employees of industrial or commercial

contractors, licensees, certificate holders, or grantees of an agency, as well as all employees of subcontractors and personal services contractor personnel, and who are granted favorable eligibility determinations for access to classified information by a CSA or are being processed for eligibility determinations for access to classified information by a CSA. A contractor may give an employee access to classified information in accordance with the provisions of § 117.10(a)(1)(iii).

Closed area means an area that meets the requirements of this rule for safeguarding classified material that, because of its size, nature, or operational necessity, cannot be adequately protected by the normal safeguards or stored during nonworking hours in approved containers.

CNWDI means a DoD category of TOP SECRET RD or SECRET RD information that reveals the theory of operation or design of the components of a thermonuclear or fission bomb, warhead, demolition munition, or test device. Specifically excluded is information concerning arming, fusing, and firing systems; limited life components; and total contained quantities of fissionable, fusionable, and high explosive materials by type. Among these excluded items are the components that DoD personnel set, maintain, operate, test or replace.

Compromise means an unauthorized disclosure of classified information.

COMSEC means the protective measures taken to deny unauthorized persons information derived from USG telecommunications relating to national security and to ensure the authenticity of such communications.

CONFIDENTIAL means the classification level applied to information, the unauthorized disclosure of which reasonably could be expected to cause damage to the national security that the original classification authority (OCA) is able to identify or describe.

Consignee means a person, firm, or Government (i.e., USG or foreign government) activity named as the receiver of a shipment; one to whom a shipment is consigned.

Consignor means a person, firm, or Government (i.e., USG or foreign government) activity by which articles are shipped. The consignor is usually the shipper.

Constant surveillance service means a transportation protective service provided by a commercial carrier qualified by the Surface Deployment and Distribution Command to transport CONFIDENTIAL shipments. The service requires constant surveillance of the

shipment at all times by a qualified carrier representative; however, an FCL is not required for the carrier. The carrier providing the service must maintain a signature and tally record for the shipment.

Consultant means an individual under contract, and compensated directly, to provide professional or technical assistance to a contractor in a capacity requiring access to classified information.

Continuous evaluation as defined in SEAD 6 is a personnel security investigative process to review the background of a covered individual who has been determined to be eligible for access to classified information or to hold a sensitive position at any time during the period of eligibility. Continuous evaluation leverages a set of automated records checks and business rules, to assist in the ongoing assessment of an individual’s continued eligibility. It supplements, but does not replace, the established personnel security program for scheduled periodic reinvestigations of individuals for continuing eligibility.

Continuous monitoring program means a system that facilitates ongoing awareness of threats, vulnerabilities, and information security to support organizational risk management decisions.

Contracting officer means a USG official who, in accordance with departmental or agency procedures, has the authority to enter into and administer contracts, licenses or grants and make determinations and findings with respect thereto, or any part of such authority. The term also includes the designated representative of the contracting officer acting within the limits of his or her authority.

Contractor means any industrial, educational, commercial, or other entity that has been granted an entity eligibility determination by a CSA. This term also includes licensees, grantees, or certificate holders of the USG with an entity eligibility determination granted by a CSA. As used in this rule, ‘‘contractor’’ does not refer to contractor employees or other personnel.

Cooperative agreement means a legal instrument which, consistent with 31 U.S.C. 6305, is used to enter into the same kind of relationship as a grant (see definition of ‘‘grant’’ in this subpart), except that substantial involvement is expected between USG and the recipient when carrying out the activity contemplated by the cooperative agreement. The term does not include ‘‘cooperative research and development agreements’’ as defined in 15 U.S.C. 3710a.

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Cooperative research and development agreement means any agreement between one or more Federal laboratories and one or more non- Federal parties under which the Government, through its laboratories, provides personnel, services, facilities, equipment, intellectual property, or other resources with or without reimbursement (but not funds to non- Federal parties) and the non-Federal parties provide funds, personnel, services, facilities, equipment, intellectual property, or other resources toward the conduct of specified research or development efforts which are consistent with the missions of the laboratory; except that such term does not include a procurement contract or cooperative agreement as those terms are used in sections 6303, 6304, and 6305 of title 31.

Corporate family means an entity, its parents, subsidiaries, divisions, and branch offices.

Counterintelligence means information gathered and activities conducted to protect against espionage, other intelligence activities, sabotage, or assassinations conducted for or on behalf of foreign powers, organizations or persons, or international terrorist activities, but not including personnel, physical, document or communications security programs.

Courier means a cleared employee, designated by the contractor, whose principal duty is to transmit classified material to its destination, ensuring that the classified material remains under their constant and continuous protection and that they make direct point-to-point delivery.

CRYPTO means the marking or designator that identifies unencrypted COMSEC keying material used to secure or authenticate telecommunications carrying classified or sensitive USG or USG-derived information. This includes non-split keying material used to encrypt or decrypt COMSEC critical software and software based algorithms.

CSA means an agency designated as having NISP implementation and security responsibilities for its own agencies (including component agencies) and any entities and non-CSA agencies under its cognizance. The CSAs are: DoD; DOE; NRC; ODNI; and DHS.

CSO means an organizational unit to which the head of a CSA delegates authority to administer industrial security services on behalf of the CSA.

CUI means information the USG creates or possesses, or that an entity creates or possesses for or on behalf of the USG, that a law, regulation, or USG- wide policy requires or permits an

agency to handle using safeguarding or dissemination controls. However, CUI does not include classified information or information a non-executive branch entity possesses and maintains in its own systems that did not come from, or was not created or possessed by or for, an executive branch agency or an entity acting for an agency.

Custodian means an individual who has possession of, or is otherwise charged with, the responsibility for safeguarding classified information.

Cybersecurity means prevention of damage to, protection of, and restoration of computers, electronic communications systems, electronic communications services, wire communication, and electronic communication, including information contained therein, to ensure its availability, integrity, authentication, confidentiality, and nonrepudiation.

Cyber incident means actions taken through the use of computer networks that result in an actual or potentially adverse effect on an information system or the information residing therein.

Declassification means a date or event which coincides with the lapse of the information’s national security sensitivity, as determined by the OCA. Declassification occurs when the OCA has determined that the classified information no longer requires, in the interest of national security, any degree of protection against unauthorized disclosure, and the information has had its classification designation removed or cancelled.

Defense articles means those articles, services, and related technical data, including software, in tangible or intangible form, which are listed on the United States Munitions List (USML) of the International Traffic in Arms Regulations (ITAR), as modified or amended. Defense articles exempt from the scope of ITAR section 126.17 are identified in Supplement No. 1 to Part 126 of the ITAR.

Defense services means: (1) Furnishing assistance (including

training) to foreign persons, whether in the United States or abroad, in the design, development, engineering, manufacture, production, assembly, testing, repair, maintenance, modification, operation, demilitarization, destruction, processing or use of defense articles;

(2) Furnishing to foreign persons anycontrolled technical data, whether in the United States or abroad; or

(3) Providing military training offoreign units and forces, regular and irregular, including formal or informal instruction of foreign persons in the United States or abroad or by

correspondence courses, technical, educational, or information publications and media of all kinds, training aid, orientation, training exercise, and military advice.

Derivative classification means the incorporating, paraphrasing, restating, or generating in new form information that is already classified, and marking the newly developed material consistent with the classification markings that apply to the source information. Derivative classification includes classifying information based on classification guidance. Duplicating or reproducing existing classified information is not derivative classification.

Document means any recorded information, regardless of the nature of the medium, or the method or circumstances of recording.

Downgrade means a determination by a declassification authority that information classified and safeguarded at a specified level will be classified and safeguarded at a lower level.

Embedded system means an information system that performs or controls a function, either in whole or in part, as an integral element of a larger system or subsystem, such as, ground support equipment, flight simulators, engine test stands, or fire control systems.

Empowered official is defined in 22 CFR part 120.

Entity is a generic and comprehensive term which may include sole proprietorships, partnerships, corporations, limited liability companies, societies, associations, institutions, contractors, licensees, grantees, certificate holders, and other organizations usually established and operating to carry out a commercial, industrial, educational, or other legitimate business, enterprise, or undertaking, or parts of these organizations. It may reference an entire organization, a prime contractor, parent organization, a branch or division, another type of sub-element, a sub- contractor, subsidiary, or other subordinate or connected entity (referred to as ‘‘sub-entities’’ when necessary to distinguish such entities from prime or parent entities). It may also reference a specific location or facility, or the headquarters or official business location of the organization, depending upon the organization’s business structure, the access needs involved, and the responsible CSA’s procedures. The term ‘‘entity’’ as used in this rule refers to the particular entity to which an agency might release, or is releasing, classified information, whether that entity is a parent or

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subordinate organization. The term ‘‘entity’’ in this rule includes contractors.

Entity eligibility determination means an assessment by the CSA as to whether an entity is eligible for access to classified information of a certain level (and all lower levels). Entity eligibility determinations may be broad or limited to specific contracts, sponsoring agencies, or circumstances. A favorable entity eligibility determination results in eligibility to access classified information under the cognizance of the responsible CSA to the level approved. When the entity would be accessing categories of information such as RD or SCI for which the CSA for that information has set additional requirements, CSAs must also assess whether the entity is eligible for access to that category of information. Some CSAs refer to their favorable entity eligibility determinations as FCLs. However, a favorable entity eligibility determination for the DHS CCIPP is not equivalent to an FCL and does not meet the requirements for FCL reciprocity. A favorable entity eligibility determination does not convey authority to store classified information.

Escort means a cleared person, designated by the contractor, who accompanies a shipment of classified material to its destination. The classified material does not remain in the personal possession of the escort but the conveyance in which the material is transported remains under the constant observation and control of the escort.

Extent of protection means the designation (such as ‘‘Complete’’) used to describe the degree of alarm protection installed in an alarmed area.

Facility means a plant, laboratory, office, college, university, or commercial structure with associated warehouses, storage areas, utilities, and components, that, when related by function and location, form an operating entity.

FCL means an administrative determination that, from a security viewpoint, an entity is eligible for access to classified information of a certain level (and all lower levels) (e.g., a type of favorable entity eligibility determination used by some CSAs). An entity eligibility determination for the DHS CCIPP is not the equivalent of an FCL and does not meet the requirements for FCL reciprocity.

FGI means information that is: (1) Provided to the United States by

a foreign government or governments, an international organization of governments, or any element thereof with the expectation, expressed or implied, that the information, the source

of the information, or both, are to be held in confidence; or

(2) Produced by the United Statespursuant to, or as a result of, a joint arrangement with a foreign government or governments, an international organization of governments, or any element thereof, requiring that the information, the arrangement, or both are to be held in confidence.

Foreign interest means any foreign government, agency of a foreign government, or representative of a foreign government; any form of business enterprise or legal entity organized, chartered or incorporated under the laws of any country other than the United States or its territories, and any person who is not a citizen or national of the United States.

Foreign national means any person who is not a citizen or national of the United States.

Foreign person is defined in 31 CFR 800.224 for CFIUS purposes.

FRD means classified information removed from the Restricted Data category upon a joint determination by the DOE and DoD that such information relates primarily to the military utilization of atomic weapons and that such information can be adequately safeguarded as classified defense information.

Freight forwarder (transportation agent) means any agent or facility designated to receive, process, and transship U.S. material to foreign recipients. In the context of this rule, it means an agent or facility cleared specifically to perform these functions for the transfer of U.S. classified material to foreign recipients.

GCA means an element of an agency that the agency head has designated and delegated broad authority regarding acquisition functions. A foreign government may also be a GCA.

Governing board means an entity’s board of directors, board of managers, board of trustees, or equivalent governing body.

Grant means a legal instrument which, consistent with 31 U.S.C. 6304, is used to enter into a relationship: (a) Of which the principal purpose is to transfer a thing of value to the recipient to carry out a public purpose of support or stimulation authorized by a law of the United States, rather than to acquire property or services for the USG’s direct benefit or use; or, (b) In which substantial involvement is not expected between DoD and the recipient when carrying out the activity contemplated by the award. Throughout this rule, the term grant will include both the grant and cooperative agreement.

Grantee means the entity that receives a grant or cooperative agreement.

Hand carrier means a cleared employee, designated by the contractor, who occasionally hand carries classified material to its destination in connection with a classified visit or meeting. The classified material remains in the personal possession of the hand carrier except for authorized overnight storage.

Home office means the headquarters of a multiple facility entity.

Industrial security means that portion of information security concerned with the protection of classified information in the custody of U.S. industry.

Information means any knowledge that can be communicated or documentary material, regardless of its physical form or characteristics.

Information security means the system of policies, procedures, and requirements established pursuant to executive order, statute, or regulation to protect information that, if subjected to unauthorized disclosure, could reasonably be expected to cause damage to national security. The term also applies to policies, procedures, and requirements established to protect unclassified information that may be withheld from release to the public.

Information system means an assembly of computer hardware, software, and firmware configured for the purpose of automating the functions of calculating, computing, sequencing, storing, retrieving, displaying, communicating, or otherwise manipulating data, information and textual material.

Insider means cleared contractor personnel with authorized access to any USG or contractor resource, including personnel, facilities, information, equipment, networks, and systems.

Insider threat means the likelihood, risk, or potential that an insider will use his or her authorized access, wittingly or unwittingly, to do harm to the national security of the United States. Insider threats may include harm to contractor or program information, to the extent that the information impacts the contractor or agency’s obligations to protect classified NSI.

Joint venture means an association of two or more persons or entities engaged in a single defined project with all parties contributing assets and efforts, and sharing in the management, profits and losses, in accordance with the terms of an agreement among the parties.

KMP means an entity’s senior management official (SMO), facility security officer (FSO), insider threat program senior official (ITPSO), and all other entity officials who either hold majority interest or stock in, or have

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direct or indirect authority to influence or decide issues affecting the management or operations of, the entity or classified contract performance.

L access authorization means an access determination that is granted by DOE or NRC based on a Tier 3 or successor background investigation as set forth in applicable national-level requirements and DOE directives. Within DOE and NRC, an ‘‘L’’ access authorization permits an individual who has an official ‘‘need to know’’ to access Confidential Restricted Data, Secret and Confidential Formerly Restricted Data, Secret and Confidential Transclassified Foreign Nuclear Information, or Secret and Confidential National Security Information, required in the performance of official duties. An ‘‘L’’ access authorization determination is required for individuals with a need to know outside of DOE, NRC, DoD, and in limited cases NASA, to access Confidential Restricted Data.

LAA means security access authorization to CONFIDENTIAL or SECRET information granted to non- U.S. citizens requiring only limited access in the course of their regular duties.

Material means any product or substance on or in which information is embodied.

Matter means anything in physical form that contains or reveals classified information.

Media means physical devices or writing surfaces including but not limited to, magnetic tapes, optical disks, magnetic disks, large-scale integration memory chips, and printouts (but not including display media) onto which information is recorded, stored, or printed within an information system.

MFO means a legal entity (single proprietorship, partnership, association, trust, or corporation) composed of two or more entities (facilities).

National of the United States means a person who owes permanent allegiance to the United States. All U.S. citizens are U.S. nationals; however, not all U.S. nationals are U.S. citizens (for example, persons born in American Samoa or Swains Island).

NATO information means information bearing NATO markings, indicating the information is the property of NATO, access to which is limited to representatives of NATO and its member nations unless NATO authority has been obtained to release outside of NATO.

NATO visits means visits by personnel representing a NATO entity and relating to NATO contracts and programs.

Need-to-know means a determination made by an authorized holder of classified information that a prospective recipient has a requirement for access to, knowledge of, or possession of the classified information to perform tasks or services essential to the fulfillment of a classified contract or program.

Network means a system of two or more information systems that can exchange data or information.

NNPI is classified or unclassified information concerning the design, arrangement, development, manufacture, testing, operation, administration, training, maintenance, and repair of the propulsion plants of naval nuclear-powered ships and prototypes, including the associated shipboard and shore-based nuclear support facilities.

Non-DoD executive branch agencies means the non-DoD agencies that have entered into agreements with DoD to receive NISP industrial security services from DoD. A list of these agencies is on the Defense Counterintelligence and Security Agency website at https://www.dcsa.mil.

Non-Federal information system is defined in 32 CFR part 2002.

NRTL means a private sector organizations recognized by the Occupational Safety and Health Administration to perform certification for certain products to ensure that they meet the requirements of both the construction and general industry Occupational Safety and Health Administration electrical standards. Each NRTL is recognized for a specific scope of test standards.

NSI means information that has been determined pursuant to E.O. 13526 or predecessor order to require protection against unauthorized disclosure and marked to indicate its classified status.

NTIB means the industrial bases of the United States and Australia, Canada, and the United Kingdom.

NTIB entity means a person that is a subsidiary located in the United States for which the ultimate parent entity and any intermediate parent entities of such subsidiary are located in a country that is part of the national technology and industrial base (as defined in section 2500 of title 10, United States Code); and that is subject to the foreign ownership, control, or influence requirements of the National Industrial Security Program.

Nuclear weapon data means Restricted Data or Formerly Restricted Data concerning the design, manufacture, or utilization (including theory, development, storage, characteristics, performance and effects) of nuclear explosives, nuclear weapons

or nuclear weapon components, including information incorporated in or related to nuclear explosive devices. Nuclear weapon data is matter in any combination of documents or material, regardless of physical form or characteristics.

OCA means an individual authorized in writing, either by the President, the Vice President, or by agency heads or other officials designated by the President, to classify information in the first instance.

Original classification means an initial determination that information requires, in the interest of national security, protection against unauthorized disclosure. Only USG officials who have been designated in writing may apply an original classification to information.

Parent means an entity that owns at least a majority of another entity’s voting securities.

PCL means an administrative determination that an individual is eligible, from a security point of view, for access to classified information of the same or lower category as the level of the personnel clearance being granted.

Prime contract means a contract awarded by a GCA to a contractor for a legitimate USG purpose.

Prime contractor means the contractor who receives a prime contract from a GCA.

Privileged user means a user that is authorized (and, therefore, trusted) to perform security-relevant functions that ordinary users are not authorized to perform.

Proscribed information means: (1) TOP SECRET information;(2) COMSEC information or material,

excluding controlled cryptographic items when unkeyed or utilized with unclassified keys.

(3) RD;(4) SAP information; or.(5) SCI.Protective security service means a

transportation protective service provided by a cleared commercial carrier qualified by DoD’s Surface Deployment and Distribution Command to transport SECRET shipments.

Q access authorization means an access determination that is granted by DOE or NRC based on a Tier 5 or successor background investigation as set forth in applicable national-level requirements and DOE directives. Within DOE and the NRC, a ‘‘Q’’ access authorization permits an individual with an official ‘‘need to know’’ to access Top Secret, Secret and Confidential Restricted Data, Formerly Restricted Data, Transclassified Foreign

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Nuclear Information, National Security Information, or special nuclear material in Category I or II quantities, as required in the performance of official duties. A ‘‘Q’’ access authorization is required for individuals with a need to know outside of DOE, NRC, DoD, and in a limited case NASA, to access Top Secret and Secret Restricted Data.

Remote terminal means a device communicating with an automated information system from a location that is not within the central computer facility.

Restricted area means a controlled access area established to safeguard classified material that, because of its size or nature, cannot be adequately protected during working hours by the usual safeguards, but is capable of being stored during non-working hours in an approved repository or secured by other methods approved by the CSA.

RD means all data concerning (1) design, manufacture, or utilization of atomic weapons; (2) the production of special nuclear material; or (3) the use of special nuclear material in the production of energy, but does not include data declassified or removed from the RD category pursuant to section 142 of the AEA.

SAP means any program that is established to control access and distribution and to provide protection for particularly sensitive classified information beyond that normally required for TOP SECRET, SECRET, or CONFIDENTIAL information. A SAP can be created or continued only as authorized by a senior agency official delegated such authority pursuant to E.O. 13526.

Schedule 13D means a form required by the Securities and Exchange Commission when a person or group of persons acquires beneficial ownership of more than 5% of a voting class of a company’s equity securities registered under Section 12 of the ‘‘Securities Exchange Act of 1934’’ (available at: https://www.sec.gov/fast-answers/ answerssched13htm.html).

SCI means a subset of classified national intelligence concerning or derived from intelligence sources, methods or analytical processes that is required to be protected within formal access control systems established by the DNI.

SECRET means the classification level applied to information, the unauthorized disclosure of which reasonably could be expected to cause serious damage to the national security that the OCA is able to identify or describe.

Security in depth means a determination made by the CSA that a

contractor’s security program consists of layered and complementary security controls sufficient to deter and detect unauthorized entry and movement within the facility. Examples include, but are not limited to, use of perimeter fences, employee and visitor access controls, use of an Intrusion Detection System (IDS), random guard patrols throughout the facility during nonworking hours, closed circuit video monitoring, or other safeguards that mitigate the vulnerability of open storage areas without alarms and security storage cabinets during nonworking hours.

Security violation means failure to comply with the policy and procedures established by this part that reasonably could result in the loss or compromise of classified information.

Shipper means one who releases custody of material to a carrier for transportation to a consignee. (See also ‘‘Consignor.’’)

SMO is the contractor’s official responsible for the entity policy and strategy. The SMO is an entity employee occupying a position in the entity with ultimate authority over the facility’s operations and the authority to direct actions necessary for the safeguarding of classified information in the facility. This includes the authority to direct actions necessary to safeguard classified information when the access to classified information by the facility’s employees is solely at other contractor facilities or USG locations.

Source document means an existing document that contains classified information that is incorporated, paraphrased, restated, or generated in new form into a new document.

Standard practice procedures means a document prepared by a contractor that implements the applicable requirements of this rule for the contractor’s operations and involvement with classified information at the contractor’s facility.

Subcontract means any contract entered into by a contractor to furnish supplies or services for performance of a prime contract or a subcontract. It includes a contract, subcontract, purchase order, lease agreement, service agreement, request for quotation (RFQ), request for proposal (RFP), invitation for bid (IFB), or other agreement or procurement action between contractors that requires or will require access to classified information to fulfill the performance requirements of a prime contract.

Subcontractor means a supplier, distributor, vendor, or firm that enters into a contract with a prime contractor to furnish supplies or services to or for

the prime contractor or another subcontractor. For the purposes of this rule, each subcontractor will be considered as a prime contractor in relation to its subcontractors.

Subsidiary means an entity in which another entity owns at least a majority of its voting securities.

System software means computer programs that control, monitor, or facilitate use of the information system; for example, operating systems, programming languages, communication, input-output controls, sorts, security packages, and other utility-type programs. Also includes off- the-shelf application packages obtained from manufacturers and commercial vendors, such as for word processing, spreadsheets, data base management, graphics, and computer-aided design.

Technical data means: (1) Information, other than software,

which is required for the design, development, production, manufacture, assembly, operation, repair, testing, maintenance or modification of defense articles. This includes information in the form of blueprints, drawings, photographs, plans, instructions or documentation.

(2) Classified information relating todefense articles and defense services on the U.S. Munitions List and 600-series items controlled by the Commerce Control List.

(3) Information covered by aninvention secrecy order.

(4) Software directly related todefense articles.

TFNI means classified information concerning the nuclear energy programs of other nations (including subnational entities) removed from the RD category under section 142(e) of the AEA after the DOE and the Director of National Intelligence jointly determine that it is necessary to carry out intelligence- related activities under the provisions of the National Security Act of 1947, as amended, and that it can be adequately safeguarded as NSI instead. This includes information removed from the RD category by past joint determinations between DOE and the CIA. TFNI does not include information transferred to the United States under an Agreement for Cooperation under the Atomic Energy Act or any other agreement or treaty in which the United States agrees to protect classified information.

TOP SECRET means the classification level applied to information, the unauthorized disclosure of which reasonably could be expected to cause exceptionally grave damage to the national security that the OCA is able to identify or describe.

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Transmission means sending information from one place to another by radio, microwave, laser, or other non- connective methods, as well as by cable, wire, or other connective medium. Transmission also includes movement involving the actual transfer of custody and responsibility for a document or other classified material from one authorized addressee to another.

Transshipping activity means a government activity to which a carrier transfers custody of freight for reshipment by another carrier to the consignee.

UK community consists of the UK Government entities with facilities and UK non-governmental facilities identified on the DDTC website (https:// www.pmddtc.state.gov/) at the time of export.

Unauthorized person means a person not authorized to have access to specific classified information in accordance with the requirements of this rule.

United States means the 50 states and the District of Columbia.

United States and its territorial areas means the 50 states, the District of Columbia, Puerto Rico, Guam, American Samoa, the Virgin Islands, Wake Island, Johnston Atoll, Kingman Reef, Palmyra Atoll, Baker Island, Howland Island, Jarvis Island, Midway Islands, Navassa Island, and Northern Mariana Islands.

Upgrade means a determination that certain classified information, in the interest of national security, requires a higher degree of protection against unauthorized disclosure than currently provided, coupled with a change to the classification designation to reflect the higher degree.

U.S. classified cryptographic information means a cryptographic key and authenticators that are classified and are designated as TOP SECRET CRYPTO or SECRET CRYPTO. This means all cryptographic media that embody, describe, or implement classified cryptographic logic, to include, but not limited to, full maintenance manuals, cryptographic descriptions, drawings of cryptographic logic, specifications describing a cryptographic logic, and cryptographic software, firmware, or repositories of such software such as magnetic media or optical disks.

U.S. person means a United States citizen, an alien known by the intelligence agency concerned to be a permanent resident alien, an unincorporated association substantially composed of United States citizens or permanent resident aliens, or a corporation incorporated in the United States, except for a corporation directed

and controlled by a foreign government or governments.

Voting securities means any securities that presently entitle the owner or holder thereof to vote for the election of directors of the issuer or, with respect to unincorporated entities, individuals exercising similar functions.

Working hours means the period of time when:

(1) There is present in the specificarea where classified material is located, a work force on a regularly scheduled shift, as contrasted with employees working within an area on an overtime basis outside of the scheduled work shift; and

(2) The number of employees in thescheduled work force is sufficient in number and so positioned to be able to detect and challenge the presence of unauthorized personnel. This would, therefore, exclude janitors, maintenance personnel, and other individuals whose duties require movement throughout the facility.

Working papers means documents or materials, regardless of the media, which are expected to be revised prior to the preparation of a finished product for dissemination or retention.

§ 117.4 Policy.E.O. 12829 established the NISP to

serve as a single, integrated, cohesive industrial security program to protect classified information and preserve our Nation’s economic and technological interests.

(a) When contracts, licenses,agreements, and grants to contractors require access to classified information, national security requires that this information be safeguarded in a manner equivalent to its protection within the executive branch of the USG.

(b) National security requires that theindustrial security program promote the economic and technological interests of the United States. Redundant, overlapping, or unnecessary requirements impede those interests.

§ 117.5 Information collections.The information collection

requirements are: (a) Standard Form (SF) 328

‘‘Certificate Pertaining to Foreign Interest’’ (available at: https://www.gsa.gov/forms-library/certificate- pertaining-foreign-interests) in § 117.8 and § 117.11, is assigned Office of Management and Budget (OMB) Control Number 0704–0579. The expiration date of this information collection is listed in the DoD Information Collections System at https://apps.sp.pentagon.mil/sites/ dodiic/Pages/default.aspx.

(b) NRC collection. ‘‘Facility SecurityClearance and Safeguarding of National

Security Information and Restricted Data,’’ is assigned OMB Control Number: 3150–0047. Under this collection, NRC-regulated facilities and other organizations are required to provide information and maintain records to ensure that an adequate level of protection is provided to NRC- classified information and material.

(c) DOE collection. ‘‘Security,’’ a NISPCSA information collection, is assigned OMB Control Number: 1910–1800. This information collection, which includes facility security clearance information, is used by the DOE to exercise management, oversight, and control over its contractors’ management and operation of DOE’s Government-owned contractor-operated facilities, and over its offsite contractors. The contractor management, oversight, and control functions relate to the ways in which DOE contractors provide goods and services for DOE organizations and activities in accordance with the terms of their contracts and the applicable statutory, regulatory, and mission support requirements of the Department. Information collected from private industry and private individuals is used to protect national security and critical assets entrusted to the Department.

(d) DoD collection. ‘‘DoD SecurityAgreement,’’ is assigned OMB Control Number: 0704–0194. ‘‘National Industrial Security System,’’ a CSA information collection, is assigned OMB Control Number: 0704–0571, and is a DoD information collection used to conduct its monitoring and oversight of contractors. Department of Defense ‘‘Contract Security Classification Specification,’’ (available at: https://www.esd.whs.mil/Portals/54/ Documents/DD/forms/dd/dd0254.pdf and available at: https://www.dcsa.mil/ is/nccs/), is assigned OMB Control Number 0704–0567 and used by both DoD and agencies which have an industrial security agreement with DoD. ‘‘Defense Information System for Security,’’ is assigned OMB Control Number: 0704–0573. Defense Information System for Security is a DoD automated system for personnel security, providing a common, comprehensive medium to record, document, and identify personal security actions within DoD including submitting adverse information, verification of security clearance status, requesting investigations, and supporting continuous evaluation activities. It requires personal data collection to facilitate the initiation, investigation and adjudication of information relevant to DoD security clearances and employment suitability

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1 On June 20, 2020, the Secretary of Defense re- named the Defense Security Service (DSS) as the Defense Counterintelligence and Security Agency (DCSA), as required by Executive Oder 13467, section 2.6(b)(i) (as amended by Executive Order 13968, Apr. 24, 2019, 84 FR 18125). Pursuant to Section 4 of E.O. 13968, references to DSS in DoD issuances should be deemed or construed to refer to DCSA.

determinations for active duty military, civilian employees and contractors seeking such credentials. Joint Personnel Adjudicative System is assigned OMB Control Number: 0704– 0496. Joint Personnel Adjudicative System is an information system which requires personal data collection to facilitate the initiation, investigation and adjudication of information relevant to DoD security clearances and employment suitability determinations for active duty military, civilian employees and contractors seeking such credentials.

§ 117.6 Responsibilities.

(a) Under Secretary of Defense forIntelligence & Security (USD(I&S)). The USD(I&S), on behalf of the Secretary of Defense, and in accordance with E.O. 12829, 32 CFR part 2004, and DoDI 5220.22:

(1) Carries out the direction in section201 of E.O. 12829 that the Secretary of Defense issue and maintain this rule and changes to it. The USD(I&S) does so in consultation with all affected agencies (E.O. 12829 section 201), with the concurrence of the Secretary of Energy, the Chairman of the NRC, the DNI, and the Secretary of Homeland Security (E.O.12829 section 201), and in consultation with the ISOO Director (E.O. 12829 section 102).

(2) Acts as the CSA for DoD.(3) Provides policy and management

of the NISP for non-DoD executive branch agencies who enter into inter- agency security agreements with DoD to provide industrial security services required when classified information is disclosed to contractors in accordance with E.O. 12829, as amended.

(b) Director, DCSA. Under theauthority, direction, and control of the USD(I&S), and in accordance with DoDI 5220.22 and DoD Directive (DoDD) 5105.42, ‘‘Defense Security Service (DSS)’’ 1 (available at: https://www.esd.whs.mil/Portals/54/ Documents/DD/issuances/dodd/ 510542p.pdf?ver=2019-01-14-090012- 283) the Director, DCSA:

(1) Oversees and manages DCSA,which serves as the DoD CSO.

(2) Administers the NISP as a separateprogram element on behalf of DoD GCAs and those agencies with agreements with DoD for security services.

(3) Provides security oversight of theNISP as the DoD CSO on behalf of DoD components and those non-DoD executive branch agencies who enter into agreements with DoD as noted in paragraph (a)(3) of this section. The Director, DCSA, will be relieved of this oversight function for DoD special access programs (SAPs) when the Secretary of Defense or the Deputy Secretary of Defense approves a carve- out provision in accordance with DoDD 5205.07, ‘‘DoD SAP Policy’’ (available at: https://www.esd.whs.mil/Portals/54/ Documents/DD/issuances/dodd/ 520507p.pdf?ver=2020-02-04-142942- 827).

(c) Secretary of Energy. In addition tothe responsibilities in paragraph (h) of this section, the Secretary of Energy:

(1) Prescribes procedures for theportions of this rule pertaining to information classified under the AEA (i.e., RD, FRD, and TFNI), as nothing in the rule shall be construed to supersede the authority of the Secretary of Energy under the AEA.

(2) Retains authority over access toinformation classified under the AEA.

(3) Inspects and monitors contractor,licensee, certificate holder, and grantee programs and facilities that involve access to information classified under the AEA, as necessary.

(d) Chairman of the NRC. In additionto the responsibilities in paragraph (h) of this section, the Chairman of the NRC:

(1) Prescribes procedures for theportions of this rule that pertain to information under NRC programs classified under the AEA, other federal statutes, and executive orders.

(2) Retains authority over access toinformation under NRC programs classified under the AEA, other federal statutes, and executive orders.

(3) Inspects and monitors contractor,licensee, certificate holder, and grantee programs and facilities that involve access to information under NRC programs classified pursuant to the AEA, other federal statutes, and executive orders where appropriate.

(e) DNI. In addition to theresponsibilities in paragraph (h) of this section, the DNI:

(1) Prescribes procedures for theportions of this rule pertaining to intelligence sources, methods, and activities, including, but not limited to, SCI.

(2) Retains authority over access tointelligence sources, methods, and activities, including SCI.

(3) Provides guidance on the securityrequirements for intelligence sources and methods of information, including, but not limited to, SCI.

(f) Secretary of Homeland Security. Inaccordance with E.O. 12829, E.O. 13691, and in addition to the responsibilities in paragraph (h) of this section, the Secretary of Homeland Security:

(1) Prescribes procedures for theportions of this rule that pertain to the CCIPP.

(2) Retains authority over access toinformation under the CCIPP.

(3) Inspects and monitors contractor,licensee, certificate holder, and grantee programs and facilities that involve access to CCIPP.

(g) All the CSA heads. The CSAheads:

(1) Oversee the security of classifiedcontracts and activities under their purview.

(2) Provide oversight of contractorsunder their security cognizance.

(3) Minimize redundant andduplicative security review and audit activities of contractors, including such activities conducted at contractor locations where multiple CSAs have equities.

(4) Execute appropriate intra-agencyand inter-agency agreements to avoid redundant and duplicate reviews.

(5) Designate one or more CSOs forsecurity administration.

(6) Designate subordinate officials, inaccordance with governing policies, to act as the authorizing official. Authorizing officials will:

(i) Assess and authorize contractors toprocess classified information on information systems.

(ii) Conduct oversight of suchinformation system processing and provide information system security guidelines in accordance with Federal information system security control policies, standards, and procedures. Minimize redundant and duplicative security review and audit activity of contractors, including such activity conducted at contractor locations where multiple CSAs have equities.

(h) Heads of component agencies. Inaccordance with applicable CSA direction, the component agency heads:

(1) Oversee compliance withprocedures identified by the applicable CSA or designated CSO.

(2) Provide oversight of contractorpersonnel visiting or working on USG installations.

(3) Promptly apprise the CSO ofinformation received or developed that could adversely affect a cleared contractor, licensee, or grantee, and their employees, to hold an FCL or PCL, or that otherwise raises substantive doubt about their ability to safeguard classified information entrusted to them.

(4) Propose changes to this rule asdeemed appropriate and provide them

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to the applicable CSA for submission to the OUSD(I&S) Counterintelligence, Law Enforcement and Security Directorate.

(i) Director, ISOO. The Director,ISOO:

(1) Oversees the NSIP and agencycompliance with it, in accordance with E.O. 12829.

(2) Issues and maintains the NISPimplementing directive (32 CFR part 2004), in accordance with E.O. 12829, to provide guidance to the CSAs and USG agencies under the NISP.

(3) Chairs the NISP Policy AdvisoryCommittee. Addresses complaints and suggestions from contractors, as detailed in the NISP Policy Advisory Committee bylaws.

§ 117.7 Procedures.(a) General. Contractors will protect

all classified information that they are provided access to or that they possess. This responsibility applies at both contractor and USG locations.

(b) Contractor Security Officials.Contractors will appoint security officials who are U.S. citizens, except in exceptional circumstances (see § 117.9(m) and § 117.11(e)).

(1) Appointed security officials listedin paragraphs (b)(2), (b)(3), and (b)(4) of this section must:

(i) Oversee the implementation of therequirements of this rule. Depending upon the size and complexity of the contractor’s security operations, a single contractor employee may serve in more than one position.

(ii) Undergo the same securitytraining that is required for all other contractor employees pursuant to § 117.12, in addition to their positionspecific training.

(iii) Be designated in writing withtheir designation documented in accordance with CSA guidance.

(iv) Undergo a personnel securityinvestigation and national security eligibility determination for access to classified information at the level of the entity’s eligibility determination for access to classified information (e.g., FCL level) and be on the KMP list for the cleared entity.

(2) SMO. The SMO will:

(i) Ensure the contractor maintains asystem of security controls in accordance with the requirements of this rule.

(ii) Appoint a contractor employee oremployees, in writing, as the FSO and appoint the same employee or a different employee as the ITPSO. The SMO may appoint a single employee for both roles or may appoint one employee as the FSO and a different employee as the ITPSO.

(iii) Remain fully informed of thefacility’s classified operations.

(iv) Make decisions based onclassified threat reporting and their thorough knowledge, understanding, and appreciation of the threat information and the potential impacts caused by a loss of classified information.

(v) Retain accountability for themanagement and operations of the facility without delegating that accountability to a subordinate manager.

(3) FSO. The FSO will:(i) Supervise and direct security

measures necessary for implementing the applicable requirements of this rule and the related USG security requirements to ensure the protection of classified information.

(ii) Complete security trainingpursuant to § 117.12 and as deemed appropriate by the CSA.

(4) ITPSO. The ITPSO will establishand execute an insider threat program.

(i) If the appointed ITPSO is not alsothe FSO, the ITPSO will ensure that the FSO is an integral member of the contractor’s insider threat program.

(ii) The ITPSO will complete trainingpursuant to § 117.12.

(iii) An entity family may choose toestablish an entity family-wide insider threat program with one senior official appointed, in writing, to establish, and execute the program as the ITPSO. Each cleared entity using the entity-wide ITPSO must separately appoint that person as its ITPSO for that facility. The ITPSO will provide an implementation plan to the CSA for executing the insider threat program across the entity family.

(5) ISSM. Contractors who are, or willbe, processing classified information on

an information system located at the contractor facility will appoint an employee to serve as the ISSM. The ISSM must be eligible for access to classified information to the highest level of the information processed on the system(s) under their responsibility. The contractor will ensure that the ISSM is adequately trained and possesses technical competence commensurate with the complexity of the contractor’s classified information system. The contractor will notify the applicable CSA if there is a change in the ISSM. The ISSM will oversee development, implementation, and evaluation of the contractor’s classified information system program. ISSM responsibilities are in § 117.18.

(6) Employees performing securityduties. Those employees whose official duties include performance of NISP- related security functions will complete security training tailored to the security functions performed. This training requirement also applies to consultants whose official duties include security functions.

(c) Other KMP. In addition to theSMO, the FSO, and the ITPSO, the contractor will include on the KMP list, subject to CSA concurrence, any other officials who either hold majority interest or stock in the entity, or who have direct or indirect authority to influence or decide issues affecting the management or operations of the contractor or issues affecting classified contract performance. The CSA may either:

(1) Require these KMP to bedetermined to be eligible for access to classified information as a requirement for the entity’s eligibility determination or;

(2) Allow the entity to formallyexclude these KMP from access to classified information. The entity’s governing board will affirm the exclusion by issuing a formal action (see table), and provide a copy of the exclusion action to the CSA. The entity’s governing board will document this exclusion action.

TABLE 1 TO PARAGRAPH (c)(2)—EXCLUSION RESOLUTIONS

Type of affirmation Language to be used in exclusion action

Affirmation for Exclusion from Access to Classi-fied Information.

[Insert name and address of entity or name and position of officer, director, partner, or similar entity official or officials] will not require, will not have, and can be effectively and formally excluded from, access to all classified information disclosed to the entity and does not oc-cupy a position that would enable them to adversely affect the organization’s policies or practices in the performance of classified contracts.

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TABLE 1 TO PARAGRAPH (c)(2)—EXCLUSION RESOLUTIONS—Continued

Type of affirmation Language to be used in exclusion action

Affirmation for Exclusion from Higher-level Clas-sified Information.

[Insert name and address of entity or name and position of officer, director, partner, or similar entity official or officials] will not require, will not have, and can be effectively and formally excluded from access to [insert SECRET or TOP SECRET] classified information and does not occupy a position that would enable them to adversely affect the organization’s policies or practices in the performance of [insert SECRET or TOP SECRET] classified contracts.

(d) Insider Threat Program. Pursuantto this rule and CSA provided guidance to supplement unique CSA mission requirements, the contractor will establish and maintain an insider threat program to gather, integrate, and report relevant and available information indicative of a potential or actual insider threat, consistent with E.O. 13587 and Presidential Memorandum ‘‘National Insider Threat Policy and Minimum Standards for Executive Branch Insider Threat Programs.’’

(e) Standard practice procedures. Thecontractor will implement all applicable provisions of this rule at each of its cleared facility locations. The contractor will prepare written procedures when the CSA determines them to be necessary to reasonably exclude the possibility of loss or compromise of classified information, and in accordance with additional CSA- provided guidance, as applicable.

(f) Cooperation with Federal agencies.Contractors will cooperate with Federal agencies and their officially credentialed USG or contractor representatives during official reviews, investigations concerning the protection of classified information, or personnel security investigations of present or former employees and others (e.g., consultants or visitors). At a minimum, cooperation includes:

(1) Providing suitable arrangementswithin the facility for conducting private interviews with employees during normal working hours;

(2) Providing, when requested,relevant employment or personnel files, security records, supervisory files, records pertinent to insider threat (e.g., security, cybersecurity, and human resources) and any other records pertaining to an individual under investigation that are, in the possession or control of the contractor or the contractor’s representatives or located in the contractor’s offices;

(3) Providing access to employmentand security records that are located at an offsite location; and

(4) Rendering other necessaryassistance.

(g) Security training and briefings.Contractors will advise all cleared employees, including those assigned to

USG locations or operations outside the United States, of their individual responsibility for classification management and for safeguarding classified information. Contractors will provide security training to cleared employees consisting of initial briefings, refresher briefings, and debriefings in accordance with § 117.12.

(h) Security reviews—(1) USG reviews.The applicable CSA will conduct recurring oversight reviews of contractors’ NISP security programs to verify that the contractor is protecting classified information and implementing the provisions of this rule. The contractor’s participation in the security review is required for maintaining the entity’s eligibility for access to classified information.

(i) Review cycle. The CSA willdetermine the scope and frequency of security reviews, which may be increased or decreased consistent with risk management principles.

(ii) Procedures. (A) The CSA willgenerally provide notice to the contractor of a forthcoming review, but may also conduct unannounced reviews at its discretion. The CSA security review may subject contractor employees and all areas and receptacles under the control of the contractor to examination.

(B) The CSA will make every effort toavoid unnecessary intrusion into the personal effects of contractor personnel.

(C) The CSA may conduct physicalexaminations of the interior space of containers not authorized to secure classified material. Such examinations will always be accomplished in the presence of a representative of the contractor.

(iii) Controlled unclassifiedinformation (CUI). 32 CFR part 2002 requires agencies to implement CUI requirements, but compliance with CUI requirements is outside the scope of the NISP and this rule. However, CSAs may conduct CUI assessments in conjunction with NISP USG reviews when:

(A) The contractor is a participant inthe NISP based on a requirement to access classified information;

(B) A classified contract under theCSA’s cognizance includes provisions

for access to, or protection or handling of, CUI; and

(C) The CSA has provided thecontractor with specific guidance regarding the assessment criteria and methodology it will use for overseeing protection of the CUI being accessed, stored or transmitted by the contractor as part of the classified contract.

(2) Contractor reviews. Contractorswill review their security programs on a continuing basis and conduct a formal self-inspection at least annually and at intervals consistent with risk management principles.

(i) Self-inspections will include thereview of the classified activity, classified information, classified information systems, conditions of the overall security program, and the insider threat program. They will have sufficient scope, depth, and frequency, and will have management support during the self-inspection and during remedial actions taken as a result of the self-inspection. Self-inspections will include the review of samples representing the contractor’s derivative classification actions, as applicable.

(ii) The contractor will prepare aformal report describing the self- inspection, its findings, and its resolution of issues discovered during the self-inspection. The contractor will retain the formal report for CSA review until after the next CSA security review is completed.

(iii) The SMO at the cleared facilitywill annually certify to the CSA, in writing, that a self-inspection has been conducted, that other KMP have been briefed on the results of the self- inspection, that appropriate corrective actions have been taken, and that management fully supports the security program at the cleared facility in the manner as described in the certification.

(i) Contractors working at USGlocations. Contractor employees performing work within the confines of a USG facility will safeguard classified information according to the procedures of the host installation or agency.

(j) Hotlines. Federal agencies maintainhotlines to provide an unconstrained avenue for USG and contractor employees to report, without fear of reprisal, known or suspected instances

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of security irregularities and infractions concerning contracts, programs, or projects. These hotlines do not supplant the contractor’s responsibility to facilitate reporting and timely investigations of security issues concerning its operations or personnel. Contractor personnel are encouraged to report information through established contractor channels. The hotline may be used as an alternate means to report this type of information. Contractors will inform all personnel that hotlines may be used for reporting issues of national security significance. Each CSA will post hotline information and telephone numbers on their websites for contractor access.

(k) Agency agreements. 32 CFR part2004 and E.O. 12829 require non-CSA agency heads to enter into agreements with the Secretary of Defense as the Executive Agent for the NISP to provide industrial security services. The

Secretary of Defense may also enter into agreements to provide services for other CSA’s in accordance with 32 CFR part 2004 and E.O. 12829. Agency agreements establish the terms of the Secretary of Defense’s (or the Secretary of Defense’s designee’s) responsibilities when acting as the CSA on behalf of these agency heads. The list of agencies for which the Secretary of Defense has agreed to render industrial security services is on the DCSA website at https://www.dcsa.mil.

(l) Security cognizance. The CSA willinform contractors if oversight has been delegated to a CSO.

(m) Rule interpretations. Contractorswill forward requests for interpretations of this rule to their CSA in accordance with their CSA-provided guidance to supplement unique CSA mission requirements.

(n) Waivers to this rule. Contractorswill submit any requests to waive

provisions of this rule in accordance with CSA procedures, which may include periodic review of approved waivers. When submitting a request for a waiver, the contractor will, in writing, explain why it is impractical or unreasonable for the contractor to comply with the requirement it is asking to waive, identify alternative measures as prescribed by this rule, and include a proposed duration for the waiver. The contractor cannot implement a waiver unless the waiver is approved by the applicable CSA.

(o) Complaints and suggestions.Contractors may forward NISP administration complaints and suggestions to the Director of ISOO. However, contractors are encouraged to forward NISP administration complaints and suggestions to their respective CSA prior to forwarding to the ISOO.

TABLE 2 TO PARAGRAPH (o) NISP ADMINISTRATION COMPLAINTS AND SUGGESTIONS

Addressee Mailing address Telephone No. Facsimile Email address

Director, ISOO, National Archives and Records Administration.

700 Pennsylvania Avenue NW, Room 100, Washington, DC 20408–0001.

202–357–5250 202–357–5907 isoo@nara.gov.

§ 117.8 Reporting requirements.(a) General. Pursuant to this rule,

Security Executive Agent Directive (SEAD) 3, (available at: https://www.dni.gov/files/NCSC/documents/ Regulations/SEAD-3-Reporting-U.pdf) and CSA-provided guidance to supplement unique CSA mission requirements, contractors and their cleared employees are required to:

(1) Report certain events that mayhave an effect on the status of the entity’s or an employee’s eligibility for access to classified information; report events that indicate an insider threat to classified information or to employees with access to classified information; report events that affect proper safeguarding of classified information; and report events that indicate classified information has been, or is suspected to be, lost or compromised.

(2) Establish internal procedures toensure employees with eligibility for access to classified information are aware of their responsibilities for reporting pertinent information to the FSO. The contractor will:

(i) Provide reports to the FBI, or otherFederal authorities as required by this rule, the terms of a classified contract or other agreement, and by U.S. law.

(ii) Provide complete information toenable the CSA to ascertain whether classified information is adequately protected.

(iii) Submit reports to the FBI, theCSA, or the ISOO as specified in paragraphs (b), (c), and (g) of this section.

(3) Appropriately mark reportscontaining classified information in accordance with § 117.14.

(4) Clearly mark a report containinginformation submitted in confidence as containing that information. When reports contain information pertaining to an individual, 5 U.S.C. 552a (also known as and referred to in this rule as ‘‘The Privacy Act of 1974, as amended,’’) permits the withholding of certain information from the individual in accordance with specific exemptions, which include authority to withhold release of information to the extent that the disclosure of the information would reveal the identity of a source who furnished the information to the USG under an express promise that the identity of the source would be held in confidence.

(b) Reports to be submitted to the FBI.The contractor will promptly submit a written report to the nearest field office of the FBI regarding information coming to the contractor’s attention concerning actual, probable, or possible espionage, sabotage, terrorism, or subversive activities at any of its locations.

(1) An initial report may be made byphone, but it must be followed up in writing (e.g., email or formal

correspondence), regardless of the FBI’s disposition of the report.

(2) The contractor will promptlynotify the CSA when they make a report to the FBI and provide the CSA a copy of the written report.

(c) Reports to be submitted to theCSA.—(1) Adverse information. Contractors are required to report adverse information coming to their attention concerning any of their employees determined to be eligible for access to classified information, in accordance with this rule, SEAD 3, and CSA-provided guidance. Contractors will not make reports based on rumor or innuendo.

(i) The termination of employment ofan employee does not negate the requirement to submit this report. If a contractor employee is assigned to a USG location, the contractor will furnish a copy of the report and its final disposition to the USG security point of contact for that location.

(ii) Pursuant to Becker v. Philco, 372F.2d 771 (4th Cir. 1967), cert. denied389 U.S. 979 (1967), and subsequentcases, a contractor may not be liable fordefamation of an employee because ofcommunications that are required ofand made by a contractor to an agencyof the United States under therequirements of this rule or under theterms of applicable contracts.

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(2) Suspicious contacts. Contractorswill report information pertaining to suspicious contacts with employees determined to be eligible for access to classified information, and pertaining to efforts to obtain illegal or unauthorized access to the contractor’s cleared facility by any means, including:

(i) Efforts by any individual,regardless of nationality, to obtain illegal or unauthorized access to classified information.

(ii) Efforts by any individual,regardless of nationality, to elicit information from an employee determined eligible for access to classified information, and any contact which suggests the employee may be the target of an attempted exploitation by an intelligence service of another country. See SEAD 3 for specific information to be reported.

(3) Change in status of employeesdetermined eligible for access to classified information. Contractors will report by means of the CSA-designated reporting mechanism information pertaining to changes in status of employees determined eligible for access to classified information such as:

(i) Death.(ii) Change in name.(iii) Termination of employment.(iv) Change in citizenship.(4) Citizenship by naturalization.

Contractors will report if a non-U.S. citizen employee granted an LAA becomes a citizen through naturalization. The report will include:

(i) City, county, and state wherenaturalized.

(ii) Date naturalized.(iii) Court.(iv) Certificate number.(5) Employees desiring not to be

processed for a national security eligibility determination or not to perform classified work. Contractors will report instances when an employee no longer wishes to be processed for a determination of eligibility for access to classified information or to continue having access to classified information, and the reason for that request.

(6) Classified informationnondisclosure agreement (NDA). Contractors will report the refusal by an employee to sign the SF 312, ‘‘Classified Information Nondisclosure Agreement,’’ (available at: https://www.gsa.gov/ cdnstatic/SF312- 13.pdf?forceDownload=1) or otherapproved NDA.

(7) Changed conditions affecting thecontractor’s eligibility for access to classified information. Contractors are required to report certain events that affect the status of the entity eligibility determination (e.g., FCL), affect the

status of an employee’s PCL, may indicate an employee poses an insider threat, affect the proper safeguarding of classified information, or indicate classified information has been lost or compromised, including:

(i) Change of ownership or control ofthe contractor, including stock transfers that affect control of the entity.

(ii) Change of operating name oraddress of the entity or any of its locations determined eligible for access to classified information.

(iii) Any change to the informationpreviously submitted for KMP including, as appropriate, the names of the individuals the contractor is replacing. A new complete KMP listing need be submitted only at the discretion of the contractor or when requested by the CSA. The contractor will provide a statement indicating:

(A) Whether the new KMP are clearedfor access to classified information, and if cleared, to what level they are cleared and when they were cleared, their dates and places of birth, social security numbers, and citizenship.

(B) Whether they have been excludedfrom access to classified information in accordance with § 117.7(b)(5)(ii).

(C) Whether they have beentemporarily excluded from access to classified information pending the determination of eligibility for access to classified information in accordance with § 117.9(g).

(iv) Any action to terminate businessor operations for any reason, imminent adjudication or reorganization in bankruptcy, or any change that might affect the validity of the contractor’s eligibility for access to classified information.

(v) Any material change concerningthe information previously reported concerning foreign ownership, control, or influence (FOCI). This report will be made by the submission of an updated SF 328, ‘‘Certificate Pertaining to Foreign Interests,’’ in accordance with CSA-provided guidance. When submitting this information, it is not necessary to repeat answers that have not changed. When entering into discussion, consultations, or agreements that may reasonably lead to effective ownership or control by a foreign interest, the contractor will report the details to the CSA in writing. If the contractor has received a Schedule 13D from the investor, the contractor will forward a copy with the report.

(8) Changes in storage capability. Thecontractor will report any changes in their storage requirement or capability to safeguard classified material.

(9) Inability to safeguard classifiedmaterial. The contractor will report any

emergency situation that renders their location incapable of safeguarding classified material as soon as possible.

(10) Unsatisfactory conditions of aprime or subcontractors. (i) Prime contractors, including subcontractors who have in turn subcontracted work, will report any information coming to their attention that may indicate that classified information cannot be adequately protected by a subcontractor, or other circumstances that may impact the validity of the eligibility for access to classified information of any subcontractors.

(ii) Subcontractors will report anyinformation coming to their attention that may indicate that classified information cannot be adequately protected or other circumstances that may impact the validity of the eligibility for access to classified information of their prime contractor.

(11) Dispositioned material previouslyterminated. The contractor will make a report when the location or disposition of material previously terminated from accountability is subsequently discovered and brought back into accountability.

(12) Foreign classified contracts.Contractors will report any pre-contract negotiation or award not placed through a CSA or U.S. GCA that involves, or may involve:

(i) The release or disclosure of U.S.classified information to a foreign interest.

(ii) Access to classified informationfurnished by a foreign interest.

(13) Reporting of improper receipt offoreign government material. The contractor will report to the CSA the receipt of classified material from foreign interests that is not received through USG channels.

(14) Reporting by subcontractor.Subcontractors will also notify their prime contractors if they make any reports to their CSA in accordance with the provisions of paragraphs (c)(7) through (c)(10) of this section.

(d) Reports of loss, compromise, orsuspected compromise. The contractor will report any loss, compromise, or suspected compromise of classified information, U.S. or foreign, to the CSA in accordance with paragraph (d)(1) through (d)(3) of this section. Each CSA may provide additional guidance concerning the reporting time period. If the contractor is located on a USG facility, the contractor will submit the report to the CSA and to the head of the USG facility.

(1) Preliminary inquiry. Immediatelyupon receipt of a security violation report involving classified information, the contractor will initiate a preliminary

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inquiry to ascertain all of the circumstances surrounding the presumed loss, compromise, or suspected compromise, including validation of the classification of the information.

(2) Initial report. If the contractor’spreliminary inquiry confirms that a loss, compromise, or suspected compromise of any classified information occurred, the contractor will promptly submit an initial report of the incident unless otherwise notified by the CSA.

(3) Final report. When theinvestigation has been completed, the contractor will submit a final report to the CSA which, in turn, will follow CSA procedures to notify the applicable GCA. The report will include:

(i) Material and relevant informationthat was not included in the initial report.

(ii) The full name and social securitynumber of the individual or individuals primarily responsible for the incident, including a record of prior loss, compromise, or suspected compromise for which the individual had been determined responsible.

(iii) A statement of the correctiveaction taken to preclude a recurrence.

(iv) Disciplinary action taken againstthe responsible individual or individuals, if any.

(v) Specific reasons for reaching theconclusion that loss, compromise, or suspected compromise occurred or did not occur.

(4) Employee information incompromise cases. When requested by the CSA, the contractor will report information concerning an employee or other individual, determined to be responsible for the incident, when the information is needed by the CSA for the loss, compromise, or suspected compromise of classified information.

(e) Individual culpability reports.Contractors will establish and enforce policies that provide for appropriate administrative or disciplinary actions taken against employees who violate the requirements of this rule.

(1) Contractors will establish a systemto manage and track information regarding employees with eligibility for access to classified information who violate the requirements of this rule in order to be able to identify patterns of negligence or carelessness, or to identify a potential insider threat.

(2) Contractors will establish andapply a graduated scale of administrative and disciplinary actions in the event of employee security violations or negligence in the handling of classified information. CSAs may provide guidance to contractors with examples of administrative or

disciplinary actions that the contractor may consider implementing in the event of employee violations or negligence. Contractors are required to submit a final report to the CSA with the findings of an employee’s culpability and what corrective actions were taken.

(3) Contractors will include astatement of the administrative or disciplinary actions taken against an employee in a final report to the CSA. A statement must be included when the individual responsible for a security violation can be determined. Contractors’ final reports will indicate whether one or more of the following factors are evident:

(i) Involved a deliberate disregard ofsecurity requirements.

(ii) Involved negligence in thehandling of classified material.

(iii) Was not deliberate in nature butreflects a recent or recurring pattern of questionable judgment, irresponsibility, negligence, or carelessness.

(f) CDC cyber incident reports. Thisparagraph applies only to CDCs and sets forth reporting requirements pursuant to 10 U.S.C. 391 and 393 and Defense Federal Acquisition Regulation Supplement Clause 252.204–7012. The reporting requirements of paragraph (f) of this section are in addition to the requirements in paragraphs (b) and (d) of this section, which can include certain activities occurring on unclassified information systems. DoD will provide detailed reporting instructions for contractors affected by these references via industrial security letter in accordance with DoDI 5220.22.

(1) Reports to be submitted to thedesignated DoD CSO. CDCs will immediately report to the DoD CSO, any cyber incident on a classified covered information system that has been approved by that CSO to process classified information.

(i) At a minimum, the report willinclude:

(A) A description of the technique ormethod used in the cyber incident.

(B) A sample of the malicioussoftware involved in the cyber incident, if discovered and isolated by the CDC,

(C) A summary of information inconnection with any DoD program that has been potentially compromised due to the cyber incident.

(ii) Information that is reported by theCDC (or derived from information reported by the CDC) will be safeguarded, used, and disseminated in a manner consistent with DoD procedures governing the handling of such information pursuant to Public Law 112–239 and 10 U.S.C. 391.

(iii) Reports involving classifiedforeign government information will be

reported to the Director, Defense Technology Security Administration (DoD).

(2) Reports on non-Federalinformation systems not authorized to process classified information. CDCs will report cyber incidents on non- Federal, unclassified information systems in accordance with contract requirements.

(3) Access to equipment andinformation by DoD personnel. (i) The CDC will allow, upon request by DoD personnel, access by DoD personnel to additional equipment or information of the CDC that is necessary to conduct forensic analysis of reportable cyber incidents in addition to any analysis conducted by the CDC.

(ii) The CDC is only required toprovide DoD access to equipment or information to determine whether information created by or for DoD in connection with any DoD program was successfully exfiltrated from a CDC’s network or information system, and what information was exfiltrated from the CDC’s network or information system.

(g) Reports to ISOO. (1) Contractorswill report instances of redundant or duplicative security review and audit activity by the CSAs to the Director, ISOO, for resolution.

(2) Contractors will report instances ofCSAs duplicating processing to determine an entity’s eligibility for access to classified information when there is an existing determination of an entity’s eligibility for access to classified information by another CSA.

§ 117.9 Entity eligibility determination foraccess to classified information.

(a) General. This section applies to allcontractors with entity eligibility determinations, except as provided in § 117.22 for entity eligibilitydeterminations for participation in theCCIPP under the cognizance of DHS.

(1) Prior to the entity being granted anentity eligibility determination for access to classified information, the responsible CSA must have determined that:

(i) The entity is eligible for access toclassified information to meet a legitimate USG or foreign government need.

(ii) Access is consistent with nationalsecurity interests.

(2) The CSA will provide guidance onprocessing entity eligibility determinations for entity access to classified information.

(3) The determination of entityeligibility for access is separate from the determination of a classified

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information safeguarding capability (see § 117.15).

(4) Neither the contractor nor itsemployees will be permitted access to classified information until the CSA has made an entity eligibility determination (e.g., issued an FCL).

(5) The requirement for a favorableentity eligibility determination (also referred to in some instances as an FCL) for a prime contractor includes instances where all access to classified information will be limited to subcontractors. A prime contractor must have a favorable entity eligibility determination at the same or higher classification level as its subcontractors.

(6) Contractors are eligible for storageof classified material in connection with a legitimate USG or foreign government requirement if they have a favorable entity eligibility determination and a classified information safeguarding capability approved by the CSA.

(7) An entity eligibility determinationis valid for access to classified information at the same or lower classification level.

(8) Each CSA will maintain a recordof entity eligibility determinations made by that CSA.

(9) A contractor will not use itsfavorable entity eligibility determination for advertising or promotional purposes. This does not prohibit the contractor from advertising employee positions that require a PCL in connection with the position.

(10) A contractor or prospectivecontractor cannot apply for its own entity eligibility determination. A GCA or a currently cleared contractor may sponsor an entity for an entity eligibility determination at any point during the contracting or agreement life cycle at which the entity must have access to classified information to participate (including the solicitation or competition phase).

(b) Reciprocity. If an entity has anappropriate, final entity eligibility determination, a CSA will not duplicate the entity eligibility determination processes performed by another CSA. If a CSA cannot acknowledge an entity eligibility determination to another CSA, the involved entity may be subject to duplicate processing in accordance with 32 CFR part 2004.

(c) Eligibility requirements. To beeligible for an initial entity eligibility determination or to maintain an existing entity eligibility determination, the entity must:

(1) Need access to classifiedinformation in connection with a legitimate USG or foreign government requirement, and access must be

consistent with U.S. national security interests as determined by the CSA.

(2) Be organized and existing:(i) Under the laws of the United

States, one of the fifty States, the District of Columbia, or an organized U.S. territory (Guam, Commonwealth of the Northern Marianas Islands, Commonwealth of Puerto Rico, and the U.S. Virgin Islands); or

(ii) Under the laws of an AmericanIndian/Alaska Native tribal entity if:

(A) The American Indian or AlaskaNative tribe under whose laws the entity is chartered has been formally acknowledged by the Assistant Secretary—Indian Affairs, of the U.S. Department of the Interior.

(B) The contractor is organized andcontinues to exist, during the period of the eligibility under a tribal statue or code, or pursuant to a resolution of an authorized tribal legislative body.

(C) The contractor has submitted orwill submit records such as a charter, certificate of organization, or other applicable tribal documents and statute or code provisions governing the formation and continuation of the entity, for CSA determination that the entity is tribally chartered.

(3) Be located in the United States orits territorial areas.

(4) Have a record of integrity andlawful conduct in its business dealings.

(5) Have a SMO, FSO, and ITPSO whohave and who maintain eligibility for access to classified information and are not excluded from participating in USG contracts or agreements in accordance with § 117.7(b)(1) through § 117.7(b)(3).

(6) Not be under FOCI to such adegree that a favorable entity eligibility determination for access to classified information would be inconsistent with the national interest, in the judgment of the CSA.

(7) Maintain sufficient authorized andcleared employees to manage and implement the requirements of this rule in accordance with CSA guidance.

(8) Not pose an unacceptable risk tonational security interests, in the judgment of the CSA.

(9) Meet all requirements governingaccess to classified information established by the CSA or the relevant authorizing law, regulation, or government-wide policy.

(d) Processing the entity eligibilitydetermination. The CSA will assess the entity’s eligibility for access to classified information based on its business structure.

(1) At a minimum, the entity will:(i) Provide CSA-requested

documentation within timelines established by the CSA.

(ii) Have and identify the SMO.

(iii) Appoint a U.S. citizen employeeas the FSO.

(iv) Appoint a U.S. citizen employeeas the ITPSO.

(v) Submit requests for personnelsecurity investigations for the SMO, FSO, ITPSO, and those other KMP identified by the CSA as requiring eligibility for access to classified information in connection with the entity eligibility.

(2) If the entity is under FOCI with aspecial security agreement (SSA) as the proposed method of FOCI mitigation, and the GCA requires the entity to have access to proscribed information, the CSA must consider the measures listed in § 117.11(d) as part of the entity eligibility determination.

(e) Other personnel eligibilitydeterminations concurrent with the entity eligibility determination. (1) Contractors may designate employees who require access to classified information during the negotiation of a contract or the preparation of a bid or quotation pertaining to a prime contract or a subcontract. These designated employees will be processed for a determination of eligibility for access to classified information (i.e., PCL eligibility) concurrent with entity’s entity eligibility determination.

(2) The entity eligibilitydetermination is not dependent on the PCL eligibility for access to classified information by such employees, provided none of these employees are among those listed in paragraph (c)(5) of this section. Even so, the employees will not be granted access to classified information until both a favorable entity eligibility determination and PCL eligibility has been granted.

(f) Exclusion procedures. If a CSAdetermines that certain KMP can be excluded from access to classified information, the contractor will follow the procedures in accordance with § 117.7(b)(5)(ii).

(g) Temporary exclusions. As a resultof a changed condition, the SMO or other KMP who require eligibility for access to classified information in connection with the facility entity eligibility determination may be temporarily excluded from access to classified information while in the process of a PCL eligibility determination provided:

(1) The SMO or other KMP are notappointed as the FSO or ITPSO. FSOs and ITPSOs may not be temporarily excluded. A cleared employee must always be appointed to fulfill the requirements of these positions in accordance with this rule.

(2) An employee, cleared to the levelof the entity eligibility determination,

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must be able to fulfill the NISP responsibilities of the temporarily excluded KMP in accordance with this rule while the temporary exclusion is in effect.

(3) The applicable CSA may provideadditional guidance on the duration of a temporary exclusion from access to classified information based on circumstances, business structure, and other relevant security information.

(4) The contractor’s governing boardaffirms the exclusion action, and provides a copy of the exclusion action to the CSA. The organization’s governing body will document this action.

TABLE 1 TO PARAGRAPH (g)(4) TEMPORARY EXCLUSION RESOLUTIONS

Type of affirmation Language to be used in exclusion action

Affirmation for Temporary Exclusion from Ac-cess to Classified Information.

Pending a final determination of eligibility for access to classified information by the U.S. Gov-ernment, [insert name and position] will not require, will not have, and can be effectively and formally excluded from access to all classified information disclosed to the entity.

Affirmation for Temporary Exclusion from High-er Level Classified Information.

Pending a final determination of eligibility for access to classified information at the [insert SE-CRET or TOP SECRET] level, [insert name and position] will not have, and can be effec-tively and formally excluded from access to higher-level classified information [specify which higher level of information].

(h) Interim entity eligibilitydeterminations. The CSA may make an interim entity eligibility determination for access to classified information, in the sole discretion of the CSA. See § 117.10(l) for access limitations thatalso apply to interim entity eligibilitydeterminations.

(i) An interim entity eligibilitydetermination is made on a temporary basis pending completion of the full investigative requirements.

(ii) If the contractor with an interimentity eligibility determination is unable or unwilling to comply with the requirements of this rule and CSA- provided guidance regarding the process to obtain a final entity eligibility determination, the CSA will withdraw the interim entity eligibility.

(i) Multiple facility organizations. Thehome office must have an entity eligibility determination at the same level as the highest entity eligibility determination of an entity within the MFO. The CSA will determine whether branch offices are eligible for access to classified information if the branch offices need access and meet all other requirements.

(j) Parent-subsidiary relationships.When a parent-subsidiary relationship exists, the CSA will process the parent and the subsidiary separately for entity eligibility determinations.

(1) If the CSA determines the parentmust be processed for an entity eligibility determination, then the parent must have an entity eligibility determination at the same or higher level as the subsidiary.

(2) When a parent and subsidiary ormultiple cleared subsidiaries are collocated, a formal written agreement to use common security services may be executed by the entities, subject to the approval of the CSA.

(k) Joint ventures. A joint venture maybe granted eligibility for access to classified information if it meets the

eligibility requirements in paragraph (c) of this section, including:

(1) The joint venture must beestablished as a legal business entity (e.g. limited liability company, corporation, or partnership). A joint venture established by contract that is not also established as a legal business entity is not eligible for an entity eligibility determination.

(2) The business entity operating as ajoint venture must have been awarded a classified contract or sponsored by a GCA or prime contractor for an entity eligibility determination in advance of a potential award for which the business entity has bid pursuant to paragraph (c) of this section.

(3) The business entity operating as ajoint venture must have an employee or employees appointed as security officials or KMP pursuant to § 117.7(b).

(l) Consultants. The responsible CSAwill determine when there is a need for self-employed consultants requiring access to classified information to be considered for an entity eligibility determination.

(m) Limited entity eligibilitydetermination (Non-FOCI). (1) The applicable CSA may choose to allow a GCA to request limited entity eligibility determinations for a single, narrowly defined contract, agreement, or circumstance and specific to the requesting GCA’s classified information. This is not the same as a limited entity eligibility determination in situations involving FOCI, when the FOCI is not mitigated or negated.

(i) Limited entity eligibilitydeterminations (or FCLs) involving FOCI will be processed in accordance with § 117.11(e).

(ii) This paragraph (paragraph (m) ofthis section) applies to limited entity eligibility determinations for purposes other than FOCI mitigation in accordance with 32 CFR part 2004.

Additional guidance may be provided by the responsible CSA.

(2) An entity must be sponsored for alimited entity eligibility determination by a GCA in accordance with the sponsorship requirements contained in paragraph (c) of this section. The contractor should be aware that the sponsorship request from the GCA to the CSA must also include:

(i) Description of the compelling needfor the limited entity eligibility determination that is in accordance with U.S. national security interests.

(ii) Specific reason(s) or rationale forlimiting the entity eligibility determination.

(iii) The GCA’s formalacknowledgement and acceptance of the risk associated with this rationale.

(3) The entity must otherwise meetthe entity eligibility determination requirements set out in this rule.

(4) Access limitations are inherentwith the limited entity eligibility determination and are imposed upon all of the entity’s employees regardless of citizenship.

(5) Contractors should be aware thatthe CSA will document the requirements of each limited entity eligibility determination it makes, including the scope of, and any limitations on, access to classified information.

(6) Contractors should be aware thatthe CSA will verify limited entity eligibility determinations only to the requesting GCA. In the case of multiple limited entity eligibility determinations for a single entity, the CSA verifies each one separately only to its requestor.

(7) The applicable CSAadministratively terminates the limited entity eligibility determination when there is no longer a need for access to the classified information for which the CSA approved the limited entity eligibility determination.

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(n) Termination of the entity eligibilitydetermination. Once granted, a favorable entity eligibility determination remains in effect until terminated or revoked. If the entity eligibility determination is terminated or revoked, the contractor will return all classified material in its possession to the appropriate GCA or dispose of the material as instructed by the CSA. The contractor should be aware that it may request an administrative termination or the CSA may:

(1) After coordination with applicableGCAs, administratively terminate the entity eligibility determination because the contractor no longer has a need for access to classified information.

(2) Revoke an entity eligibilitydetermination if the contractor is unable or unwilling to protect classified information or is unable to comply with the security requirements of this rule.

(o) Invalidation of the entity eligibilitydetermination. The CSA may invalidate an existing entity eligibility determination. While the entity eligibility determination is in an invalidated status, the contractor may not bid on or be awarded new classified contracts or solicitations. The contractor may continue to work on existing classified contracts if the GCA agrees.

(p) Records maintenance. Contractorswill maintain the original CSA designated forms for the duration of the entity eligibility determination in accordance with CSA-provided guidance.

§ 117.10 Determination of eligibility foraccess to classified information forcontractor employees.

(a) General. (1) The CSA isresponsible for determining an employee’s eligibility for access to classified information.

(i) The contractor must determine thataccess to classified information is essential in the performance of tasks or services related to the fulfillment of a classified contract.

(ii) Access must be clearly consistentwith U.S. national security interests as determined by the CSA.

(iii) A contractor may give anemployee access to classified information at the same or lower level of classification as the level of the contractor’s entity eligibility determination if the employee has:

(A) A valid need-to-know for theclassified information.

(B) A USG favorable eligibilitydetermination for access to classified information at the appropriate level; and

(C) Signed a non-disclosureagreement.

(2) The CSA will determine eligibilityfor access to classified information in

accordance with SEAD 4 (available at: https://www.dni.gov/files/NCSC/ documents/Regulations/SEAD-4- Adjudicative-Guidelines-U.pdf) and notify the contractor when eligibility has been granted.

(i) The CSA will notify the contractorwhen an employee’s eligibility has been denied, suspended, or revoked.

(ii) The contractor will immediatelydeny access to classified information to any employee when notified of a denial, revocation, or suspension of eligibility regardless of the contractor employee’s location.

(iii) If the employee’s performance isat a USG facility, the contractor will provide notification to the appropriate GCA of any denial, revocation, or suspension of eligibility for access to classified information.

(3) Contractors will annotate andmaintain the accuracy of their employees’ records in the system of record for contractor eligibility and access to classified information, when one has been designated by the CSA.

(4) Within an MFO or within the samebusiness organization, contractors may centrally manage eligibility for access to classified information and access to classified information records.

(5) The contractor will limit requestsfor determinations of eligibility for access to classified information to the minimum number of employees and consultants necessary for operational efficiency in accordance with contractual obligations and other requirements of this rule. Requests for determinations of eligibility for access to classified information will not be used to establish a cache of cleared employees.

(6) The contractor will not submit arequest for an eligibility determination to one CSA if the employee applicant is known to be cleared or in process for eligibility for access to classified information by another CSA. In such cases, reciprocity of eligibility determination in accordance with SEAD 7 (available at: https://www.dni.gov/ files/NCSC/documents/Regulations/ SEAD-7_BI_ReciprocityU.pdf) shall be used. The contractor will provide the new CSA with the full name, date, and place of birth, social security number, clearing agency, and type of investigation for verification.

(7) Contractors will not submitrequests for determination of eligibility for access to classified information for individuals who are not their employees or consultants; nor will they submit requests for employees of subcontractors.

(8) Access to SCI, SAP, FRD, and RDinformation is a determination made by

the granting authority by the applicable USG granting authority for each category of information.

(b) Investigative requirements. E.O.13467, as amended, ‘‘Reforming Processes Related to Suitability for Government Employment, Fitness for Contractor Employees, and Eligibility for Access to Classified National Security Information,’’ designates the Security and Suitability Executive Agents responsible for establishing the standards for investigative requirements that apply to contractors.

(1) Investigative tiers. The standardsestablished in accordance with E.O. 13467, as amended, designate specific investigative tiers that are acceptable for access to classified information. An investigative tier is for positions designated as moderate risk, non-critical sensitive, and allow access to information classified at the L, CONFIDENTIAL, and SECRET levels. Another investigative tier is for positions designated as high risk, critical sensitive, special sensitive, and allow access to information classified at the Q, TOP SECRET, and SCI levels.

(2) Investigative coverage. (i)Automated sources. Investigative providers will use automation whenever possible to collect, verify, corroborate, or discover information about an individual, as documented on the request for investigation or developed from other sources, i.e., automated record checks and inquiries.

(ii) Interviews. Interviews, if required,will cover areas of adjudicative concern.

(iii) Information Covered in PreviousInvestigations. Information validated in a prior investigation, the results of which are not expected to change (e.g., verification of education degree), will not be repeated as part of subsequent investigations.

(3) Polygraph. Agencies with policiesauthorizing the use of the polygraph for purposes of determining eligibility for access to classified information may require polygraph examinations when necessary. If adjudicatively relevant information arises during the investigation or the polygraph examination, the investigation may be expanded to resolve the adjudicative concerns.

(4) Financial disclosure. When a GCArequires that a contractor employee complete a financial disclosure form, the contractor will ensure that the employee has the opportunity to complete and submit the form in accordance with the Privacy Act of 1974, as amended, and other applicable provisions of law.

(5) Reinvestigation and ContinuousEvaluation. Contractor employees

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determined eligible for access to classified information will follow CSA guidance to complete reinvestigation and continuous evaluation or continuous vetting requirements. The contractor will validate that the employee requires continued eligibility for access to classified information before initiating the reinvestigation.

(c) Verification of U.S. citizenship. Acontractor will require each applicant for determination of eligibility for access to classified information who claims U.S. citizenship to provide evidence of citizenship to the FSO or other authorized representative of the contractor. All documentation must be the original or certified copies of the original documents.

(1) Any document, or its successor,listed in this paragraph is an acceptable document to corroborate U.S. citizenship by birth, including by birth abroad to a U.S. citizen.

(i) A birth certificate certified with theregistrar’s signature, which bears the raised, embossed, impressed, or multicolored seal of the registrar’s office.

(ii) A current or expired U.S. passportor passport card that is unaltered and undamaged and was originally issued to the individual.

(iii) A Department of State Form FS–240, ‘‘Consular Report of Birth Abroad of a Citizen of the United States of America.’’

(iv) A Department of State Form FS–545 or DS–1350, ‘‘Certification of Report of Birth.’’

(2) Any document, or its successor,listed in this paragraph is an acceptable document to corroborate U.S. citizenship by certification, naturalization, or birth abroad to a U.S. citizen.

(i) A U.S. Citizenship andImmigration Services Form N–560 or N– 561, ‘‘Certification of U.S. Citizenship.’’

(ii) A U.S. Citizenship andImmigration Services Form 550, 551, or 570, ‘‘Naturalization Certificate.’’

(iii) A valid or expired U.S. passportor passport card that is unaltered and undamaged and was originally issued to the individual.

(d) Procedures for completing theelectronic version of the SF 86, ‘‘Questionnaire for National Security Positions.’’ The electronic version of the SF 86 (available at: https://www.opm.gov/forms/pdf_fill/sf86.pdf) must be completed in e-QIP or its successor system by the contractor employee and reviewed by the FSO or other contractor employee(s) who has (have) been specifically designated by the contractor to review an employee’s SF 86. The FSO or designee will:

(1) Provide the employee with writtennotification that review of the SF 86 by the FSO or other contractor employee is for adequacy and completeness and information will be used for no other purpose within the entity. The use and disclosure by the U.S. Government, and by U.S. Government contractors operating systems of records on behalf of a U.S. Government agency to accomplish an agency function, of the information provided by the employee on the SF–86 is governed by the Privacy Act of 1974, as amended, and by the routine uses published by the USG in the applicable System of Records Notice.

(2) Not share information from theemployee’s SF 86 within the entity and will not use the information for any purpose other than determining the adequacy and completeness of the SF 86.

(e) Fingerprint collection. Thecontractor will submit fingerprints in accordance with CSA guidance. Contractors will use digital fingerprints whenever possible.

(f) Pre-employment eligibilitydetermination action. (1) If a potential employee requires access to classified information immediately upon commencement of employment, the contractor may submit a request for investigation prior to the date of employment, provided:

(i) A written commitment foremployment has been made by the contractor.

(ii) The candidate has accepted theoffer in writing.

(2) The commitment for employmentmust indicate employment will commence within 45 days of the employee being granted eligibility for access to classified information at a level that allows them to perform the tasks or services associated with the contract or USG requirement for which they were hired.

(3) Contractors will comply with therequirements pursuant to paragraph (a) (5) of this section.

(g) Classified information NDA. TheNDA designated by the CSA (e.g., SF 312), is an agreement between the USG and an individual who is determined eligible for access to classified information.

(1) An employee determined eligiblefor access to classified information must execute an NDA prior to being granted access to classified information.

(2) The employee must sign and datethe NDA in the presence of a witness. The employee’s and witness’ signatures must bear the same date.

(3) The contractor will forward theexecuted NDA to the CSA for retention.

The CSA may authorize the contractor to retain a copy of the form for administrative purposes, if appropriate.

(4) If the employee refuses to executethe NDA, the contractor will deny the employee access to classified information and submit a report to the CSA in accordance with § 117.8(c)(6).

(h) Reciprocity. The applicable CSA isresponsible for determining whether contractor employees have been previously determined eligible for access to classified information or investigated by an authorized investigative activity in accordance with SEAD 7 (available at: https://www.dni.gov/files/NCSC/documents/ Regulations/SEAD-7_BI_ReciprocityU.pdf).

(1) Any current eligibilitydetermination for access to classified information that is based on an investigation of a scope that meets or exceeds that necessary for the required level of access will provide the basis for a new eligibility determination.

(2) The prior investigation will beused without further investigation or adjudication unless the CSA becomes aware of significant derogatory information that was not previously adjudicated.

(i) Break in access. There arecircumstances when a contractor administratively terminates an employee’s access to classified information solely because of no current requirement for such access. If the employee again requires access to classified information and has been in the contractor’s continuous employment, and the employee again requires access to classified information, the contractor may provide access to classified information without further investigation, based on CSA guidance, so long as the employee remains eligible for access to classified information and has a current investigation of a scope that meets or exceeds that necessary for the access required and no new derogatory information is known. Any adverse information from or about the employee must continue to be reported while the employee maintains eligibility for access to classified information, even when access to classified information has been administratively terminated.

(j) Break in employment. (1) When anemployee had a break in employment and now requires access to classified information, the contractor may provide access to classified information based on CSA guidance provided the employee remains eligible for access to classified information and has a current investigation of a scope that meets or exceeds that necessary for the access required.

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(2) The contractor may not provideaccess to classified information to an employee who previously was eligible for access to classified information, but has had a break in employment that resulted in a loss of eligibility without a new eligibility determination by the CSA.

(k) Non-U.S. citizens. (1) Contractorsmust make every effort to ensure that non-U.S. citizens are not employed in duties that may require access to classified information. However, compelling reasons may exist to grant access to classified information to a non-U.S. citizen. The CSA may grant such individuals a LAA in those rare circumstances where a non-U.S. citizen possesses unique or unusual skills or expertise that is urgently needed to support a specific USG contract involving access to specified classified information, and a cleared or clearable U.S. citizen is not readily available. The CSA will provide specific procedures for requesting an LAA, to include the need for approval by a GCA senior official.

(2) An LAA granted under theprovisions of this rule is not valid for access to:

(i) TOP SECRET information.(ii) RD or FRD.(iii) Information that has not been

determined releasable by a USG designated disclosure authority to the country of which the individual is a citizen.

(iv) Communications security(COMSEC) information.

(v) Intelligence information.(vi) NATO information. Foreign

nationals of a NATO member nation may be authorized access to NATO information provided:

(A) The CSA obtains a NATO securityclearance certificate from the individual’s country of citizenship.

(B) NATO access is limited toperformance on a specific NATO contract.

(vii) Information for which foreigndisclosure has been prohibited in whole or in part.

(viii) Information provided to the USGin confidence by a third-party government.

(ix) Classified information furnishedby a third-party government.

(l) Temporary eligibility for access toclassified information. In accordance with SEAD 8 (available at: https://www.dni.gov/files/NCSC/documents/ Regulations/SEAD-8_Temporary_Eligibility_U.pdf), the CSA may grant temporary (previously called interim) eligibility for access to classified information, as appropriate, to applicants for access to TOP SECRET,

SECRET, and CONFIDENTIAL information. This eligibility may only be granted if there is no evidence of adverse information that calls into question an individual’s eligibility for access to classified information. If results are favorable following completion of full investigative requirements, the CSA will update the temporary eligibility determination for access to classified information to be final. In any case, a temporary eligibility determination shall not exceed one year unless approved by the applicable CSA in the system of record. Non-U.S. citizens are not eligible for access to classified information on a temporary basis.

(1) A temporary SECRET orCONFIDENTIAL eligibility determination is valid for access to classified information at the level of the eligibility granted. Access to RD, COMSEC information, and NATO information requires a final SECRET eligibility determination.

(2) A temporary TOP SECRETeligibility determination is valid for access to TOP SECRET information. If an individual has a temporary TOP SECRET eligibility determination and has a final SECRET eligibility determination based on a previously completed investigation, the temporary TOP SECRET eligibility determination is valid for access to RD, NATO, and COMSEC information at the SECRET or CONFIDENTIAL level.

(3) Access to SCI and SAPinformation based on a temporary eligibility determination is a determination made by the granting authority.

(4) When a temporary eligibilitydetermination has been made and derogatory information is subsequently developed, the CSA may withdraw the temporary eligibility pending completion of the processing that is a prerequisite to the final eligibility determination.

(5) When a temporary eligibilitydetermination is withdrawn for an individual who is required to be eligible for access to classified information in connection with the entity eligibility determination for access to classified information, the contractor must remove the individual from access to classified information and any KMP position requiring PCL eligibility or the temporary entity eligibility determination will also be withdrawn.

(6) Withdrawal of a temporaryeligibility determination is not a denial, termination, or revocation of eligibility under this rule and may not be appealed.

(m) Consultants. (1) A consultant willnot access classified information off the premises of the using (hiring) contractor except in connection with authorized classified visits.

(2) A contractor may only assign aconsultant outside the United States with responsibilities requiring access to classified information when:

(i) The consultant agreement betweenthe contractor and consultant includes:

(A) Identification of the contract,license, or agreement that requires access to classified information, the level of classified information that is required, and access to FGI by the consultant while assigned outside the United States.

(B) A formal agreement that prohibitsthe consultant from disclosing any classified information related to the contract, license, or agreement as required in paragraph (m)(i)(A) of this section to any party other than the USG or foreign government with which the consultant is meeting, and who possesses the requisite clearance and need to know.

(ii) The consultant and the usingcontractor will jointly execute the consultant agreement setting forth respective security responsibilities. The contractor will retain an original signed copy of the agreement and will ensure its availability if requested by the CSA.

(iii) The contractor, in consultationwith the applicable CSA as appropriate, will determine what threat briefing(s) the consultant should receive before the assignment, and conduct those briefings as part of the consultant’s pre- assignment and recurring security training.

(iv) The contractor provides notice ofany changes to the consultant agreement to the applicable CSA during assessments or upon CSA request.

(3) The using contractor will be theconsumer of the consultant services as set forth in the consultant agreement.

(4) For security administrationpurposes, a consultant will be considered an employee of the using contractor for compliance with this rule.

(5) Consultants to GCAs are not underthe purview of the NISP and will be processed for determination of eligibility by the GCA in accordance with GCA procedures.

§ 117.11 Foreign Ownership, Control, orInfluence (FOCI).

(a) General. Foreign investment canplay an important role in maintaining the vitality of the U.S. industrial base. Therefore, it is the intent of the USG to allow foreign investment consistent with the national security interests of the United States. The following FOCI

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procedures for cleared U.S. entities are intended to mitigate the risks associated with FOCI by ensuring that foreign firms cannot undermine U.S. security to gain unauthorized access to classified information.

(1) The CSA will consider a U.S.entity to be under FOCI when:

(i) A foreign interest has the power todirect or decide issues affecting the entity’s management or operations in a manner that could either:

(A) Result in unauthorized access toclassified information; or

(B) Adversely affect performance of aclassified contract or agreement.

(ii) The foreign government iscurrently exercising, or could prospectively exercise, that power, whether directly or indirectly, such as:

(A) Through ownership of the U.S.entity’s securities, by contractual arrangements, or other means, or;

(B) By the ability to control orinfluence the election or appointment of one or more members to the entity’s governing board.

(2) When the CSA has determinedthat an entity is under FOCI, the primary consideration will be the protection of classified information. The CSA will take whatever action is necessary to protect classified information, in coordination with other affected agencies as appropriate.

(3) A U.S. entity that is in process foran entity eligibility determination for access to classified information and subsequently determined to be under FOCI is ineligible for access to classified information unless and until effective security measures have been put in place to negate or mitigate FOCI to the satisfaction of the CSA.

(4) When a contractor determined tobe under FOCI is negotiating an acceptable FOCI mitigation or negation measure in good faith, an existing entity eligibility determination may continue in effect so long as there is no indication that classified information is at risk of compromise in consultation with the applicable GCA. The applicable CSA may decide that circumstances involving the FOCI are such that the entity eligibility determination will be invalidated until implementation of an acceptable FOCI mitigation plan.

(5) An existing entity eligibilitydetermination will be invalidated if the contractor is unable or unwilling to negotiate and implement an acceptable FOCI mitigation or negation measure. An existing entity eligibility determination will be revoked if security measures cannot be taken to remove the possibility of unauthorized access to classified information or

adverse effect on performance of classified contracts.

(6) Changed conditions, such as achange in ownership, indebtedness, or a foreign intelligence threat, may justify certain adjustments to the security terms under which an entity is operating or, alternatively, that a different FOCI mitigation or negation method be employed. If a changed condition is of sufficient significance, it might also result in a determination that a contractor is no longer considered to be under FOCI, or, conversely, that a contractor is no longer eligible for access to classified information.

(7) The USG reserves the right, andhas the obligation, to impose any security method, safeguard, or restriction (including denial, termination or revocation of an entity eligibility determination) it believes necessary to ensure that unauthorized access to classified information is effectively precluded and performance of classified contracts is not adversely affected.

(8) Nothing contained in this sectionaffects the authority of a Federal agency head to limit, deny, or revoke access to classified information under its statutory, regulatory, or contract jurisdiction.

(b) Factors. Factors relating to theentity, relevant foreign interests, and the government of such foreign interests, as appropriate, will be considered in the aggregate to determine whether an applicant entity is under FOCI, its eligibility for access to classified information, and the protective measures required. These factors include:

(1) Record of espionage against U.S.targets, either economic or government.

(2) Record of enforcement actionsagainst the entity for transferring technology without authorization.

(3) Record of compliance withpertinent U.S. laws, regulations, and contracts or agreements.

(4) Type and sensitivity of theinformation the entity would access.

(5) Source, nature, and extent of FOCI,including whether foreign interests hold a majority or minority position in the entity, taking into consideration the immediate, intermediate, and ultimate parent entities.

(6) Nature of any relevant bilateraland multilateral security and information exchange agreements.

(7) Ownership or control, directly orindirectly, in whole or in part, by a foreign government.

(8) Any other factor that indicates ordemonstrates capability of foreign interests to control or influence the entity’s operations or management.

(c) Procedures. An entity is requiredto complete an SF 328 during the process for an entity eligibility determination or when significant changes occur to information previously submitted. In the case of a corporate family, the form may be a consolidated response rather than separate submissions from individual members of the corporate family based on CSA guidance.

(1) If an entity provides anyaffirmative answers on the SF 328, or the CSA receives other information which indicates that the applicant entity may be under FOCI, the CSA will make a risk-based determination regarding the relative significance of the information in regard to:

(i) Whether the applicant is underFOCI.

(ii) The extent and manner to whichthe FOCI represents a risk to the national security or may adversely impact classified contract performance.

(iii) The type of actions, if any, thatwould be necessary to mitigate or negate the effects of FOCI to a level deemed acceptable to the USG. The CSA will advise entities on the CSA’s appeal channels for disputing CSA FOCI determinations.

(2) When an entity with a favorableeligibility determination enters into negotiations for the proposed merger, acquisition, or takeover by a foreign interest, the entity will submit notification to the CSA of the commencement of such negotiations.

(i) The submission will include thetype of transaction under negotiation (e.g., stock purchase, asset purchase), the identity of the potential foreign interest investor, and a plan to negate or mitigate the FOCI by a method outlined in paragraph (d) of this section.

(ii) The entity will submit copies ofloan, purchase, and shareholder agreements, annual reports, bylaws, articles of incorporation, partnership agreements, other organizational documents, and reports filed with other Federal agencies to the CSA.

(d) FOCI action plans. (1) When FOCIfactors not related to ownership are present, the CSA will determine if positive measures will assure the CSA that the foreign interest can be effectively mitigated and cannot otherwise adversely affect performance on classified contracts. Examples of such measures include:

(i) Modification or termination of loanagreements, contracts, and other understandings with foreign interests.

(ii) Diversification or reduction offoreign-source income.

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(iii) Demonstration of financialviability independent of foreign interests.

(iv) Elimination or resolution ofproblem debt.

(v) Assignment of specific oversightduties and responsibilities to board members.

(vi) Formulation of special executive- level security committees to consider and oversee issues that affect the performance of classified contracts.

(vii) Physical or organizationalseparation of the contractor component performing on classified contracts.

(viii) Adoption of special boardresolutions.

(ix) Other actions that negate ormitigate foreign control or influence.

(x) A combination of these methods,as determined by the CSA.

(2) When FOCI factors related toownership are present, methods the CSA may apply to negate or mitigate the risk of foreign ownership include, but are not limited to:

(i) Board resolution. (A) When aforeign interest does not possess voting interests sufficient to elect, or otherwise is not entitled to representation on the entity’s governing board, a resolution(s) by the governing board may be adequate. In the resolution, the governing board will:

(1) Identify the foreign shareholder.(2) Describe the type and number of

foreign-owned shares. (3) Acknowledge the entity’s

obligation to comply with all industrial security program requirements.

(4) Certify that the foreign owner doesnot require, will not have, and can be effectively precluded from unauthorized access to all classified information entrusted to or held by the entity.

(B) The governing board will providefor annual certifications to the CSA acknowledging the continued effectiveness of the resolution.

(C) The entity will distribute tomembers of its governing board and to its KMP copies of such resolutions, and report in the entity’s corporate records the completion of such distribution.

(ii) Security control agreement (SCA).When a foreign interest does not effectively own or control an entity (i.e., the entity is under U.S. control), but the foreign interest is entitled to representation on the entity’s governing board, an SCA may be adequate. At least one cleared U.S. citizen must serve as an outside director on the entity’s governing board. There are no access limitations under an SCA.

(iii) SSA. When a foreign interesteffectively owns or controls an entity, an SSA may be adequate. An SSA is an arrangement that, based upon an

assessment of the source and nature of FOCI and FOCI factors, imposes various industrial security measures within an institutionalized set of entity practices and procedures. The SSA preserves the foreign owner’s right to be represented on the entity’s board or governing body with a direct voice in the entity’s business management, while denying the foreign owner majority representation and unauthorized access to classified information.

(A) Requirement for a NationalInterest Determination (NID). Unless otherwise prohibited by law or regulation (e.g., Section 842 of Pub. L. 115–232), the applicable CSA must determine whether allowing an entity access to proscribed information under an SSA is consistent with national security interests of the U.S. with concurrence from controlling agencies, as applicable. Such NIDs will be made as part of an entity eligibility determination or because of a changed condition when a GCA requires an entity to have access to proscribed information and the CSA proposes an SSA as the mitigation measure. The NID can be program, project, or contract specific.

(B) NID process: (1) The CSA makesa NID for TOP SECRET or SAP information to which the entity requires access. Contractors should be aware that DOE Order 470.4B provides additional information and requirements for processing NID requests for access to RD.

(2) In cases in which any category ofthe proscribed information is controlled by another agency (ODNI for SCI, DOE for RD, the National Security Agency (NSA) for COMSEC), the CSA asks that controlling agency to concur or non- concur on the NID for that category of information.

(3) The CSA informs the GCA and theentity when the NID is complete. In cases involving SCI, RD, or COMSEC, the CSA also informs the GCA and the entity when a controlling agency concurs or non-concurs on that agency’s category of proscribed information. The entity may begin accessing a category of proscribed information once the CSA informs the GCA and the entity that the controlling agency concurs, even if other categories of proscribed information are pending concurrence.

(4) An entity’s access to SCI, RD, orCOMSEC remains in effect so long as the entity remains eligible for access to classified information and the contract or agreement (or program or project) which imposes the requirement for access to those categories of proscribed information remains in effect, except

under any of the following circumstances:

(i) The CSA, GCA, or controllingagency becomes aware of adverse information that impacts the entity eligibility determination.

(ii) The CSA’s threat assessmentpertaining to the entity indicates a risk to one of the categories of proscribed information.

(iii) The CSA becomes aware of anymaterial change regarding the source, nature, and extent of FOCI.

(iv) The entity’s record of NISPcompliance, based on CSA reviews, becomes less than satisfactory. Consult DOE Order 470.4B for additional information and requirements for processing NID requests for access to RD.

(5) Under any of the circumstances inparagraphs (d)(2)(iii)(B)(4)(i) through (d)(2)(iii)(B)(4)(iv) in this section, the CSA determines whether the entity remains eligible for access to classified information, it must change the FOCI mitigation measure in order to remain eligible for access to classified information, or the CSA must terminate or revoke the access to classified information.

(6) When an entity is eligible foraccess to classified information that includes a favorable NID for SCI, RD, or COMSEC, the CSA does not have to request a new NID concurrence for the same entity if the access to classified information requirements for the relevant category of proscribed information and terms remain unchanged for:

(i) Renewing the contract oragreement.

(ii) New task orders issued under thecontract or agreement.

(iii) A new contract or agreement thatcontains the same provisions as the previous one (this usually applies when the contract or agreement is for a program or project.)

(iv) Renewing the SSA.(7) Under certain conditions, entities

under an SSA may not require a NID for one or more categories of proscribed information in accordance with CSA- provided guidance. Categories of proscribed information for entities under SSAs not requiring a NID will be recorded in the CSA’s system of record for entity eligibility determinations.

(iv) Voting Trust (VT) or ProxyAgreement (PA). The VT and the PA are arrangements that vest the voting rights of the foreign-owned stock in cleared U.S. citizens approved by the USG. Under a VT, the foreign owner transfers legal title its ownership interests in the entity to the trustees. Under a PA, the foreign owner’s voting rights are

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conveyed to the proxy holders. Neither arrangement imposes any restrictions on the entity’s eligibility to have access to classified information or to compete for classified contracts.

(A) Establishment of a VT or PAinvolves the selection of trustees or proxy holders, all of whom must become members of the entity’s governing board. Both arrangements must provide for the exercise of all prerogatives of ownership by the trustees or proxy holders with complete freedom to act independently from the foreign owners, except as provided in the VT or PA. The arrangements may limit the authority of the trustees or proxy holders by requiring approval be obtained from the foreign owner with respect to issues such as:

(1) The sale or disposal of the entity’sassets or a substantial part thereof.

(2) Pledges, mortgages, or otherencumbrances on the entity’s assets, capital stock, or ownership interests.

(3) Mergers, consolidations, orreorganizations.

(4) Dissolution.(5) Filing of a bankruptcy petition.(B) The trustees or proxy holders may

consult with the foreign owner, or vice versa, where otherwise consistent with U.S. laws, regulations, and the terms of the VT or PA.

(C) The trustees or proxy holdersassume full responsibility for the foreign owner’s voting interests and for exercising all governance and management prerogatives relating thereto to ensure the foreign owner will be insulated from the entity, thereby solely retaining the status of a beneficiary. The entity must be organized, structured, and financed to be capable of operating as a viable business entity and independent from the foreign owners’ interests that required FOCI mitigation or negation.

(v) Combination measures. The CSAmay apply combinations of the measures in paragraphs (d)(2)(i) through (d)(2)(iv) in this section or other similar measures that effectively mitigate or negate the risks involved with foreign ownership.

(e) Limited entity eligibilitydetermination due to FOCI. In accordance with the provisions of this section and CSA-provided guidance, a limited entity eligibility determination may be an option for a single, narrowly defined contract, agreement, or circumstance for entities under FOCI without mitigation or negation. Limitations on access to classified information are inherent with the granting of limited entity eligibility determinations and are imposed upon

all of the entity’s employees regardless of citizenship.

(1) In exceptional circumstances,when an entity is under FOCI, the CSA may decide that a limited entity eligibility determination is appropriate when the entity is unable or unwilling to implement FOCI mitigation or negation measures, and the conditions in paragraphs (e)(1)(i) through (iii) of this section are met. This is not the same as a limited entity eligibility determination for purposes not related to FOCI. Information on limited entity eligibility determinations for purposes other than FOCI can be found in § 117.9(m). A CSA may decide that alimited entity eligibility is appropriatefor an entity under FOCI if:

(i) The limited entity eligibilitydetermination is in accordance with national security interests and a GCA has informed the CSA that access to classified information by the contractor is essential to contract or agreement performance.

(ii) There is an industrial securityagreement with the foreign government of the country from which the FOCI is derived.

(iii) The contractor meets all otherentity eligibility requirements outlined in § 117.9(c) except that KMP, other than the FSO, may be citizens of the country from which the FOCI derives and the United States has obtained security assurances at the appropriate level from that country.

(2) A U.S. subsidiary of a foreignentity may be sponsored for a limited entity eligibility determination by a foreign government when the foreign government desires to award a contract or agreement to the U.S. subsidiary that involves access to only that classified information for which the foreign government is the OCA.

(3) Limited entity eligibilitydeterminations are specific to the classified information for the requesting GCA or foreign government and the single narrowly defined contract, agreement, or circumstance the request was based on. The limited entity eligibility determination will only be verified to that GCA or foreign government for the authorized level of access to classified information and any limitations to that access to classified information.

(4) A limited entity eligibilitydetermination is not an option for contractors that require access to proscribed information when a foreign government has ownership or control over the entity.

(5) Release of classified informationmust be in conformity with the U.S. National Disclosure Policy-1 (provided

to designated disclosure authorities on a need-to-know basis from the Office of the Under Secretary of Defense for Policy, Defense Technology Security Administration).

(6) A limited entity eligibilitydetermination will be administratively terminated when there is no longer a need for the contractor to access the classified information for which it was sponsored. Administrative termination of one limited entity eligibility determination does not impact a contractor’s other limited entity eligibility determinations.

(7) If there is no industrial securityagreement with the foreign government of the country from which the FOCI is derived, in extraordinary circumstances, a limited entity eligibility determination may also be granted if there is a compelling need to do so consistent with U.S. national security interests and the GCA has informed the applicable CSA that access to classified information by the contractor is essential to contract or agreement performance. Under this circumstance, the entity must follow all provisions of this rule.

(f) Qualifications of trustees, proxyholders, and outside directors. Individuals who serve as trustees, proxy holders, or outside directors must meet the following criteria:

(1) Trustees and proxy holders mustbe resident U.S. citizens who can exercise governance and management prerogatives relating to their position in a way that ensures that the foreign owner can be effectively insulated from the entity.

(2) Outside directors must be residentU.S. citizens who can exercise governance and management prerogatives relating to their position in a way that ensures that the foreign owner can be effectively separated from the entity’s classified work.

(3) New trustees, proxy holders, andoutside directors must be completely disinterested individuals with no prior involvement with the entity, the entities with which it is affiliated, or the foreign owner.

(4) The CSA may consider othercircumstances that may affect an individual’s eligibility to serve effectively including the number of boards on which the individual serves, the length of time serving on any other governance boards, and other factors in accordance with CSA-provided guidance.

(5) Trustees, proxy holders, andoutside directors must be determined eligible for access to classified information at the level of the entity eligibility determination for access to

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classified information. Individuals who are serving as trustees, proxy holders, or outside directors as part of a mitigation measure for the entity are not considered to have prior involvement solely by performing that role for purposes of paragraph (f)(3) of this section.

(g) Government security committee(GSC). Under a VT, PA, SSA, or SCA, the contractor is required to establish a permanent committee of its board of directors, known as the GSC.

(1) Unless otherwise approved by theCSA, the GSC consists of trustees, proxy holders, or outside directors and those officer directors who have been determined to be eligible for access to classified information.

(2) The members of the GSC arerequired to ensure that the contractor adheres to laws and regulations and maintains internal entity policies and procedures to safeguard classified information entrusted to it. The GSC ensures that violations of those policies and procedures are promptly investigated and reported to the appropriate authority when it has been determined that a violation has occurred.

(3) The contractor’s FSO will be theprincipal advisor to the GSC and attend GSC meetings. The chairman of the GSC must concur with the appointment and replacement of FSOs selected by management. The FSO functions will be carried out under the authority of the GSC.

(h) Additional procedures for FOCImitigation or negation measures. In addition to the basic requirements of the FOCI mitigation or negation agreement, the entity may be required to document and implement additional procedures based upon the circumstances of an entity’s operations. Those additional procedures will be established in supplements to the FOCI mitigation agreement to allow for flexibility as circumstances change without having to renegotiate the entire agreement. When making use of supplements, the CSA does not consider the FOCI mitigation measure final until the CSA has approved the required supplements. These supplements may include:

(1) Technology control plan (TCP). ATCP approved by the CSA will be developed and implemented by those entities cleared under a VT, PA, SSA and SCA and when otherwise deemed appropriate by the CSA. The TCP will prescribe all security measures determined necessary to reasonably prevent the possibility of access by non- U.S. citizen employees and visitors to information for which they are not authorized. The TCP will also prescribe

measures designed to assure that access by non-U.S. citizens is strictly limited to only that specific information for which appropriate USG disclosure authorization has been obtained, e.g., an approved export license or technical assistance agreement. Unique badging, escort, segregated work area, security indoctrination schemes, and other measures will be included, as appropriate.

(2) Electronic communications plan(ECP). The contractor will develop and implement an ECP, subject to CSA approval, tailored to the contractor’s operations to verify that electronic controls are in place for clear technical and logical separation of electronic communications and networks between the contractor, the foreign interest, and its affiliates. The purpose is to prevent the unauthorized disclosure of classified information to the foreign parent or its affiliates. The contractor will include in the ECP a detailed network description and configuration diagram that clearly delineates which networks will be shared and which will be protected from access by the foreign parent or its affiliates. The network description will address firewalls, remote administration, monitoring, maintenance, and separate email servers, as appropriate.

(3) Affiliated operations plan. Theremay be circumstances when the parties to a transaction propose in the FOCI action plan that the U.S. contractor provides certain services for the foreign interest or enters into arrangements with the foreign interest, or the foreign interest provides services for or enters into arrangements with the U.S. contractor. In such circumstances, the contractor will document a plan, subject to CSA approval, outlining the entity’s consolidated policies and procedures regarding the control of affiliated operations, regardless of whether such endeavors are administrative, operational, or commercial, performed directly or through third-party service providers, within the entity, or among any of the entity’s controlled entities, or the foreign interest and its affiliates.

(4) Facilities location plan. When acontractor is potentially collocated with or in close proximity to its foreign parent or an affiliate, the contractor will prepare a facilities location plan to assist the CSA in determining if the contractor is collocated or if the close proximity can be allowed under the FOCI mitigation plan. A U.S. entity generally cannot be collocated with the foreign parent or affiliate, i.e., at the same address or in the same location.

(i) Annual review and certification.—(1) Annual review. The CSA will meet

at least annually, and otherwise as required by circumstances, with the GSCs of contractors operating under a VT, PA, SSA, or SCA to review the purpose and effectiveness of the clearance arrangement and to establish a common understanding of the operating requirements and their implementation. These reviews will include an examination of:

(i) Acts of compliance ornoncompliance with the approved security arrangement, standard rules, and applicable laws and regulations.

(ii) Problems or impedimentsassociated with the practical application or utility of the security arrangement.

(iii) Whether security controls,practices, or procedures warrant adjustment.

(2) Annual certification. Forcontractors operating under a VT, PA, SSA, or SCA, the chairman of the GSC will submit to the CSA one year from the effective date of the agreement and annually thereafter, an implementation and compliance report. Such reports will include:

(i) A detailed description of themanner in which the contractor is carrying out its obligations under the agreement.

(ii) Changes to security procedures,implemented or proposed, and the reasons for those changes.

(iii) A detailed description of any actsof noncompliance, whether inadvertent or intentional, with a discussion of remedial measures, including steps taken to prevent such acts from recurring.

(iv) Any changes, or impendingchanges, of KMP or key board members, including the reasons therefore.

(v) Any changes or impendingchanges in the organizational structure or ownership, including any reorganizations, acquisitions, mergers, or divestitures.

(vi) Any other issues that could havea bearing on the effectiveness of the applicable agreement.

(j) Transactions involving foreignpersons, and the Committee on Foreign Investment in the United States (CFIUS).

(1) The CFIUS is a USG interagencycommittee chaired by the Treasury Department that conducts assessments, reviews and investigations of transactions that could result in foreign control of a U.S. business, and certain non-controlling investments and certain real estate transactions involving foreign persons under 50 U.S.C. 4565.

(2) In CFIUS cases where the acquiredU.S. business requires access to classified information, the CFIUS assessment, review or investigation, as applicable, and the CSA industrial

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security FOCI review are carried out in parallel, but are separate processes with different time constraints and considerations.

(3) The CSA will promptly advise theparties in a transaction under CFIUS review that would require FOCI negation or mitigation measures if consummated, to submit to the CSA a plan to negate or mitigate FOCI. If it appears that an agreement cannot be reached on material terms of a FOCI action plan, or if the U.S. person that is a party, or in applicable cases, a subject of the proposed transaction fails to comply with the FOCI reporting requirements of this rule, the CSA may recommend a full investigation of the transaction by the CFIUS to determine the effects on national security.

§ 117.12 Security training and briefings.

(a) General. Contractors will provideall cleared employees with security training and briefings commensurate with their involvement with classified information.

(b) Training materials. Contractorsmay obtain security, threat awareness, and other education and training information and material from their CSA or other sources.

(c) Government provided briefings.The CSA is responsible for providing initial security briefings to the FSO and for ensuring other briefings required for special categories of information are provided to the FSO.

(d) FSO training. Contractors willensure the FSO and others performing security duties complete training considered appropriate by the CSA. Training requirements will be based on the contractor’s involvement with classified information. Training may include an FSO orientation course, and for FSOs at contractor locations with a classified information safeguarding capability, an FSO program management course. Contractor FSOs will complete training within six months of appointment to the position of FSO. When determined by the applicable CSA, contractor FSOs must complete an FSO program management course within six months of the CSA approval to store classified information at the contractor.

(e) Initial security briefings. Prior tobeing granted access to classified information, contractors will provide employees with an initial security briefing that includes:

(1) Threat awareness, includinginsider threat awareness in accordance with paragraph (g) in this section.

(2) Counterintelligence (CI)awareness.

(3) Overview of the informationsecurity classification system.

(4) Reporting obligations andrequirements, including insider threat.

(5) Cybersecurity training for allauthorized information system users in accordance with CSA-provided guidance pursuant to § 117.18(a)(1) and (a)(2).

(6) Security procedures and dutiesapplicable to the employee’s position requirements (e.g. marking and safeguarding of classified information) and criminal, civil, or administrative consequences that may result from the unauthorized disclosure of classified information, even though the individual has not yet signed an NDA.

(f) CUI training. While outside therequirements of the NISPOM, when a classified contract includes provisions for CUI training, contractors will comply with those contract requirements.

(g) Insider threat training. Thedesignated ITPSO will ensure that contractor program personnel assigned insider threat program responsibilities and all other cleared employees complete training consistent with applicable CSA provided guidance.

(1) The contractor will providetraining to insider threat program personnel, including the contractor’s designated ITPSO, on:

(i) CI and security fundamentals.(ii) Procedures for conducting insider

threat response actions. (iii) Applicable laws and regulations

regarding the gathering, integration, retention, safeguarding, and use of records and data, including the consequences of misuse of such information.

(iv) Applicable legal, civil liberties,and privacy policies and requirements applicable to insider threat programs.

(2) The contractor will provide insiderthreat awareness training to all cleared employees on an annual basis. Depending upon CSA specific guidance, a CSA may instead conduct such training. The contractor must provide all newly cleared employees with insider threat awareness training before granting access to classified information. Training will address current and potential threats in the work and personal environment and will include at a minimum:

(i) The importance of detectingpotential insider threats by cleared employees and reporting suspected activity to the insider threat program designee.

(ii) Methodologies of adversaries torecruit trusted insiders and collect classified information, in particular within information systems.

(iii) Indicators of insider threatbehavior and procedures to report such behavior.

(iv) CI and security reportingrequirements, as applicable.

(3) The contractor will establishprocedures to validate all cleared employees who have completed the initial and annual insider threat training.

(h) Derivative classification.—(1)Initial training. The contractor will ensure all employees authorized to make derivative classification decisions are trained in the proper application of the derivative classification principles, in accordance with CSA direction. Employees are not authorized to conduct derivative classification until they receive such training.

(2) Refresher training. In addition tothe initial training, contractors will ensure all employees who conduct derivative classification receive training at least once every two years. Contractors will suspend an employee’s derivative classification authority for any employee who does not receive such training at least once every two years. Training will emphasize the avoidance of over-classification and address:

(i) Classification levels.(ii) Duration of classification.(iii) Identification and markings.(iv) Classification prohibitions and

limitations. (v) Sanctions and classification

challenges. (vi) Security classification guides.(vii) Information sharing.(3) Record of training. Contractors

will retain records of the date of the most recent training (initial or refresher) and type of training provided to employees.

(i) Information systems security. Allinformation system authorized users will receive training on the security risks associated with their user activities and responsibilities under the NISP. The contractor will determine the appropriate content of the training, taking into consideration assigned roles and responsibilities, specific security requirements, and the information system to which personnel are authorized access.

(j) Temporary help suppliers. Acleared temporary help supplier, or other contractor who employs cleared individuals solely for dispatch elsewhere, will be responsible for ensuring that required briefings (both initial and refresher training) are provided to their cleared personnel. The temporary help supplier or the using contractor may conduct these briefings.

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(k) Refresher training. The contractorwill provide all cleared employees with security education and training every 12 months. Refresher training will reinforce the information provided during the initial security briefing and will keep cleared employees informed of changes in security regulations and should also address issues or concerns identified during contractor self- reviews. Training methods may include group briefings, interactive videos, dissemination of instructional materials, or other media and methods. Contractors will maintain records about the programs offered and employee participation in them.

(l) Debriefings. Contractors willdebrief cleared employees and annotate the debriefing in the appropriate contractor records when access to classified information is no longer needed; at the time of termination of employment (discharge, resignation, or retirement); when an employee’s eligibility for access to classified information is terminated, suspended, or revoked; and upon termination of the entity eligibility determination.

§ 117.13 Classification.(a) Original classification. Only a USG

official designated or delegated the authority in writing can make an original classification decision.

(1) An OCA classifies informationpursuant to E.O. 13526 and 32 CFR part 2001, designates and marks it as TOP SECRET, SECRET, or CONFIDENTIAL, and, except as provided by statute, may use no other terms to identify classified information.

(2) The designation UNCLASSIFIED isused to identify information that does not meet the criteria for classification in accordance with E.O. 13526. In accordance with 32 CFR 2002, CUI implementing guidance (including the Marking Handbook) and any GCA- provided guidance, CUI commingled with classified information must be marked as CUI to alert users to its presence and sensitivity. The CUI regulation, guidance, and handbook are available at: https://www.archives.gov/ cui.

(b) Derivative classification. (1)Contractor personnel make derivative classification decisions when they incorporate, paraphrase, restate, or generate in new form, information that is already classified. They must mark the newly developed material consistently with the classification markings that apply to the source information.

(2) Derivative classification is theclassification of information based on guidance from an OCA, which may be

either a properly marked source document or a current security classification guide provided by a GCA in accordance with E.O. 13526. The duplication or reproduction of existing classified information is not derivative classification.

(3) A source document that does notcontain portion markings, due to an ISOO-approved waiver, must contain a warning statement that it may not be used as a source for derivative classification in accordance with 32 CFR 2001.24(k)(4).

(4) Classified information in emailmessages is marked pursuant to E.O. 13526 and 32 CFR part 2001. If an email is transmitted on a classified system, includes a classified attachment, and contains no classified information within the body of the email itself, the email serves as a transmittal document and is not a derivatively classified document. The email’s overall classification must reflect the highest classification level present in the attachment.

(c) Derivative classificationresponsibilities. Contractors will provide employees with pertinent classification guidance to fulfill their derivative classification responsibilities. All contractor employees authorized to make derivative classification decisions will:

(1) Mark the face of each derivativelyclassified document with a classification authority block that includes the employee’s name and position or personal identifier, the entity name, and when applicable, the division or the branch.

FIGURE 1 TO PARAGRAPH (c)(1) EXAM-PLE OF INDUSTRY CLASSIFICATION AUTHORITY BLOCK

UNCLASSIFIED: CLASSIFICATION MARK-INGS FOR ILLUSTRATION PURPOSES ONLY

Classified by: John Doe, Security Specialist, Entity ABC Security Division

Derived From: SecDef Memo, dtd 20101024, Subj: lll

Declassify On: 20201024

(2) Observe and respect originalclassification decisions.

(3) Carry forward the pertinentclassification markings to any newly created documents. For information derivatively classified based on multiple sources, the derivative classifier will carry forward:

(i) The date or event fordeclassification that corresponds to the longest period of classification among the sources.

(ii) A listing of the source materials.

(4) Be trained, in accordance with§ 117.12(h), in the proper application ofthe derivative classification principlesat least once every two years.

(5) Whenever possible, use aclassified addendum if classified information constitutes a small portion of an otherwise unclassified document.

(d) Security classification guidance.(1) Contractors should be aware theGCA will:

(i) Incorporate appropriate securityrequirement clauses in a classified contract, IFB, RFP, RFQ, or all solicitations leading to a classified contract.

(ii) Provide the contractor with thesecurity classification guidance needed during performance of the contract.

(iii) Provide this guidance to thecontractor in the contract security classification specification, or equivalent.

(2) The contract security classificationspecification, or equivalent, must identify the specific elements of classified information involved in the contract that require security protection.

(3) At the discretion of the CSA,contractors may, to the extent possible, advise and assist in the development and any updates to or any revisions to the contract security classification specification, or equivalent.

(4) The contractor will comply withall aspects of the classification guidance.

(i) Users of classification guides areencouraged to notify the originator of the guide when they acquire information that suggests the need for change in the instructions contained in the guide.

(ii) Classification guidance is theexclusive responsibility of the GCA, and the final determination of the appropriate classification for the information rests with that activity. The contract security classification specification, or equivalent, is a contractual specification necessary for the performance of a classified contract. Challenges to classification status are in paragraph (e) in this section.

(iii) If the contractor receives aclassified contract without a contract security classification specification, or equivalent, the contractor will notify the GCA. If the GCA does not respond with the appropriate contract security classification specification, or equivalent, the contractor will notify the CSA.

(5) Upon completion of a classifiedcontract, the contractor must return all USG provided or deliverable information to the custody of the USG.

(i) If the GCA does not advise to thecontrary, the contractor may retain

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copies of the USG material for a period of two years following the completion of the contract. The contract security classification specification, or equivalent, will continue in effect for this two-year period.

(ii) If the GCA determines the contractor has a continuing need for the copies of the USG material beyond the two-year period, the GCA will issue a final contract security classification specification, or equivalent, for the classified contract and will include disposition instructions for the copies.

(e) Challenges to classification status. (1) The contractor will address challenges to classification status with the GCA and request remedy when:

(i) Information is classified improperly or unnecessarily.

(ii) Current security considerations justify downgrading to a lower classification level or upgrading to a higher classification level.

(iii) Security classification guidance is not provided, improper or inadequate.

(2) If the GCA does not provide a remedy, and the contractor still believes that corrective action is required, the contractor will make a formal written challenge to the GCA. The challenge will include:

(i) A description sufficient to identify the issue.

(ii) The reasons why the contractor thinks that corrective action is required.

(iii) Recommendations for appropriate corrective action.

(3) The contractor will safeguard the information as required for its assigned or proposed level of classification, whichever is higher, until action is completed.

(4) If the contractor does not receive a written answer from the GCA within 60 days, the contractor will request assistance from the CSA. If the contractor does not receive a response from the GCA within 120 days, the contractor may appeal the challenge to the Interagency Security Classification Appeals Panel through ISOO.

(5) The fact that a contractor has initiated such a challenge will not, in any way, serve as a basis for adverse action against the contractor by the USG. If a contractor believes that adverse action did result from a classification challenge, the contractor will promptly furnish full details to ISOO for resolution.

(f) Contractor developed information. Whenever a contractor develops an unsolicited proposal or originates information not in the performance of a classified contract, the provisions of this paragraph apply.

(1) If the information was previously identified as classified, it will be

classified according to an appropriate classification guide, or source document, and appropriately marked.

(2) If the information was not previously classified, but the contractor believes the information may or should be classified, the contractor will:

(i) Protect the information as though classified at the appropriate level.

(ii) Submit the information to the agency that has an interest for a classification determination. In such cases, clearly mark the material ‘‘CLASSIFICATION DETERMINATION PENDING; Protect as either TOP SECRET, SECRET, or CONFIDENTIAL.’’ This marking will appear conspicuously at least once on the material but no further markings are necessary until a classification determination is received.

(iii) Not be precluded from marking such material as entity-private or entity- proprietary information, unless the material was based upon information obtained from prior deliverables to the USG or was developed from USG material.

(iv) Protect the information pending a final classification determination. The information may be CUI, if it is not classified. Only information that is owned by, produced by, produced for, or is under the control of the USG can be classified in accordance with E.O. 13526.

(3) To be eligible for classification: (i) The information must incorporate

classified information to which the contractor was given prior access.

(ii) The information must be partially or wholly owned by, produced by or for, or under the control of the USG.

(4) 10 CFR 1045.21 includes provisions for the DOE with regard to privately generated RD, whereby the DOE may classify such information in accordance with the AEA.

(g) Improperly released classified information appearing in public media. Improperly released classified information is not automatically declassified. When classified information has been improperly released, and even when that classified information has become publicly available, contractors will:

(1) Continue to protect the information at the appropriate classification level until formally advised to the contrary by the GCA.

(2) Bring any questions about the propriety of continued classification in these cases to the immediate attention of the GCA.

(3) Notify the applicable CSA if an employee downloads the improperly released classified information to determine how to resolve a data spill.

(h) Downgrading or declassifying classified information. Information is downgraded or declassified based on the loss of sensitivity of the information due to the passage of time or on occurrence of a specific event. Downgrading or declassifying actions constitute implementation of a directed action based on a review by either the OCA or the USG-designated classification authority. Declassification is not an approval for public disclosure.

(1) Downgrading. Contractors will refer information for classification or downgrade to the GCA based on the guidance provided in a contract security classification specification, or equivalent, or upon formal notification.

(2) Declassification. Contractors are not authorized to implement downgrading or declassification instructions even when the material is marked for automatic downgrading or declassification. If the material is marked for automatic declassification and the contractor notes that the date or event for the automatic declassification has occurred, the contractor will seek guidance from the GCA.

(i) RD, FRD, and TFNI. Protection requirements for RD, FRD, and TFNI are pursuant to § 117.23(e). Information about classification and declassification of RD, FRD, or TFNI documents is in § 117.23(e)(5).

§ 117.14 Marking requirements. (a) Purpose for marking. (1) Physically

marking classified information with appropriate classification markings serves to warn and inform holders of the information of the degree of protection required. Other notations facilitate downgrading and declassification, and aid in derivative classification actions.

(2) Contractors will clearly mark all classified information and material to convey to the holder the level of classification assigned, the portions that contain or reveal classified information, the period of time protection is required, the identity (by name and position or personal identifier) of the classifier, the source(s) for derivative classification, and any other notations required for protection of the information.

(b) Marking guidance for classified information and material. Contractors will use the marking guidance conveyed in 32 CFR 2001.22 through 2001.26, and its companion document, ISOO booklet ‘‘Marking Classified National Security Information,’’ (available at: https://www.archives.gov/isoo/training/ training-aids) or CSA specific provided guidance for marking derivatively classified information and material and as required by applicable security

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classification guide. The special requirements for marking documents containing RD, FRD, and TFNI are addressed in § 117.23.

(c) Marking guidance for CUI.Contractors will use marking guidance conveyed in 32 CFR 2002.20, the CUI Marking Handbook (available at: https:// www.archives.gov/files/cui/documents/ 20161206-cui-marking-handbook-v1-1- 20190524.pdf), and agency policy to mark CUI in accordance with contract requirements.

(d) Working papers. Working paperswill be marked, destroyed, and retained in accordance with § 117.15(e)(3).

(e) Translations. The contractor willmark translations of U.S. classified information into a language other than English with the appropriate U.S. markings and the foreign language equivalent to show the United States as the country of origin.

(f) Marking wholly unclassifiedmaterial. The contractor will not mark or stamp wholly UNCLASSIFIED material as UNCLASSIFIED unless it is essential to convey to a recipient of such material that:

(1) The material has been examinedspecifically with a view to impose a security classification and has been determined not to require classification by the GCA.

(2) The material has been reviewedand has been determined to no longer require classification and it has been declassified by the applicable GCA.

(g) Marking miscellaneous material.The contractor will:

(1) Handle miscellaneous materialdeveloped in connection with the handling, processing, production, storage, and utilization of classified information in a manner that ensures adequate protection of the classified information involved.

(2) Destroy the miscellaneous materialat the earliest practical time, unless a requirement exists to retain such material. Notwithstanding the provisions of paragraph (a) of this section, there is no requirement for the contractor to mark such material, but disposition and retention requirements in § 117.15(i) and (j) apply.

(h) Marking training material. Thecontractor will clearly mark unclassified documents or materials that are created to simulate or demonstrate classified documents or material to indicate the actual UNCLASSIFIED status of the information. For example, the contractor may use: MARKINGS ARE FOR TRAINING PURPOSES ONLY, OTHERWISE UNCLASSIFIED or UNCLASSIFIED SAMPLE, or other similar marking.

(i) Downgrading or declassificationactions. When a contractor removes documents or material that have been downgraded or declassified from storage for use or for transmittal outside the contractor location:

(1) The documents or material mustbe re-marked pursuant to paragraph (i)(1)(i) or (i)(1)(ii) in this section.

(i) Prior to taking any action todowngrade or declassify information, the contractor will seek guidance from the GCA. If the GCA approves such action, the contractor will cancel all old classification markings with the new markings substituted, whenever practical. For documents, at a minimum the outside of the front cover, the title page, the first page, and the outside of the back will reflect the new classification markings, or include the designation UNCLASSIFIED. The contractor will re-mark other material by the most practical method for the type of material involved to ensure that it is clear to the holder what level of classification is assigned to the material.

(ii) When the GCA notifies contractorsof downgrading or declassification actions that are contrary to the markings shown on the material, the contractor will re-mark material to indicate the change and notify other holders if further dissemination was made. The contractor will mark the material to indicate the:

(A) Authority for the action.(B) Date of the action.(C) Identity and position of the

individual taking the action. (2) If the volume of material is such

that prompt re-marking of each classified item cannot be accomplished without unduly interfering with operations, the contractor may attach a downgrading and declassification notice to the inside of the file drawers or other storage container instead of the re- marking otherwise required.

(3) When such documents ormaterials are withdrawn from the container solely for transfer to another container, or when the container is transferred from one place to another, the transfer may be made without re- marking if the notice is attached to the new container or remains with each shipment.

(4) For the purpose of paragraphs(i)(2) and (i)(3) in this section, the contractor must include in the downgrading and declassification notice:

(i) The authority for the downgradingor declassification action.

(ii) The date of the action.(iii) The storage container to which it

applies.

(j) Upgrading action. (1) When thecontractor receives notice from the GCA to upgrade material to a higher level; for example, from CONFIDENTIAL to SECRET, the contractor will:

(i) Immediately enter the newmarkings on the material according to the notice to upgrade, and strike through all the superseded markings.

(ii) Enter the authority for and thedate of the upgrading action on the material.

(iii) Ensure all records affected arestored at the appropriate level of security, including digital networks and systems. Upgrades requiring network or system adjustment will be coordinated with the GCA to mitigate or account for impact on the execution of the contract.

(2) The contractor will notify allholders to whom they disseminated the material. The contractor will not mark the notice as classified unless it contains additional information warranting classification.

(3) In the case of material which wasinadvertently released as UNCLASSIFIED, the contractor will mark and protect the notice as classified at the CONFIDENTIAL level, unless it contains additional information warranting a higher classification. The contractor will cite the applicable Contract Security Classification Specification, or equivalent, or other classification guide on the ‘‘Derived From’’ line and mark the notice with an appropriate declassification instruction.

(k) Dissemination of improperlymarked information. If the contractor inadvertently distributes classified material without the proper classification assigned to it, or without any markings to identify the material as classified, as appropriate, the contractor will:

(1) Determine whether all holders ofthe material are cleared and authorized access to it.

(2) If recipients are authorizedpersons, and the contractor disseminated the information through authorized channels, promptly provide written notice to all holders of the proper classification to be assigned. The contractor will also include the classification source as well as declassification instructions in the notification.

(3) Report compromises to the CSA inaccordance with the provisions of § 117.8(d), if:

(i) Any of the recipients of thematerial are not authorized persons.

(ii) Any material cannot be accountedfor.

(iii) The material was transmittedthrough unauthorized channels.

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(l) Marking foreign governmentclassified material. Foreign government classified information will retain its original classification markings or will be assigned a U.S. classification that provides a degree of protection at least equivalent to that required by the foreign government entity that furnished the information in accordance with 32 CFR 2001.54. The equivalent U.S. classification and the country of origin will be marked on the front and back in English.

(m) Foreign government restrictedinformation and ‘‘in confidence’’ information.

(1) Some foreign governments have afourth level of classification that does not correspond to an equivalent U.S. classification that is identified as RESTRICTED information. In many cases, security agreements require RESTRICTED information to be protected as U.S. CONFIDENTIAL information.

(2) Some foreign governments mayhave a category of unclassified information that is protected by law. This latter category is normally provided to other governments with the expectation that the information will be treated ‘‘In Confidence.’’ The foreign government or international organization must state that the information is provided in confidence and that it must be protected from release.

(i) 10 U.S.C. 130c protects informationprovided ‘‘In Confidence’’ by foreign governments which is not classified but meets special requirements.

(ii) This provision also applies toRESTRICTED information which is not required by an agreement to be protected as classified information.

(iii) The contractor will not discloseinformation protected by this statutory provision to anyone except personnel who require access to the information in connection with the contract.

(3) It is the responsibility of theforeign entity that awards the contract to incorporate requirements for the protection and marking of RESTRICTED or ‘‘In Confidence’’ information in the contract. The contractor will advise the CSA if requirements were not provided by the foreign entity.

(n) Marking U.S. documentscontaining FGI. (1) U.S. documents containing FGI must be marked on the front, ‘‘THIS DOCUMENT CONTAINS (indicate country of origin) INFORMATION.’’ In addition, the portions must be marked to identify both the country and classification level, (e.g., (UK–C), (GE–C)). The ‘‘Derived From’’ line will identify U.S. as well as foreign classification sources.

(2) If the identity of the foreigngovernment must be concealed, the front of the document will be marked ‘‘THIS DOCUMENT CONTAINS FOREIGN GOVERNMENT INFORMATION;’’ paragraphs will be marked FGI, together with the classification level (e.g., (FGI–C)); and the ‘‘Derived From’’ line will indicate FGI in addition to any U.S. source. The identity of the foreign government will be maintained with the record copy of the document.

(3) A U.S. document that contains FGIwill not be downgraded below the highest level of FGI contained in the document or be declassified without the written approval of the foreign government that originated the information. Recommendations concerning downgrading or declassification will be submitted to the GCA or foreign government contracting authority, as applicable.

(o) Marking documents prepared forforeign governments. Documents prepared for foreign governments that contain U.S. classified information and FGI will be marked as prescribed by the foreign government. In addition, they will be marked on the front, ‘‘THIS DOCUMENT CONTAINS UNITED STATES CLASSIFIED INFORMATION.’’ Portions will be marked to identify the U.S. classified information.

(p) Marking requirements for transfersof defense articles to Australia (AUS) or the United Kingdom (UK). Marking requirements for transfers of defense articles to AUS or the UK without a license or other written authorization are pursuant to § 117.19(i).

(q) Commingling of RD and FRD.Commingling of RD, FRD, and TFNI with national security information (NSI) in the same document should be avoided to the greatest degree possible. When mixing this information cannot be avoided, the marking requirements in 10 CFR part 1045, section 140(f) and declassification requirements of 10 CFR part 1045, section 155 apply.

§ 117.15 Safeguarding ClassifiedInformation.

(a) General safeguarding. Contractorswill be responsible for safeguarding classified information in their custody or under their control, with approval for such storage of classified information by the applicable CSA. Individuals are responsible for safeguarding classified information entrusted to them. Contractors will provide the extent of protection to classified information sufficient to reasonably protect it from loss or compromise.

(1) Oral discussions. Contractors willensure that all cleared personnel are

aware of the prohibition against discussing classified information over unsecured telephones, in public conveyances or places, or in any other manner that permits interception by unauthorized persons.

(2) End of day security checks. (i)Contractors that store classified material will establish a system of security checks at the close of each working day to verify that all classified material and security repositories have been appropriately secured.

(ii) Contractors that operate multiplework shifts will perform the security checks at the end of the last working shift in which classified material was removed from storage for use. The checks are not required during continuous 24-hour operations.

(3) Perimeter controls. (i) Contractorsauthorized to store classified material will establish and maintain a system to deter and detect unauthorized introduction or removal of classified material from their facility without proper authority.

(ii) If the unauthorized introductionor removal of classified material can be reasonably prevented through technical means (e.g., an intrusion detection system), which are encouraged, no further controls are necessary. The contractor will provide appropriate authorization to personnel who have a legitimate need to remove or transport classified material for passing through designated entry or exit points.

(iii) The contractor will:(A) Provide appropriate authorization

to personnel who have a legitimate need to remove or transport classified material for passing through designated entry or exit points.

(B) Conspicuously post notices at allpertinent entries and exits that persons who enter or depart the facility are subject to an inspection of their personal, except under circumstances where the possibility of access to classified material is remote.

(C) Limit inspections to buildings orareas where classified work is being performed.

(D) Establish the extent, frequency,and location of inspections in a manner consistent with contractual obligations and operational efficiency. The contractor may use any appropriate random sampling technique.

(E) Seek legal advice during theformulation of implementing procedures.

(F) Submit significant problemspertaining to perimeter controls and inspections to the CSA.

(iv) Contractors will developprocedures for safeguarding classified material in emergency situations.

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(A) The procedures should be assimple and practical as possible and adaptable to any type of emergency that may reasonably arise.

(B) Contractors will promptly reportto the CSA any emergency situation that renders them incapable of safeguarding classified material.

(b) Standards for Security Equipment.Contractors will follow guidelines established in 32 CFR part 2001, when procuring storage and destruction equipment. Authorized repairs for GSA- approved security containers and vaults must be in accordance with Federal Standard 809.

(c) Storage. Contractors will storeclassified information and material in General Services Administration (GSA)- approved security containers, vaults built to Federal Standard 832, or an open storage area constructed in accordance with 32 CFR 2001.53. In the instance that an open storage area has a false ceiling or raised floor, contractors shall develop and implement procedures to ensure their structural integrity. Nothing in 32 CFR part 2001, should be construed to contradict or inhibit compliance with local laws or building codes, but the contractor will notify the applicable CSA if there are any conflicting issues that would inhibit compliance. Contractors will store classified material in accordance with the specific sections of 32 CFR 2001.43:

(1) CONFIDENTIAL. See 32 CFR2001.43(b)(3).

(2) SECRET. See 32 CFR2001.43(b)(2).

(3) TOP SECRET Documents. See 32CFR 2001.43(b)(1).

(d) Intrusion Detection Systems (IDS).This paragraph specifies the minimum standards for an approved IDS when used for supplemental protection of TOP SECRET and SECRET material. The CSA will provide additional guidance for contingency protection procedures in the event of IDS malfunction, including contractors located in USG owned contractor operated facilities.

(1) CSA approval. (i) CSA approval isrequired before installing an IDS. The CSA will base approval of a new IDS on the criteria of Intelligence Community Directive 705 (available at: https://www.dni.gov/files/documents/ICD/ICD_705_SCIFs.pdf) and any applicable intelligence community standard, Underwriters Laboratories (UL) Standard 2050 (Government agencies with a role as a CSA or CSO may obtain this reference without charge; available at: www.ul.com/contact), or the CSA may base approval on written CSA- specific standards for the information to be protected.

(ii) Installation will be performed byan alarm services company certified by a NRTL that meets the requirements in 29 CFR 1910.7 to perform testing and certification. The NRTL-approved alarm service company is responsible for completing the appropriate alarm system description form approved by the NRTL.

(iii) All the intrusion detectionequipment (IDE) used in the IDS installation will be tested and approved (or listed) by a NRTL, ensuring its proper operation and resistance from tampering. Any IDE that has not been tested and approved by a NRTL will require CSA approval.

(2) Central monitoring station. (i) Forthe purpose of monitoring alarms, an equivalent level of monitoring service is available from multiple types of providers. The central monitoring station may be located at a one of the following:

(A) Government contractormonitoring station (GCMS), formerly called a proprietary central station.

(B) Cleared commercial centralstation.

(C) Cleared protective signal servicestation (e.g., fire alarm monitor).

(D) Cleared residential monitoringstation.

(E) National industrial monitoringstation.

(ii) SECRET-cleared central stationemployees at the alarm monitoring station will be in attendance in sufficient number to monitor each alarmed area within the cleared contractor facility.

(iii) The central monitoring stationwill be supervised continuously by a U.S. citizen who has eligibility for access to SECRET information.

(iv) The IDS must be activated at theclose of business whenever the area is not occupied by cleared personnel. Any IDS exit delay function must expire prior to the cleared personnel leaving the immediate area. A record will be maintained to identify the person or persons who are responsible for setting and deactivating the IDS.

(v) Records will be maintained for 12months indicating time of receipt of alarm, name(s) of security force personnel responding, time dispatched to facility or area, time security force personnel arrived, nature of alarm, and what follow-up actions were accomplished.

(3) Investigative response to alarms.(i) Alarm response teams will ascertainif intrusion has occurred and, ifpossible, assist in the apprehension ofthe individuals involved.

(A) If an alarm activation resets in areasonable amount of time and no

damage to the area is visible, then entrance into the area is not required and an initial response team may consist of uncleared personnel.

(B) If the alarm activation does notreset and damage is observed, then a cleared response team must be dispatched. The initial uncleared response team must stay on station until relieved by the cleared response team. If a cleared response team does not arrive within 1 hour, then a report to the CSA must be made by the close of the next business day.

(ii) The following resources may beused to investigate alarms: Proprietary security force personnel, central station guards, local law enforcement personnel, or a subcontracted guard service. The CSA may approve procedures for the use of entity cleared employees who can meet the minimum response requirements outlined in this section.

(A) For a GCMS, trained proprietaryor subcontractor security force personnel, cleared to the SECRET level and sufficient in number to be dispatched immediately to investigate each alarm, will be available at all times when the IDS is in operation.

(B) For a commercial central station,protective signaling service station, or residential monitoring station, there will be a sufficient number of trained guards available to respond to alarms. Guards will be cleared only if they have the ability and responsibility to access the area or container(s) housing classified material (i.e., keys to the facility have been provided or the personnel are authorized to enter the building or check the container or area that contains classified material).

(C) Uncleared guards dispatched by acommercial central station, protective signaling service station, or residential monitoring station in response to an alarm will remain on the premises until a designated, cleared representative of the facility arrives, or for a period of not less than 1 hour, whichever comes first. If a cleared representative of the facility does not arrive within 1 hour following the arrival of the guard, the central control station must provide the CSA with a report of the incident that includes the name of the subscriber facility, the date and time of the alarm, and the name of the subscriber’s representative who was contacted to respond. A report will be submitted to the CSA by the end of business on the next business day.

(D) Subcontracted guards must beunder a classified contract with either the installing alarm service company or the cleared facility.

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(iii) The response time will be in accordance with the provisions in paragraphs (c)(1) through (c)(3) in this section as applicable. When environmental factors (e.g., traffic, distance) legitimately prevent meeting the requirements for TOP SECRET information, as indicated in paragraph (c)(3) in this section, the CSA may authorize up to a 30-minute response time. The CSA approval will be documented on the alarm system description form and the specified response time will be noted on the alarm certificate. The requirement for response is 80 percent within the time limits.

(4) Installation. The IDS will be installed by an NRTL-approved entity or by an entity approved in writing by the CSA. When connected to a commercial central station, GCMS, national industrial monitoring station, or residential monitoring station, the service provided will include line security (i.e., the connecting lines are electronically supervised to detect evidence of tampering or malfunction). The level of protection for the alarmed area will include all points of probable entry (perimeter doors and accessible windows) with magnetic contacts and motion detectors positioned in the probable intruder paths from the probable points of entry to the classified information. In accordance with Federal Standard 809, no IDS sensors (magnetic contacts or vibration detectors) will be installed on GSA-approved security containers. CSA authorization on the alarm system description form is required in the following circumstances:

(i) When line security is not available, installation will require two independent means of transmission of the alarm signal from the alarmed area to the monitoring station.

(ii) Alarm installation provides a level of protection, e.g. UL’s Extent 5, based on patrolling employees and CSA approval of security-in-depth.

(iii) Where law enforcement personnel are the primary alarm response. Under those circumstances, the contractor must obtain written assurance from the police department regarding the ability to respond to alarms in the required response time.

(iv) Alarm signal transmission is over computer-controlled data-networks (e.g., internet, intranet). The CSA will provide specific acceptance criteria (e.g., encryption requirements) for alarms monitored over data networks.

(v) Alarm investigator response time exceeds the parameters outlined in paragraphs (c)(1) through (c)(3) in this section as applicable.

(5) Certification of compliance. Evidence of compliance with the requirements of this section will consist of a valid (current) certification by an approved NRTL for the appropriate category of service. This certificate:

(i) Will have been issued to the protected facility by the NRTL, through the alarm service company.

(ii) Serves as evidence that the alarm service company that did the installation is:

(A) Listed as furnishing security systems of the category indicated.

(B) Authorized to issue the certificate of installation as representation that the equipment is in compliance with requirements established by NRTL for the class of alarm system.

(C) Subject to the NRTL inspection program whereby periodic inspections are made of representative alarm installations by NRTL personnel to verify the correctness of certification practices.

(6) Exceptional cases. (i) If the requirements in paragraphs (d)(1) through (d)(5) in this section cannot be met, the contractor may request CSA approval for an alarm system meeting one of these conditions, which will be documented on the alarm system description form:

(A) Monitored by a central control station but responded to by a local (municipal, county, state) law enforcement organization.

(B) Connected by direct wire to alarm receiving equipment located in a local (municipal, county, State) police station or public emergency service dispatch center. This alarm system is activated and deactivated by employees of the contractor, but the alarm is monitored and responded to by personnel of the monitoring police or emergency service dispatch organization. Personnel monitoring alarm signals at police stations or dispatch centers do not require PCLs. Police department response systems may be requested only when:

(1) The contractor facility is located in an area where central control station services are not available with line security or proprietary security force personnel, or a contractually-dispatched response to an alarm signal cannot be achieved within the time limits required by the CSA.

(2) It is impractical for the contractor to establish a GCMS or proprietary guard force at that location. In this case, installation of these systems must use NRTL-approved equipment and be accomplished by an NRTL-approved entity meeting the applicable testing standard for the category of service.

(ii) An installation proposal, explaining how the system would operate, will be submitted to the CSA. The proposal must include:

(A) Sufficient justification for the granting of an exception and the full name and address of the police department that will monitor the system and provide the required response.

(B) The name and address of the NRTL-approved entity that will install the system, and inspect, maintain, and repair the equipment.

(iii) The response times will be in accordance with the provisions in paragraphs (c)(1) through (c)(3) in this section as applicable. Arrangements will be made with the central monitoring station to immediately notify a contractor representative on receipt of the alarm. The contractor representative is required to go immediately to the facility to investigate the alarm and to take appropriate measures to secure the classified material.

(iv) In exceptional cases where central station monitoring service is available, but no proprietary security force, central station, or subcontracted guard response is available, and where the police department does not agree to respond to alarms, and no other manner of investigative response is available, the CSA may approve cleared employees as the sole means of response.

(e) Information controls.—(1) Information management system. Contractors will establish:

(i) A system to verify that classified information in their custody is used or retained only for a lawful and authorized USG purpose.

(ii) An information management system to protect and control the classified information in their possession regardless of media, to include information processed and stored on authorized information systems.

(2) Top secret information. Contractors will establish controls for TOP SECRET information and material to validate procedures are in place to address accountability, need to know, and retention, e.g., demonstrating that TOP SECRET material stored in an electronic format on an authorized classified information system does not need to be individually numbered in series. These controls are in addition to the information management system and must be applied, unless otherwise directed by the applicable CSA, regardless of the media of the TOP SECRET information, to include information processed and stored on authorized information systems. Unless otherwise directed by the applicable

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CSA, the contractor will establish the following additional controls:

(i) Designate TOP SECRET controlofficials to receive, transmit, and maintain access and accountability records to TOP SECRET information.

(ii) Conduct an annual inventory ofTOP SECRET information and material.

(iii) Establish a continuous receiptsystem for the transmittal of TOP SECRET information within and outside the contractor location.

(iv) Number each item of TOPSECRET material in a series. Place the copy number on TOP SECRET documents, regardless of media, and on all associated transactions documents.

(v) Establish a record of TOP SECRETmaterial when the material is:

(A) Completed as a finisheddocument.

(B) Retained for more than 180 daysafter creation, regardless of the stage of development.

(C) Transmitted outside the contractorlocation.

(vi) Establish procedures fordestruction of TOP SECRET material bytwo authorized persons.

(vii) Establish destruction records forTOP SECRET material and maintain the records for two years in accordance with § 117.13(d)(5) or in accordance withGCA requirements.

(3) Working papers. Contractors willestablish procedures for the control of classified working papers generated in the preparation of a finished document. The contractor will:

(i) Date working papers when they arecreated.

(ii) Mark each page of the workingpapers with the highest classification level of any information contained in them and with the annotation ‘‘WORKING PAPERS.’’

(iii) Destroy working papers when nolonger needed.

(iv) Mark in the same mannerprescribed for a finished document at the same classification level if released outside the contractor location or retained for more than 180 days from the date of origin.

(4) Combinations to locks. Contractorswill follow the guidance in 32 CFR 2001.45(a)(1) and 2001.43 (c) to address thresholds when combinations will be changed. Combinations to locks used to secure vaults, open storage areas, and security containers that are approved for the safeguarding of classified information will be protected in the same manner as the highest level of classified information that the vault, open storage area, or security container is used to protect.

(5) Information system passwords.Contractors will follow the guidance

established in 32 CFR 2001.45(a)(2) for the protection of passwords to information systems authorized to process and store classified information at the highest level of classification to which the information system is authorized.

(6) Reproduction of classifiedinformation. Contractors will follow the guidance established in 32 CFR 2001.45(b) for the reproduction of classified information.

(f) Transmission of classifiedinformation. Contractors will establish procedures for transmitting and receiving classified information and material in accordance with 32 CFR 2001.46.

(1) Top secret. The contractor musthave written authorization from the GCA to transmit TOP SECRET material outside the contractor location.

(2) Transmission outside the UnitedStates and its Territorial Areas. The contractor may transmit classified material to a USG activity outside the United States or a U.S. territorial area only under the provisions of a classified contract or with written authorization from the GCA.

(3) Commercial delivery entities. TheCSA may approve contractors to transmit SECRET or CONFIDENTIAL information within the United States and its territorial areas by means of a commercial delivery entity that is a current holder of the GSA contract for overnight delivery, and which provides nation-wide, overnight service with computer tracking and reporting features (a list of current contract holders may be found at: https://www.archives.gov/isoo/faqs#what-is- overnightcarriers). Such entities do not need to be determined eligible for access to classified information.

(i) Prior to CSA approval, thecontractor must establish and document procedures to ensure the proper protection of incoming and outgoing classified packages, including the street delivery address, for each cleared facility intending to use GSA-listed commercial delivery entities for overnight services.

(ii) Contractors will establishprocedures for the use of commercial delivery entities in accordance with 32 CFR part 2001. The procedures will:

(A) Confirm that the commercialdelivery entity provides nationwide, overnight delivery service with automated in-transit tracking of the classified packages.

(B) Ensure the package integrityduring transit and that incoming shipments are received by appropriately cleared personnel.

(C) Not be used for COMSEC, NATO,or FGI.

(4) Couriers and hand carriers.Contractors may designate cleared employees as couriers or hand carriers. Contractors will:

(i) Brief employees providing suchservices on their responsibility to safeguard classified information and keep classified material in their possession at all times.

(ii) Provide employees with anidentification card or badge which contains the contractor’s name and the name and a photograph of the employee.

(iii) Make arrangements in advance ofdeparture for overnight storage at a USG installation or at a cleared contractor’s facility that has appropriate storage capability, if needed.

(iv) Conduct an inventory of thematerial prior to departure and upon return. The employee will carry a copy of the inventory with them.

(5) Use of commercial passengeraircraft. The contractor may authorize cleared employees to hand carry classified material aboard commercial passenger aircraft.

(i) Routine processing. Employeeshand carrying classified material are subject to routine processing by airline security agents. Hand-held packages will normally be screened by x-ray examination. If security personnel are not satisfied with the results of the inspection and requests the prospective passenger to open a classified package for visual examination, the traveler must inform the screener that the carry-on items contain USG classified information and cannot be opened. Under no circumstances may traveler or security personnel open the classified material unless required by customs or other government officials.

(ii) Special processing. The contractorwill contact the appropriate air carrier in advance to explain the particular circumstances and obtain instructions on the special screening procedures to follow when:

(A) Routine processing would subjectthe classified material to compromise or damage.

(B) Visual examination is or may berequired to successfully screen a classified package.

(C) Classified material is inspecialized containers, which due to its size, weight, or other physical characteristics cannot be routinely processed.

(iii) Authorization letter. Contractorswill provide employees with written authorization to hand carry classified material on commercial aircraft that includes:

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(A) Full name, date of birth, height,weight, and signature of the traveler and statement that he or she is authorized to transmit classified material.

(B) Description of the type ofidentification the traveler will present on request.

(C) Description of the material beinghand carried, with a request that it be exempt from opening.

(D) Identification of the points ofdeparture, destination, and known transfer points.

(E) Name, telephone number, andsignature of the FSO, and the location and telephone number of the CSA.

(6) Escorts. If an escort is necessary toensure the protection of the classified information being transported, the contractor will assign a sufficient number to each classified shipment to ensure continuous surveillance and control over the shipment while in transit. The contractor will furnish escorts with specific written instructions and operating procedures prior to shipping that include:

(i) Name and address of persons,including alternates, to whom the classified material is to be delivered.

(ii) Receipting procedures.(iii) Means of transportation and the

route to be used. (iv) Duties of each escort during

movement, during stops end route, and during loading and unloading operations.

(v) Emergency and communicationprocedures.

(g) Destruction. Contractors will:(1) Destroy classified material in their

possession based on the disposition instructions in the contract security classification specification or equivalent.

(2) Follow the guidance fordestruction of classified material in accordance with 32 CFR 2001.47 and the destruction equipment standards in accordance with 32 CFR 2001.42(b). See https://www.nsa.gov/resources/ everyone/media-destruction/ and any CSA provided guidance for additional information.

(h) Disclosure. Contractors willestablish processes by which classified information is disclosed only to authorized persons.

(1) Disclosure to employees.Contractors are authorized to disclose classified information to their cleared employees with the appropriate eligibility for access to classified information and need to know as necessary, including cleared employees across the MFO, when applicable, for the performance of tasks or services essential to the fulfillment of a classified contract or subcontract.

(2) Disclosure to subcontractors.—(i)Contractors: (A) Are authorized to disclose classified information to a cleared subcontractor with the appropriate entity eligibility determination (also known as a facility security clearance) and need to know when access to classified information is necessary for the performance of tasks or services essential to the fulfillment of a prime contract or a subcontract.

(B) Will convey appropriateclassification guidance for the classified information to be disclosed with the subcontract in accordance with § 117.13.

(ii) The CSA must have: (A) Made adetermination of eligibility for access to classified information for the subcontractor, at the same level, or higher, than the classified information to be disclosed, to allow for such disclosures.

(B) Approved storage capability forclassified material at the subcontractor location if a physical transfer of classified material occurs.

(3) Disclosure between parent andsubsidiaries—(i) Contractors: (A) Are authorized to disclose classified information between parent and subsidiary entities with the appropriate entity eligibility determination (also known as a facility security clearance) and need to know when access to classified information is necessary for the performance of tasks or services essential to the fulfillment of a prime or subcontract.

(B) Will convey appropriateclassification guidance with the agreement or procurement action that necessitates the disclosure.

(ii) The CSA must have: (A) Made adetermination of eligibility for access to classified information for both the parent and subsidiary, at the same level, or higher, than the classified information to be disclosed, to allow for such disclosures.

(B) Approved storage capability forclassified material at the parent and the subsidiary if a physical transfer of classified material occurs.

(4) Disclosure to federal agencies.Contractors will not disclose classified information received or generated under a contract from one agency to any other federal agency unless specifically authorized by the agency that has classification jurisdiction over the information.

(5) Disclosure of classifiedinformation to foreign persons. Contractors will not disclose classified information to foreign persons unless specified by the contract and release of the information is authorized in writing by the government agency having

classification jurisdiction over the information involved, i.e. the DOE for RD and FRD (also see § 117.23), the NSA for COMSEC, the DNI for SCI, and all other executive branch departments and agencies for classified information under their respective jurisdictions.

(6) Disclosure to other contractors.Contractors will not disclose classified information to another contractor except in furtherance of a contract, subcontract, or other GCA purpose without the authorization of the GCA, if such authorization is required by contract.

(7) Disclosure of classifiedinformation in connection with litigation. Contractors will not disclose classified information to:

(i) Attorneys hired solely to representthe contractor in any civil or criminal case in federal or State courts unless the disclosure is specifically authorized by the agency that has jurisdiction over the information.

(ii) Any federal or state court excepton specific instructions of the agency, which has jurisdiction over the information or the attorney representing the United States in the case.

(8) Disclosure to the public.Contractors will not disclose classified information to the public. Contractors will not disclose unclassified information pertaining to a classified contract to the public without prior review and clearance as specified in the Contract Security Classification Specification, or equivalent, for the contract or as otherwise specified by the GCA. The procedures of this paragraph also apply to information pertaining to classified contracts intended for use in unclassified brochures, promotional sales literature, reports to stockholders, or similar material.

(i) The contractor will:(A) Submit requests for approval

through the activity specified in the GCA-provided classification guidance for the contract involved.

(B) Include in each request theapproximate date the contractor intends to release the information for public disclosure and identify the media to be used for the initial release.

(C) Retain a copy of each approvedrequest for release for a period of one inspection cycle for review by the CSA.

(D) Clear all information developedsubsequent to the initial approval through the appropriate office prior to public disclosure.

(ii) Unless specifically prohibited bythe GCA, the contractor does not need to request approval for disclosure of:

(A) The fact that a contract has beenreceived, including the subject of the contract or type of item in general terms

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provided the name or description of the subject is not classified.

(B) The method or type of contract.(C) Total dollar amount of the contract

unless that information equates to: (1) A level of effort in a sensitive

research area. (2) Quantities of stocks of certain

weapons and equipment that are classified.

(D) Whether the contract will requirethe hiring or termination of employees.

(E) Other information that from time- to-time may be authorized on a case-by- case basis in a specific agreement with the contractor.

(F) Information previously officiallyapproved for public disclosure.

(iii) Information that has beendeclassified is not authorized for public disclosure. If the information is comingled with CUI, or qualifies as CUI once declassified, it will be marked and protected as CUI until it is decontrolled pursuant to 32 CFR part 2002 and reviewed for public release. If the information does not qualify as CUI, it will be protected in accordance with the basic safeguarding requirements in 48 CFR 52.204–21 and subject to the agency’s public release procedures. Contractors will request approval for public disclosure of declassified information in accordance with the procedures of this paragraph.

(i) Disposition. Contractors will:(1) Establish procedures for review of

their classified holdings on a recurring basis to ensure the classified holdings are in support of a current contract or authorization to retain beyond the end of the contract period.

(2) Destroy duplicate copies as soonas practical.

(3) For disposition of classifiedmaterial not received under a specific contract:

(i) Return or destroy classifiedmaterial received with a bid, proposal, or quote if the bid, proposal, or quote is not:

(A) Submitted or is withdrawn within180 days after the opening date of bids, proposals, or quotes.

(B) Accepted within 180 days afternotification that a bid, proposal, or quote has not been accepted.

(ii) If the classified material was notreceived under a specific contract, such as material obtained at classified meetings or from a secondary distribution center, return or destroy the classified material within one year after receipt.

(j) Retention. The provisions of§ 117.13(d)(5) apply for retention ofclassified material upon completion of aclassified contract.

(1) If contractors propose to retaincopies of classified material beyond 2 years, the contractor will identify:

(i) TOP SECRET material identified ina list of specific documents unless the GCA authorizes identification by subject and approximate number of documents.

(ii) SECRET and CONFIDENTIALmaterial may be identified by general subject and the approximate number of documents.

(iii) Contractors will include astatement of justification for retention beyond two years based on if the material:

(A) Is necessary for the maintenanceof the contractor’s essential records.

(B) Is patentable or proprietary data towhich the contractor has the title.

(C) Will assist the contractor inindependent research and development efforts.

(D) Will benefit the USG in theperformance of other prospective or existing agency contracts.

(E) Will benefit the USG in theperformance of another active contract and will be transferred to that contract (specify contract).

(2) If the GCA does not authorizeretention beyond two years, the contractor will destroy all classified material received or generated in the performance of a classified contract unless it has been declassified or the GCA has requested that the material be returned.

(k) Termination of security agreement.Notwithstanding the provisions for retention outlined in paragraph (i) in this section, in the event that the CSA terminates the contractor’s eligibility for access to classified information, the contractor will return all classified material in its possession to the GCA concerned, or dispose of such material in accordance with instructions from the CSA.

(l) Safeguarding CUI. While outsidethe requirements of the NISPOM, when a classified contract also includes provisions for protection of CUI, contractors will comply with those contract requirements.

§ 117.16 Visits and meetings.(a) Visits. This paragraph applies

when, for a lawful and authorized USG purpose, it is anticipated that classified information will be disclosed during a visit to a cleared contractor facility or to a USG facility.

(1) Classified visits. The number ofclassified visits will be held to a minimum. The contractor:

(i) Must determine that the visit isnecessary and the purpose of the visit cannot be achieved without access to, or disclosure of, classified information.

(ii) Will establish procedures toensure positive identification of visitors, appropriate PCL, and need-to-know prior to the disclosure of any classified information.

(iii) Will establish procedures toensure that visitors are only afforded access to classified information consistent with the purpose of the visit.

(2) Need-to-know determination. Theresponsibility for determining need-to- know in connection with a classified visit rests with the individual who will disclose classified information during the visit. Need-to-know is generally based on a contractual relationship between the contractors. In other circumstances, disclosure of the information will be based on an assessment that the receiving contractor has a bona fide need to access the information in furtherance of a GCA purpose.

(3) Visits by USG representatives.Representatives of the USG, when acting in their official capacities as inspectors, investigators, or auditors, may visit a contractor’s facility, provided these representatives present appropriate USG credentials upon arrival.

(4) Visit authorization. (i) If a visitrequires access to classified information, the host contractor will verify the visitor’s PCL level. Verification of a visitor’s PCL may be accomplished by a review of a CSA-designated database that contains the information or by a visit authorization letter (VAL) provided by the visitor’s employer.

(ii) If a CSA-designated database isnot available and a VAL is required, contractors will include in all VALs:

(A) Contractor’s name, employee’sname, address, and telephone number, assigned commercial and government entity (CAGE) code, if applicable, and certification of the level of the entity eligibility determination.

(B) Name, date and place of birth, andcitizenship of the employee intending to visit.

(C) Certification of the proposedvisitor’s PCL and any special access authorizations required for the visit.

(D) Name of person(s) to be visited.(E) Purpose and sufficient justification

for the visit to allow for a determination of the necessity of the visit.

(F) Date or period during which theVAL is to be valid.

(5) Long term visitors. (i) When USGemployees or employees of one contractor are temporarily stationed at another contractor’s facility, the security procedures of the host contractor will govern.

(ii) USG personnel assigned to orvisiting a contractor facility and engaged in oversight of an acquisition program

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will retain control of their work product. Classified work products of USG employees will be handled in accordance with this rule. Contractor procedures will not require USG employees to relinquish control of their work products, whether classified or not, to a contractor.

(iii) Contractor employees at USG installations will follow the security requirements of the host. This does not relieve the contractor from security oversight of their employees who are long-term visitors at USG installations.

(b) Classified meetings. This paragraph applies to a conference, seminar, symposium, exhibit, convention, training course, or other such gathering during which classified information is disclosed, hereafter called a ‘‘meeting.’’ Disclosure of classified information to large diverse audiences such as conferences increases security risks. Classified disclosure at such meetings may occur when it serves a government purpose and adequate security measures have been provided in advance.

(1) Meeting conducted by a cleared contractor. If conducted by a cleared contractor, the meeting is authorized by a USG agency that has agreed to assume security jurisdiction. The USG agency:

(i) Must approve security arrangements, announcements, attendees, and the location of the meeting.

(ii) May delegate certain responsibilities to a cleared contractor for the security arrangements and other actions necessary for the meeting under the general supervision of the USG agency.

(2) Request for authorization. Contractors desiring to conduct meetings that require sponsorship will submit their requests to the USG agency that has principal interest in the subject of each meeting. Requests for authorization will include:

(i) An explanation of the USG purpose to be served by disclosing classified information at the meeting and why the use of conventional channels for release of the classified information will not advance those interests.

(ii) The subject of the meeting and scope of classified topics, to include the classification level, to be disclosed at the meeting.

(iii) The expected dates and location of the meeting.

(iv) The general content of the proposed announcement or invitation to be sent to prospective attendees or participants.

(v) The identity of any other non- government organization involved and a

full description of the type of support it will provide.

(vi) A list of any foreign representatives (including their nationality, name, organizational affiliation) whose attendance at the meeting is proposed.

(vii) A description of the security arrangements necessary for the meeting to comply with the requirements of this rule.

(3) Locations of meetings. Classified sessions will be held only at a USG installation or a cleared contractor facility where adequate physical security and procedural controls have been approved. The authorizing USG agency is responsible for evaluating and approving the location proposed for the meeting.

(4) Security arrangements for meetings. The contractor will develop the security measures and procedures to be used and obtain the authorizing agency’s approval. The security arrangements must provide:

(i) Announcements. Approval of the authorizing agency will be obtained for all announcements of the meeting.

(A) Announcements will be unclassified and will be limited to a general description of topics expected to be presented, names of speakers, and administrative instructions for requesting invitations or participation. Classified presentations will not be solicited in the announcement.

(B) When the meeting has been approved, announcements may only state that the USG agency has authorized the conduct of classified sessions and will provide necessary security assistance.

(C) The announcement will further specify that security clearances and justification to attend classified sessions are to be forwarded to the authorizing agency or its designee.

(D) Invitations to foreign persons will be sent by the authorizing USG agency.

(ii) Clearance and need-to-know. All persons in attendance at classified sessions will possess the requisite clearance and need-to-know for the information to be disclosed.

(A) Need-to-know will be determined by the authorizing agency or its designee based on the justification provided.

(B) Attendance will be authorized only to those persons whose security clearance and justification for attendance have been verified by the security officer of the organization represented.

(C) The names of all authorized attendees or participants must appear on an access list with entry permitted to the classified session only after

verification of the attendee’s identity based on presentation of official photographic identification such as a passport, contractor or USG identification card.

(iii) Presentations. Classified information must be authorized for disclosure in advance by the USG agency having jurisdiction over the information to be presented.

(A) Individuals making presentations at meetings will provide sufficient classification guidance to enable attendees to identify what information is classified and the level of classification.

(B) Classified presentations will be delivered orally or visually.

(C) Copies of classified presentation materials will not be distributed at the classified meeting, and any classified notes or electronic recordings of classified presentations will be classified, safeguarded, and transmitted as required by this rule.

(iv) Physical security. The physical security measures for the classified sessions will provide for control of, access to, and dissemination of, the classified information to be presented and will provide for secure storage capability, if necessary.

(5) Disclosure authority at meetings. Authority to disclose classified information at meetings, whether disclosure is by officials of industry or USG, must be granted by the USG agency or activity that has classification jurisdiction over the information to be disclosed. Each contractor that desires to disclose classified information at a meeting is responsible for requesting and obtaining disclosure approvals. Associations are not responsible for ensuring that classified presentations and papers of other organizations have been approved for disclosure. A contractor desiring to disclose classified information at a meeting will:

(i) Obtain prior written authorization for each proposed disclosure of classified information from the USG agency having jurisdiction over the information involved.

(ii) Furnish a copy of the disclosure authorization to the USG agency sponsoring the meeting.

(6) Requests to attend classified meetings. Before a contractor employee can attend a classified meeting, the contractor will provide justification for why the employee requires access to the classified information, cite the classified contract or GCA program or project involved, and forward the information to the authorizing USG agency.

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§ 117.17 Subcontracting.

(a) Prime contractor responsibilities.—(1) Responsibilities. Before a primecontractor may release or discloseclassified information to asubcontractor, or cause classifiedinformation to be generated by asubcontractor, a determination thataccess to classified information will berequired and such access serves alegitimate USG requirement for theperformance of a ‘‘classified contract’’ inaccordance with § 117.9(a) must bemade. Prime contractors are responsiblefor communicating the appropriatesecurity requirements to allsubcontractors.

(i) A ‘‘security requirements clause’’and a ‘‘Contract Security Classification Specification,’’ or equivalent, will be incorporated in the solicitation and in the subcontract. (See the ‘‘security requirements clause’’ in the prime contract.)

(ii) The subcontractor must possess anappropriate entity eligibility determination and a classified information safeguarding capability if possession of classified information will be required.

(A) If access to classified informationwill not be required in the pre-award phase, prospective subcontractors are not required to possess an entity eligibility determination to receive or bid on the solicitation.

(B) If a prospective subcontractorrequires access to classified information during the pre-award phase and does not have the appropriate entity eligibility determination or a classified information safeguarding capability, the prime contractor will request the CSA of the subcontractor to initiate the necessary action.

(iii) If access to classified informationwill not be required, the contract is not a classified contract within the meaning of this rule. If the prime contract contains requirements for release or disclosure of protected information that is not classified, such as CUI, the requirements will be incorporated in the solicitation and the subcontract and are not covered by this rule.

(2) Prospective subcontractors entityeligibility determinations. (i) The prime contractor will verify whether the prospective subcontractors have the appropriate entity eligibility determination and also a classified information safeguarding capability, if a subcontract requirement. This determination can be made if there is an existing contractual relationship between the parties involving classified information of the same or higher category, and must be verified by

accessing the CSA-designated database, or by contacting the CSA.

(ii) If a prospective subcontractor doesnot have the appropriate entity eligibility determination or a classified information safeguarding capability, the prime contractor will request that the CSA of the subcontractor initiate the necessary action.

(A) Requests will include, at aminimum, the full name, address, and contact information for the requester; the full name, address, and contact information for a contact at the facility to be processed for an entity eligibility determination; the level of clearance and the required classified information safeguarding capability; and full justification for the request.

(B) Requests for safeguardingcapability will include a description, quantity, end-item, and classification of the information related to the proposed subcontract.

(C) Other factors necessary to help theCSA determine if the prospective subcontractor meets the requirements of this rule will be identified, such as any special access requirements.

(3) Lead time for entity eligibilitydetermination when awarding to an uncleared subcontractor. Requesting contractors will allow sufficient lead time in connection with the award of a classified subcontract to enable an uncleared bidder to be processed for the necessary entity eligibility determination. When the entity eligibility determination cannot be granted in sufficient time to qualify the prospective subcontractor for participation in the current procurement action, the CSA will continue the entity eligibility determination processing action to qualify the prospective subcontractor for future contract consideration provided:

(i) The delay in processing the entityeligibility determination was not caused by a lack of cooperation on the part of the prospective subcontractor.

(ii) Future classified negotiations mayoccur within 12 months.

(iii) There is reasonable likelihood thesubcontractor may be awarded a classified subcontract.

(iv) Subcontracting that involvesaccess to FGI. (A) A U.S. contractor may award a subcontract that involves access to FGI to another U.S. contractor after verifying with the CSA that the prospective subcontractor has the appropriate entity eligibility determination and a classified information storage capability, and review of the prime contract to determine if there are any contractual limitations for approval before awarding a subcontract. The contractor awarding

a subcontract will provide appropriate security classification guidance and incorporate the pertinent security provisions in the subcontract.

(B) The contractor cannot awardsubcontracts involving FGI to a contractor in a third country or to a U.S. entity with a limited entity eligibility determination based on third-country FOCI without the express written consent of the originating foreign government. The CSA will coordinate with the appropriate foreign government authorities.

(b) Security classification guidance.(1) Prime contractors will ensure that aContract Security ClassificationSpecification, or equivalent, isincorporated in each classifiedsubcontract.

(i) When preparing classificationguidance for a subcontract, the prime contractor may extract pertinent information from:

(A) The Contract SecurityClassification Specification, or equivalent, issued with the prime contract.

(B) Security classification guidesissued with the prime contract.

(C) Any security guides that provideguidance for the classified information furnished to, or that will be generated by, the subcontractor.

(ii) The Contract SecurityClassification Specification, or equivalent, prepared by the prime contractor will be certified by a designated official of the contractor.

(iii) In the absence of exceptionalcircumstances, the classification specification will not contain any classified information. If classified supplements are required as part of the Contract Security Classification Specification, or equivalent, they will be identified and forwarded to the subcontractor by separate correspondence.

(2) An original Contract SecurityClassification Specification, or equivalent, will be included with each RFQ, RFP, IFB, or other solicitation to ensure that the prospective subcontractor is aware of the security requirements of the subcontract and can plan accordingly. An original Contract Security Classification Specification, or equivalent, will also be included in the subcontract awarded to the successful bidder.

(3) A revised Contract SecurityClassification Specification, or equivalent, will be issued as necessary during the lifetime of the subcontract when the security requirements change.

(4) Requests for public release by asubcontractor will be forwarded through the prime contractor to the GCA.

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(c) Responsibilities upon completionof the subcontracts. (1) Upon completion of the subcontract, the subcontractor may retain classified material received or generated under the subcontract for a two-year period, in accordance with the provisions in § 117.13(d)(5).

(2) If retention is required beyond thetwo-year period, the subcontractor must request written retention authority through the prime contractor to the GCA, including the information required by § 117.15(j).

(3) If retention authority is approvedby the GCA, the prime contractor will issue a final Contract Security Classification Specification, or equivalent, annotated to provide the retention period and final disposition instructions.

(d) Notification of invalidation,marginal, or unsatisfactory conditions. The prime contractor will be notified if the CSA discovers marginal or unsatisfactory conditions at the subcontractor’s facility or if the CSA invalidates the subcontractor’s facility clearance. Once notified, the prime contractor will follow the instructions received on what action, if any, should be taken in order to safeguard classified material relating to the subcontract.

§ 117.18 Information system security.(a) General. (1) Contractor information

systems that are used to capture, create, store, process, or distribute classified information must be properly managed to protect against unauthorized disclosure of classified information. The contractor will implement protective measures using a risk-based approach that incorporates minimum standards for their insider threat program in accordance with CSA-provided guidance.

(2) The CSA will issue guidance basedon requirements for federal systems, pursuant to 44 U.S.C. Ch. 35 of subchapter II, also known as the ‘‘Federal Information Security Modernization Act,’’ and as set forth in National Institute of Standards and Technology (NIST) Special Publication 800–37 (available at: https://csrc.nist.gov/publications/detail/sp/800- 37/rev-2/final), Committee on National Security Systems (CNSS) Instruction 1253 (available at: https://www.cnss.gov/CNSS/openDoc.cfm?QwPYrAJ5Ldq+s+jvttTznQ==), and other applicable CNSS and NIST publications (e.g., NIST Special Publication 800–53).

(b) Information system securityprogram. The contractor will maintain an information system security program that supports overall information

security by incorporating a risk-based set of management, operational, and technical security controls in accordance with CSA-provided guidance. The contractor will incorporate into the program:

(1) Policies and procedures thatreduce information security risks to an acceptable level and address information security throughout the information system life cycle.

(2) Plans and procedures to assess,report, isolate, and contain data spills and compromises, to include sanitization and recovery methods.

(3) Information system securitytraining for authorized users, as required in CSA provided guidance.

(4) Policies and procedures thataddress key components of the contractor’s insider threat program, such as:

(i) User activity monitoring networkactivity, either automated or manual.

(ii) Information sharing procedures.(iii) A continuous monitoring

program. (iv) Protecting, interpreting, storing,

and limiting access to user activity monitoring automated logs to privileged users.

(5) Processes to continually evaluatethreats and vulnerabilities to contractor activities, facilities, and information systems to ascertain the need for additional safeguards.

(6) Change control processes toaccommodate configuration management and to identify security relevant changes that may require re- authorization of the information system.

(7) Methods to ensure users are awareof rights and responsibilities through the use of banners and user agreements.

(c) Contractor responsibilities—(1)Certification. The contractor will:

(i) Certify to the CSA that the securityprogram for information systems to process classified information addresses management, operation, and technical controls in accordance with CSA- provided guidelines.

(ii) Provide adequate resources to theinformation system security program and organizationally align to ensure prompt support and successful execution of a compliant information system security program.

(2) ISSM. Contractors that are or willbe processing classified information on an information system will appoint an employee ISSM. The contractor will confirm that the ISSM is adequately trained, has sufficient experience, and possesses technical competence commensurate with the complexity of the information system. The ISSM will:

(i) Oversee the development,implementation, and evaluation of the

contractor’s information system program for contractor management, information system personnel, users, and others as appropriate.

(ii) Coordinate with the contractor’sinsider threat senior program official so that insider threat awareness is addressed in the contractor’s information system security program.

(iii) Develop, document, and monitorcompliance of the contractor’s information system security program in accordance with CSA-provided guidelines for management, operational, and technical controls.

(iv) Verify self-inspections areconducted at least every 12 months on the contractor’s information systems that process classified information, and that corrective actions are taken for all identified findings.

(v) Certify to the CSA in writing thatthe systems security plan (SSP) is implemented for each authorized information systems, specified in the SSP; the specified security controls are in place and properly tested; and the information system continues to function as described in the SSP.

(vi) Brief users on theirresponsibilities with regard to information system security and verify that contractor personnel are trained on the security restrictions and safeguards of the information system prior to access to an authorized information system.

(vii) Develop and maintain securitydocumentation of the security authorization request to the CSA. Documentation may include:

(A) SSPs.(B) Security assessment reports.(C) Plans of actions and milestones.(D) Risk assessments.(E) Authorization decision letters.(F) Contingency plans.(G) Configuration management plans.(H) Security configuration checklists.(I) System interconnection

agreements. (3) Information systems security

officer (ISSO). The ISSM may assign an ISSO. If assigned, the ISSO will:

(i) Verify the implementation of thecontractor’s information system security program as delegated by the ISSM.

(ii) Ensure continuous monitoringstrategies and verify corrective actions to the ISSM.

(iii) Conduct self-inspections andverify corrective actions to the ISSM.

(4) Information system users. Allinformation system users will:

(i) Comply with the informationsystem security program requirements as part of their responsibilities for protecting classified information.

(ii) Be accountable for their actions onan authorized information system.

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(iii) Not share any authenticationmechanisms (including passwords) issued for the control of their access to an information system.

(iv) Protect authenticationmechanisms at the highest classification level and most restrictive classification category of information to which the mechanisms permit access.

(v) Be subject to monitoring of theiractivity on any classified network, understanding that the results of such monitoring can be used against them in a criminal, security, or administrative proceeding or action.

(vi) Notify the ISSM or ISSO whenaccess to a classified system is no longer required.

(d) Information system security life- cycle. The CSA-provided guidance on the information system security life- cycle is based on the risk management framework outlined in NIST special publication 800–37 that emphasizes:

(1) Building security into informationsystems during initial development.

(2) Maintaining continuous awarenessof the current state of information system security.

(3) Keeping contractor managementinformed to facilitate risk management decisions.

(4) Supporting reciprocity ofinformation system authorizations.

(e) Risk management framework. Therisk management framework is a seven- step process used for managing information system security-related risks. These steps will be used to help ensure security capabilities provided by the selected security controls are implemented, tested, validated, and approved by the USG authorizing official with a degree of assurance appropriate for the information system. This process accommodates an on-going risk mitigation strategy.

(1) Prepare. The contractor willexecute essential activities at the organization, mission and business process, and system levels of the organization to help prepare the organization to manage its security and privacy risks using the Risk Management Framework.

(2) Categorize. The contractor willcategorize the information system and the information processed, stored, and transmitted by the information system based on an impact analysis. Unless imposed by contract, the information system baseline is moderate- confidentiality, low-integrity, and low- availability.

(3) Select. The contractor will selectan initial set of baseline security controls for the information system based on the security categorization; tailoring and supplementing the

security control baseline as needed based on an organizational assessment of risk and local conditions.

(4) Implement. The contractor willimplement the security controls and document how the controls are deployed within the information system and the operational environment.

(5) Assess. The contractor will assessthe security controls to determine the extent to which the controls are implemented correctly, operating as intended, and producing the desired outcome with respect to meeting the security requirements for the information system. The contractor will review and certify to the CSA that all systems have the appropriate protection measures in place.

(6) Authorize. The CSA will use theinformation provided by the contractor to make a timely, credible, and risk- based decision to authorize the system to process classified information. The CSA must authorize the system before the contractor can use the system to process classified information.

(7) Monitor. The contractor willmonitor and assess selected security controls in the information system on an ongoing basis:

(i) Effectiveness of security controls.(ii) Documentation of changes to the

information system and the operational environment.

(iii) Analysis of the security impact ofchanges to the information system.

(iv) Making appropriate reports to theCSA.

(f) Unclassified information systemsthat process, store, or transmit CUI. While outside the requirements of the NISPOM, contractors will comply with contract requirements regarding contractor information systems that process, store, or transmit CUI.

§ 117.19 International securityrequirements.

(a) General. This section providesinformation and procedures governing the protection of classified information in international programs.

(b) Disclosure of classified U.S.information to foreign interests.—(1) Applicable federal law. The transfer of articles, services, and related data to a foreign person, within or outside the United States, or the movement of such material or information to any destination outside of the legal jurisdiction of the United States constitutes an export. Depending on the nature of the articles or data, most exports are pursuant to (1) 22 U.S.C. chapter 39, also known and referred to in this rule as the ‘‘Arms Export Control Act,’’ (2) 50 U.S.C. 4801 et seq., also known as the ‘‘Export Control Reform

Act of 2018,’’ or (3) the AEA. This section applies to those exports that involve classified information.

(2) Security agreements.—(i) Bilateralsecurity agreements (e.g., General Security of Information Agreements and General Security of Military Information Agreements) are negotiated with various foreign governments. Confidentiality requested by some foreign governments prevents a listing of the countries that have executed these agreements. The bilateral security agreement, negotiated through diplomatic channels:

(A) Requires that each governmentprovide substantially the same degree of protection to classified information released by the other government.

(B) Contains provisions concerninglimits on the use of each government’s information, including restrictions on third-party transfers and proprietary rights.

(C) Does not commit governments toshare classified information, nor does it constitute authority to release classified material to that government.

(D) Satisfies, in part, the eligibilityrequirements of the Arms Export Control Act concerning the agreement of the recipient foreign government to protect U.S. classified defense articles and classified information.

(ii) The applicable CSA will providea mechanism for contractors to access, for official purposes, classified general security agreements.

(iii) Industrial security agreementshave been negotiated with certain foreign governments that identify the procedures to be used when foreign government classified information is provided to U.S. industry and UUSG classified information is provided to foreign defense industry.

(3) Authorization for disclosure. TheGCA will provide disclosure guidance.

(i) Contractors will only disclose non- public USG information to foreign persons in accordance with specified requirements of the contract. In the absence of any specified requirements the contractor will not disclose non- public USG information to foreign persons.

(ii) Disclosure authorization may be inthe form of an export license or other export authorization by a cognizant export authority.

(iii) The contractor may not usedisclosure guidance provided by the GCA for a previous contract or program unless so instructed in writing by the GCA or the licensing authority.

(iv) Disclosure and export of classifiedinformation, authorized by an appropriate USG disclosure official, by a contractor will ensure the following:

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(A) International agreements.Contractors may not disclose classified information until agreements are signed by the participating government and disclosure guidance and security arrangements are established. The export of technical data pursuant to such agreements may be exempt by approval of the Department of State or the Department of Commerce.

(B) Symposia, seminars, exhibitions,and conferences. Contractors must assure that any foreign nationals who will be attending a classified gathering have the appropriate export license, disclosure authority, and security assurance on file.

(C) Visits by foreign nationals to thecontractor. The contractor will limit disclosure of classified information to that specific information authorized in connection with an approved visit request and an export authorization, as required.

(D) Temporary exports. Classifiedarticles, including articles that require the use of classified information for operation, exported for demonstration purposes must remain under U.S. control. The contractor must obtain an export authorization from the relevant authority (i.e., from the Department of State in accordance with 22 CFR parts 120–130, also known as and referred to in this rule as the ‘‘International Traffic in Arms Regulations,’’ or from the Department of Commerce in accordance with 15 CFR parts 730–774, also known as the ‘‘Export Administration Regulations’’).

(4) Direct commercial arrangements.(i) The disclosure of classifiedinformation may be authorized pursuantto a direct commercial sale with theappropriate export authorization. Adirect commercial arrangement includessales, loans, leases, or grants ofclassified items, including sales under agovernment agency sales financingprogram.

(ii) If a proposed disclosure is insupport of a foreign government requirement, the contractor should consult with U.S. in-country officials, normally the U.S. Security Assistance/ Armaments Cooperation Office or Commercial Counselor.

(A) Before a contractor makes aproposal to a foreign interest that involves the eventual disclosure of U.S. classified information, the contractor must obtain appropriate government disclosure authorization.

(B) Such disclosure authorizationdoes not equate with authorization for export. Export authorization must be obtained from the appropriate regulatory body.

(iii) The contractor will request a FCLassurance for a foreign entity through the CSA from the security authority of the foreign entity’s sponsoring government prior to entering into a contractual arrangement with the foreign entity.

(5) Subcontract security provisions. (i)A U.S. contractor may be authorized to enter into an agreement involving classified information with a foreign contractor. The U.S. contractor’s empowered official will verify the contractor can release the information to a foreign person. Such agreements may include:

(A) Award of a subcontract.(B) Department of State authorized

manufacturing license agreement, technical assistance agreement, or other direct commercial arrangement.

(ii) The contractor will incorporatesecurity provisions into the subcontract document or agreement, and provide security classification guidance by means of a Contract Security Classification Specification, or equivalent.

(iii) The contractor will provide acopy of the signed contract with the provisions and the classification guidance to the CSA.

(iv) If the export authorizationspecifies that additional security arrangements are necessary for performance on the contract, the contractor will incorporate those additional arrangements by appropriate provision in the contract or in a separate security document.

(v) The contractor will prepare andmaintain a written record that identifies the originator or source of classified information that will be used in providing classified defense articles, material or services to foreign customers. The contractor will maintain this listing with the contractor’s record copy of the pertinent export authorization.

(vi) The contractor will include thesecurity provisions in accordance with paragraph (b)(5) in this section in all contracts and subcontracts involving classified information that are awarded to foreign contractors. Contractors must insert the bracketed contract specific information (e.g., applicable country and disposition of classified material) where noted, when using the following security clauses in the contract.

(A) All classified information andmaterial furnished or generated under the contract will be protected to ensure that:

(1) The recipient will not release theinformation or material to any third party without disclosure authorization

and export authorization, as appropriate.

(2) The recipient will afford theinformation and material a degree of protection equivalent to that afforded it by the releasing government.

(3) The recipient will not use theinformation and material for other than the purpose for which it was furnished without the prior written consent of the releasing government.

(B) Classified information andmaterial furnished or generated under this contract will be transferred through government channels or other channels specified in writing by the governments of the United States and [insert applicable country]. It will only be transferred to persons who have an appropriate security clearance and an official need for access to the information in order to perform on the contract.

(C) Classified information andmaterial furnished under the contract will be re-marked by the recipient with its government’s equivalent security classification markings.

(D) Classified information andmaterial generated under the contract must be assigned a security classification as specified by the Contract Security Classification Specifications, or equivalent, provided with this contract.

(E) All cases in which it is known orthere is reason to believe that classified information or material furnished or generated under the contract has been lost or disclosed to unauthorized persons will be reported promptly and fully by the contractor to its government’s security authorities.

(F) Classified information andmaterial furnished or generated pursuant to the contract will not be further provided to another potential contractor or subcontractor unless:

(1) A potential contractor which islocated in the United States or [insert applicable country] has been approved for access to classified information and material by the USG or [insert applicable country] security authorities; or

(2) If located in a third country, priorwritten USG consent is obtained.

(G) Upon completion of the contract,all classified material furnished or generated pursuant to the contract will be [insert whether the material is to be returned or destroyed, or provide other instructions].

(H) The recipient contractor willinsert terms that substantially conform to the language of these provisions, including this one, in all subcontracts under this contract that involve access

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to classified information furnished or generated under this contract.

(c) FGI.—(1) General. The contractor will notify the csa when awarded contracts by a foreign interest that will involve access to classified information. The csa will oversee and ensure implementation of the security requirements of the contract on behalf of the foreign government, including the establishment of channels for the transfer of classified material.

(2) Contract security requirements. The foreign entity that awards a classified contract is responsible for providing appropriate security classification guidance and any security requirements clauses. The contractor will report to the CSA when a foreign entity fails to provide classification guidance.

(3) Marking foreign government classified material. Foreign government classified material will be marked in accordance with § 117.14(l).

(4) Foreign Government RESTRICTED Information and ‘‘In Confidence’’ Information. Foreign government RESTRICTED information and ‘‘in confidence’’ information will be marked in accordance with § 117.14(m).

(5) Marking U.S. documents containing FGI. U.S. documents containing FGI will be marked in accordance with § 117.14(n).

(6) Marking documents prepared for foreign governments. Marking documents prepared for foreign governments will be marked in accordance with § 117.14(o).

(7) Storage and control. Contractors will store foreign government material and control access generally in the same manner as U.S. classified material of an equivalent classification. Contractors will store foreign government material in a manner that will separate it from other material. Separation can be accomplished by establishing distinct files in a storage container or on an information system.

(8) Disclosure and use limitations. (i) FGI is provided by the foreign government to the United States. The contractor will:

(A) Not disclose FGI to nationals of a third country, or to any other third party, or use it for any purpose other than that for which it was provided without the prior written consent of the originating foreign government.

(B) Submit requests for other uses or further disclosure to the GCA for U.S. contracts, and through the CSA for direct commercial contracts.

(ii) Approval of the request by the foreign government does not eliminate the requirement for the contractor to obtain an export authorization.

(9) Transfer. The contractor will transfer FGI within the United States and its territories using the same channels as specified for U.S. classified information of an equivalent classification, except that contractors cannot use non-cleared express overnight carriers for FGI.

(10) Reproduction. The reproduction of foreign government TOP SECRET or equivalent information requires the written approval of the originating government.

(11) Disposition. The contractor: (i) Will destroy FGI on completion of

the contract unless the contract specifically authorizes retention or return of the information to the U.S. GCA or foreign government that provided the information.

(ii) Must witness the destruction of TOP SECRET, execute a destruction certificate, and retain the destruction certificate for two years.

(12) Reporting of improper receipt of foreign government material. The contractor will report improper receipt of foreign government material in accordance with § 117.8(c)(13).

(13) Subcontracting. Subcontracting procedures will be in accordance with § 117.17(a)(4).

(d) International transfers of classified material.—(1) General. This paragraph (d) contains the procedures for international transfers of classified material through government-to- government channels or other arrangements agreed to by the governments involved, otherwise referred to as government-to- government transfers. The requirements in this paragraph (d) do not apply to the transmission of classified material to usg activities outside the united states.

(i) All international transfers of classified material must take place through channels approved by both governments. U.S. control of classified material must be maintained until the material is officially transferred to the intended recipient government through its designated government representative (DGR).

(ii) To ensure government control, written transmission instructions must be prepared for all international transfers of classified material. The contractor is responsible for the preparation of instructions for direct commercial arrangements, and the GCA will prepare instructions for government arrangements.

(iii) The contractor will contact the CSA at the earliest possible stage in deliberations that will lead to the international transfer of classified material. The CSA will advise the contractor on the transfer arrangements,

identify the recipient government’s DGR, appoint a U.S. DGR, and ensure that the transportation plan prepared by the contractor or foreign government is adequate.

(iv) The contractor’s empowered official is responsible for requests for all export authorizations, including ones that will involve the transfer of classified information.

(2) Transfers of freight.—(i) Transportation plan (TP). (A) A requirement to prepare a TP will be included in each arrangement that involves the international transfer of classified material as freight. The TP will:

(1) Describe requirements for the secure shipment of the material from the point of origin to the ultimate destination.

(2) Provide for security requirements in the event the transfer cannot be made promptly.

(B) The U.S. and recipient government DGRs will be identified in the TP as well as any requirement for an escort. When there are to be repetitive shipments, a notice of classified consignment will be used.

(ii) Government agency arrangements. Classified material to be furnished to a foreign government under such transactions normally will be shipped via government agency-arranged transportation and be transferred to the foreign government’s DGR within the recipient government’s territory.

(A) The government agency that executes the arrangement is responsible, in coordination with the recipient foreign government, for preparing a TP.

(B) When the point of origin is a U.S. contractor facility, the GCA will provide the contractor with a copy of the TP and the applicable letter of offer and acceptance. If a freight forwarder will be involved in processing the shipment, the GCA will provide a copy of the TP to the freight forwarder.

(C) Commercial arrangements. (1) The contractor will prepare a TP in coordination with the receiving government. This requirement applies whether the material is moved by land, sea, or air, and applies to U.S. and foreign classified contracts.

(2) After the CSA approves the TP, the CSA will forward it to the recipient foreign government security authorities for final coordination and approval. The CSA will notify the contractor upon the concurrence by the respective parties.

(D) International carriers. The international transfer of classified material will be made using only ships, aircraft, or other carriers that:

(1) Are owned or chartered by the USG or under U.S. registry;

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(2) Are owned or chartered by or under the registry of the recipient government; or

(3) Are other than those described that are expressly authorized to perform this function in writing by the Designated Security Authority of the GCA and the security authorities of the foreign government involved. This authority cannot be delegated and this exception may be authorized only when a carrier described in paragraph (d)(2)(iv)(A) or (d)(2)(iv)(B) in this section is not available and an urgent operational requirement dictates use of the exception.

(E) Escorts. (1) The contractor must provide escorts for international shipments of SECRET or CONFIDENTIAL material by air.

(2) Escorts must have an eligibility determination and access to classified information at the classification level of the material being shipped.

(3) Escorts are responsible for ensuring that the classified material being shipped is safeguarded in the event of an emergency stop en route, re- routing of the aircraft, or in the event that the recipient government’s representative fails to meet the shipment at its destination.

(4) The contractor does not have to provide escorts if:

(i) The classified material is shipped by the Defense Transportation System or a U.S. military carrier.

(ii) The recipient government DGR has signed for the receipt of the classified material within the United States.

(iii) The classified material is shipped via a military carrier of the recipient government or a carrier owned by or registered to the recipient government.

(iv) The classified material is shipped via a cleared U.S. commercial freight carrier, so long as the contractor has a written agreement from the U.S. commercial freight carrier to provide an escort who is eligible for access to classified information and has access to classified information at the classification level of the material being shipped.

(v) There are exceptional circumstances, and procedures have been approved by both the USG and the recipient government.

(3) Secure communications plan. (i) The contractor is required to meet all requirements outlined in this section, as applicable, for the secure communications plan.

(ii) The secure communications plan may be approved within a program security instruction, SSP, or a government to government agreement by the designated security authorities. A separate memorandum of understanding

or memorandum of agreement is not required.

(iii) Additionally, an SSP must be authorized in accordance with § 117.18 and the CSA provided guidance.

(4) Return of material for repair, modification, or maintenance. (i) A foreign government or foreign contractor may return classified material to a U.S. contractor for repair, modification, or maintenance.

(ii) The approved methods of return will be specified in either the GCA sales arrangement, the security requirements section of a direct commercial sales arrangement or, in the case of material transferred as freight, in the original TP.

(iii) The contractor, on receipt of notification that classified material is to be received, will notify the applicable CSA.

(5) Use of freight forwarders. (i) A commercial freight forwarder may be used to arrange for the international transfer of classified material as freight.

(A) The freight forwarder must be under contract to a USG agency, U.S. contractor, or the recipient foreign government.

(B) The contract will describe the specific functions to be performed by the freight forwarder.

(C) The responsibility for security and control of the classified material that is processed by freight forwarders remains with the USG until the freight is transferred to a DGR of the recipient government.

(ii) Only freight forwarders that have a valid determination of eligibility for access to classified information and storage capability for classified material at the appropriate level are eligible to take custody or possession of classified material for delivery as freight to foreign recipients. Freight forwarders that only process unclassified paperwork and make arrangements for the delivery of classified material to foreign recipients do not require an eligibility determination for access to classified information.

(iii) A freight forwarder cannot serve as a DGR.

(6) Hand carrying classified material. To meet contractual requirements, the CSA may authorize contractor employees to hand carry classified material outside the United States. SECRET is the highest level of classified material to be carried and it must be of such size and weight that the courier can retain it in his or her possession at all times.

(i) The CSA will ensure that the contractor has made necessary arrangements with U.S. airport security and customs officials and that security authorities of the receiving government

approve the plan. If the transfer is under a contract or a bilateral or multinational government program, the GCA will approve the request in writing. The contractor will notify the CSA of a requirement to hand carry at least 5 working days in advance of the transfer.

(ii) The courier must be a full-time employee of the dispatching or receiving contractor who has been determined eligible and has been granted access to classified information.

(iii) The employing contractor will provide the courier with a courier certificate that is consecutively numbered and valid for one journey only. The journey may include more than one stop if approved by the CSA and secure government storage has been arranged at each stop. The courier will return the courier certificate to the dispatching contractor immediately on completion of the journey.

(iv) Before commencement of each journey, the courier will read and initial the notes to the courier attached to the courier certificate and sign the courier declaration. The contractor will maintain the declaration until completion of the next CSA security review.

(v) The dispatching contractor will inventory, wrap, and seal the material in the presence of the U.S. DGR. The contractor will place the address of the receiving security office and the return address of the dispatching contractor security office on the inner envelope or wrapping and mark it with the appropriate classification. The contractor will place the address of the receiving government’s DGR on the outer envelope or wrapping along with the return address of the dispatching contractor.

(vi) The dispatching contractor will prepare three copies of a receipt based on the inventory and list the classified material that is being sent. The dispatching contractor will retain one copy of the receipt. The contractor will pack the other two copies with the classified material. The contractor will obtain a receipt for the sealed package from the courier.

(vii) The dispatching contractor will provide the receiving contractor with 24 work hours advance notification of the anticipated date and time of the courier’s arrival and the identity of the courier. The receiving contractor must notify the dispatching contractor if the courier does not arrive within 8 hours of the expected time of arrival. The dispatching contractor will notify its DGR of any delay, unless officially notified otherwise of a change in the courier’s itinerary.

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(viii) The receiving DGR will verify the contents and sign the receipts enclosed in the consignment. The receiving DGR will return one copy to the courier. On return, the courier will provide the executed receipt to the dispatching contractor.

(ix) Throughout the journey, the courier will maintain the classified material under direct personal control. The courier will not leave the material unattended at any time during the journey, in the transport being used, in hotel rooms, in cloakrooms, or other such location, and will not deposit it in hotel safes, luggage lockers, or in luggage offices. In addition, the courier will not open envelopes or packages containing the classified material en route, unless required by customs or other government officials.

(x) When inspection by government officials is unavoidable, the courier will request that the officials provide written verification that they have opened the package. The courier will notify their employing contractor as soon as possible. The contractor will notify the U.S. DGR. If the inspecting officials are not of the same country as the dispatching contractor, the CSA will notify the designated security authority in the country whose officials inspected the consignment. Under no circumstances will the courier hand over the classified material to customs or other officials for their custody.

(xi) When carrying classified material, the courier will not travel by surface routes through third countries, except as authorized by the CSA. The courier will travel only on carriers described in paragraph (d)(2)(iv) in this section, and will travel direct routes between the United States and the destination.

(7) Classified material receipts. (i) The U.S. DGR and the DGR of the ultimate foreign recipient will maintain a continuous chain of receipts to record international transfers of all classified material from the contractor through the dispatching DGR and recipient DGR to the ultimate foreign recipient. The dispatching contractor will retain:

(A) An active suspense record until return of applicable receipts for the material.

(B) A copy of the external receipt that records the passing of custody of the package containing the classified material and each intermediate consignee in a suspense file until the receipt that is enclosed in the package is signed and returned.

(ii) The contractor will initiate follow- up action through the CSA if the signed receipt is not returned within 45 days.

(8) Contractor preparations for international transfers of classified

material pursuant to direct commercial and foreign military sales. To prepare for international transfers the contractor will:

(i) Identify each party to be involved in the transfer in the applicable contract or agreement and in the license application or letter request.

(ii) Notify the appropriate U.S. DGR when the material is ready.

(iii) When the classified material is also ITAR-controlled, provide documentation or written certification by an empowered official (as defined in the ITAR) to the U.S. DGR. This documentation must verify that the classified shipment is within the limitation scope of the pertinent export authorization or an authorized exemption to the export authorization requirements, or is within the limitations of the pertinent GCA contract.

(iv) Have the classified shipment ready for visual review and verification by the DGR. As a minimum this will include:

(A) Preparing the packaging materials, address labels, and receipts for review.

(B) Marking the contents with the appropriate U.S. classification or the equivalent foreign government classification, downgrading, and declassification markings, as applicable.

(C) Ensuring that shipping documents (including, as appropriate, the shipper’s export declaration) include the name and contact information for the CSA that validates the license or letter authorization, and the FSO or designee for the particular transfer.

(D) Sending advance notification of the shipment to the CSA, the recipient, and to the freight forwarder, if applicable. The notification will require that the recipient confirm receipt of the shipment or provide notice to the contractor if the shipment is not received in accordance with the prescribed shipping schedule.

(9) Transfers pursuant to an ITAR exemption. (i) The contractor will provide to the DGR valid documentation (i.e., license, export authorization, letter of offer and acceptance, or agreement) to verify the export authorization for classified technical data information or certain defense articles to be transferred under an exemption to the ITAR exemption. The documentation must include a copy of the Department of State Form DSP–83 associated with the original export authorization.

(ii) Classified technical data information or certain defense articles to be exported pursuant to ITAR exemptions will be supported by a written authorization signed by an authorized exemption official or

exemption certifying official who has been appointed by the GCA’s responsible disclosure authority.

(A) The contractor will provide a copy of the authorization to the CSA.

(B) The CSA will provide a copy of the authorization to the Department of State Directorate of Defense Trade Controls (DDTC).

(e) International visits.—(1) General. (i) The contractor will establish procedures to monitor international visits by their employees and visits or assignments of foreign nationals to the contractor location. Doing so will ensure that the disclosure of, and access to, classified export-controlled articles related to classified information are limited to those that are approved by an export authorization.

(ii) Contractors cannot use visit authorizations to employ or otherwise acquire the services of foreign nationals that require access to export-controlled information. An export authorization is required for such situations.

(2) International visits by U.S. contractor employees.—(i) Types and purpose of international visits.—(A) One-time visits. A visit for a single, short-term occasion (normally 30 days or fewer) for a specified purpose.

(B) Recurring visits. Intermittent, recurring visits over a specified period of time, normally up to one year in duration, in support of a government- approved arrangement, such as an agreement, contract, or license. By agreement of the governments, the term of the authorization may be for the duration of the arrangement, subject to annual review, and validation.

(C) Long-term visits. A single visit for an extended period of time, normally up to one year, in support of an agreement, contract, or license.

(D) Emergency visits. A visit related to a specific government-approved contract, international agreement or announced request for proposal, and failure to make the visit could be reasonably expected to seriously jeopardize performance on the contract or program, or result in the loss of a contract opportunity.

(ii) Requests for visits. Visit requests are necessary to make administrative arrangements and disclosure decisions and obtain security assurances.

(A) Many foreign governments require the submission of a visit request for all visits to a government facility or a cleared contractor facility, even though classified information may not be involved. They may also require that the requests be received a specified number of days in advance of the visit.

(B) The contractor can obtain information pertaining to the visit

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requirements of other governments and the NATO from the CSA. The contractor must obtain an export authorization if classified export controlled articles or technical data is to be disclosed or if information to be divulged is related to a classified USG program, unless the disclosure of the information is covered by other agreements, authorizations, or exemptions.

(iii) Request format. Contractors willrequest a visit request template from the CSA. The contractor will forward the visit request to the security official designated by the CSA. The host for the visit should coordinate the visit in advance with appropriate government authorities who are required to approve the visit. It is the visitor’s responsibility to ensure that such coordination has occurred.

(iv) Government agency programs.The contractor will submit a visit request when contractor employees are to visit foreign government facilities or foreign contractors on USG orders in support of a government contract or agreement.

(v) Requests for emergency visits. Therequester will include in the emergency visit request, and any other requirements in accordance with applicable CSA guidance:

(A) The complete name, position,address, and telephone number of the person to be visited.

(B) A knowledgeable foreigngovernment point of contact.

(C) The identification of the contract,agreement, or program and the justification for submission of the emergency visit request.

(vi) Requests for recurring visits.Contractors will request recurring visit authorizations at the beginning of each program. After approval of the request, the contractor may arrange individual visits directly with the security office of the location to be visited subject to 5 working days advance notice.

(vii) Amendments. (A) Once visitrequests have been approved or are being processed, the contractor may amend them only to change, add, or delete names and change dates.

(B) The contractor cannot amend visitrequests to specify dates that are earlier than originally specified.

(C) The contractor cannot amendemergency visit authorizations.

(3) Classified visits by foreignnationals to U.S. contractors.—(i) Requests for classified visits. Requests for visits by foreign nationals to U.S. contractors that will involve the disclosure of classified information may require authorization by the Department of State. Classified visits by foreign nationals must be processed by

government national security authorities on behalf of the contractor through the sponsoring foreign government (normally the visitor’s embassy) to the USG for approval.

(ii) USG approval. The USG mayapprove or deny the request or decline to render a decision.

(A) USG-Approved Visits. (1) USGapproved classified visits cannot be used to avoid the export licensing requirements for commercial initiatives.

(2) When the cognizant USG agencyapproves a classified visit, the notification of approval will contain instructions on the level and scope of classified and unclassified information authorized for disclosure, as well as any limitations.

(3) Final acceptance for the visit willbe subject to the concurrence of the contractor. The contractor will notify the USG agency when a classified visit is not desired.

(B) Visit request denials. (1) If theUSG agency does not approve the disclosure of the information related to the proposed classified visit, it will deny the classified visit request. The USG agency will advise the requesting government and the contractor to be visited of the reason for the denial.

(2) The contractor may accept thevisitor(s), but only information that is in the public domain may be disclosed during the classified visit.

(C) Non-sponsorship. The USG agencywill decline to render a decision on a classified visit request that is not in support of a USG program. The USG agency will furnish a declination notice indicating that the classified visit is not USG-approved (i.e., the classified visit is non-sponsored) to the requesting foreign government with an information copy to the U.S. contractor to be visited.

(1) A declination notice does notpreclude the classified visit, provided the contractor has, or obtains, an export authorization for the information involved and, has been notified that the requesting foreign government has provided the required security assurance of the proposed visitor to the USG agency in the original classified visit request.

(2) It is the contractor’s responsibilityto consult applicable export regulations to determine licensing requirements regarding the disclosure of export- controlled information during such classified visits by foreign nationals.

(D) Visits to subsidiaries. A classifiedvisit request authorization for a classified visit to any element of a corporate family may be used for visits to other divisions or subsidiaries within the same corporate family in accordance with § 117.15(h)(3), provided

disclosures are for the same purpose and the information to be disclosed does not exceed the parameters of the approved classified visit request.

(E) Long-term classified visits andassignments of foreign nationals. Extended classified visits and assignments of foreign nationals to contractor locations can be authorized only when it is essential pursuant to a contract or government agreement (e.g., joint venture, liaison representative to a joint or multinational program, and direct commercial sale). The contractor will:

(1) Consult with its empoweredofficial for guidance.

(2) Notify the CSA in advance of alllong-term classified visits and assignments of foreign nationals.

(3) Provide the CSA with a copy of theapproved classified visit authorization or the USG export authorization.

(4) Control of foreign visitors to U.S.contractors.—(i) Contractor. The contractor will:

(A) Establish procedures to ensurethat foreign visitors are not afforded access to classified information except as authorized by an export license, approved visit request, or other exemption to the licensing requirements.

(B) Not inform the foreign visitor ofthe scope of access authorized or of the limitations imposed by the government.

(ii) Foreign visitors. Foreign visitorswill not be given custody of classified material except when they are acting as official couriers of the government and the CSA authorizes the transfer.

(iii) Visitor records. The contractorwill maintain a record of foreign visitors for one year when the visit involves access to classified information.

(iv) Temporary approval ofsafeguarding. (A) Classified U.S. and foreign government material at a U.S. contractor location is to remain under U.S. contractor custody and control and is subject to self-inspection and CSA security reviews.

(B) This does not preclude thecontractor from furnishing a foreign visitor with a security container for the temporary storage of classified material, consistent with the purpose of the visit or assignment, provided the CSA approves and responsibility for the container and its contents remains with the U.S. contractor.

(1) The CSA may approve exceptionsto this policy on a case-by-case basis for the storage of foreign government classified information furnished to the visitor by the visitor’s government through government channels.

(2) The CSA must approve suchexceptions in advance in writing with

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agreement from the visitor’s government. The agreed procedures will be included in the contractor’s TCP, will require the foreign nationals to provide receipts for the material, and will include an arrangement for the CSA to ensure compliance, including provisions for the CSA to inspect and inventory the material.

(v) TCP. A TCP is required to control access by foreign nationals assigned to, or employed by, cleared contractor facilities, and when foreign nationals visit cleared contractor facilities on a long-term or extended basis, unless the CSA determines that procedures already in place at the contractor’s facility are adequate. The TCP will contain procedures to control access for all export-controlled information. A sample TCP may be obtained from the CSA.

(f) Contractor operations abroad.—(1) Access by contractor employees assigned outside the United States. (i) Contractor employees assigned outside the United States, its possessions, or territories may have access to classified information in connection with performance on a specified U.S., NATO, or foreign government classified contract.

(ii) The assignment of an employee who is a non-U.S. citizen outside the United States on programs that will involve access to classified information is prohibited.

(2) Storage, custody, and control of classified information abroad by contractor employees. (i) The USG is responsible for the storage, custody, and control of classified information required by a U.S. contractor employee abroad. Therefore, the storage of classified information by contractor employees at any location abroad that is not under USG control is prohibited. The storage may be at a U.S. military facility, an American Embassy or consulate, or other location occupied by a USG organization.

(ii) A contractor employee may be furnished a security container to

temporarily store classified material at a USG agency overseas location. The decision to permit a contractor to temporarily store classified information must be approved in writing by the senior security official for the USG host organization.

(iii) A contractor employee may be permitted to temporarily remove classified information from an overseas USG-controlled facility when necessary for the performance of a GCA contract or pursuant to an approved export authorization.

(A) The responsible USG security official at the facility will verify that the contractor has an export authorization or other written USG approval to have the material, verify the need for the material to be removed from the facility, and brief the employee on handling procedures.

(1) In such cases, the contractor employee will sign a receipt for the classified material.

(2) Arrangements will also be made with the USG custodian for the return and storage of the classified material during non-duty hours.

(B) The security office at the USG facility will report violations of this policy to the applicable CSA.

(iv) A contractor employee will not store classified information at overseas divisions or subsidiaries of U.S. entities incorporated or located in a foreign country.

(A) The divisions or subsidiaries may possess classified information that has been transferred to the applicable foreign government through government-to-government channels pursuant to an approved export authorization or other written USG authorization.

(B) Access to this classified information at such locations by a U.S. contractor employee assigned abroad by the parent facility on a visit authorization in support of a foreign government contract or subcontract, is governed by the laws and regulations of

the country in which the division or subsidiary is registered or incorporated. The division or subsidiary that has obtained the information from the foreign government will provide the access.

(v) U.S. contractor employees assigned to foreign government or foreign contractor locations under a direct commercial sales arrangement will be subject to the host-nation’s industrial security policies.

(3) Transmission of classified material to employees abroad. The transmission of classified material to a cleared contractor employee located outside the United States will be through USG channels.

(i) If the material is to be used for other than USG purposes, an export authorization is required and a copy of the authorization, validated by the DGR, will accompany the material. The material will be addressed to a U.S. military organization or other USG organization (e.g., an embassy).

(ii) USG organization abroad will be responsible for custody and control of the material.

(4) Security briefings. An employee being assigned outside the United States will be briefed on the security requirements of his or her assignment, including the handling, disclosure, and storage of classified information overseas.

(g) NATO information security requirements.—(1) General. This section provides the security requirements needed to comply with the procedures established by the U.S. Security Authority for NATO Affairs Instruction 1–07 (available at: http://archives.nato.int/informationobject/ browse?topLod=0&query=United+States+Security+Authority+for+NATO+Affairs+Instruction+1-07) for safeguarding NATO information provided to U.S. industry.

(2) NATO security classification levels.

TABLE 1 TO PARAGRAPH (g)(2) NATO SECURITY CLASSIFICATION LEVELS

NATO security classification Classification level

COSMIC TOP SECRET ........................................................................... Top Secret. NATO SECRET ........................................................................................ Secret. NATO CONFIDENTIAL ............................................................................ Confidential. NATO RESTRICTED 1 ............................................................................. Does not correspond to an equivalent U.S. classification.

1 Pursuant to applicable NATO security regulations and United States Security Authority, NATO Instruction 1–07, security accreditation may be delegated to contractors for information systems processing only NATO RESTRICTED information. The contractor will be responsible for exe-cuting specific provisions under contract for the accreditation of such systems, and shall provide the Contracting Authority with a written state-ment confirming the information system has been accredited in compliance with the minimum requirements established in the contract security clause or contract Security Aspects Letter.

(3) ATOMAL Classification Markings. ATOMAL is a marking applied to U.S.

RESTRICTED DATA or FORMERLY RESTRICTED DATA and UK Atomic

information that has been released to the NATO.

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TABLE 2 TO PARAGRAPH (g)(3) ATOMAL CLASSIFICATION MARKINGS

ATOMAL marking Classification level

COSMIC TOP SECRET ATOMAL ........................................................... Top Secret. NATO SECRET ATOMAL ........................................................................ Secret. NATO CONFIDENTIAL ATOMAL ............................................................ Confidential.

(4) NATO contracts. NATO contractsinvolving NATO-unique systems, programs, or operations are awarded by a NATO Production and Logistics Organization (NPLO), a designated NATO Management Agency, the NATO Research Staff, or a NATO Command. In the case of NATO infrastructure projects (e.g., airfields, communications), the NATO contract is awarded by a contracting agency or prime contractor of the NATO nation responsible for the infrastructure project.

(5) NATO facility security clearancecertificate (FSCC). A NATO FSCC is required for a contractor to negotiate or perform on a NATO classified contract.

(i) A U.S. entity qualifies for a NATOFSCC if it has an equivalent U.S. entity eligibility determination and its personnel have been briefed on NATO procedures.

(ii) The CSA will provide the NATOFSCC to the requesting activity.

(iii) A NATO FSCC is not required forGCA contracts involving access to NATO classified information.

(6) Eligibility for personnel access toclassified information. Access to NATO classified information requires a final determination that an individual is eligible for access to classified information at the equivalent level.

(7) NATO briefings. Before havingaccess to NATO classified information, the contractor will give employees a NATO security briefing that covers the requirements of this section and the consequences of negligent handling of NATO classified information. A representative of the CSA will give the initial briefing to the contractor. The contractor must conduct annual refresher briefings.

(i) When access to NATO classifiedinformation is no longer required, the contractor will debrief the employees. The employees will sign a certificate stating that they have been briefed or debriefed, as applicable, and acknowledge their responsibility for safeguarding NATO information.

(ii) The contractor will maintaincertificates for two years for NATO SECRET and CONFIDENTIAL, and three years for COSMIC TOP SECRET and all ATOMAL information. The contractor will maintain a record of all NATO briefings and debriefings in the CSA- designated database.

(8) Access to NATO classifiedinformation by foreign nationals. Foreign nationals of non-NATO nations may have access to NATO classified information only with the consent of the NATO Office of Security and the contracting activity.

(i) Requests will be submitted to theCentral U.S. Registry (CUSR).

(ii) Access to NATO classifiedinformation may be permitted for citizens of NATO member nations, provided a NATO security clearance certificate is provided by their government and they have been briefed.

(9) Subcontracting for NATOcontracts. The contractor will obtain prior written approval from the NATO contracting activity and a NATO FSCC must be issued prior to awarding the subcontract. The contractor will forward the request for approval through the CSA.

(10) Preparing and marking NATOdocuments. All classified documents created by a U.S. contractor will be portion-marked. Any portion extracted from a NATO document that is not portion marked, must be assigned the classification that is assigned to the NATO document.

(i) All U.S.-originated NATOclassified documents will bear an assigned reference number and date on the first page. The reference numbers will be assigned as follows:

(A) The first element will be theabbreviation for the name of the contractor.

(B) The second element will be theabbreviation for the highest classification followed by a hyphen and the 4-digit sequence number for the document within that classification that has been generated for the applicable calendar year.

(C) The third element will be the year;e.g., MM/NS–0013/17.

(ii) COSMIC TOP SECRET, NATOSECRET, and ATOMAL documents will bear the reference number on each page and a copy number on the cover or first page.

(A) Copies of NATO documents willbe serially numbered.

(B) Pages will be numbered.(C) The first page, index, or table of

contents will include a list, including page numbers, of all annexes and appendices.

(D) The total number of pages will bestated on the first page.

(E) All annexes or appendices willinclude the date of the original document and the purpose of the new text (addition or substitution) on the first page.

(iii) One of the following markingswill be applied to NATO documents that contain ATOMAL information:

(A) ‘‘This document contains U.S.ATOMIC Information (RESTRICTED DATA or FORMERLY RESTRICTED DATA) made available pursuant to the NATO Agreement for Cooperation Regarding ATOMIC Information, dated 18 June 1964, and will be safeguarded accordingly.’’

(B) ‘‘This document contains UKATOMIC Information. This information is released to NATO including its military and civilian agencies and member states on condition that it will not be released by the recipient organization to any other organization or government or national of another country or member of any other organization without prior permission from H.M. Government in the United Kingdom.’’

(iv) Working papers will be retainedonly until a final product is produced and in accordance with § 117.15(e)(3).

(11) Classification guidance.Classification guidance will be in the form of a NATO security aspects letter and a security requirements checklist for NATO contracts, or a Contract Security Classification Specification, or equivalent.

(i) If adequate classification guidanceis not received, the contractor will contact the CSA for assistance.

(ii) NATO classified documents andNATO information in other documents will not be declassified or downgraded without the prior written consent of the originating activity.

(iii) Recommendations concerning thedeclassification or downgrading of NATO classified information will be forwarded to the CUSR.

(12) Further distribution. Thecontractor will not release or disclose NATO classified information to a third party or outside the contractor’s facility for any purpose without the prior written approval of the contracting agency.

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(13) Storage of NATO documents.NATO classified documents will be stored as prescribed for U.S. documents of an equivalent classification level, except as follows:

(i) NATO classified documents willnot be comingled with other documents.

(ii) Combinations for containers usedto store NATO classified information will be changed annually. The combination also will be changed when an individual with access to the container departs or no longer requires access to the container, and if the combination is suspected of being compromised.

(iii) When the combination isrecorded it will be marked with the highest classification level of documents stored in the container as well as to indicate the level and type of NATO documents in the container. The combination record must be logged and controlled in the same manner as NATO classified documents.

(14) International transmission. TheNATO has a registry system for the receipt and distribution of NATO documents within each NATO member nation. The central distribution point for the United States is the CUSR now located at 9301 Chapek Road, Building 1458, Fort Belvoir, Virginia 22060.

(i) The CUSR establishes sub registriesat USG organizations for further distribution and control of NATO documents. Sub registries may establish control points at contractor facilities.

(ii) COSMIC TOP SECRET, NATOSECRET, and all ATOMAL documents will be transferred through the registry system. NATO CONFIDENTIAL documents provided as part of NATO infrastructure contracts will be transmitted via government channels in compliance with paragraph (d) in this section.

(15) Hand carrying. NATO SECRETand NATO CONFIDENTIAL documents may be hand carried across international borders if authorized by the GCA. The courier will be issued a NATO Courier Certificate by the CSA. When hand carrying is authorized, the documents will be delivered to a U.S. organization at NATO, which will transfer them to the intended NATO recipient.

(16) Reproduction. Reproductions ofCOSMIC TOP SECRET and COSMIC TOP SECRET ATOMAL information will be performed by the responsible Registry. The reproduction of NATO SECRET and CONFIDENTIAL documents may be authorized to meet contractual requirements unless reproduction is prohibited by the contracting entity. Copies of COSMIC TOP SECRET, NATO SECRET, and

ATOMAL documents will be serially numbered and controlled and accounted for in the same manner as the original.

(17) Disposition. (i) Generally, allNATO classified documents will be returned to the contracting activity that provided them on completion of the contract. Documents provided in connection with an invitation to bid also will be returned immediately if the bid is not accepted or submitted.

(ii) NATO classified documents mayalso be destroyed when permitted. COSMIC TOP SECRET and COSMIC TOP SECRET ATOMAL documents will be destroyed by the registry that provided the documents.

(A) Destruction certificates arerequired for all NATO classified documents except NATO CONFIDENTIAL.

(B) The destruction of COSMIC TOPSECRET, NATO SECRET, and all ATOMAL documents must be witnessed.

(18) Accountability records. Logs,receipts, and destruction certificates are required for NATO classified information. Records for NATO documents will be maintained separately from records of non-NATO documents (methods such as separate drawers of a container).

(i) COSMIC TOP SECRET and allATOMAL documents will be recorded on logs maintained separately from other NATO logs and will be assigned unique serial control numbers.

(ii) Additionally, disclosure recordsbearing the name and signature of each person who has access are required for all COSMIC TOP SECRET, COSMIC TOP SECRET ATOMAL, and all other ATOMAL or NATO classified documents to which special access limitations have been applied.

(iii) Minimum identifying data onlogs, receipts, and destruction certificates will include the NATO reference number, short title, date of the document, classification, and serial copy numbers. Logs will reflect the short title, unclassified subject, and distribution of the documents.

(iv) Receipts are required for allNATO classified documents except NATO CONFIDENTIAL.

(v) Inventories will be conductedannually of all COSMIC TOP SECRET, NATO SECRET, and ATOMAL documents.

(vi) Accountability records forATOMAL documents will be retained for 10 years after transfer or destruction of the ATOMAL document. Destruction certificates will be retained for 10 years after destruction of the related ATOMAL documents.

(19) Security violations and loss,compromise, or possible compromise. The contractor will immediately report the loss, compromise, or suspected loss or compromise, as well as any other security violations involving NATO classified information to the CSA.

(20) Extracting from NATOdocuments. Permission to extract from a COSMIC TOP SECRET or ATOMAL document will be obtained from the CUSR.

(i) If extracts of NATO information areincluded in a U.S. document prepared for a non-NATO contract, the document will be marked with U.S. classification markings. The caveat, ‘‘THIS DOCUMENT CONTAINS NATO (level of classification) INFORMATION’’ also will be marked on the front cover or first page of the document. Additionally, each paragraph or portion containing the NATO information will be marked with the appropriate NATO classification, abbreviated in parentheses (e.g., ‘‘NS’’ for NATO SECRET) preceding the portion or paragraph. Declassification and downgrading instructions shall indicate that the NATO information is exempt from declassification or downgrading without the prior consent of NATO, in the absence of other originator instructions, citing the reason ‘‘Foreign Government Information.’’

(ii) The declassification ordowngrading of NATO information in a U.S. document requires the approval of the originating NATO activity. Requests will be submitted to the CUSR for NATO contracts, through the GCA for U.S. contracts, and through the CSA for non-NATO contracts awarded by a NATO member nation.

(21) Release of U.S. information toNATO. (i) Release of U.S. classified or export-controlled information to NATO requires an export authorization or other written disclosure authorization. When a document containing U.S. classified information is being prepared for NATO, the appropriate NATO classification markings will be applied to the document.

(A) Documents containing U.S.classified information and U.S. classified documents that are authorized for release to NATO will be marked on the cover or first page ‘‘THIS DOCUMENT CONTAINS U.S. CLASSIFIED INFORMATION. THE INFORMATION IN THIS DOCUMENT HAS BEEN AUTHORIZED FOR RELEASE TO (cite the NATO organization) BY (cite the applicable license or other written authority).’’

(B) The CSA will providetransmission instructions to the contractor. The material will be

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addressed to a U.S. organization at NATO, which will then place the material into NATO security channels. The material will be accompanied by a letter to the U.S. organization that provides transfer instructions and assurances that the material has been authorized for release to NATO. The inner wrapper will be addressed to the intended NATO recipient.

(C) Material to be sent to NATO via mail will be routed through the U.S. Postal Service and U.S. military postal channels to the U.S. organization that will make the transfer.

(ii) A record will be maintained that identifies the originator and source of classified information that are used in the preparation of documents for release to NATO. The record will be provided with any request for release authorization.

(22) Visits. NATO visits will be handled in accordance with the requirements in paragraph (e) of this section. A NATO Certificate of Security Clearance will be included with the visit request.

(i) NPLO and NATO industrial advisory group (NIAG) recurring visits. NATO has established special procedures for recurring visits involving contractors, government departments and agencies, and NATO commands and agencies that are participating in a NPLO or NIAG contract or program. The NATO management office or agency responsible for the NPLO program will prepare a list of the government and contractor facilities participating in the program. For NIAG programs, the list

will be prepared by the responsible NATO staff element. The list will be forwarded to the appropriate clearance agency of the participating nations, which will forward it to the participating contractor.

(ii) Visitor record. The contractor will maintain a record of NATO visits including those by U.S. personnel assigned to NATO. The records will be maintained for three years.

(h) Security and export control violations involving foreign nationals. Contractors will report any violation of administrative security procedures or export control regulations that would subject classified information to possible compromise by foreign visitors or foreign national employees to the applicable CSA.

(i) Transfers of defense articles to the UK or AUS without a license or other written authorization.—(1) Treaties with AUS and UK. Exemptions in ITAR parts 126.16 and 126.17 implement the Defense Trade Cooperation Treaty between the Government of the United States of America and the Government of the UK of Great Britain and Northern Ireland and the Defense Trade Cooperation Treaty between the Government of the United States of America and the Government of AUS, also known as the ‘‘U.S.-UK Treaty’’ and ‘‘U.S.-AUS Treaty,’’ respectively, referred to collectively in this rule as ‘‘the Treaties.’’

(i) The Treaties provide a comprehensive framework for exports and transfers to the UK or AUS of certain classified and unclassified

defense articles without a license or other written authorization.

(ii) The ITAR part 126, supplement no. 1 identifies those defense articles and services that are not eligible for export via treaty exemptions.

(iii) This exemption applies to contractors registered with the DDTC and eligible to export defense articles.

(2) Defense articles. Defense articles fall under the scope of the Treaties when they are in support of:

(i) U.S. and UK or U.S. and AUS combined military or counter-terrorism operations.

(ii) U.S. and UK or U.S. and AUS cooperative security and defense research, development, production, and support programs.

(iii) Mutually agreed specific security and defense projects where the government of the UK or AUS is the end-user.

(iv) USG end-use. (3) Marking requirements. Contractors

are required to mark defense articles that fall under the scope of the treaty prior to transferring from the U.S. to the UK in accordance with the provisions of this paragraph. All other standard classification marking in accordance with § 117.14 also apply. When defense articles are returned from the UK or AUS to the United States, any defense articles marked as RESTRICTED in the manner shown in Table 4 purely for the purposes of the treaties will be considered to be unclassified and such marking will be removed.

TABLE 3 TO PARAGRAPH (i)(3) CLASSIFIED U.S. DEFENSE ARTICLE MARKINGS UNCLASSIFIED: CLASSIFICATION MARKINGS FOR ILLUSTRATION PURPOSES ONLY

Treaty with: Marking Example (for SECRET classified defense articles)

Government of UK .......... //CLASSIFICATION LEVEL USML/REL GBR AND USA TREATY COMMUNITY//.

//SECRET USML//REL GBR AND USA TREATY COMMUNITY//’’

Government of AUS ....... //CLASSIFICATION LEVEL USML/REL AUS AND USA TREATY COMMUNITY//.

//SECRET USML//REL AUS AND USA TREATY COMMUNITY//’’

TABLE 4 TO PARAGRAPH (i)(3) UNCLASSIFIED U.S. DEFENSE ARTICLE MARKINGS UNCLASSIFIED: CLASSIFICATION MARKINGS FOR ILLUSTRATION PURPOSES ONLY

Treaty with: Marking

Government of UK ......... //RESTRICTED–USML//REL GBR AND USA TREATY COMMUNITY//Government of AUS ....... //RESTRICTED–USML//REL AUS AND USA TREATY COMMUNITY//

(4) Notice. A notice will be included (e.g., as part of the bill of lading) whenever defense articles are exported

in accordance with the provisions of these treaties and the ITAR.

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TABLE 5 TO PARAGRAPH (i)(4) NOTICE TEXT FOR EXPORTED DEFENSE ARTICLES

Notice text ........ These U.S. Munitions List commodities are authorized by the U.S. Government under the U.S. [AUS or UK, as applicable] Defense Trade Cooperation Treaty for export only to [AUS or UK, as applicable] for use in approved projects, programs or operations by members of the [AUS or UK, as applicable] Community. They may not be retransferred or re-exported or used outside of an approve project, program, or operation, either in their original form or after being incorporated into other end-items, without the prior written approval of the U.S. Department of State.

(5) Labeling. (i) Defense articles (otherthan technical data) will be individually labeled with the appropriate identification; or, where such labeling is impracticable (e.g., propellants, chemicals), will be accompanied by documentation (such as contracts or invoices) clearly associating the defense articles with the appropriate markings.

(ii) Technical data (including datapackages, technical papers, manuals, presentations, specifications, guides and reports), regardless of media or means of transmission (i.e., physical, oral, or electronic), will be individually labeled with the appropriate identification detailed. Where such labeling is impracticable, the data will be accompanied by documentation (such as contracts or invoices) or oral notification clearly associating the technical data with the appropriate markings.

(iii) Defense services will beaccompanied by documentation (e.g. contracts, invoices, shipping bills, or bills of lading clearly labeled with the appropriate identification).

(6) Transfers. (i) All defense articlesthat fall under the scope of the Treaties must be transferred from the U.S. point of embarkation through channels approved by both the United States and the UK or the United States and AUS, as applicable.

(ii) For transfers of defense articles asfreight, the contractor will prepare a transportation plan. For transfer of classified U.S. defense articles, a freight forwarder must have a valid entity eligibility determination and a classified information storage capability at the appropriate level. For unclassified U.S. defense articles transferred as freight, a freight forwarder is not required to be cleared.

(7) Records. Contractors will maintainrecords of exports, transfers, re-exports, or re-transfers of defense articles subject to the Treaties for a minimum of five years. The contractor will make records available to the CSA upon request. In accordance with the ITAR parts 126.16 and 126.17 the records will contain:

(i) Port of entry or exit.(ii) Date and time of export or import.(iii) Method of export or import.(iv) Commodity code and description

of the commodity, including technical data.

(v) Value of export.(vi) Justification for export under the

Treaties. (vii) End-user or end-use.(viii) Identification of all U.S. and

foreign parties to the transaction. (ix) How export was marked.(x) Security classification of the

export. (xi) All written correspondence with

the USG on the export. (xii) All information relating to

political contributions, fees, or commissions furnished or obtained, offered, solicited, or agreed upon, as outlined in the ITAR parts 126.16(m) or 126.17(m).

(xiii) Purchase order, contract, orletter of intent.

(xiv) Technical data actuallyexported.

(xv) The internal transaction numberfor the electronic export information filing in the automated export system.

(xvi) All shipping documentation(including, but not limited to, the airway bill, bill of lading, packing list, delivery verification, and invoice).

(xvii) Statement of registration(Department of State Form DS–2032 (available at: https://www.pmddtc.state.gov/sys_attachment.do?sysparm_referring_url=tear_off&view=true&sys_id=dabc05f6db6be344529d368d7c961984)).

§ 117.20 Critical Nuclear Weapon DesignInformation (CNWDI).

(a) General. This section contains thespecial requirements for protection of CNDWI. The sensitivity of DoD CNWDI is such that access shall be granted to the absolute minimum number of employees who require it for the accomplishment of assigned responsibilities on a classified contract. Because of the importance of such information, special requirements have been established for its control. DoDI 5210.02, ‘‘Access to and Dissemination of Restricted Data and Formerly Restricted Data’’ (available at: https://www.esd.whs.mil/Portals/54/ Documents/DD/issuances/dodi/ 521002p.pdf?ver=2019-01-14-072742- 700) establishes these controls in theDoD.

(b) Briefings. Prior to having access toCNWDI, employees will be briefed on

its sensitivity by the FSO or his or her alternate. The FSO will be initially briefed by a USG representative.

(1) The briefing will include:(i) The definition of CNWDI.(ii) A reminder of the extreme

sensitivity of the information. (iii) An explanation of the

individual’s continuing responsibility for properly safeguarding CNWDI and for ensuring that dissemination is strictly limited to other personnel who have been authorized for access and have a need-to-know for the particular information.

(2) The briefing will also be tailoredto cover any special local requirements. Upon termination of access to CNWDI, the employee will be given an oral debriefing.

(c) Markings. In addition to any otherrequired markings, CNWDI material will be clearly marked in accordance with DoDI 5210.02. At a minimum, CNWDI documents will show such markings on the cover or first page. Portions of documents that contain CNWDI will be marked with an (N) or (CNWDI) following the classification of the portion; for example, TS (RD)(N) or TS(RD)(CNWDI).

(d) Subcontractors. Contractors willnot disclose CNWDI to subcontractors without the prior written approval of the GCA. This approval may be included in a contract security classification specification, or equivalent, other contract-related document, or by separate correspondence.

(e) Transmission outside the facility.Transmission of CNWDI outside the contractor’s facility is authorized only to the GCA, or to a subcontractor as described in paragraph (d) of this section. Any other transmission must be approved by the GCA.

(1) Prior to transmission to anothercleared facility, the contractor will verify from the CSA that the facility has been authorized access to CNWDI. When CNWDI is transmitted to another facility, the inner wrapping will be addressed to the personal attention of the FSO or his or her alternate, and in addition to any other prescribed markings, the inner wrapping will be marked: ‘‘Critical Nuclear Weapon Design Information-DoD Instruction 5210.02 Applies.’’

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(2) The same marking will be used onthe inner wrapping of transmissions addressed to the GCA or other USG.

(f) Records. Contractors will annotateCNWDI access in the CSA-designated database for all employees who have been authorized access to CNWDI.

(g) Nuclear weapon data. Somenuclear weapon data is divided into Sigma categories, the protection of which is prescribed by DOE Order 452.8 (available at: https://www.directives.doe.gov/directives- documents/400-series/0452.8-border/@@images/file). However, certain nuclear weapon data has been re-categorized as CNWDI and is protected as described in this section.

§ 117.21 COMSEC.

(a) General. The procedures in thissection pertaining to classified COMSEC information will apply to contractors when the contractor:

(1) Requires the use of COMSECsystems in the performance of a contract.

(2) Is required to install, maintain, oroperate COMSEC equipment for the USG.

(3) Is required to accomplish research,development, or production of COMSEC systems, COMSEC equipment, or related COMSEC material.

(b) Instructions. Specific requirementsfor the management and safeguarding of COMSEC material in industry are established in the COMSEC material control and operating procedures provided to the account manager of each industrial COMSEC account by the agency central office of record (COR) responsible for establishing the account. Such procedures that are above the baseline requirements detailed in the other sections of this rule will be contractually mandated.

(c) Clearance and accessrequirements. (1) Before a COMSEC account can be established and a contractor may receive or possess COMSEC material accountable to a COR, individuals occupying the positions of FSO, COMSEC account manager, and alternate COMSEC account manager must have a final PCL appropriate for the material to be held in the account.

(i) COMSEC account managers andalternate COMSEC account managers having access to operational TOP SECRET keying material marked as CRYPTO must have a final TOP SECRET security clearance based upon a current investigation of a scope that meets or exceeds that necessary for the access required.

(ii) This requirement does not applyto contractors using only data transfer devices and seed key.

(2) Before disclosure of COMSECinformation to a contractor, GCAs must first verify with the CSA that appropriate COMSEC procedures are in place at the contractor facility. If procedures are not in place, the GCA will provide a written request and justification to the CSA to establish COMSEC procedures and a COMSEC account, if appropriate, at the facility and to conduct the initial COMSEC or cryptographic access briefings for the FSO and COMSEC account personnel.

(3) Access to COMSEC information bya contractor requires a final entity eligibility determination and a USG- issued final PCL at the appropriate level; however, an Interim TOP SECRET entity eligibility determination or PCL is valid for access to COMSEC at the SECRET and CONFIDENTIAL levels.

(4) If a COMSEC account will berequired, the Contract Security Classification Specification, or equivalent, will contain a statement regarding the establishment of a COMSEC account as appropriate.

(d) Establishing a COMSEC account.(1) When COMSEC material that isaccountable to a COR is to be provided,acquired, or produced under a contract,the contracting officer will inform thecontractor that a COMSEC account mustbe established. The contractor willforward the names of U.S. citizenemployees who will serve as theCOMSEC account manager and alternateCOMSEC account manager to the CSA.The CSA will forward the names of theFSO, COMSEC account manager, andalternate COMSEC account manager,along with a contractual requirement forthe establishment of a COMSEC account(using DD Form 254 or equivalent) tothe appropriate COR, with a copy to theGCA, indicating that the persons havebeen cleared and COMSEC has beenbriefed.

(2) The COR will then establish theCOMSEC account and notify the CSA that the account has been established.

(3) An individual may be appointedas the COMSEC account manager or alternate COMSEC account manager for more than one account only when approved by each COR concerned.

(e) COMSEC briefing and debriefing.(1) All contractor employees whorequire access to classified COMSECinformation in the performance of theirduties will be briefed before access isgranted. Depending on the nature ofCOMSEC access required, either aCOMSEC briefing or a cryptographicaccess briefing will be given. The FSO,the COMSEC account manager, and the

alternate COMSEC account manager will be briefed by a USG representative or their designee. Other contractor employees will be briefed by the FSO, the COMSEC account personnel, or other individual designated by the FSO. The purpose of the briefing is to ensure that the contractor understands:

(i) The unique nature of COMSECinformation and its unusual sensitivity.

(ii) The special security requirementsfor the handling and protection of COMSEC information.

(iii) The penalties prescribed in 18U.S.C. 793, 794, and 798 for disclosure of COMSEC information.

(2) COMSEC debriefings are notrequired.

(3) The contractor will maintain arecord of all COMSEC briefings as specified by the appropriate COR.

(f) U.S. classified cryptographicinformation access briefing and debriefing requirements. (1) U.S. classified cryptographic information does not include seed key or controlled cryptographic items.

(2) A contractor’s employee may begranted access to U.S. classified cryptographic information only if the employee:

(i) Is a U.S. citizen.(ii) Has a final USG-issued eligibility

determination appropriate to the classification of the U.S. cryptographic information to be accessed.

(iii) Has a valid need-to-know toperform duties for, or on behalf of, the USG.

(iv) Receives a security briefingappropriate to the U.S. Classified Cryptographic Information to be accessed.

(v) Acknowledges the granting ofaccess to classified information by executing Section I of Secretary of Defense (SD) Form 572, ‘‘Cryptographic Access Certification and Termination’’ (available at: https://www.esd.whs.mil/ Portals/54/Documents/DD/forms/sd/ sd0572.pdf).

(vi) Where so directed by a USGdepartment or agency head, acknowledges the possibility of being subject to a CI scope polygraph examination that will be administered in accordance with department or agency directives and applicable law.

(3) An employee granted access tocryptographic information will be debriefed and execute Section II of the SD 572 not later than 90 days from the date access is no longer required.

(4) The contractor will maintain theSD 572 for a minimum of five years following the debriefing.

(5) Cryptographic access briefingsmust fully meet the requirements of paragraph (e) of this section.

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(g) Destruction and disposition ofCOMSEC material. The appropriate GCA representative, e.g., the contracting officer representative, will provide directions to the contractor when accountable COMSEC material is to be destroyed. These directions may be provided in superseding editions of publications or by specific instructions.

(h) Subcontracting COMSEC work.Subcontracts requiring the disclosure of classified COMSEC information will be awarded only upon the written approval of the GCA.

(i) Unsolicited proposals. Anyunsolicited proposal for a COMSEC system, equipment, development, or study that may be submitted by a contractor to a USG agency will be forwarded to the Deputy National Manager for National Security Systems for review and follow up action at: Deputy National Manager for National Security Systems, NSA, Fort George G. Meade, MD 20755–6000.

§ 117.22 DHS CCIPP.(a) General. DHS will coordinate with

other USG agencies that have an equity with a private sector entity and the CCIPP in accordance with § 117.6(f).

(b) Authority. (1) The Secretary ofHomeland Security has the authority to determine the eligibility for personnel security clearances and to administer the sharing of relevant classified NSI with certain private sectors or non- federal partners for the purpose of furthering cybersecurity information sharing among critical infrastructure partners pursuant to E.O. 13691.

(2) DHS provides security oversightand assumes security responsibilities similar to those of an FSO, unless otherwise provided in this section. Participating entities will cooperate with DHS security officials to ensure the entity is in compliance with requirements in this rule.

§ 117.23 Supplement to this rule: SecurityRequirements for Alternative CompensatoryControl Measures (ACCM), Special AccessPrograms (SAPs), SensitiveCompartmented Information (SCI),Restricted Data (RD), Formerly RestrictedData (FRD), Transclassified Foreign NuclearInformation (TFNI), and NNPI.

(a) General. Given the sensitive natureof Alternative Compensatory Control Measures (ACCM), SAPs, SCI, RD, FRD, TFNI, and NNPI, the security requirements prescribed in this section exceed baseline standards for this rule and must be applied, as applicable, through specific contract requirements.

(1) Compliance. The contractor willcomply with the security measures reflected in this section and other documents specifically referenced,

when applied by the GCA or designee as part of a contract. Acceptance of the contract security measures is a prerequisite to any negotiations leading to program participation and an area accreditation (e.g., an SCI facility or SAP facility accreditation).

(2) CSA-imposed higher standards. Insome cases, security or sensitive factors of a CSA-created program may require security measures that exceed the standards of this section. In such cases, the CSA-imposed higher standards specifically detailed in the contract or conveyed through other applicable directives will be binding on USG and contractor participants. In cases of doubt over the specific provisions, the contractor should consult the program security officer and the contracting officer before taking any action or expending program-related funds. In cases of extreme emergencies requiring immediate attention, the action taken should protect the USG’s interest and the security of the program from loss or compromise.

(3) Waivers. Every effort will be madeto avoid waivers to established standards unless they are in the best interest of the USG. In those cases where waivers are deemed necessary, a request will be submitted in accordance with the procedures established by the CSA.

(b) Intelligence information. Nationalintelligence is under the jurisdiction and control of the DNI, who establishes security policy for the protection of national intelligence and intelligence sources, methods, and activities. In addition to the guidance in this rule, contractors will follow Intelligence Community directives, policy guidance, standards, and specifications for the protection of classified national intelligence and SCI.

(c) ACCM. Contractors mayparticipate in ACCMs, or be directed to participate, only when such access and the associated security plan are identified in DD Form 254 or equivalent. Care must be taken to ensure identification of the security plan does not disclose ACCM-protected data.

(1) ACCM contracts. DoD contractorswill implement the security requirements for ACCMs, when established by contract, in accordance with applicable statutes, E.O.s, CSA directives, instructions, manuals, regulations, standards, and memorandums.

(2) Non-DoD with ACCMs. Contractorsperforming on ACCM contracts issued by other than DoD GCAs will implement ACCM protection requirements imposed in their contracts.

(d) SAPs.—(1) DoD SAP contracts.Contractors will implement the security requirements for SAPs codified in SAP- related policy, when established by contract. These documents include, but are not limited to, statutes, E.O.s, CSA directives, instructions, manuals, regulations, standards, memorandums, and other SAP security related policy documents.

(2) Non-DoD SAPs. Contractorsperforming on SAP contracts issued by non-DoD GCAs will implement SAP protection requirements imposed in their contracts. These requirements may be from, but are not limited to, statutes, E.O.s, CSA directives, instructions, manuals, regulations, standards, memorandums, and other SAP security related policy documents.

(e) RD, FRD, and TFNI.—(1) General.This section describes some of the requirements for nuclear-related information designated RD, FRD, or TFNI in accordance with the AEA and 10 CFR part 1045. 10 CFR part 1045 contains the full requirements for classification and declassification of RD, FRD, and TFNI. Information on safeguarding of RD by access permittees is contained in 10 CFR part 1016. For RD that is NNPI, the additional provisions of paragraph (f) of this section apply.

(i) The DOE is the sole authority forestablishing requirements for classifying, accessing, handling, securing, and protecting RD. The DOE and the DoD share authority for the requirements for FRD. The DOE and ODNI share authority for establishing requirements for TFNI.

(ii) RD, FRD, and TFNI categories aredistinguished from the NSI category, which is governed in accordance with E.O. 13526.

(A) RD, FRD, and TFNI have uniquemarking requirements and are not subject to automatic declassification. In addition, RD and FRD have special restrictions regarding foreign release.

(B) It is necessary to differentiatebetween the handling of this information and NSI because of its direct relationship to our nation’s nuclear deterrent.

(iii) Some access requirements for RDand FRD exceed the requirements for NSI. Due to the unique national security implications of RD and FRD, and to facilitate maintaining consistency of codified requirement, they are not repeated in the baseline of this rule, but may be applied through specific contract requirements.

(iv) When RD is transclassified asTFNI, it is safeguarded as NSI. Such information will be labeled as TFNI. The label TFNI will be included on

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documents to indicate it is exempt from automatic declassification as specified in 10 CFR part 1045, the AEA, E.O. 13526, and 32 CFR part 2001.

(2) Unauthorized disclosures. Contractors will report all unauthorized disclosures involving RD, FRD and TFNI information to the CSA.

(3) International requirements. The AEA provides for a program of international cooperation to promote common defense and security and to make available to cooperating nations the benefits of peaceful applications of atomic energy as widely as expanding technology and considerations of the common defense and security will permit.

(i) Information controlled in accordance with the AEA, RD, and FRD may be shared with another nation only under the terms of an agreement for cooperation. The disclosure by a contractor of RD and FRD will not be permitted until an agreement is signed by the United States and participating governments, and disclosure guidance and security arrangements are established.

(ii) RD and FRD will not be transmitted to a foreign national or regional defense organization unless such action is approved and undertaken under an agreement for cooperation between the United States and the cooperating entity and supporting statutory determinations, as prescribed in the AEA.

(4) Personnel security clearance and access. Only the DOE, the NRC, the DoD, and the National Aeronautics and Space Agency can grant access to RD and FRD that is under their cognizance. Access to RD and FRD must be granted in accordance with the AEA. Baseline requirements for access to RD and FRD are codified in specific DoD, DOE, NRC, and the National Aeronautics and Space Agency directives and regulations. In addition, need-to-know and other restrictions on access apply.

(5) Classification and declassification. (i) All persons with access to RD and FRD must receive initial and periodic refresher training as required under § 1045.120 10 CFR. The training must include the following information:

(A) What information is potentially RD and FRD.

(B) Matter that potentially contains RD or FRD must be reviewed by an RD derivative classifier to determine whether it is RD or FRD.

(C) The DOE must review matter that potentially contains RD or TFNI for public release and DOE or DoD must review matter that potentially contains FRD for public release.

(D) RD derivative classification authority is required to classify or upgrade matter containing RD or FRD, or to downgrade the level of matter containing RD or FRD.

(E) Only a person trained in accordance with § 1045.120 10 CFR may classify matter containing TFNI.

(F) Matter containing RD, FRD, and TFNI is not automatically declassified and only DOE-authorized persons may downgrade the category or declassify matter marked as containing RD. Only DOE or DoD authorized persons may downgrade the category or declassify matter marked as containing FRD.

(G) How to submit a challenge if they believe RD, FRD, or TFNI information (e.g., a guide topic) or matter containing RD, FRD, or TFNI is not properly classified.

(H) Access requirements for matter marked as containing RD or FRD.

(ii) All persons with access to TFNI must receive initial and periodic refresher training as required under § 1045.120 10 CFR. This training may be combined with the training for access to RD and FRD. The training must include the following information:

(A) What information is potentially TFNI.

(B) Only a person with appropriate training may determine if matter contains TFNI.

(C) Marking requirements for matter containing TFNI.

(D) Matter containing TFNI is not automatically declassified and only DOE authorized persons may downgrade the category or declassify matter marked as containing TFNI.

(E) How to submit a challenge if they believe TFNI information (e.g., a guide topic) or matter containing TFNI is not properly classified.

(iii) Persons with access to RD, FRD, or TFNI must submit matter that potentially contains RD or FRD to an RD derivative classifier for review. If matter potentially contains TFNI, it must be submitted to a person trained to make TFNI determinations. Matter potentially containing RD, FRD, or TFNI must be reviewed, even if the potential RD, FRD, or TFNI is derived from the open literature. Prior to review, the matter must be marked as a working paper under 10 CFR 1045.140(c). If the matter is intended for pubic release and potentially contains RD or TFNI, it must be submitted to the DOE for review. If the matter is intended for public release and contains FRD, it must be submitted to the DOE or the DoD.

(iv) Only RD derivative classifiers may classify matter containing RD or FRD. RD derivative classifiers must receive initial training and refresher

training every two years as required under 10 CFR 1045.120. The training must include the content for persons with access to RD and FRD, along with the following:

(A) The use of classification guides, classification bulletins, and portion- marked source documents to classify matter containing RD and FRD.

(B) What to do if applicable classification guidance is not available.

(C) Limitations on an RD derivative classifier’s authority to remove RD or FRD portions from matter.

(D) Marking requirements for matter containing RD and FRD.

(v) Only persons with appropriate training may review matter to determine if it contains TFNI. Training must be completed prior to making determinations and every two years after. The training must include the content for persons with access to TFNI and the following:

(A) The markings applied to matter containing TFNI.

(B) Limitations on their authority to remove TFNI portions from matter.

(C) Only DOE authorized persons may determine that classified matter no longer contains TFNI.

(D) Only DOE-authorized persons may declassify matter marked as containing TFNI.

(E) The DOE must review matter that potentially contains TFNI for public release.

(vi) RD derivative classifiers must use approved classification guides, classification bulletins, or portion- marked source documents as the basis for classifying matter containing RD and FRD.

(vii) Persons trained to make TFNI determinations must use approved TFNI guidelines, classification guides, classification bulletins, or portion- marked source documents as the basis for classifying or upgrade matter containing TFNI.

(6) Marking matter containing RD, FRD, and TFNI. The front page of matter containing RD or FRD must have the highest classification level of the information on the top and bottom of the first page, the RD or FRD admonishment, the subject or title marking, and the classification authority block. Matter containing TFNI must include the TFNI identifier on each page unless the matter also contains RD or FRD, in which case the RD or FRD takes precedence.

(i) Documents classified as RD or FRD must also include a Classification Authority Block with the RD derivative classifier’s name and position, title, or unique identifier and the classification guide or source document (by title and

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date) used to classify the document. No declassification date or event may be placed on a document containing RD, FRD, or TFNI. If a document containing RD, FRD, or TFNI also contains NSI, ‘‘N/ A to RD/FRD/TFNI’’ (as appropriate)

must be placed on the ‘‘Declassify On:’’ line.

(ii) Each interior page of matter containing RD or FRD must be clearly marked at the top and bottom with the overall classification level and category of the matter or the overall classification

level and category of the page, whichever is preferred. The abbreviations ‘‘RD’’ or ‘‘FRD’’ may be used in conjunction with the matter classification (e.g., SECRET//RD, CONFIDENTIAL//FRD).

TABLE 1 TO PARAGRAPH (e)(6)(ii) RD AND FRD ADMONISHMENT MARKINGS

Document containing

Admonishment that must be included on the front page of the document

RD .................... ‘‘RESTRICTED DATA This document contains RESTRICTED DATA as defined in the Atomic Energy Act of 1954. Unauthorized disclosure is subject

to administrative and criminal sanctions.’’ FRD .................. ‘‘FORMERLY RESTRICTED DATA

Unauthorized disclosure subject to administrative and criminal sanctions. Handle as Restricted Data in foreign dissemination. Section 144b, AEA 1954.’’

(iii) Documents classified as RD or FRD must also include a Classification Authority Block with the RD derivative classifier’s name and position, title, or unique identifier and the classification guide or source document (by title and date) used to classify the document.

(iv) Other than the required subject or title markings, portion marking is permitted, but not required, for matter containing RD or FRD. Each agency that generates matter containing RD or FRD determines the policy for portion- marking matter generated within the agency. If matter containing RD or FRD is portion-marked, each portion containing RD or FRD must be marked with the level and category of the information in the portion (e.g., SRD, CFRD, S//RD, C//FRD).

(v) Additional information and requirements are in 10 CFR 1045.140. Requests for additional information about the classification and declassification of RD, FRD, and TFNI can be directed to Agency RD Management Officials or the DOE Office of Classification at outreach@hq.doe.gov or at (301) 903–7567.

(7) Declassification. (i) No date or event for automatic declassification ever applies to RD, FRD, or TFNI documents, even if they contain classified NSI. RD, FRD, or TFNI documents remain classified until a positive action by a designated DOE official (for RD, FRD, or TFNI) or an appropriate DoD official (for FRD) is taken to declassify them.

(ii) RD derivative classifiers may remove RD or FRD from portion-marked source matter if the resulting matter is not for public release. RD derivative classifiers cannot declassify matter marked as containing RD, FRD, and TFNI. Matter that potentially contains RD or TFNI must be sent to designated individuals in the DOE and those containing FRD must be sent to designated individuals in the DoD for

declassification or removal of the RD, FRD, or TFNI prior to public release.

(iii) Matter containing TFNI is excluded from the automatic declassification provisions of E.O. 13526 until the TFNI designation is properly removed by the DOE. When the DOE determines that a TFNI designation may be removed, any remaining classified information must be referred to the appropriate agency.

(iv) Any matter marked as or that potentially contains RD, FRD, or TFNI within a document intended for public release that contains RD or FRD subject area indicators must be reviewed by the appropriate DOE organization.

(8) Challenges to RD, FRD, and TFNI. A contractor employee who believes RD, FRD, or TFNI is classified improperly or unnecessarily may challenge that classification following the procedures established by the GCA. They may also send challenges directly to the Director, Office of Classification, AU–60/ Germantown Building; U.S. Department of Energy; 1000 Independence Avenue SW, Washington, DC 20585, at any time. Under no circumstance is an employee subject to retribution for challenging the classification status of RD, FRD, or TFNI.

(9) Commingling. Commingling of RD, FRD, and TFNI with NSI in the same document should be avoided to the greatest degree possible. When mixing this information cannot be avoided, the marking requirements in 10 CFR part 1045, section 140(f) and declassification requirements of 10 CFR part 1045, section 155 apply.

(10) Protection of RD and FRD. Most of the protection requirements for RD and FRD are similar to NSI and are based on the classification level. However, there are some protection requirements for certain RD information that may be applied through specific contract requirements by the GCA.

These range from distribution limitations through the limitation of access to specifically authorized individuals to specific storage requirements, including the requirement for IDSs, and additional accountability records.

(i) Any DOE contractor that violates a classified information security requirement may be subject to a civil penalty under the provisions of 10 CFR part 824.

(ii) Certification is required for individuals authorized access to specific Sigma categories, as appropriate. Address questions regarding these requirements to DOE’s National Nuclear Security Administration, Office of Defense Programs.

(iii) Storage and distribution requirements are determined by the classification level, category, and Sigma category. Sigma designation is not a requirement for all RD documents. Storage and distribution requirements will be dependent only on classification level and category.

(11) Accountability. In addition to TOP SECRET information, some SECRET RD information is considered accountable (e.g., specific Sigma 14 matter). Each nuclear weapon data control point will keep a record of transactions involving Secret nuclear weapon data documents under its jurisdiction including origination, receipt, transmission, current custodian, reproduction, change of classification, declassification, and destruction.

(12) Cybersecurity. Classified databases, systems, and networks containing RD and FRD are protected under the requirements developed and distributed by the DOE Office of the Chief Information Officer.

(f) NNPI. NNPI is information associated with the Naval Nuclear Propulsion Program and is governed by Office of the Chief of Naval Operations

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Instruction (OPNAVINST) N9210.3, ‘‘Safeguarding of Naval Nuclear Propulsion Information’’ (available at: https://www.secnav.navy.mil/doni/ Directives/09000%20General%20Ship%20Design%20and%20Support/09- 200%20Propulsion%20Plants%20Support/ N9210.3%20(Unclas%20Portion).pdf). Naval Reactors, a joint DOE/Department of Navy organization established under 50 U.S.C. 2406 and 2511, is responsible for the protection of this information.

All contracts which grant access to NNPI must require compliance with the specific safeguarding requirements contained in OPNAVINST N9210.3. All waivers or deviations involving security requirements protecting NNPI require Naval Reactors’ concurrence. Classified NNPI may not be processed on any contractor information system unless approved by the cognizant authorizing authority with concurrence from Naval Reactors.

§ 117.24 Cognizant Security Office information.

(a) DoD. Refer to the DCSA website (https://www.dcsa.mil) for a listing of office locations and areas of responsibility and for information on verification of facility clearances and safeguarding. In those cases where the cleared facility is located on a DoD installation the applicable DCSA field office can advise if the installation commander is providing security oversight.

TABLE 1 TO PARAGRAPH (a) DOD COGNIZANT SECURITY OFFICE

Designation Office name Mailing address Telephone No.

Headquarters, CSO ................................ Defense Counterintelligence and Secu-rity Agency.

27130 Telegraph Rd., Quantico, VA 22134.

(888) 282–7682

(b) DOE.

TABLE 2 TO PARAGRAPH (b) DOE COGNIZANT SECURITY OFFICES

Designation Office name Mailing address Telephone No.

Headquarters .......................................... Headquarters Office of Security Oper-ations (AU–40).

19901 Germantown Road, German-town, MD 20874.

(301) 903–2177

CSO, Clearance Agency, Central Verification Activity, Adjudicative Au-thority, and PCL and FCL databases.

DOE/National Nuclear Security Admin-istration Office of Personnel and Fa-cility Clearances and Classifications.

Pennsylvania & H Street, Kirtland Air Force Base, Albuquerque, NM 87116.

(505) 845–4154

CSO ........................................................ U.S. Department of Energy, Idaho Op-erations Office.

850 Energy Drive, Idaho Falls, ID 83401.

(208) 526–2216

TABLE 3 TO PARAGRAPH (b) DOE COGNIZANT SECURITY OFFICES CONTINUED

Designation Office name Mailing address Telephone No.

CSO, Naval Nuclear Propulsion Infor-mation.

Director, Naval Reactors ....................... NA–30, 1240 Isaac Hull Ave., SE., Washington Navy Yard, DC 20376.

(202) 781–6297

CSO ........................................................ U.S. Department of Energy, Office of Science Consolidated Service Center.

200 Administration Road, P.O. Box 2001, Oak Ridge, TN 37830.

(865) 576–2140

CSO ........................................................ U.S. Department of Energy, Pacific Northwest Site Office.

902 Battelle Boulevard, Richland, WA 99354.

(888) 375–7665

CSO ........................................................ U.S. Department of Energy, Richland Operations Office.

825 Jadwin Avenue, P.O. Box 550, Richland, WA 99352.

(509) 376–7411

CSO ........................................................ U.S. Department of Energy, Savannah River Operations Office.

Road 1A, Aiken, SC 29801 ................... (803) 725–6211

(c) NRC.

TABLE 4 TO PARAGRAPH (c) NRC COGNIZANT SECURITY OFFICES

Designation Mailing address Telephone No.

CSO, Adjudicative Authority, PCL and FCL databases, and Industrial Security Program.

U.S. Nuclear Regulatory Commission, ATTN: Director of Fa-cilities and Security, Washington, DC 20555.

(301) 415–8080

CSO, FCL Database and Industrial Security Program for Li-censees.

U.S. Nuclear Regulatory Commission, ATTN: Information Security Branch, 11555 Rockville Pike, Rockville, MD 20853.

(301) 415–7048

Clearance Agency ................................................................... U.S. Nuclear Regulatory Commission, ATTN: Director of Fa-cilities and Security Personnel Security, 11545 Rockville Pike, Rockville, MD 20853.

(301) 415–8080

Central Verification Agency ..................................................... U.S. Nuclear Regulatory Commission, ATTN: Director of Se-curity Facilities Security, 11545 Rockville Pike, Rockville, MD 20853.

(301) 415–8080

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(d) DHS.

TABLE 6 TO PARAGRAPH (d) DHS COGNIZANT SECURITY OFFICE

Designation Mailing address Telephone No.

CSO ......................................................................................... DHS Cognizant Security Office, ATTN: Chief Security Offi-cer, 245 Murray Lane, M/S 0120–3, Washington, DC 20528.

(202) 447–5424; (202) 447–5345

Dated: December 11, 2020. Patricia L. Toppings, OSD Federal Register Liaison Officer, Department of Defense. [FR Doc. 2020–27698 Filed 12–18–20; 8:45 am]

BILLING CODE 5001–06–P

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Indian Tribe in which that biological parent was enrolled.

(e) If trust personalty does notdescend under paragraph (d) of this section, then:

(1) To the Indian Tribe in which thedecedent’s biological grandparents were enrolled; if all enrolled biological grandparents were enrolled in the same Tribe;

(2) To the Indian Tribes in which thedecedent’s biological grandparents were enrolled, in equal shares, if two or more of the decedent’s biological grandparents were enrolled in different Tribes; or

(3) If only one biological grandparentwas enrolled in an Indian Tribe, to the Indian Tribe in which that biological grandparent was enrolled.

(f) If trust personalty does not descendunder paragraph (e) of this section, then to an Indian Tribe selected by the judge, in consideration of the following factors:

(1) The origin of the funds in thedecedent’s IIM account;

(2) The Tribal designator contained inthe owner identification number or IIM account number assigned to the decedent by BIA; and

(3) The geographic origin of thedecedent’s Indian ancestors.

Tara Sweeney, Assistant Secretary—Indian Affairs. Scott Cameron, Principal Deputy Assistant Secretary for Policy, Management and Budget. [FR Doc. 2020–28306 Filed 1–6–21; 8:45 am]

BILLING CODE 4337–15–P

DEPARTMENT OF DEFENSE

Office of the Secretary

32 CFR Part 158

[Docket ID: DOD–2020–OS–0015]

RIN 0790–AK81

Operational Contract Support (OCS) Outside the United States

AGENCY: Office of the Under Secretary of Defense for Acquisition and Sustainment, Department of Defense (DoD). ACTION: Proposed rule.

SUMMARY: The DoD is issuing this rule to update the policies and procedures for operational contract support (OCS) outside the United States. These changes include broadening the range of applicable operational scenarios, eliminating content internal to the Department, and making updates to comply with law and policy. Changes

include designating contractor personnel as part of the DoD total force, incorporating requirements for accountability and reporting, and clarifying responsibilities. Through these updates, the Department will also address open recommendations from the Government Accountability Office (GAO). OCS is a segment of the GAO High Risk Area of DoD Contract Management and while the latest update in March 2019 acknowledged progress, GAO cited the need to revise and reissue guidance to address several open recommendations. DATES: Comments must be received by March 8, 2021. ADDRESSES: You may submit comments, identified by docket number and/or Regulatory Information Number (RIN) number and title, by any of the following methods:

• Federal Rulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.

• Mail: DoD cannot receive writtencomments at this time due to the COVID–19 pandemic. Comments should be sent electronically to the docket listed above.

Instructions: All submissions received must include the agency name and docket number or RIN for this Federal Register document. The general policy for comments and other submissions from members of the public is to make these submissions available for public viewing on the internet at http://www.regulations.gov as they are received without change, including any personal identifiers or contact information.

FOR FURTHER INFORMATION CONTACT: Ms. Donna M. Livingston, 703–692–3032, donna.m.livingston.civ@mail.mil. SUPPLEMENTARY INFORMATION:

I. Executive Summary

A. Purpose of the Rule

The Joint Force relies on contractedsupport in nearly every mission and operational setting. Operational Contract Support (OCS) is how the Department plans for and integrates contracted capabilities and associated contractor personnel providing support to operations within a designated geographic area. Since 2007, the Department has been heavily focused on better oversight, management, and accounting of contractors supporting U.S. military operations. Concurrently, there has been increasing demand from commanders for more visibility of contractor personnel. Successfully planning for, procuring, and integrating contracted support requires that

commanders have a full understanding of what contracted support is needed and when; how requirements can be optimized and executed; and how the Department includes contracted support as part of the total force. The existing part describes, in detail, the specific DoD policy, responsibilities, and procedures that enable and substantiate OCS and enable both the DoD and its commercial partners to plan for contractor support when operating with U.S. Armed Forces in applicable operations. Contractors are currently required to load their employees’ information in the Synchronized Pre- deployment Operational Tracker— Enterprise System (SPOT–ES) when an employee deploys under a contract to support U.S. military operations overseas, and this revision neither increases nor decreases the burden of this requirement. The changes resulting from the revised rule increase transparency of new policies and better inform the DoD’s commercial partners.

B. BackgroundOperational contract support was

born in the aftermath of significant reporting on DoD acquisition and contracting operations in Iraq and Afghanistan, including the 2008 ‘‘Commission on Army Acquisition and Program Management in Expeditionary Operations’’ and the 2011 ‘‘Commission on Wartime Contracting in Iraq and Afghanistan.’’ The Commission on Wartime Contracting in Iraq and Afghanistan published findings that identified deficiencies related to contract management and oversight that required DoD’s attention. As a result, the DoD has invested heavily in efforts to address these findings and enhance oversight, better define contract requirements, and improve the visibility and accounting of contractors supporting U.S. operations overseas. There has been persistent scrutiny of the DoD’s progress to close these deficiencies, namely by the GAO. The GAO has reviewed the Departments’ progress on OCS on multiple occasions, and classified OCS as a segment within the DoD Contract Management High Risk Area. In the last report (GAO–19– 157SP) published in March 2019 (available at https://www.gao.gov/ products/GAO-19-157SP), GAO recognized the progress made on OCS and affirmed that it could remove its high-risk status. Removal could come quickly once the DoD successfully completes the few remaining GAO recommendations. By implementing the GAO recommendations, updating internal policies especially DoD Instruction 3020.41 ‘‘Operational

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Contract Support’’ (available at https:// www.esd.whs.mil/Portals/54/ Documents/DD/issuances/dodi/ 302041p.pdf), and revising this CFR part, the DoD will address the vital need for greater efficiency and accountability. Improved policy and guidance will foster an environment focused on operational planning of contracted support to operations and improved readiness, and will result in cost savings by reducing the potential for waste, fraud, and abuse.

C. Summary of Major Provisions

This proposed rule: (1) Broadens thetypes of operations when contracted support may be employed, beyond contingency operations; (2) describes and clarifies contractors’ responsibilities related to theater admission requirements for their personnel deploying in support of operations outside the United States; (3) clarifies contractors’ responsibilities to provide personnel who meet specific medical and dental fitness standards; (4) details the services the U.S. Government is authorized to provide to contractors; and (5) removes all internally facing information to promote efficiency and streamline communication with the public.

To address GAO recommendations to improve the ability to track contracts and contractor personnel in contingency and other operations and to help ensure that DoD possesses the capability to collect and report statutorily required information and to clarify responsibilities and procedures, § 158.5(g) was updated to address SPOTminimum reporting requirements,system requirements, and references tothe SPOT business rules were includedwhich include area specificrequirements.

D. Legal Authority

The legal authority for this rule isfound in Section 861, Memorandum of Understanding on Matters Relating to Contracting, of the National Defense Authorization Act for Fiscal Year 2008 (Pub. L. 110–181), and Section 854, Additional Contractor Requirements and Responsibilities Relating to Alleged Crimes By or Against Contractor Personnel in Iraq and Afghanistan, of the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 (Pub. L. 110–417).

II. Regulatory HistoryAn interim final rule for this part was

published on December 29, 2011 (76 FR 81807). The DoD adopted the interim final rule as a final rule without change on December 3, 2013 (78 FR 72573). The 2011 rule action procedurally closed gaps that existed in planning, oversight, and management of DoD contractors supporting contingency operations. The rule was necessary to address legislative mandates, remove confusion with other policies, and better reflect the practices and procedures in place at that time. The rule was crucial at the time due to the sustained employment of a large number of contractors in the U.S. Central Command area of responsibility; the importance of contractor oversight in support of counter-insurgency operations in Afghanistan; and the requirement to manage contractors effectively during the withdrawal of U.S. forces from Iraq in 2011.

III. Regulatory Analysis

A. Regulatory Planning and Review

a. Executive Orders

Executive Order 12866, ‘‘Regulatory Planning and Review,’’ and Executive Order 13563, ‘‘Improving Regulation and Regulatory Review’’

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distribute impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This rule has been designated a ‘‘not significant regulatory action’’ and has been determined not to be economically significant under section 3(f) of Executive Order 12866.

Executive Order 13771, ‘‘Reducing Regulation and Controlling Regulatory Costs’’

This rule is not significant under Executive Order 12866; therefore, it is not subject to the requirements of Executive Order 13771.

b. SummaryThis rule broadens the range of

operations in which contracted support

may be employed; updates requirements for the development of contractor oversight plans; increases visibility and accountability; reinforces requirements for adequate military personnel necessary to execute contract oversight; and describes U.S. Government standards for medical care available to deployed contractor personnel, when authorized. It also updates policy resulting from changes in law and policy. Lastly, the rule has been streamlined to show only information relevant to the public and removes internally facing responsibilities and procedures.

c. Affected Population

The existing rule providesinformation relevant to contractors and their personnel that may provide contracted support to the DoD during applicable operations outside the United States. The following populations are expected to continue to be stakeholders in the content of the revised rule:

D Contractor personnel—Provides information and describes the requirements the DoD imposes on employees of commercial industry partners who may be employed in support of DoD operations conducted outside the United States.

D CCompanies or organizations— Provides information for commercial industry partners to understand how contractor personnel are managed and accounted for and includes deployment requirements necessary to provide support to DoD in applicable operations.

d. Costs

A negligible burden reduction to thepublic may be achieved by the clarifications and increased transparency provided by this revision. Contractors may save time by having increased access to DoD policy requirements and in avoiding unnecessary duplication or providing personnel not suitable or prepared to support applicable operations outside the United States. The changes implemented by this rule are not expected to alter significantly the baseline burden that was calculated as part of the most recent SPOT–ES system collection, Control Number 0704–0460, approved by the OMB in 2019 in accordance with the Public Law 96–511, ‘‘Paperwork Reduction Act.’’

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Collection instrument (SPOT database)

2016 approved estimates

2019 approved estimates

Estimation of Respondent Burden Hours

Number of Respondents ............................................................................................................... 1670 964. Number of Responses per Respondent ....................................................................................... 56 77. Number of Total Annual Responses ............................................................................................. 93,520 74,561. Response Time (Amount of time needed to complete the collection instrument) ....................... .5 .5. Respondent Burden Hours (Total Annual Responses multiplied by Response Time) Please

compute these into hours).46,760 37,291.

Labor Cost of Respondent Burden

Number of Responses .................................................................................................................. 93,520 74,561 (decrease of 18,959).

Response Time per Response ..................................................................................................... .5 .5. Respondent Hourly Wage ............................................................................................................. $36.00 $32.11. Labor Burden per Response (Response Time multiplied by Respondent Hourly Wage) ............ $18.00 $16.06. Total Labor Burden (Number of Respondents multiplied by Response Time multiplied by Re-

spondent Hourly Wage).$1,683,360 $1,197,077

(decrease of $486,283).

The burden and cost decreased due to contractor deployments to ongoing contingencies having been reduced since 2016. Thus, the number of responses required was reduced from 93,520 to 74,561. This drove the associated calculations down and resulted in a decrease in cost of $486,283. In addition, the difference in the respondent hourly range is attributed to the respondent labor category from a management labor category in 2016 to human resources specialist in 2019. Wage information is based on data from the Department of Labor Statistics (https://www.bls.gov/ oes/current/oes_nat.htm).

Based on data from the Federal Procurement Data System—Next Generation for contract actions for fiscal year 2019 with a place of performance outside the United States, approximately 15,742 of 2.4 million (or 1 percent), are to small businesses. This amounts to $2,438,406,319 of $36,747,264,771 (or less than 8 percent) of contracts obligated to small businesses worldwide.

e. Benefits

OCS is a force multiplier, givingcommanders more options, and supports force optimization. When properly planned for and integrated into operations, OCS can be leveraged to support the Secretary of Defense’s objective of restoring military readiness and to close any gaps in fulfilling requirements associated with maintenance, material, intelligence information, or translation services, which can be filled by either short- or long-term commercial capabilities. This rule most significantly improves and refines DoD policy for planning and integrating contracted support in applicable operations. The Department

has been working for more than a decade to establish OCS as a core defense capability; one that minimizes risk, increases readiness and flexibility, and improves effectiveness. This rule codifies policy that implements a programmatic approach and improves oversight of contracted support, reducing the likelihood that historical instances of waste, fraud, and abuse will be repeated. This rule furthermore ensures contractors supporting applicable operations are fully prepared to meet the requirements necessary to support operations outside the United States.

f. Alternatives

The DoD has considered the followingalternatives:

D No action—maintain the status quo. If no action is taken, the significant improvements made to accounting and managing, planning for, and overseeing contracted support will not be codified, raising the risk that past mismanagement will persist, resulting in significant waste, fraud, and abuse. In addition, the rule must be updated and published before an update to the associated DoD issuance, DoD Instruction 3020.41, ‘‘Operational Contract Support (OCS),’’ may be issued. Publishing the updated policy is required to remove the OCS element of DoD Contract Management as a GAO High-Risk Area.

D Publish proposed rule. Codify changes in policy and statute that result in improved management of contract requirements, contractor management and visibility and accountability of contractors. These improvements will support removing OCS as a sub-area under the GAO High Risk Area of DoD Contract Management.

In summary, if the status quo is maintained, resolution of the GAO recommendations cannot be implemented.

B. Public Law 96–354, ‘‘RegulatoryFlexibility Act’’ (5 U.S.C. 601)

The DoD certifies that this rule, if promulgated, does not have a significant economic impact on a substantial number of small entities. Based on data from the Federal Procurement Data System—Next Generation for contract actions for fiscal year 2019 with a place of performance outside the United States, approximately 15,742 of 2.4 million (or 1 percent), are to small businesses. This amounts to $2,438,406,319 of $36,747,264,771 (or less than 8 percent) of contracts obligated to small businesses worldwide. Therefore, the requirements of the Regulatory Flexibility Act do not apply.

C. Congressional Review ActThe Congressional Review Act, 5

U.S.C. 801 et seq. generally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report, which includes a copy of the rule, to each House of the Congress and to the Comptroller General of the United States. The DoD will submit a report containing the final rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States. A major rule cannot take effect until 60 days after it is published in the Federal Register. This rule is not a ‘‘major rule’’ as defined by 5 U.S.C. 804(2).

D. Sec. 202, Public Law 104–4,‘‘Unfunded Mandates Reform Act’’

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)

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(2 U.S.C. 1532) requires agencies to assess anticipated costs and benefits before issuing any rule whose mandates require spending in any one year of $100 million in 1995 dollars, updated annually for inflation. This rule will not mandate any requirements for State, local, or tribal governments.

E. Public Law 96–511, ‘‘PaperworkReduction Act’’ (44 U.S.C. Chapter 35)

It has been determined that 32 CFR part 158 does impose reporting or recordkeeping requirements under the Paperwork Reduction Act of 1995. This SPOT–ES system collection has been reviewed and approved by the OMB and assigned OMB Control Number 0704– 0460 (cleared through September 30, 2022). The SPOT–ES collection package encapsulated the requirement for all DoD, Department of State (DOS), and United States Agency for International Development (USAID) contractor personnel to register in the SPOT–ES database. Within the current collection, 87 percent of contractor personnel records were related to DoD contracts and less than 13 percent were from other government agencies. This collection of information does not require collection to be conducted in a manner inconsistent with the guidelines delineated in 5 CFR 1320.5(d)(2).

System of Records Notices (SORNs) and Privacy Impact Assessments (PIAs) (https://www.dmdc.osd.mil/appj/dwp/ documents.jsp) have been accomplished under SORN Identifier DMDC 18 DoD (https://dpcld.defense.gov/Privacy/ SORNsIndex/DOD-wide-SORN-Article- View/Article/570569/dmdc-18-dod/), ‘‘Synchronized Predeployment Operational Tracker Enterprise Suite.’’

F. Executive Order 13132, ‘‘Federalism’’

Executive Order 13132 establishescertain requirements that an agency must meet when it promulgates a proposed rule (and subsequent final rule) that imposes substantial direct requirement costs on State and local governments, preempts State law, or otherwise has federalism implications. The changes in this rule will not have a substantial effect on State and local governments and do not implicate federalism.

List of Subjects in 32 CFR Part 158

Accountability/visibility, Accounting, Armed forces, Combating trafficking in persons, Deployment and redeployment, Government contracts, Medical clearances, Passports and visas, Planning, Security measures, Support to contractors, Transportation.

■ Accordingly, 32 CFR part 158 is proposed to be revised to read asfollows:

PART 158—OPERATIONAL CONTRACT SUPPORT (OCS) OUTSIDE THE UNITED STATES

Sec. 158.1 Purpose. 158.2 Applicability. 158.3 Definitions. 158.4 Policy. 158.5 Procedures. 158.6 Guidance for contractor medical and

dental fitness.

Authority: Public Law 110–181; Public Law 110–417.

§ 158.1 Purpose.This part establishes policy, assigns

responsibilities, and provides procedures for operational contract support (OCS), including contract support integration, contracting support, management, and deployment of defense contractor personnel in applicable operations outside the United States.

§ 158.2 Applicability.This part applies to contracts and

contractor personnel supporting DoD Components operating outside the United States in contingency operations, humanitarian assistance, or peace operations and other activities, including operations and exercises as determined by a Combatant Commander or as directed by the Secretary of Defense.

§ 158.3 Definitions.Unless otherwise noted, the following

terms and their definitions are for the purposes of this part.

Acquisition. The acquiring by contract with appropriated funds of supplies or services (including construction) by and for the use of the Federal Government through purchase or lease, whether the supplies or services are already in existence or must be created, developed, demonstrated, and evaluated. Acquisition begins at the point when agency needs are established and includes the description of requirements to satisfy agency needs, solicitation and selection of sources, award of contracts, contract financing, contract performance, contract administration, and those technical and management functions directly related to the process of fulfilling agency needs by contract.

Applicable operations. Contingency operations, humanitarian assistance, or peace operations conducted outside the United States and other activities, including operations and exercises outside the United States as determined

by a combatant commander (CCDR) or as directed by the Secretary of Defense.

Austere environment. Areas where applicable operations may be conducted that are in remote, isolated locations, where access to modern comforts and resources may be limited or non- existent.

Civil augmentation program. External support contracts designed to augment Military Department logistics capabilities with contracted support in both preplanned and short-notice operations.

Contingency contract. A legally binding agreement for supplies, services, and/or construction let by a U.S. Government contracting officer in the operational area, or that has a prescribed area of performance within an operational area.

Contingency operation. A military operation that is either designated by the Secretary of Defense as a contingency operation or becomes a contingency operation as a matter of law as defined in 10 U.S.C. 101(a)(13).

Contract administration. The processes and procedures of contracting, from contract award through closeout, that includes oversight efforts by contracting professionals and designated non-contracting personnel to ensure that supplies, services, and/or construction are delivered and/or performed in accordance with the terms and conditions of the contract.

Contract support integration. The coordination and synchronization of contracted support executed in a designated operational area in support of military operations.

Contracting. Purchasing, renting, leasing, or otherwise obtaining supplies or services from nonfederal sources. Contracting includes description (but not determination) of supplies and services required, selection and solicitation of sources, preparation and award of contracts, and all phases of contract administration. It does not include making grants or cooperative agreements.

Contracting officer. A person with the authority to enter into, administer, and/ or terminate contracts and make related determinations and findings. The term includes certain authorized representatives of the contracting officer acting within the limits of their authority as delegated by the contracting officer. ‘‘Administrative contracting officer (ACO)’’ refers to a contracting officer who is administering contracts. ‘‘Termination contracting officer (TCO)’’ refers to a contracting officer who is settling terminated contracts. A single contracting officer may be responsible for duties in any or all of these areas.

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Contracting Officer’s Representative (COR). An individual, including a contracting officer’s technical representative (COTR), designated and authorized in writing by the contracting officer to perform specific technical or administrative functions.

Contracting support. The coordination of contracts and execution of contracting authority by a warranted contracting officer that legally binds commercial entities to perform contractual requirements in support of DoD operational requirements.

Contractor management. The oversight and integration of contractor personnel and associated equipment providing support to military operations.

Contractor personnel. Any individual, employed by a firm, corporation, partnership, or association, employed under contract with the DoD to furnish services, supplies, or construction. Contractor personnel may include U.S. citizens and host nation and third country national (TCN) individuals.

Contractor personnel accountability. The process of identifying, capturing, and recording the personally identifiable information and assigned permanent duty location of an individual contractor employee through the use of a designated database.

Contractor personnel visibility. Information on the daily location, movement, status, and identity of contractor personnel.

Contractors Authorized to Accompany the Force (CAAF). Contractor personnel and all tiers of subcontractor personnel authorized to accompany U.S. Armed Forces in applicable operations outside of the United States who have been afforded this status through the issuance of a Letter of Authorization (LOA). CAAF generally include all U.S. citizen and TCN employees not normally residing within the operational area whose area of performance is in the direct vicinity of the U.S. Armed Forces and who are routinely co-located with the U.S. Armed Forces. In some cases, CCDR subordinate commanders may designate mission-essential host nation (HN) or local national (LN) contractor personnel (e.g., interpreters) as CAAF. CAAF includes contractor personnel previously identified as contractors deploying with the force. CAAF status does not apply to contractor personnel within U.S. territory working in support of contingency operations outside the United States.

Defense contractor. Any individual, firm, corporation, partnership, association, or other legal non-Federal entity that enters into a contract directly

with the DoD to furnish services, supplies, or construction.

DoD Components. Includes the Office of the Secretary of Defense, the Military Departments, the Office of the Chairman of the Joint Chiefs of Staff (CJCS) and the Joint Staff, the Combatant Commands (CCMDs), the Office of the Inspector General of the Department of Defense, the Defense Agencies, and the DoD Field Activities.

Essential contractor service. A service provided by a firm or an individual under contract to the DoD to support mission-essential functions, such as support of vital systems, including ships owned, leased, or operated in support of military missions or roles at sea; associated support activities, including installation, garrison, and base support services; and similar services provided to foreign military sales customers under the Security Assistance Program. Services are essential if the effectiveness of defense systems or operations has the potential to be seriously impaired by the interruption of these services, as determined by the appropriate functional commander or civilian equivalent.

Expeditionary Contract Administration (ECA). Contract administration conducted during joint or other expeditionary operations. Formerly known as the Contingency Contract Administrative Services or CCAS.

Expeditionary operations. Activities organized to achieve a specific objective in a foreign country.

External support contracts. Contracts awarded by contracting organizations whose contracting authority does not derive directly from the theater support contracting head(s) of contracting activity or from systems support contracting authorities.

Host nation (HN). A nation that permits, either in writing or other official invitation, government representatives or agencies and/or agencies of another nation to operate, under specified conditions, within its borders.

Hostile environment. Operational environment in which local government forces, whether opposed to or receptive to operations that a unit intends to conduct, do not have control of the territory and population in the intended operational area.

Isolated personnel. U.S. military, DoD civilians, and contractor personnel (and others designated by the President or Secretary of Defense) who are unaccounted for as an individual or a group while supporting an applicable operation and are, or may be, in a

situation where they must survive, evade, resist, or escape.

Law of war. The treaties and customary international law binding on the United States that regulate: The resort to armed force; the conduct of hostilities and the protection of war victims in international and non- international armed conflict; belligerent occupation; and the relationships between belligerent, neutral, and non- belligerent States. Sometimes also called the ‘‘law of armed conflict’’ or ‘‘international humanitarian law,’’ the law of war is specifically intended to address the circumstances of armed conflict.

Letter of authorization (LOA). A document issued by a contracting officer or his or her designee that authorizes contractor personnel to accompany the force to travel to, from, and within an operational area, and outlines U.S. Government authorized support authorizations within the operational area, as agreed to under the terms and conditions of the contract. For more information, see 48 CFR subpart 225.3.

Local national (LN). An individual who is a permanent resident of the nation in which the United States is conducting operations.

Long-term care. A variety of services that help a person with comfort, personal, or wellness needs. These services assist in the activities of daily living, including such things as bathing and dressing. Sometimes known as custodial care.

Mission-essential functions. Those organizational activities that must be performed under all circumstances to achieve DoD component missions or responsibilities, as determined by the appropriate functional commander or civilian equivalent. Failure to perform or sustain these functions would significantly affect the DoD’s ability to provide vital services or exercise authority, direction, and control.

Non-CAAF. Personnel who are not designated as CAAF, such as LN employees and non-LN employees who are permanent residents in the operational area or TCNs not routinely residing with the U.S. Armed Forces (and TCN expatriates who are permanent residents in the operational area), who perform support functions away from the close proximity of, and do not reside with, the U.S. Armed Forces. U.S. Government-furnished support to non-CAAF is typically limited to force protection, emergency medical care, and basic human needs (e.g., bottled water, latrine facilities, security, and food when necessary) when performing their jobs in the direct vicinity of the U.S. Armed Forces.

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Operational area. An overarching term encompassing more descriptive terms (such as area of responsibility and joint operations area) for geographic areas where military operations are conducted.

Operational contract support (OCS). The ability to orchestrate and synchronize the provision of integrated contract support and management of contractor personnel providing support to command-directed operations within a designated operational area.

Operationally critical support. A critical source of supply for airlift, sealift, intermodal transportation services, or logistical support that is essential to the mobilization, deployment, or sustainment of the U.S. Armed Forces in applicable operations.

Prime contractor. Any supplier, distributor, vendor, or firm that has entered into a contract with the United States government.

Replacement centers. Centers at selected installations that ensure necessary accountability, training, and processing actions are taken to prepare personnel for onward movement and deployment to a designated operational area.

Requiring activity. A military or other designated supported organization that identifies the need for and receives contracted support to meet mission requirements during military operations.

Subcontractor. Any supplier, distributor, vendor, or firm that furnishes supplies or services to or for a prime contractor or another subcontractor.

Synchronized Pre-deployment Operational Tracker-Enterprise System (SPOT–ES). A common joint database used to maintain contractor personnel visibility and accountability in applicable operations. References to SPOT–ES in this part will refer to that system or any database system that supersedes it for use in OCS.

Systems support contract. Contracts awarded by Military Service acquisition program management offices that provide fielding support, technical support, maintenance support, and, in some cases, repair parts support, for selected military weapon and support systems.

Theater business clearance. A CCDR policy or process to ensure visibility of and control over systems support and external support contracts executing or delivering support in designated areas of operations.

Theater support contract. A type of contract awarded by contracting officers deployed to an operational area serving under the direct contracting authority of

the Military Service component, special operations force command, or designated joint contracting authority for the designated operation.

Total force. The organizations, units, and individuals that comprise the DoD resources for implementing the National Security Strategy. It includes DoD Active and Reserve Component military personnel, military retired members, DoD civilian personnel (including foreign national direct- and indirect- hires, as well as nonappropriated fund employees), contractors, and host-nation support personnel. (For source information, see paragraph (a) of appendix A to this part.)

Uncertain environment. Operational environment in which host government forces, whether opposed to or receptive to operations that a unit intends to conduct, do not have totally effective control of the territory and population in the intended operational area.

§ 158.4 Policy.

It is DoD policy that:(a) Defense contractor personnel are

part of the total force. (See paragraph (a) of appendix A of this part).

(b) DoD Components implement OCSfunctions, including contract support integration, contracting support, and contractor management, during applicable operations.

(c) DoD Components will usecontracted support only in appropriate situations, consistent with 48 CFR subpart 7.5, 48 CFR subpart 207.5, and Office of Federal Procurement Policy (OFPP) Policy Letter 11–01 (available at https://www.federalregister.gov/ documents/2011/09/12/2011-23165/ publication-of-the-office-of-federal- procurement-policy-ofpp-policy-letter- 11-01-performance-of), and paragraph(b) of appendix A to this part.

(d) Generally, contractors areresponsible for providing their employees with all life, mission, medical, logistics, and administrative support necessary to perform the contract. However, in many operations, especially in those in which conditions are austere, hostile, and/or non- permissive, the contracting officer may decide it is in the interest of the U.S. Government to allow for selected life, mission, medical, logistics, and administrative support to be provided to contractor personnel to ensure continuation of essential contractor services. Contractors authorized to accompany the force (CAAF) may receive U.S. Government-furnished support commensurate with the operational situation in accordance with the terms of the contract.

(e) A common joint database (i.e., theSynchronized Predeployment and Operational Tracker-Enterprise Suite (SPOT–ES) or its successor) will be used to maintain contractor personnel visibility and accountability in applicable operations. References to SPOT–ES in this part will refer to that system or any database system that supersedes it for contractor personnel visibility and accountability.

(f) Solicitations and contracts will:(1) Require defense contractors to

provide personnel who are ready to perform contract duties in applicable operations and environments by verifying the medical, dental, and psychological fitness of their employees and, if applicable, by ensuring currency of any professional qualifications and associated certification requirements needed for employees to perform contractual duties.

(2) Incorporate contractual terms andclauses into the contract that are consistent with applicable host nation (HN) laws and agreements or designated operational area performance considerations.

(g) Contracts for highly sensitive,classified, cryptologic, or intelligence projects and programs must implement this rule to the maximum extent possible, consistent with applicable laws, Executive orders, presidential directives, and relevant DoD issuances. To the extent that contracting activities are unable to comply with this rule, they should submit a request for a waiver to the Under Secretary of Defense for Acquisition and Sustainment (USD(A&S)). Waiver requests should include specific information providing the rationale regarding the inability to comply with this rule.

§ 158.5 Procedures.

(a) Planning considerations andrequirements; requirements for publication. CCDRs will make management policies and specific OCS requirements for contractual support available to affected contractor personnel. The Geographic Combatant Commander (GCC) OCS web page will set forth the following:

(1) Theater business clearance (TBC)requirements for contracts currently being performed and delivering contracted support in the CCDR’s AOR.

(2) Restrictions imposed by applicablelocal laws, international law, status of forces agreements (SOFAs), and other agreements with the HN.

(3) CAAF-related deploymentrequirements, including, but not limited to:

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(i) Pre-deployment and requiredindividual protective equipment (IPE) training.

(ii) Physical health standards.(iii) Immunization and medical

requirements. (iv) Deployment procedures and

theater reception. (4) Reporting requirements for

accountability and visibility of contractor personnel and associated contracts.

(5) Operational security (OPSEC)plans and restrictions.

(6) Force protection policies.(7) Personnel recovery procedures.(8) Availability of medical and other

authorized U.S. Government support (AGS).

(9) Redeployment procedures,including disposition of U.S. Government-furnished equipment.

(b) Contractual relationships. Thecontract provides the only legal basis for the contractual relationship between the DoD and the contractor. The contracting officer is the only individual with the legal authority to enter into such a binding relationship with the contractor.

(1) Commanders have the ability torestrict installation access, and contractor personnel must comply with applicable CCDR and local commander force protection policies. However, military commanders or unit personnel do not have contracting authority over contractors or contractor personnel and may not direct contractors or contractor personnel to perform contractual tasks. Moreover, the contract does not provide a basis for commanders to exercise operational control or tactical control over contractors or their personnel or to assign or attach contractors or their personnel to a command or organization.

(2) The contract must specify:(i) The terms and conditions under

which the contractor is to perform, including minimum acceptable professional and technical standards.

(ii) The method by which thecontracting officer will notify the contractor of the deployment procedures to process contractor personnel who are deploying to the operational area.

(iii) The specific contractual supportterms and agreement between the contractor and DoD.

(iv) The appropriate flow-down ofprovisions and clauses to subcontractors and state that the service performed by contractor personnel is not considered to be active duty or active service. For more information, see paragraph (c) in appendix A to this part, and 38 U.S.C. 106, ‘‘Active Duty Service

Determinations for Civilian or Contractual Groups.’’

(3) The contract must containapplicable clauses to ensure efficient deployment, accountability, visibility, protection, and redeployment of contractor personnel and detail authorized levels of health service, sustainment, and other support that is authorized to be provided to contractor personnel supporting applicable operations outside the United States.

(c) Restrictions on contractorsperforming inherently governmental functions. (1) Paragraph (c) of appendix A of this part, 48 CFR subpart 7.5, 48 CFR subpart 207.5; Public Law 105–270 and Office of Management and Budget Circular No. A–76 (available at https:// www.whitehouse.gov/sites/ whitehouse.gov/files/omb/circulars/ A76/a76_incl_tech_correction.pdf) bar inherently governmental functions and duties from private sector performance.

(2) Contractor personnel may providesupport during applicable operations, including, but not limited to:

(i) Transporting munitions and othersupplies.

(ii) Providing communicationssupport.

(iii) Performing maintenancefunctions for military equipment.

(iv) Providing force protection andprivate security services.

(v) Providing foreign languageinterpretation and translation services.

(vi) Providing logistics services, suchas billeting and messing.

(vii) Intelligence surveillance andreconnaissance support.

(viii) Commercial air assets.(3) The requiring official will review

each service performed by contractor personnel in applicable operations on a case-by-case basis to ensure compliance with paragraph (b) of appendix A of this part and applicable laws and international agreements.

(4) Restrictions on use of contractorpersonnel for private security services. A contractor may be authorized to provide private security services only if such authorization is consistent with applicable U.S., local, and international law, including applicable agreements with the HN or other applicable international agreements, and 32 CFR part 159. For more information, see paragraph (b) of appendix A of this part and 48 CFR subpart 252.2, which provide specific procedures and guidance.

(d) Combating trafficking in persons.Trafficking in persons is a violation of U.S. law and internationally recognized human rights, and is incompatible with DoD core values.

(1) 48 CFR subpart 222.17 and 48 CFR52.222–50 also known and referred to as Combating Trafficking in Persons, describe how contractors, contracting officers and their representatives, and commanders must deter activities such as prostitution, forced labor, and other related activities contributing to trafficking in persons. For more information, see paragraph (d) of appendix A to this part.

(2) Contracts in support of applicableoperations will include terms and provisions that require that the contractor remove personnel from the performance of the contract and return any of its personnel who have been determined to have engaged in any of the activities mentioned in paragraph (h)(4)(v)(H) of this section from the operational area to the home of record, point of origin, or an authorized location at the end of contract performance or sooner as directed by the contracting officer. Once notified of such an incident, the contracting officer will notify the commander responsible in the AOR and provide any information required to support an investigation. For more information, see 48 CFR subpart 222.17.

(e) CAAF designation, legal status,credentialing, and security clearance requirements—(1) CAAF designation. (i) CAAF designation is provided to contractor personnel, including all tiers of subcontractor personnel, through a letter of authorization (LOA). CAAF generally include all U.S. citizen and third country national (TCN) employees not normally residing within the operational area whose area of performance is in the direct vicinity of the U.S. Armed Forces and who routinely are co-located with the U.S. Armed Forces, especially in non- permissive environments. Personnel co- located with the U.S. Armed Forces will be afforded CAAF status through an LOA.

(ii) In some cases, CCDRs orsubordinate commanders may designate mission-essential HN or LN contractor personnel as CAAF unless otherwise precluded by HN law, a SOFA, or other agreement. In general, LNs are only afforded CAAF status when they assume great personal risk to perform an essential function.

(iii) Personnel who do not receive aCAAF designation are referred to as non-CAAF. Individuals’ CAAF status may change depending on where their employers or the provisions of their contract details them to work. CAAF designation may affect, but does not necessarily affect, a person’s legal status under the law of war and the treatment to which that person is entitled under

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the 1949 Geneva Conventions if that person falls into the power of the enemy during international armed conflict. Although CAAF are regarded as ‘‘persons authorized to accompany the armed forces,’’ personnel who are not CAAF may also receive this status under the law of war. For more information, see § 4.15 of paragraph (e) of appendix A of this part. In addition, although CAAF designation and access to AGS often coincide, CAAF status does not determine AGS provided.

(2) Legal status. In implementing thispart, the DoD Component heads must abide by applicable laws, regulations, international agreements, and DoD policy as they relate to contractor personnel performing contractual support in support of applicable operations.

(i) HN and third country laws. Allcontractor personnel must comply with applicable HN and third country laws. The applicability of HN and third country laws may be affected by international agreements (e.g., agreements between the United States and the HN) and customary international law (e.g., limits imposed by customary international law on the reach of third country laws).

(A) U.S., HN, or other countries mayhire contractor personnel whose status may change (e.g., from non-CAAF to CAAF) depending on where in the operational AOR their employers or the provisions of their contracts detail them to work.

(B) CCDRs, as well as subordinatecommanders, Military Service Component commanders, the Directors of the Defense Agencies, and Directors of DoD Field Activities should recognize limiting factors regarding the employment of LN and TCN personnel. Limiting factors include, but are not limited to:

(1) Imported labor worker permits.(2) Workforce and hour restrictions.(3) Medical, life, and disability

insurance coverage. (4) Taxes, customs, and duties.(5) Cost of living allowances.(6) Hardship differentials.(7) Access to classified information.(8) Hazardous duty pay.(ii) U.S. laws. U.S. citizens and CAAF,

with some exceptions, are subject to U.S. laws and U.S. Government regulations.

(A) All U.S. citizen and TCN CAAFare subject to potential prosecutorial action under the criminal jurisdiction of the United States, including, but not limited to, 18 U.S.C. 3261, also known and referred to in this part as the Military Extraterritorial Jurisdiction Act of 2000 (MEJA). MEJA extends U.S.

federal criminal jurisdiction to certain contractor personnel for offenses committed outside U.S. territory.

(B) The March 10, 2008, Secretary ofDefense Memorandum states that contractor personnel are subject to prosecution pursuant to 10 U.S.C. Chapter 47, also known and referred to in this part as the Uniform Code of Military Justice (UCMJ), when serving overseas in support of a declared war or contingency, and provides guidance to commanders on the exercise of this UCMJ jurisdiction.

(C) Other U.S. law may allowprosecution of offenses by contractor personnel (e.g., 18 U.S.C. 7).

(3) 1949 Geneva Conventions. The1949 Geneva Conventions, including the Geneva Convention Relative to the Treatment of Prisoners of War, may be applicable to certain contractor personnel who fall into the power of the enemy during international armed conflict.

(i) All contractor personnel may be atrisk of injury or death incidental to enemy actions while supporting military operations.

(ii) Contractor personnel with CAAFstatus will receive an appropriate identification card required by the Geneva Convention Relative to the Treatment of Prisoners of War, consistent with paragraph (f) of appendix A to this part.

(iii) CAAF may be used in support ofapplicable operations, consistent with the terms of U.S. Government authorization. If they fall into the power of the enemy during international armed conflict, contractor personnel with CAAF status are entitled to prisoner of war status.

(4) Credentialing. Contracts mustrequire CAAF to receive an identification card with the Geneva Convention’s category of persons authorized to accompany the armed forces. For more information, see paragraphs (f) through (h) of appendix A to this part. At the time of identification card issuance, CAAF must present their SPOT–ES-generated LOA as proof of eligibility.

(i) Sponsorship must incorporate theprocesses for confirming eligibility for an identification card. The sponsor is the person affiliated with the DoD or another Federal agency that takes responsibility for verifying and authorizing an applicant’s need for a Geneva Convention identification card. A DoD official or employee must sponsor applicants for a common access card (CAC).

(ii) Individuals who have multipleDoD personnel category codes (e.g., an individual who is both a reservist and

a contractor) will receive a separate identification card in each personnel category for which they are eligible. Individuals under a single personnel category code may not hold multiple current identification cards of the same form.

(5) Security clearance requirements.To the extent necessary, the contract must require the contractor to provide personnel who have the appropriate security clearance or who are able to satisfy the appropriate background investigation requirements to obtain access required to perform contractual requirements in support of the applicable operation.

(f) Considerations for support tocontractors—(1) U.S. Government support. Generally, contracts supporting applicable operations must require contractors to provide to their personnel all life, mission, medical, and administrative support necessary to perform the contractual requirements and meet CCDR guidance posted on the GCC OCS web page. In some operations, especially those in which conditions are austere, uncertain, or non-permissive, the CCDR may decide it is in the U.S. Government’s interest for the DoD to allow contractor personnel access to selected AGS. The contract must state the level of access to AGS in its terms and conditions.

(i) In operations where conditions areaustere, uncertain, or non-permissive, the contracting officer will consult with the requiring activity to determine if it is in the U.S. Government’s interests to allow for selected life, mission, medical, and administrative support to certain contractor personnel.

(ii) The solicitation and contract mustspecify the level of AGS that the U.S. Government will provide to contractor personnel and what support provided to the contractor personnel is reimbursable to the U.S. Government.

(iii) Access to DoD benefits facilitatedby the identification card may be granted to contractors under certain circumstances. For more information, see paragraph (i) of appendix A to this part.

(2) IPE. When necessary or directedby the CCDR, the contracting officer will include language in the contract authorizing the issuance of military IPE (e.g., chemical, biological, radiological, nuclear (CBRN) protective ensemble, body armor, ballistic helmet) to contractor personnel as part of AGS.

(i) Typically, IPE will be issued by thecentral issue facility at the deployment center before deployment to the designated operational area and must be accounted for and returned to the U.S. Government or otherwise accounted for,

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in accordance with appropriate DoD Component regulations, directives, and instructions.

(ii) Contractor personnel deploymenttraining will include training on the proper care, fitting, and maintenance of protective equipment, whether issued by the U.S. Government or provided by the contractor in accordance with the contractual requirements. This training will include practical exercises within mission-oriented protective posture levels.

(iii) When the terms and conditions ofa contract require a contractor to provide IPE, such IPE must meet minimum standards as defined by the contract.

(3) Clothing. Contractors, or theirpersonnel, must provide their own personal clothing, including casual and work clothing required to perform the contract requirements.

(i) Generally, CCDRs will notauthorize the issuance of military clothing to contractor personnel or will not allow the wearing of military or military look-alike uniforms. Contractor personnel are prohibited from wearing military clothing unless specifically authorized in writing by the CCDR. However, a CCDR or subordinate joint force commander (JFC) deployed forward may authorize contractor personnel to wear standard uniform items for operational reasons. Contracts must include terms and clauses that require that this authorization be provided in writing by the CCDR and that the uniforms are maintained in the possession of authorized contractor personnel at all times.

(ii) When commanders issue any typeof standard uniform item to contractor personnel, care must be taken to ensure that contractor personnel are distinguishable from military personnel through the use of distinctive patches, arm bands, nametags, or headgear, consistent with force protection measures, and that contractor personnel carry the CCDR’s written authorization with them at all times.

(4) Weapons. Contractor personnel arenot authorized to possess or carry firearms or ammunition during applicable operations, except as provided in paragraph (h)(2)(ii) of this section and 32 CFR part 159. The contract will provide the terms and conditions governing the possession of firearms by contractor personnel. Information on all weapons authorized for contractors and their personnel will be entered into the SPOT–ES database.

(5) Mortuary affairs. The DoDMortuary Affairs Program, as described in paragraph (j) of appendix A to this part, covers all CAAF who die while

performing contractual requirements in support of the U.S. Armed Forces. Mortuary affairs support and transportation will be provided on a reimbursable basis for the recovery, identification, and disposition of remains and personal effects of CAAF.

(i) Every effort must be made toidentify remains and account for un- recovered remains of contractor personnel and their dependents who die in military operations, training accidents, and other incidents. The remains of contractor personnel who die as the result of an incident in support of military operations are afforded the same dignity and respect afforded to military remains. For more information, see paragraph (k) of appendix A to this part.

(ii) The DoD may provide mortuaryaffairs support and transportation on a reimbursable basis for the recovery, identification, and disposition of remains and personal effects of non- CAAF at the request of the Department of State (DOS) and in accordance with this rule, applicable agreements with the HN, and applicable contract provisions. The Under Secretary of Defense for Personnel and Readiness (USD(P&R)) will coordinate this support with the DOS, including for cost reimbursement to the DoD Component for the provision of this support.

(iii) The responsibility forcoordinating the transfer of non-CAAF remains to the HN or affected nation resides with the GCC in coordination with the DOS, through the respective embassies, or through the International Committee of the Red Cross, the International Federation of the Red Cross or Red Crescent Societies, as appropriate, and in accordance with applicable contract clauses.

(6) Medical support and evacuation.Generally, the DoD will provide only resuscitative care, stabilization, and hospitalization at military medical treatment facilities (MTFs) and assistance with patient movement in emergencies where loss of life, limb, or eyesight could occur. The DoD Foreign Clearance Guide (FCG) and the GCC OCS web pages contain theater-specific contract language to provide contract terms to clarify available healthcare for contractor personnel. During operations in austere, uncertain, or hostile environments, CAAF may encounter situations in which they cannot access adequate medical support in the local area.

(i) All costs associated with thetreatment and transportation of contractor personnel to the selected civilian facility are reimbursable to the U.S. Government and are the

responsibility of contractor personnel, their employers, or their health insurance providers. For more information, see paragraph (l) of appendix A to this part. Nothing in this paragraph is intended to affect the allowability of costs incurred under a contract.

(ii) Medical support and evacuationprocedures:

(A) All CAAF will normally beafforded emergency medical and dental care if injured while supporting applicable operations. Additionally, non-CAAF who are injured while in the vicinity of the U.S. Armed Forces while supporting applicable operations also normally will receive emergency medical and dental care. Emergency medical and dental care includes medical care situations in which life, limb, or eyesight is jeopardized. Examples of emergency medical and dental care include:

(1) Examination and initial treatmentof victims of sexual assault.

(2) Refills of prescriptions for life- dependent drugs.

(3) Repair of broken bones,lacerations, and infections.

(4) Traumatic injuries to the teeth.(B) MTFs normally will not authorize

or provide primary medical or dental care to CAAF. When required and authorized by the CCDR or subordinate JFC, this support must be specifically authorized under the terms and conditions of the contract and detailed in the corresponding LOA. Primary care is not authorized for non-CAAF. Primary care includes:

(1) Routine inpatient and outpatientservices.

(2) Non-emergency evacuation.(3) Pharmaceutical support (with the

exception of emergency refills of prescriptions for life-dependent drugs).

(4) Non-emergency dental services.(5) Other medical support, as

determined by the CCDR or JFC based on recommendations from the cognizant medical authority and the existing capabilities of the forward-deployed MTFs.

(C) The DoD will not provide long- term care to contractor personnel.

(D) The CCDR or subordinatecommander has the authority to quarantine or restrict movement of contractor personnel. For more information, see paragraph (m) of appendix A to this part.

(E) When CAAF are evacuated formedical reasons from the designated operational area to MTFs funded by the Defense Health Program, normal reimbursement policies will apply for services rendered by the facility. If CAAF require medical evacuation

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outside the United States, the sending MTF staff will assist the CAAF in making arrangements for transfer to a civilian facility of the CAAF’s choice. When U.S. forces provide emergency medical care to LN contractor personnel, these patients will use HN transportation means, when possible, for evacuation or transportation to their local medical systems. For more information, see paragraph (n) of appendix A to this part.

(7) Other AGS. 48 CFR subpart 225.3lists types of support that may be authorized for contractor personnel who are deployed with or otherwise provide support to applicable operations, which may include transportation to and within the operational area, mess operations, quarters, phone service, religious support, and laundry.

(i) Contractor personnel of U.S.owned-contractors who are supporting DoD activities may be authorized the use of the military postal service. For more information, see paragraph (o) of appendix A to this part. The extent of postal support will be set forth in the contract. The provisions for postal support in such contracts must be reviewed and approved by the applicable CCDR, or the designated representative, and the Military Department concerned before execution of the contract.

(ii) Morale, welfare, and recreationand exchange services are authorized for contractor personnel who are U.S. citizens supporting DoD activities outside the United States. For more information, see paragraphs (p) and (q) of appendix A to this part.

(g) Accountability and visibility ofcontracts and contractor personnel. (1) During applicable operations, contractors will use SPOT–ES as follows:

(i) All CAAF will register in SPOT–ESby name.

(ii) Non-CAAF will be registered inSPOT–ES by name if they are performing on a DoD contract for at least 30 consecutive days unless a lesser number of days is requested by the CCDR or if they require access to a U.S. or coalition-controlled installation. Contracting officers will ensure non- CAAF who require access to U.S. or coalition-controlled installations are registered in SPOT–ES before requesting or receiving installation access.

(iii) All private security contractorpersonnel and all other contractor personnel authorized to carry weapons, regardless of the length of the performance or contract value, will register in SPOT–ES by name.

(iv) During operations other thancontingency operations, humanitarian

assistance, or peace operations, contractors will use SPOT–ES in situations required by the CCDR and as follows:

(2) To account for:(i) All U.S. citizen and TCN contractor

personnel. (ii) All private security contractor

personnel and all other contractor personnel authorized to carry weapons, where the designated area and place of performance are outside the United States, regardless of the length of performance or contract value.

(3) The contracting officer willaccount for an estimated total number of LNs employed under the contract, by country or on a monthly basis.

(4) Contract linguists will register inSPOT–ES in the same manner as other contractor personnel and will also be tracked using the Contract Linguist Enterprise-wide Database. For more information, see paragraph (r) of appendix A to this part.

(5) LNs should be registered in SPOT–ES by name to improve data quality and reduce confusion during a transition to accountability requirements during a contingency operation, which will require by-name accountability.

(6) The DoD has designated SPOT–ESas the joint web-based database to assist the CCDRs in maintaining awareness of the nature, extent, and potential risks and capabilities associated with contracted support for contingency operations, humanitarian assistance, and peacekeeping operations, or military exercises designated by the CCDR. To facilitate integration of contractors and other personnel, as directed by the USD(A&S) or the CCDR, and to ensure the accurate forecasting and provision of accountability, visibility, force protection, medical support, personnel recovery, and other related support, the following procedures will help establish, maintain, and validate the accuracy of information in the database.

(i) SPOT–ES will:(A) Serve as the central repository for

deployment status and reporting on the contractor personnel as well as other U.S. Government agency contractor personnel, as applicable. For additional information, see paragraph (s) of appendix A to this part.

(B) Track information for all DoDcontracts that are awarded in support of applicable operations outside of the United States, in accordance with the SPOT Business Rules and as directed by the USD(A&S), 48 CFR subpart 225.3, or the CCDR. SPOT–ES will collect and report on:

(1) The total number of contractorpersonnel working under contracts

entered into as of the end of each calendar quarter.

(2) The total number of contractorpersonnel performing security functions under contracts entered into with the DoD.

(3) The total number of contractorpersonnel killed or wounded who were performing under any contracts entered into with the DoD.

(C) Provide personnel accountabilityvia unique identifier (e.g., Electronic Data Interchange Personnel Identifier or Foreign Identification Number) of contractor personnel and other personnel, as directed by the USD(A&S), 48 CFR subpart 225.3, or the CCDR.

(D) Contain, or link to, minimumcontract information necessary to:

(1) Establish and maintainaccountability of the personnel in paragraph (g) of this section.

(2) Maintain information on specificequipment related to the performance of private security contracts.

(3) Maintain oversight information onthe contracted support in applicable operations.

(E) Comply with:(1) The personnel identity protection

program requirements found in paragraphs (t) and (u) of appendix A to this part.

(2) The DoD Information Enterprisearchitecture. For more information, see paragraph (v) of appendix A to this part.

(3) The interoperability and securesharing of information requirements found in paragraphs (w) through (y) of appendix A to this part.

(ii) Before registering in SPOT–ES,contracting officers, company administrators, and U.S. Government administrators or authorities must meet minimum training requirements in the SPOT Business Rules.

(iii) The contractor must enter allrequired data into SPOT–ES before its employees may deploy to or enter a theater of operations, and maintain such data, as directed by the USD(A&S), 48 CFR subpart 225.3, or the CCDR.

(iv) The contracting officer will enterthe DoD contract services or capabilities for all contracts that are awarded in support of applicable operations, including theater support, external support, and systems support contracts, into SPOT–ES consistent with 48 CFR 252.225–7040.

(v) In accordance with applicableacquisition policy and regulations and under the terms and conditions of each affected contract, all contractors awarded contracts that support applicable operations must input employee data and maintain accountability, by name, of designated

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contractor personnel in SPOT–ES as required by 48 CFR 252.225–7040.

(A) Contractors must maintain currentstatus of the daily location of their employees and, when requested, submit to the COR up-to-date, real-time information reflecting all personnel deployed or to be deployed in support of applicable operations.

(B) Prime contractors must enter up- to-date information regarding their subcontractors at all tiers into SPOT–ES.

(vi) In all cases, users providingclassified information in response to the requirements of this part must report and maintain that information on systems approved for the level of classification of the information provided.

(7) The contracting officer or his orher designee will ensure a SPOT–ES- generated LOA has been issued to all CAAF who are approved to deploy, as required by 48 CFR 252.225–7040, and selected non-CAAF (e.g., LN and non- LN employees who are permanent residents in the operational area, or TCNs not routinely residing with the U.S. Armed Forces who perform support functions away from the close proximity of, and do not reside with, the U.S. Armed Forces, and private security contractors), pursuant to 48 CFR subpart 225.3, or as otherwise designated by the CCDR.

(i) The contract will require that allcontractor personnel issued an LOA carry the LOA with them at all times.

(ii) Reserved.(h) Theater admission requirements.

Special area, country, and theater personnel clearance documents must be current, in accordance with the DoD FCG, and coordinated with affected agencies to ensure that entry requirements do not adversely affect accomplishment of mission requirements.

(1) CAAF employed in support of DoDmissions are considered DoD-sponsored personnel for DoD FCG purposes.

(2) Contracting officers must ensurecontracts include a requirement for contractor personnel to meet theater personnel clearance requirements and obtain personnel clearances through the Aircraft and Personnel Automated Clearance System before entering a designated theater of operations. For more information, see paragraph (z) of appendix A to this part.

(3) Contracts must require contractorpersonnel to obtain proper identification credentials, such as passports, visas, and other documents required to enter and exit a designated operational area, and have a required Geneva Conventions identification card,

or other appropriate DoD credential from the deploying center.

(i) Deployment procedures. Contractsmust contain terms and conditions that detail the need for contractors to follow these credentialing requirements, as required by 48 CFR subpart 225.3, 48 CFR 252.225–7040, and as outlined in the DoD FCG. At a minimum, contracting officers must ensure that contracts address operational area- specific contract requirements and the means by which the DoD will inform contractor personnel of the requirements and procedures applicable to their deployment.

(1) Deployment center designation. Aformally designated group, joint, or Military Department deployment center will be used to conduct deployment and redeployment processing for CAAF, unless contractor-performed theater admission preparation is authorized or waived by the CCDR or designee pursuant to DoDI 3020.41, ‘‘Operational Contract Support (OCS).’’ If the contract contains clauses that specify another U.S. Government-authorized process that incorporates all the functions of a deployment center, such process may also be used by a contractor to conduct deployment and redeployment processing for CAAF.

(2) Medical preparation. (i) Inaccordance with 32 CFR 158.7, contracts must require that contractors provide medically and physically qualified contractor personnel to perform duties in applicable operations, as outlined in the contract.

(A) Any CAAF deemed unsuitable todeploy during the deployment process due to medical or dental reasons will not be authorized to deploy.

(B) The Secretary of Defense maydirect immunizations as mandatory for CAAF performing essential contractor services.

(C) For contracts that employ CAAFwho are U.S. citizens, the contract must require that contractors make available the medical and dental records of deploying employees who authorize release for this purpose based on this section, applicable cognizant medical authority guidance, and relevant Military Department policy. These records should include current panographic x-rays. For more information see paragraph (aa) of appendix A to this part.

(ii) U.S. Government personnel maynot involuntarily immunize contractor personnel or require contractor personnel to disclose their medical records involuntarily. Therefore, the contracting officer will provide contractors time to notify and/or hire employees who voluntarily consent to

U.S. Government medical requirements, including to receiving U.S. Government- required immunizations and disclosing their private medical information to the U.S. Government.

(iii) All CAAF will receive medicalthreat pre-deployment briefings at the deployment center to communicate health risks and countermeasures in the designated operational area. For more information, see paragraph (bb) of appendix A to this part.

(A) In accordance with GCC or JFCplans and orders, contracts must include terms and conditions that fully specify health readiness and force health protection capability, either as a responsibility of the contractor or the DoD Components, to ensure appropriate medical staffing in the operational area.

(B) Health surveillance activities mustinclude plans for CAAF. For more information, see paragraphs (bb) and (cc) of appendix A to this part. Section158.7 of this rule further addressesdeoxyribonucleic acid (DNA) collectionand other medical requirements.

(3) Training. Joint training policy andguidance for the Military Services, including contractors, is provided. For more information, see paragraph (dd) of appendix A to this part. CCDRs will place standing training requirements on the GCC OCS web pages for reference by contractors. Other training requirements that are specific to an applicable operation will be placed on the GCC OCS web pages shortly after identifying the requirement so that contracting officers can incorporate the training requirement into the appropriate contracts as soon as possible. Training requirements:

(i) Must be included, or incorporatedby reference in contracts employing contractor personnel supporting applicable operations.

(ii) Include specific requirementsestablished by the CCDR and training required in accordance with this rule, 32 CFR part 159, and paragraphs (ee) through (hh) of appendix A to this part.

(4) Deployment center procedures.Affected contracts must require that all CAAF deploying from outside the operational area process through a designated deployment center or a U.S. Government-authorized, contractor- performed deployment processing facility before deploying to an applicable operation and redeploy in the same manner. Upon receiving the contracted company’s certification that employees meet deployability requirements, the contracting officer or representative will digitally sign the LOA, which CAAF will then present to officials at the deployment center. The

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deployment process includes, but is not limited to:

(i) Verifying registration in SPOT–ES.(ii) Issuing applicable U.S.

Government-furnished equipment. (iii) Verifying the completion of

medical and dental screening before arrival.

(iv) Administering required theater- specific immunizations and medications not available through healthcare providers in the general public.

(v) Verifying and, when necessary,providing required training, country and cultural awareness briefings, and other training and briefings, as required by the CCDR. Examples of required training include, but are not limited to:

(A) Law of war, including the 1949Geneva Conventions.

(B) Law and policy applicable todetainee operations and intelligence interrogation operations, as appropriate.

(C) General orders.(D) Standards of conduct.(E) Force protection.(F) Personnel recovery.(G) First aid.(H) Combatting trafficking in persons.(I) OPSEC.(J) Anti-terrorism.(K) Counterintelligence reporting.(L) The use of CBRN protective

ensemble. (M) Deployment health threats

briefing. (5) Certification. Contracts supporting

applicable operations must include terms and conditions requiring contractors to certify to the authorized U.S. Government representative, before deployment, that each individual has completed all required deployment processing actions.

(6) Legal. Contractor personnel are notentitled to military legal assistance in- theater or at the deployment center. Individual contractor personnel must have their personal legal affairs in order (e.g., preparing and completing powers of attorney, wills, trusts, and estate plans) before reporting to deployment centers.

(7) Waivers. For required contractedsupport of 17 days or less in an operational area, the CCDR or designee may waive a portion of the formal procedural requirements pursuant to DoDI 3020.41, ‘‘Operational Contract Support (OCS),’’ which may include the CCDR or designee waiving the requirement in writing for processing through a deployment center. However, the CCDR or designee may not waive the requirements to possess proper identification cards and to establish and maintain accountability for all contractor personnel, or any medical requirement without the prior approval

of the cognizant medical authority or their designee. If a contract authorizes contractor personnel to be armed, the requirements of paragraphs (c)(4) and (k)(2) of this section may not be waived.

(j) Reception—(1) Designatedreception site. In applicable operations, all CAAF must enter into the operational area through a designated reception site.

(i) Based upon a visual inspection ofthe LOA, the site will verify that contractor personnel are entered in SPOT–ES and meet theater-specific entry requirements.

(ii) Contractor personnel already inthe designated operational area when a contingency is declared must report to the designated reception site as soon as it is operational based on the terms and conditions of the contract.

(iii) When entering a designatedreception site for theater entry processing, if any CAAF does not have the proper documentation to perform in an area, he or she will be refused entry into the theater, and the contracting officer will notify the contractor to take the necessary action to resolve the issue. Should the contractor fail to take action, the CAAF individual will be sent back to his or her departure point, or directed to report to the Military Service Component command or Defense Agency responsible for that specific contract for theater entrance processing.

(2) Contractor integration. It is criticalthat CAAF brought into an operational area are properly integrated into the military operation through a formal reception process. At a minimum, they will:

(i) Meet theater entry requirementsand be authorized to enter the theater.

(ii) Be accounted for in SPOT–ES.(iii) Possess any required IPE,

including CBRN protective ensemble. (iv) Be authorized any contractually

required AGS and force protection. (k) In-theater management—(1)

Conduct and discipline. Contract terms and conditions must require that CAAF comply with CCDR theater orders, applicable directives, laws, and regulations. Non-CAAF who require base access to perform contractual requirements must follow base force protection and security-related procedures, as applicable.

(i) The contracting officer mayappoint a designee (usually a COR) as a liaison between the contracting officer and the contractor and requiring activity. This designee monitors and reports contractor performance and requiring activity concerns to the contracting officer. In emergency situations (e.g., enemy or terrorist actions or natural disaster), the

cognizant military commander may recommend or issue warnings or messages urging contractor personnel to take emergency actions to remove themselves from harm’s way or to take other appropriate self-protective measures. During armed conflict, contractor personnel are not exempt from the authority that commanders may exercise to control the movement of persons and vehicles within the immediate vicinity of operations. For more information, see §§ 5.2.2.1, 13.8, and 14.6 of paragraph (e) of appendix A to this part.

(ii) The contractor is responsible fordisciplining contractor personnel, as necessary and appropriate. However, in accordance with paragraph (h)(1) of 48 CFR 252.225–7040, the contracting officer may direct the contractor, at its own expense, to remove and replace any contractor personnel who jeopardize or interfere with mission accomplishment, who threaten force protection measures, or who fail to comply with or violate applicable requirements of the contract. Such action may:

(A) Include contractor personnelwhose actual field performance (certification or professional standard) is below the contractual requirement.

(B) Be taken at U.S. Governmentdiscretion without prejudice to the contractor’s rights under any other provision of the contract. A commander also has the authority to take certain actions affecting contractor personnel, such as the ability to revoke or suspend security access or impose restrictions from access to military installations or specific worksites.

(iii) CAAF, or individuals employedby or accompanying the Military Services outside the United States, are subject to potential prosecutorial action under the criminal jurisdiction of the United States, pursuant to Sections 7, 2441, 2442, or 3261 of Title 18, U.S.C., or other provisions of U.S. law, including the UCMJ.

(A) Commanders possess significantauthority to act whenever criminal acts are committed by anyone subject to the MEJA and UCMJ that relates to or affects the commander’s responsibilities. This includes situations in which the alleged offender’s precise identity or actual affiliation is undetermined. The March 10, 2008, Secretary of Defense Memorandum provides guidance to commanders on the exercise of this UCMJ jurisdiction over DoD contractor personnel serving with or accompanying the U.S. Armed Forces overseas during declared war and in contingency operations.

(B) Contracting officers will ensurethat contractors are aware of their

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employees’ status and liabilities as CAAF and the required training associated with this status.

(C) CCDRs retain authority to respondto an incident, restore safety and order, investigate, apprehend suspected offenders, and otherwise address the immediate needs of the situation.

(iv) The Department of Justice mayprosecute misconduct under applicable Federal laws, including MEJA and 18 U.S.C. 2441. Contractor personnel also are normally subject to the domestic criminal law of the local country. When confronted with disciplinary problems involving contractor personnel, commanders should seek the assistance of their legal staff, the contracting officer responsible for the contract, and the contractor’s management team.

(v) In the event of an investigation ofreported offenses allegedly committed by or against contractor personnel, appropriate investigative authorities will keep the contracting officer informed, to the extent possible without compromising the investigation, if the alleged offense has a potential contract performance implication.

(2) Force protection and weaponsissuance. CCDRs must include contractor personnel in their force protection planning and communicate the results to contracting activities and contractors via the GCC OCS web page. In general, contractors are responsible for the security of their own personnel. Contractor personnel working within a U.S. military facility or in close proximity to the U.S. Armed Forces may receive incidentally the benefits of measures taken to protect the U.S. Armed Forces. For more information, see paragraph (ee) of appendix A to this part. However, where additional security is needed to achieve force protection, and it is not operationally or cost effective for contractors to do so individually, the commander may determine it is in the interests of the U.S. Government to provide security for contractor personnel. When security is provided through military means, contractor personnel should receive a level of force protection equal to that of DoD civilian employees.

(i) When the CCDR deems militaryforce protection and legitimate civil authority are unavailable or insufficient, he or she may authorize, in writing, contractor personnel to be armed for self-defense purposes only. In authorizing contractor personnel to be armed, the contractor, the armed contractor personnel, and the U.S. military must adhere to:

(A) Applicable U.S., HN, andinternational law;

(B) Relevant SOFAs and otheragreements;

(C) Other arrangements with localauthorities; and

(D) The rules for the use of force, andguidance and orders regarding the possession, use, safety, accountability of weapons and ammunition that are issued by the CCDR.

(ii) Depending on the operationalsituation and the specific circumstances of contractor personnel, the contractor may apply for its personnel to be armed for self-defense purposes on a case-by- case basis. The appropriate Staff Judge Advocate (or their designee) to the CCDR will review all applications to ensure there is a legal basis for approval. In reviewing applications, CCDRs will apply the criteria mandated for arming contractor personnel for private security services consistent with 32 CFR part 159.

(A) In such cases, the contractor willvalidate to the contracting officer, or designee, that the contractor personnel have received weapons familiarization, qualification, and briefings regarding the rules for the use of force, in accordance with CCDR policies.

(B) Acceptance of weapons bycontractor personnel is voluntary. In accordance with paragraph (j) of 48 CFR 252.225–7040, the contract must require contractors to ensure that applicable U.S. law does not prohibit personnel from possessing firearms.

(C) Contracts must require allcontractor personnel to comply with applicable CCDR and local commander force protection policies. When armed for personal protection, the contract may only authorize contractor personnel to use force for self-defense and must require contractors to ensure that U.S. law does not prohibit its personnel from possessing firearms, in accordance with paragraph (j) of 48 CFR 252.225–7040. Unless not subject to local laws or HN jurisdiction by virtue of an international agreement or customary international law, the contract must include terms and conditions setting forth that the inappropriate use of force could subject contractor personnel to U.S. and/or local or HN prosecution and civil liability.

(3) Personnel recovery, missingpersons, and casualty reporting. (i) The DoD personnel recovery program applies to all CAAF regardless of their citizenship. For more information, see paragraph (ii) of appendix A to this part. If a CAAF individual becomes isolated or unaccounted for, the contractor must promptly file a search and rescue incident report to the theater’s personnel recovery architecture (e.g., the component personnel recovery

coordination cell or the CCMD joint personnel recovery center).

(ii) Upon recovery following anisolating event, a CAAF returnee must enter the first of the three phases of reintegration. For more information, see paragraph (jj) of appendix A to this part. The contractor must offer the additional phases of reintegration to the returnee to ensure his or her physical and psychological well-being while adjusting to the post-captivity environment.

(iii) The contractor must report allCAAF and non-CAAF casualties. For more information, see paragraph (s) of appendix A to this part.

(l) Redeployment procedures. Theconsiderations in this section apply during the redeployment of CAAF. At the end of the performance period of a contract, or in cases of early redeployment, CAAF must complete the redeployment process to adjust AGS requirements and turn in U.S. Government-provided equipment.

(1) Preparation for redeployment.CAAF must complete intelligence out- briefs and customs and immigration briefings and inspections in accordance with CCDR policy and applicable HN law. CAAF are subject to customs and immigration processing procedures at all designated stops and their final destination during their redeployment. CAAF returning to the United States are subject to U.S. reentry customs requirements in effect at the time of reentry.

(2) Transportation out of theater. Theterms and conditions of the contract will state whether the U.S. Government will provide transportation out of theater.

(i) Upon completion of thedeployment or other authorized release, the U.S. Government must provide contractor personnel transportation from the theater of operations to the location from which they deployed, in accordance with each individual’s LOA and unless otherwise directed. If commercial transportation is not available, it should be stated in the LOA in accordance with paragraph (l) of appendix A to this part. CAAF are also required to depart from the operational area through the designated reception site.

(ii) Before redeployment, thecontractor personnel, through his or her contractor, will coordinate exit times and transportation with the continental U.S. replacement center or designated reception site.

(3) Redeployment center procedures.In most instances, the deployment center or site that prepared the CAAF for deployment will serve as the return

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processing center. As part of CAAF redeployment processing, the designated reception site personnel will screen contractor records, recover U.S. Government-issued identification cards and equipment, and conduct debriefings, as appropriate. The returning CAAF will spend the minimum amount of time possible at the return processing center in order to complete the necessary administrative procedures.

(i) Contractor personnel must returnall U.S. Government-issued identification and access badges (e.g., badges, key cards, and other access devices, including CACs).

(ii) Contractor personnel must returnany issued clothing and equipment and report any lost, damaged, or destroyed clothing and equipment in accordance with procedures of the issuing facility. Contractor personnel also will receive a post-deployment medical briefing on signs and symptoms of potential diseases (e.g., tuberculosis (TB)). As some countries hosting an intermediate staging base may not permit certain items to enter their territory, certain clothing and equipment, whether issued by the contractor, purchased by the employee, or provided by the DoD, may not be permitted to be removed from the AOR. In this case, CCDR or JFC guidance and contract terms and conditions will provide alternate methods of accounting for U.S. Government-issued equipment and clothing.

(4) Update to SPOT–ES. Contractingofficers or their designated representatives must verify that contractors have updated SPOT–ES to reflect their employee’s change in status within three days of a contractor employee’s redeployment, close out the deployment, and collect or revoke the LOA.

(5) Transportation to homedestination. Transportation of CAAF from the deployment center or site to their home destinations is the employer’s responsibility.

§ 158.6 Guidance for contractor medicaland dental fitness.

(a) General. (1) DoD contractsrequiring the deployment of CAAF must include medical and dental fitness requirements as specified in this section. Under the terms and conditions of their contracts, contractors will employ personnel who meet such medical and dental requirements. Replacement of non-medically qualified contractor personnel already deployed to theater will be at the contractor’s cost.

(2) The GCC concerned will establishforce health protection policies and

programs for the protection of all forces assigned or attached to their command in accordance with force health protection (FHP) standards and applicable medical and dental standards of fitness in order to promote and sustain a healthy and fit force. For more information, see paragraph (kk) of appendix A to this part. When the requiring activity requests exceptions to these standards through the contracting officer, the CCDR concerned will establish a process for reviewing such exceptions and ensuring that a mechanism is in place to track and archive all approved and denied waivers, including the medical condition supporting the basis for the waiver.

(3) The GCC concerned will ensurethat processes and procedures are in place to remove contractor personnel in theater who are not medically qualified, once so identified by a healthcare provider. The GCC concerned will ensure development of appropriate procedures and criteria for requiring removal of contractor personnel identified as ‘‘no longer medically qualified,’’ and post such language on the GCC OCS web page. Contracting officers will incorporate the language into clauses for all contracts for performance in the AOR.

(4) Unless otherwise stated in thecontract terms and conditions, all medical evaluations and treatment are the contractor’s responsibility.

(b) Medical and dental evaluations.(1) All CAAF deploying in support of anapplicable operation must be medically,dentally, and psychologically fit fordeployment pursuant to paragraph (kk)of appendix A to this part and CCDRguidance. Fitness specifically includesthe ability to accomplish the tasks andduties unique to a particular operationand the ability to tolerate theenvironmental and operationalconditions of the deployed location.Under the terms and conditions of theircontracts, contractors will employmedically, dentally, and psychologicallyfit contractor personnel to performcontractual duties.

(2) All CAAF must undergo a medicaland dental assessment within 12 months before arrival at the designated deployment center or U.S. Government- authorized contractor-performed deployment processing facility. This assessment, conducted by the contractor’s medical health provider, should emphasize diagnosing system disease conditions (e.g., cardiovascular, pulmonary, orthopedic, neurologic, endocrinologic, dermatologic, psychological, visual, auditory, dental) that may preclude the CAAF from

performing the functional requirements of the contract, especially in the austere work environments encountered in some applicable operations.

(3) CAAF will receive a health threatand countermeasures briefing from the applicable Military Service before deployment to the operational area. For more information, see paragraph (bb) of appendix A to this part.

(4) In general, CAAF who have any ofthe medical conditions listed in paragraph (j) of this section should not be deployed.

(5) Individuals who are deemed ‘‘notmedically fit’’ at the deployment center or at any period during the deployment process based upon an individual assessment by a licensed medical provider, or who require extensive preventive dental care (see paragraph (j)(2)(xxv) of this section), are not authorized to deploy.

(6) Non-CAAF shall be medicallyscreened by a U.S. Government designee when required by the requiring activity and the contract, for the class of labor under consideration (e.g., LNs working in a dining facility).

(7) Contracts will require contractorsto replace individuals who develop conditions that cause them to become medically unqualified to perform contractual requirements at any time during contract performance.

(8) Contracts must require that CAAFcomplete a post-deployment health assessment in the Defense Medical Surveillance System at the end of their deployment or within 30 days of redeployment. For more information, see paragraph (bb) of appendix A to this part.

(c) Glasses and contact lenses. (1) Ifcontractor personnel require vision correction, they must have two pairs of glasses, and if applicable, eyeglass inserts for a chemical protective mask. The contractor personnel may also provide a written prescription to the supporting military medical component in order to prepare eyeglass inserts for use in a compatible chemical protective mask. If the type of protective mask to be issued is known and time permits, the military medical component should attempt to complete the preparation of eyeglass inserts before deployment.

(2) Wearing contact lenses in a fieldenvironment is not recommended and is at the contractor personnel’s own risk due to the potential for irreversible eye damage caused by debris, chemical or other hazards present, and the lack of ophthalmologic care in a field environment.

(d) Medications. Other than thoseforce health protection prescription products provided by the U.S.

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Government to CAAF and selected non- CAAF, contracts must require that contractor personnel deploy with a minimum 90-day supply of any required medications obtained at their own expense. For more information, see paragraph (bb) of appendix A to this part.

(1) Contractor personnel must know that deployed medical units are equipped and staffed to provide emergency care to healthy adults and are unable to provide or replace many medications required for routine treatment of chronic medical conditions, such as high blood pressure, heart conditions, and arthritis.

(2) The contract must require contractor personnel to review both the amount of the medication and its suitability in the foreign area with their personal physician and make any necessary adjustments before deploying. The contract must also hold the contractor personnel responsible for the re-supply of required medications.

(e) Comfort items. The contract must require that contractor personnel take spare hearing-aid batteries, sunglasses, insect repellent, sunscreen, and any other supplies related to their individual physical requirements. DoD sources will not provide these items.

(f) Immunizations. A list of immunizations, both those required for entry into the designated area of operations and those recommended by medical authorities, will be produced by the cognizant medical authority for each deployment; posted to the GCC OCS web page and DoD FCG; and incorporated in contracts for performance in the designated AOR.

(1) The GCC, upon the recommendation of the cognizant medical authority, will provide contractor personnel who are deploying to the applicable theater of operation guidance and a list of immunizations required to protect against communicable diseases assessed to be a potential hazard to their health. The cognizant medical authority will prepare and maintain this list.

(2) The contract must require that CAAF be immunized appropriately before completing the pre-deployment process.

(3) During pre-deployment processing, the DoD will provide contractor personnel, at no cost to the contractor, any theater-specific immunizations and medications not available to the general public. Contractor personnel must obtain all other immunizations before arrival at the deployment center, documented on the International Certificate of Vaccinations of Prophylaxis as

approved by the World Health Organization or the Department of Health and Human Services Centers for Disease Control and Prevention Form 731. However, the contract must stipulate that CAAF and selected non- CAAF obtain all other necessary immunizations before their arrival at the deployment center. The TB skin test is required for all contractor personnel within three months before they are deployed.

(4) The DoD will provide theater- specific medical supplies and force health protection prescription products to CAAF and selected non-CAAF. Additionally, these personnel will receive deployment medication information sheets for all vaccines or deployment-related medications that are to be dispensed or administered.

(5) Contractors will ensure that individuals with a positive TB skin test be evaluated for targeted diagnosis and treatment of latent TB infection in accordance with the procedures outlined in the World Health Organization Guidelines on the Management of Latent Tuberculosis Infection.

(6) The contract must stipulate that CAAF and selected non-CAAF bring a current copy of the International Certificate of Vaccination or Prophylaxis to the pre-deployment processing center and to the operational area.

(g) Human Immunodeficiency Virus (HIV) Testing. HIV testing is not mandatory for contractor personnel unless specified by the GCC CCDR or by host nation requirements. HIV testing, if required, must occur within one year before deployment.

(h) Armed Forces Repository of Specimen Samples for the Identification of Remains (AFRSSIR). For identification of remains purposes, contractors whose CAAF members are U.S. citizens will obtain a dental panograph and will forward a specimen sample suitable for DNA analysis to, and ensure it is on file with, the AFRSSIR before or during deployment processing and recorded in SPOT–ES. The DoD Components must ensure that all contracts require CAAF who are U.S. citizens to provide DNA specimen samples for AFRSSIR as a condition of deployment. For more information, see paragraph (ll) of appendix A to this part.

(1) All CAAF who are U.S. citizens processing through a deployment center will have a DNA specimen sample collected and forwarded to the AFRSSIR for storage. Contracts must require contractors to verify in SPOT–ES or its successor that AFRSSIR has received the DNA specimen sample or that the

contractor has collected the DNA specimen sample.

(2) If CAAF who are U.S. citizens do not process through a deployment center, or the contractor is authorized to process its own personnel, the contract must require that the contractor collect and forward DNA specimen samples for all contractor personnel who are deployed as CAAF to the AFRSSIR. Regardless of what specimen collection and storage arrangements are made, all contractors deploying CAAF who are U.S. citizens must provide the CAAF’s name and Social Security number, location of the DNA specimen sample, facility contact information, and retrieval plan to AFRSSIR. If the AFRSSIR is not used and a CAAF who is a U.S. citizen becomes a casualty, the contractor must be able to retrieve identification media for use by the Armed Forces Medical Examiner (AFME) or other competent authority to conduct a medical-legal investigation of the incident and identification of the victim or victims. These records must be retrievable within 24 hours for forwarding to the AFME when there is a reported incident that would necessitate their use for identifying human remains. The contractor shall have access to the location of its employees’ fingerprint, medical, and dental records, including panographs.

(3) AFRSSIR is responsible for implementing special rules and procedures to ensure the protection of privacy interests in regards to the specimen samples and any DNA analysis of those samples. Specimen samples shall only be used for the purposes outlined in paragraph (ll) of appendix A to this part.

(i) Pre-existing medical conditions. All evaluations of pre-existing medical conditions should occur before contractor personnel deploy. Personnel who have pre-existing medical conditions may deploy if:

(1) The condition is not of such a nature it is likely to have a medically grave outcome or a negative impact on mission execution if it unexpectedly worsens.

(2) The condition is stable and reasonably anticipated by the pre- deployment medical evaluator not to worsen during the deployment under contractor-provided medical care in- theater in light of the physical, physiological, psychological, environmental, and nutritional effects of the duties and location.

(3) Any required ongoing health care or medications must be available or accessible to contractor personnel, independent of the military health system, and not be subject to special

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handling, storage, or other requirements (e.g., refrigeration requirements and/or cold chain, electrical power requirements) that cannot be met in the specific theater of operations.

(4) The condition does not and is not anticipated to require duty limitations that would preclude performance of contractual requirements or to require accommodation by the DoD component or requiring activity. When necessary, the cognizant medical authority (or delegated representative) is the appropriate authority to evaluate the suitability of an individual’s limitations in theater.

(5) There is no need for routine out- of-theater evacuation for continuing diagnostics or other evaluations.

(j) Conditions usually precluding medical clearance. This section is not intended to be comprehensive. A list of all possible diagnoses, including relevant severity levels that should preclude approval by the cognizant medical authority or designee would be too expansive to list in this part. These are minimum requirements. Contractor personnel may have additional medical clearance requirements based on their occupation and local laws. It is the responsibility of the contractor to ensure that its employees’ medical clearances comply with any applicable local occupation-specific medical requirements.

(1) In general, individuals with the conditions in paragraph (b) of § 158.7, based on an individual assessment pursuant to paragraph (bb) of appendix A to this part, will not normally be approved for deployment to provide contractual support in applicable operations. The medical evaluator must carefully consider whether climate; altitude; the nature of available food and housing available; the nature of medical, behavioral health, and dental services; or other environmental or operational factors may prove hazardous to the deploying person’s heath because of a known physical or mental condition.

(2) Medical clearance for deployment of persons with any of the conditions in this section shall be granted by the contracting officer only after consultation with the appropriate cognizant medical authority or a designated representative. The cognizant medical authority makes recommendations and serves as the GCC’s advisor on conditions precluding the medial clearance of deploying personnel; however, the geographic CCDR is the final approval or disapproval authority except as provided in paragraph (k)(3) of this section. The cognizant medical authority or designated representative

may determine if adequate treatment facilities and specialist support are available at the duty station for:

(i) Physical or psychological conditions resulting in the inability to wear IPE effectively, if wearing IPE may be reasonably anticipated or required in the deployed location.

(ii) Conditions that prohibit immunizations or use of force health protection prescription products required for the specific deployment. Depending on the applicable threat assessment, required force health protection prescription products, vaccines, and countermeasures may include atropine, epinephrine, and/or 2- pam chloride auto-injectors, certain antimicrobials, antimalarials, and/or pyridostigmine bromide.

(iii) Any chronic medical conditions that require frequent clinical visits, fail to respond to adequate conservative treatment, or necessitate significant limitation of physical activity.

(iv) Any medical conditions that require durable medical equipment or appliances or periodic evaluation or treatment by medical specialists not readily available in theater (e.g., Continuous Positive Airway Pressure (CPAP) machine for sleep apnea).

(v) Any unresolved acute or chronic illness or injuries that would impair duty performance in a deployed environment during the duration of the deployment.

(vi) Active TB or known blood-borne diseases that may be transmitted to others in a deployed environment. (For HIV infections, see paragraph (j)(2)(xvii) of this section.)

(vii) An acute exacerbation of a physical or mental health condition that could affect duty performance.

(viii) Recurrent loss of consciousness for any reason.

(ix) Any medical condition that could result in sudden incapacitation including a history of stroke within the last 24 months, seizure disorders, and diabetes mellitus type I or II, treated with insulin or oral hypoglycemic agents.

(x) Hypertension not controlled with medication or that requires frequent monitoring to achieve control.

(xi) Pregnancy. (xii) Cancers for which individuals

are receiving continuing treatment or that require periodic specialty medical evaluations during the anticipated duration of the deployment.

(xiii) Precancerous lesions that have not been treated or evaluated and that require treatment or evaluation during the anticipated duration of the deployment.

(xiv) Any medical conditions that require surgery or for which surgery has been performed that requires rehabilitation or additional surgery to remove devices.

(xv) Asthma that has a Forced Expiratory Volume-1 (FEV–1) of less than or equal to 50 percent of predicted FEV–1 despite appropriate therapy, that has required hospitalization at least two times in the last 12 months, or that requires daily systemic oral or injectable steroids.

(xvi) Any musculoskeletal conditions that significantly impair performance of duties in a deployed environment.

(xvii) HIV antibody positive with the presence of progressive clinical illness or immunological deficiencies. The contracting officer should consult the cognizant medical authority in all instances of HIV seropositivity before medical clearance for deployment.

(xviii) Hearing loss. The requirement for use of a hearing aid does not necessarily preclude deployment. However, the individual must have sufficient unaided hearing to perform duties safely.

(xix) Loss of vision. Best corrected visual acuity must meet job requirements to perform duties safely.

(xx) Symptomatic coronary artery disease.

(xxi) History of myocardial infarction within one year of deployment.

(xxii) History of coronary artery bypass graft, coronary artery angioplasty, carotid endarterectomy, other arterial stenting, or aneurysm repair within one year of deployment.

(xxiii) Cardiac dysrhythmias or arrhythmias, either symptomatic or requiring medical or electrophysiologic control, such as the presence of an implanted defibrillator and/or pacemaker.

(xxiv) Heart failure. (xxv) Individuals without a dental

exam within the last 12 months or who are likely to require dental treatment or reevaluation for oral conditions that are likely to result in dental emergencies within 12 months.

(xxvi) Psychotic and/or bipolar disorders. For detailed guidance on deployment-limiting psychiatric conditions or psychotropic medications, see paragraph (mm) of appendix A to this part.

(xxvii) Psychiatric disorders under treatment with fewer than three months of demonstrated stability.

(xxviii) Clinical psychiatric disorders with residual symptoms that impair duty performance.

(xxix) Mental health conditions that pose a substantial risk for deterioration

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or recurrence of impairing symptoms in the deployed environment.

(xxx) Chronic medical conditions thatrequire ongoing treatment with antipsychotics, lithium, or anticonvulsants.

(k) Exceptions to medical standards(waivers). If a contractor believes an individual CAAF with one of the conditions listed in paragraphs (j)(2)(i) through (xxx) of this section can accomplish his or her tasks and duties and tolerate the environmental and operational conditions of the deployed location, the contractor may request a waiver for that individual through the contracting officer to the CCDR for approval.

(1) It is unlikely that the CCDR willgrant waivers for contractor personnel. Thus, the contractor must provide an explanation as to why it has no other qualified employees available who meet the medical standards to fulfill the deployed duties. Contractors will include a summary of a detailed medical evaluation or consultation concerning the medical condition or conditions in the requests for waivers. Since maximization of mission accomplishment and the protection of the health of personnel are the ultimate goals, justification for the waiver will include:

(i) Statement indicating the CAAFindividual’s experience.

(ii) The position the CAAF individualwill occupy and the nature and scope of contractual duties assigned.

(iii) Any known specific hazards ofthe position.

(iv) Anticipated availability and needfor care while deployed.

(v) The benefit expected to accruefrom the waiver.

(2) Medical clearance to deploy orcontinue serving in a deployed environment for persons with any of the conditions in paragraphs (j)(2)(i) through (xxx) of this section must have the concurrence of the cognizant medical authority, or designee, who will recommend approval or disapproval to the GCC. The GCC, or designee, is the final decision authority for approvals and disapprovals.

(3) For CAAF employees workingwith Special Operations Forces personnel who have conditions in paragraphs (j)(2)(i) through (xxx) of this section, medical clearance may be granted by the contracting officer after consultation with the appropriate Theater Special Operations Command (TSOC) surgeon. The TSOC surgeon, in coordination with the CCMD cognizant medical authority and senior in-theater medical authority, will ascertain the capability and availability of treatment

facilities and specialist support in the general duty area versus the operational criticality of the particular SOF member. The TSOC surgeon will recommend approval or disapproval to the TSOC Commander. The TSOC Commander is the final approval or disapproval authority.

Appendix A to Part 158—Related Policies

The Operational Contract Support Outside the United States Program is supported by the following policies:

(a) DoD Directive 5124.02, ‘‘UnderSecretary of Defense for Personnel and Readiness (USD(P&R))’’ (available at https:// www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodd/512402p.pdf).

(b) DoD Instruction 1100.22, ‘‘Policy andProcedures for Determining Workforce Mix’’ (available at https://www.esd.whs.mil/ Portals/54/Documents/DD/issuances/dodi/ 110022p.pdf).

(c) DoD Directive 1000.20, ‘‘Active DutyService Determinations for Civilian or Contractual Groups’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodd/100020p.pdf).

(d) DoD Instruction, ‘‘CombatingTrafficking in Persons (CTIP)’’ (available at https://www.esd.whs.mil/Portals/54/ Documents/DD/issuances/dodi/ 220001p.pdf).

(e) DoD Law of War Manual (June 2015,Updated Dec. 2016) (available at https://ogc.osd.mil/images/law_war_manual_december_16.pdf).

(f) DoD Instruction 1000.01, ‘‘Identification(ID) Cards Required by the Geneva Conventions’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodi/100001p.pdf).

(g) DoD Instruction 1000.13, ‘‘Identification(ID) Cards for Members of the Uniformed Services, Their Dependents, and Other Eligible Individuals’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodi/100013p.pdf).

(h) DoD Manual 1000.13, ‘‘DoDIdentification (ID) Cards: ID Card Life-Cycle’’ Volume 1 (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodm/100013_vol1.pdf).

(i) DoD Manual 1000.13, ‘‘DoDIdentification (ID) Cards: ID Card Life-Cycle’’, Volume 2 (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodm/100013_vol2.pdf).

(j) DoD Directive 1300.22, ‘‘MortuaryAffairs Policy’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodd/130022p.pdf).

(k) DoD Instruction 1300.18, ‘‘Departmentof Defense (DoD) Personnel Casualty Matters, Policies, and Procedures’’ (available at https://www.esd.whs.mil/Portals/54/ Documents/DD/issuances/dodi/ 130018p.pdf).

(l) DoD Instruction 4515.13, ‘‘AirTransportation Eligibility’’ (available at https://www.esd.whs.mil/Portals/54/ Documents/DD/issuances/dodi/ 451513p.PDF).

(m) DoD Instruction 6200.03, ‘‘PublicHealth Emergency Management (PHEM)

within the DoD’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodi/620003p.pdf).

(n) DoD Instruction 6000.11, ‘‘PatientMovement (PM)’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodi/600011p.pdf).

(o) DoD 4525.6–M, ‘‘Department of DefensePostal Manual’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodm/452506m.pdf).

(p) DoD Instruction 1015.10, ‘‘MilitaryMorale, Welfare, and Recreation (MWR) Programs’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodi/101510p.pdf).

(q) DoD Directive 1330.21, ‘‘ArmedServices Exchange Regulations’’ (available at https://www.esd.whs.mil/Portals/54/ Documents/DD/issuances/dodi/ 133021p.pdf).

(r) DoD Directive 5160.41E, ‘‘DefenseLanguage, Regional Expertise, and Culture (LREC) Program’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodd/516041Ep.pdf).

(s) Synchronized Predeployment andOperational Tracker (SPOT) Business Rules (available at https://www.acq.osd.mil/LOG/ PS/spot.html).

(t) DoD 5400.11–R, ‘‘Department of DefensePrivacy Program’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodm/540011r.pdf).

(u) DoD Manual 6025.18, ‘‘Implementationof the Health Insurance Portability and Accountability Act (HIPPA) Privacy Rule in DoD Health Care Programs’’ (available at https://www.esd.whs.mil/Portals/54/ Documents/DD/issuances/dodm/ 602518m.pdf).

(v) DoD Directive 8000.01, ‘‘Management ofthe Department of Defense Information Enterprise (DoD IE)’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodd/800001p.pdf).

(w) DoD Instruction 8320.02, ‘‘SharingData, Information, and Information Technology (IT) Services in the Department of Defense’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodi/832002p.pdf).

(x) DoD Instruction 8330.01,‘‘Interoperability of Information Technology (IT), Including National Security Systems (NSS)’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodi/833001p.pdf).

(y) DoD Instruction 8500.01,‘‘Cybersecurity’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodi/850001_2014.pdf).

(z) DoD Directive 4500.54E, ‘‘DoD ForeignClearance Program (FCP)’’ (available at https://www.esd.whs.mil/Portals/54/ Documents/DD/issuances/dodd/ 450054E.pdf).

(aa) DoD Directive 6485.02E, ‘‘DoD Human Immunodeficiency Virus (HIV)/Acquired Immune Deficiency Syndrome (AIDS) Prevention Program (DHAPP) to Support Foreign Militaries’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodd/648502E.pdf).

(bb) DoD Instruction 6490.03, ‘‘Deployment Health’’ (available at https://

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www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodi/649003p.pdf).

(cc) DoD Directive 6490.02E, ‘‘Comprehensive Health Surveillance’’ (available at https://www.esd.whs.mil/ Portals/54/Documents/DD/issuances/dodd/ 649002Ep.pdf).

(dd) CJCS Instruction 3500.01H, ‘‘Joint Training Policy for the Armed Forces of the United States’’ (available at https://www.jcs.mil/Portals/36/Documents/Library/ Instructions/3500_01.pdf).

(ee) DoD Instruction 2000.12, ‘‘DoD Antiterrorism (AT) Program’’ (available at https://www.esd.whs.mil/Portals/54/ Documents/DD/issuances/dodi/ 200012p.pdf).

(ff) DoD Directive 2310.01, ‘‘DoD Detainee Program’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodd/231001e.pdf).

(gg) DoD Directive 2311.01, ‘‘DoD Law of War Program’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodd/231101e.pdf).

(hh) DoD Directive 3115.09, ‘‘DoD Intelligence Interrogations, Detainee Debriefings, and Tactical Questioning’’ (available at https://www.esd.whs.mil/ Portals/54/Documents/DD/issuances/dodd/ 311509p.pdf).

(ii) DoDD 3002.01, ‘‘Personnel Recovery in the Department of Defense’’ (available at https://www.esd.whs.mil/Portals/54/ Documents/DD/issuances/dodd/ 300201p.pdf).

(jj) DoD Instruction 3002.03, ‘‘DoD Personnel Recovery—Reintegration of Recovered Personnel’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodi/300203p.pdf).

(kk) DoD Directive 6200.04, ‘‘Force Health Protection (FHP)’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodd/620004p.pdf).

(ll) DoD Instruction 5154.30, ‘‘Armed Forces Medical Examiner System (AFMES) Operations’’ (available at https://www.esd.whs.mil/Portals/54/Documents/DD/ issuances/dodi/515430p.pdf).

(mm) Assistant Secretary of Defense for Health Affairs Memorandum, ‘‘Policy Guidance for Deployment-Limiting Psychiatric Conditions and Medications,’’ November 7, 2006 (available at http://www.ha.osd.mil/policies/2006/061107_deployment-limiting_psych_conditions_meds.pdf).

Dated: October 30, 2020. Patricia L. Toppings, OSD Federal Register Liaison Officer, Department of Defense.

[FR Doc. 2020–27694 Filed 1–6–21; 8:45 am]

BILLING CODE 5001–06–P

POSTAL SERVICE

39 CFR Part 111

Extra Services Refund Time Limit

AGENCY: Postal ServiceTM.

ACTION: Proposed rule; revision; additional comment period.

SUMMARY: The Postal Service is revising its pending proposal to amend Mailing Standards of the United States Postal Service, Domestic Mail Manual (DMM®) in subsection 604.9.2 to revise the time limit for extra service refunds. DATES: Submit comments on or before February 8, 2021. ADDRESSES: Mail or deliver written comments to the manager, Product Classification, U.S. Postal Service, 475 L’Enfant Plaza SW, Room 4446, Washington, DC 20260–5015. If sending comments by email, include the name and address of the commenter and send to PC Federal Register@usps.gov, with a subject line of ‘‘Extra Services Refund Time Limit’’. Faxed comments are not accepted.

Confidentiality

All submitted comments and attachments are part of the public record and subject to disclosure. Do not enclose any material in your comments that you consider to be confidential or inappropriate for public disclosure.

You may inspect and photocopy all written comments, by appointment only, at USPS® Headquarters Library, 475 L’Enfant Plaza SW, 11th Floor North, Washington, DC 20260. These records are available for review on Monday through Friday, 9 a.m.–4 p.m., by calling 202–268–2906. FOR FURTHER INFORMATION CONTACT: Sheila Marano at (202) 268–4257, Adaisja Johnson at (202) 268–6724, or Garry Rodriguez at (202) 268–7281. SUPPLEMENTARY INFORMATION: On May 14, 2020, the Postal Service published a notice of proposed rulemaking (85 FR 28917–28918) to revise the time limit for extra service refunds on all classes of mail except Priority Mail Express®. The Postal Service has elected to issue a second revised proposed rule that also includes revising the timelines for Priority Mail Express® with an extra service.

Currently, DMM Exhibit 604.9.2.1, Postage and Fees Refunds, provides that for Priority Mail Express with an extra service a customer must apply for an extra service refund no sooner than 10 days, or no later than 30 days, and for all other classes of mail with an extra service a customer must apply for an extra service refund no sooner than 10 days, or no later than 60 days, from the date the service was purchased.

Certain extra services (e.g., Certified Mail®) have workflow timelines that extend beyond the current 10-day limit to initially file for a refund. As a result,

to meet the required workflow timelines for these extra services, and for consistency in application of the refund processes, the Postal Service is proposing to extend the current Priority Mail Express with an extra service timelines to no sooner than 30 days, or no later than 60 days. For all other classes of mail with an extra service, the 10-day time limit will be extended to a 30-day time limit before a customer can file for a refund.

We believe this proposed revision will provide customers with a more efficient process and a more consistent customer experience.

Although exempt from the notice and comment requirements of the Administrative Procedure Act (5 U.S.C. 553(b), (c)) regarding proposed rulemaking by 39 U.S.C. 410(a), the Postal Service invites public comments on the following proposed revisions to Mailing Standards of the United States Postal Service, Domestic Mail Manual (DMM), incorporated by reference in the Code of Federal Regulations. See 39 CFR 111.1.

We will publish an appropriate amendment to 39 CFR part 111 to reflect these changes.

Accordingly, 39 CFR part 111 is proposed to be amended as follows:

List of Subjects in 39 CFR Part 111 Administrative practice and

procedure, Postal Service.

PART 111—GENERAL INFORMATION ON POSTAL SERVICE

■ 1. The authority citation for 39 CFR part 111 continues to read as follows:

Authority: 5 U.S.C. 552(a); 13 U.S.C. 301– 307; 18 U.S.C. 1692–1737; 39 U.S.C. 101, 401, 403, 404, 414, 416, 3001–3011, 3201– 3219, 3403–3406, 3621, 3622, 3626, 3632, 3633, and 5001.

■ 2. Revise the Mailing Standards of the United States Postal Service, Domestic Mail Manual (DMM) as follows:

Mailing Standards of the United States Postal Service, Domestic Mail Manual (DMM)

* * * * *

600 Basic Standards for All Mailing Services

* * * * *

604 Postage Payment Methods and Refunds

* * * * *

9.0 Exchanges and Refunds

* * * * *

9.2 Postage and Fee Refunds

* * * * *

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3679 Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations

■ 6. Amend section 9.406–2 by adding paragraph (b)(1)(vii) to read as follows:

9.406–2 Causes for debarment.

* * * * * (b) * * *(1) * * *(vii) Determination of a false

certification under 52.209–13, Violation of Arms Control Treaties or Agreements- Certification. * * * * *

■ 7. Amend section 9.406–4 by revising paragraph (a)(1)(iii) to read as follows:

9.406–4 Period of debarment.

(a) * * * (1) * * * (iii) Debarments under 9.406–

2(b)(1)(vii) shall be for a period of not less than 2 years, inclusive of any suspension period, if suspension precedes a debarment (see paragraph (a)(2) of this section). * * * * *

■ 8. Amend section 9.407–2 by— ■ a. Redesignating paragraph (a)(9) as (a)(10); and■ b. Adding a new paragraph (a)(9) to read as follows:

9.407–2 Causes for suspension.

(a) * * * (9) Determination of a false

certification under 52.209–13, Violation of Arms Control Treaties or Agreements- Certification. * * * * *

PART 52—SOLICITATION PROVISIONS AND CONTRACT CLAUSES

■ 9. Amend section 52.209–13 by— ■ a. Revising the date of the provision; ■ b. Removing from paragraph (a) ‘‘acquisitions below’’ and adding‘‘acquisitions at or below’’ in its place;■ c. Removing from paragraph (b)(1)(i) ‘‘available via the internet at’’ andadding ‘‘available at’’ in its place; and■ d. Removing from paragraph (b)(1)(ii) ‘‘available via the internet at’’ andadding ‘‘available at’’ in its place.

The revision reads as follows:

52.209–13 Violation of Arms Control Treaties or Agreements-Certification.

* * * * *

Violation of Arms Control Treaties or Agreements—Certification (Feb 2021)

* * * * * [FR Doc. 2020–29086 Filed 1–13–21; 8:45 am]

BILLING CODE 6820–EP–P

DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 12, 13, 15, 16, and 37

[FAC 2021–03; FAR Case 2018–016; Item II; Docket No. FAR–2018–0016, Sequence No. 1]

RIN 9000–AN75

Federal Acquisition Regulation: Lowest Price Technically Acceptable Source Selection Process

AGENCY: Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA). ACTION: Final rule.

SUMMARY: DoD, GSA, and NASA are issuing a final rule amending the Federal Acquisition Regulation (FAR) to implement a section of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 that applies criteria for and limitations on the use of the lowest price technically acceptable source selection criteria in solicitations. DATES: Effective: February 16, 2021. FOR FURTHER INFORMATION CONTACT: Mr. Michael O. Jackson, Procurement Analyst, at 202–208–4949 or Michaelo.jackson@gsa.gov for clarification of content. For information pertaining to status or publication schedules, contact the Regulatory Secretariat Division at (202) 501–4755 or GSARegSec@gsa.gov. Please cite FAC 2021–03, FAR Case 2018–016. SUPPLEMENTARY INFORMATION:

I. Background

DoD, GSA, and NASA published aproposed rule at 84 FR 52425 on October 2, 2019, to implement section 880 of the John S. McCain National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2019 (Pub. L. 115–232, 41 U.S.C. 3701 Note). Section 880 specifies the criteria that must be met in order to include lowest price technically acceptable (LPTA) source selection criteria in a solicitation; and requires solicitations predominantly for the acquisition of certain services and supplies to avoid the use of LPTA source selection criteria, to the maximum extent practicable. Nine respondents submitted public comments in response to the proposed rule.

II. Discussion and Analysis

The Civilian Agency AcquisitionCouncil and the Defense Acquisition Regulations Council (the Councils) reviewed the public comments in the development of the final rule.

A. Summary of Significant ChangesFrom the Proposed Rule

No changes were made to the final rule as a result of public comments. Minor edits were made to the final rule to account for baseline updates and to add the full name of the applicable statute. A discussion of the comments is provided as follows:

B. Analysis of Public Comments

Comment: Respondents expressedsupport for the rule and advised that the rule is beneficial to the small business community and provides them with a greater opportunity to compete in the Federal marketplace.

Response: The Councils acknowledge support for the rule.

Comment: Respondents expressed support for using the LPTA source selection process, when its use is appropriate and the selection criteria can be well-defined.

Response: The Councils agree that use of the LPTA source selection process is a valuable part of the best value continuum and an acceptable and appropriate source selection approach for many acquisitions.

Comment: Respondents expressed concern that the rule will be considered a complete ban on the use of the LPTA source selection process. A respondent is specifically concerned that the use of the LPTA source selection process is prohibited for a significant number of information technology (IT) supplies and services that can be appropriately purchased using the process. As a result, the respondent recommends that the rule not be implemented, or be revised to narrow the scope of IT products and services to which the rule applies, because the rule, as proposed, will result in increased acquisition lead times and higher prices without a corresponding increase in quality of services.

Response: It is not the intent of the rule to prohibit the use of the LPTA source selection process. Instead, the intent of the rule is to implement the statutory language, which aims to identify circumstances that must exist for an acquisition to use the LPTA source selection process and certain types of requirements that will regularly benefit from the use of tradeoff source selection procedures. Specifically, section 880 requires use of the LPTA

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source selection process to be avoided, to the maximum extent practicable, in acquisitions for various services and/or supplies, including acquisitions for ‘‘information technology services’’ or ‘‘telecommunications devices and services.’’ The statute does not further define or narrow these categories; as such, the rule implements the law, as written. With the exception of telecommunications devices, the rule does not preclude buying IT supplies on an LPTA basis.

Comment: Respondents recommended that sections 813, 822, and 880, to the maximum extent practicable, be harmonized in the FAR and the DoD-unique requirements be addressed in the Defense Federal Acquisition Regulation Supplement (DFARS). Another respondent recommended revising the proposed FAR rule text to add cross-references to the DFARS, when DoD-unique requirements exist, in order to avoid confusion for individuals that are unaware of the DFARS requirements.

Response: The intent of this rule is to implement section 880 of the NDAA for FY 2019 in the FAR. Sections 813 of the NDAA for FY 2017 and 822 of the NDAA for FY 2018, which prescribe limitations on the use of the LPTA source selection process for DoD, are implemented in the DFARS. These statutes, as codified, are similar, but not identical, in text. As such, the statutes are implemented separately, and in their entirety, in the FAR and DFARS, respectively, in order to provide contracting officers with a single, complete, clear, and uniform policy on the use of the LPTA source selection process, as it applies to their agency. Contracting officers are responsible for being aware of and complying with acquisition policies and procedures, including the FAR and other applicable agency regulations; therefore, it is not necessary to make cross-references to agency supplements in the FAR.

Comment: Respondents asserted that section 880(c) applies to DoD because the term ‘‘executive agencies’’ does not appear in that paragraph of the statute; as such, the DoD should also be excluded from using the LPTA source selection process to acquire health care services and records and telecommunications devices and services, as directed in section 880(c). Respondents advised that because section 813, as amended by section 822, existed at the time section 880 was written, it is the intent of section 880 to clarify and/or add to the limitations of section 813, which apply only to DoD.

Response: Section 813 (Pub. L. 114– 328, enacted December 23, 2016) and

section 822 (Pub. L. 115–91, enacted December 12, 2017) apply to DoD and are codified at 10 U.S.C. 2305 note. Section 880 (Pub. L. 115–132, enacted August 13, 2018) applies to executive agencies, other than DoD, and is codified at 41 U.S.C. 3701 note. The text of sections 813 and 822 are implemented in the DFARS as they currently appear in law. 10 U.S.C. 2305 note has not been revised, via subsequent legislation, to amend the list of procurements for which the use of LPTA should be avoided to the maximum extent practicable.

Comment: A respondent suggested that future Federal acquisition guidance emphasize the importance of effectively conveying clear technical and performance requirements.

Response: The Councils agree that it is important to clearly identify and communicate the functional, performance, and physical requirements of a supply or service being acquired by an agency. To facilitate this goal, guidance, tools, and training are available to acquisition personnel on a variety of acquisition topics (e.g., market research techniques, describing agency needs, and encouraging competition) to support the requirements outlined in the FAR. Additionally, agencies have internal controls and procedures to monitor and evaluate contract performance and compliance.

Comment: A respondent advised on the importance of robust oversight of contract performance when services are provided on a contract awarded using the LPTA source selection process.

Response: The Councils agree that it is essential to exercise appropriate and adequate oversight of contractor performance on all contracts. Contracting officers are responsible for ensuring compliance with the terms of the contract, while safeguarding the interests of the United States in its contractual relationships. In addition, agencies are required to establish effective management practices to monitor and evaluate contract performance and compliance, and prevent fraud, waste, and abuse in service contracting.

Comment: A respondent recommended establishing adequate monitoring systems to ensure LPTA is applied appropriately and only when the requirements of a contract meet the rule’s criteria. The respondent also suggested that public accountability should be established, possibly through the System for Award Management (SAM) at SAM.gov contract opportunities notice, when a contracting officer uses the LPTA source selection process.

Response: Contracting officers are responsible for ensuring that the requirements of this rule are met when issuing a solicitation that includes the LPTA source selection process. Agencies have internal controls and procedures to monitor and evaluate their compliance with acquisition rules, regulations, and policies. To maintain public accountability, the respondent suggests that agencies publish the LPTA determination in the SAM.gov contract opportunities notice. However, section 880 does not require public notice or publication of the documented determination to use LPTA source selection criteria, and the Councils do not believe additional oversight protocols are required at this time.

Comment: A respondent expressed concern that the rule is not being applied to the GSA Federal Supply Schedules (FSS) Program and recommends aligning the Program with the rule to avoid inconsistent application and use of LTPA source selection criteria across the Federal and contractor communities when placing orders under FSS contracts.

Response: GSA will separately address, outside of this rule, the applicability of section 880 to the GSA FSS Program.

Comment: A respondent advised against using LPTA source selection criteria in solicitations for multiple award IT supply contracts that require contractors to bid on a notional supply list. The respondent advised that this approach leads to unrealistically low- priced offers for the items on the initial supply list, but substantially higher- priced offers for supplies added to the contracts or refreshed after contract award. As a result, the Government does not realize the cost savings that is implied during the initial contract award.

Response: Contracting officers are responsible for ensuring that the requirements of this rule are met when issuing a solicitation that includes the LPTA source selection process. Section 880 does not prohibit the use of the LPTA source selection process when issuing multiple-award indefinite- delivery, indefinite-quantity contracts. Section 880 does require contracting officers to avoid, to the maximum extent practicable, using the LPTA source selection process in the case of a procurement that is predominantly for the acquisition of telecommunications devices and services. The rule reflects this statutory requirement.

In addition, contracting officers consider price or cost when issuing or modifying multiple-award indefinite- delivery indefinite-quantity supply

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contracts, or placing orders under these contracts in accordance with FAR subpart 16.5. When issuing or modifying these contracts, contracting officers must evaluate the reasonableness of the offered prices, in accordance with the procedures of FAR part 13 or 15, as applicable. When placing orders under these contracts, FAR subpart 16.5 requires contracting officers to consider price or cost as part of their selection decision for each order. These procedures help to ensure that the contracted price and the price paid under each order is fair and reasonable to the Government.

Comment: One respondent recommended that the DoD budget be reduced by 30%.

Response: This comment is outside the scope of this rule.

III. Applicability to Contracts at orBelow the Simplified AcquisitionThreshold (SAT) and for CommercialItems, Including CommerciallyAvailable Off-the-Shelf (COTS) Items

This final rule does not create any new provisions or clauses, nor does it change the applicability or burden of any existing provisions or clauses included in solicitations and contracts valued at or below the SAT, or for commercial items, including COTS items.

IV. Executive Orders 12866 and 13563Executive Orders (E.O.s) 12866 and

13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This is not a significant regulatory action and, therefore, was not subject to review under section 6(b) of E.O. 12866, Regulatory Planning and Review, dated September 30, 1993. This rule is not a major rule under 5 U.S.C. 804.

V. Executive Order 13771This rule is not subject to E.O. 13771,

because this rule is not a significant regulatory action under E.O. 12866.

VI. Regulatory Flexibility ActDoD, GSA, and NASA have prepared

a Final Regulatory Flexibility Analysis (FRFA) consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. The FRFA is summarized as follows:

This rule is necessary to implement section 880 of the John S. McCain National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2019 (Pub. L. 115–232). The objective of this rule is to avoid the use of lowest price technically acceptable (LPTA) source selection criteria in circumstances that would deny the Government the benefits of cost and technical tradeoffs in the source selection process. No public comments were received in response to the initial regulatory flexibility analysis.

DoD, GSA, and NASA do not expect this rule to have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. The rule primarily affects internal Government requirements determination decisions, acquisition strategy decisions, and contract file documentation requirements. The Government does not collect data on the total number of solicitations issued on an annual basis that do or do not specify the use of the LPTA source selection process. However, the Federal Procurement Data System (FPDS) provides the following information for FY 2018:

• Federal competitive contracts and ordersawarded using FAR parts 13, 15, or subpart 16.5 procedures. In FY 2018, the Federal Government, excluding DoD, awarded approximately 82,337 new contracts and orders using the competitive procedures of FAR parts 13, 15, or subpart 16.5. This data excludes acquisitions for the supply/service categories identified in section 880(c) of the NDAA for FY 2019. Of the 82,337 contracts and orders, approximately 69 percent (or 56,622 contracts and orders) were awarded to approximately 27,029 unique small businesses. It is important to note that FPDS does not collect data on solicitations. FPDS can identify contracts that are awarded using competitive procedures, but did not begin collecting data on the source selection process used to award those contracts until 2020. Therefore, the data described above represents all competitively awarded contracts, including those using other than the LPTA source selection process.

• Federal competitive contracts and ordersawarded for specific services and supplies. In FY 2018, the Federal Government, excluding DoD, awarded approximately 22,581 new contracts and orders potentially for the supplies and services identified in section 880(c) of the NDAA for FY 2019 using the competitive procedures of FAR parts 13, 15, and subpart 16.5, of which approximately 63 percent (or 14,285 contracts and orders) were awarded to approximately 10,129 unique small businesses.

This rule does not include any new reporting, recordkeeping, or other compliance requirements on any small entities.

There are no known significant alternative approaches to the rule that would meet the stated objectives of the applicable statute.

Interested parties may obtain a copy of the FRFA from the Regulatory Secretariat Division. The Regulatory Secretariat Division has submitted a copy of the FRFA to the Chief Counsel

for Advocacy of the Small Business Administration.

VII. Paperwork Reduction ActThe rule does not contain any

information collection requirements that require the approval of the Office of Management and Budget under the Paperwork Reduction Act (44 U.S.C. chapter 35).

List of Subjects in 48 CFR Parts 12, 13, 15, 16, and 37

Government procurement.

William F. Clark, Director, Office of Government-wide Acquisition Policy, Office of Acquisition Policy, Office of Government-wide Policy.

Therefore, DoD, GSA, and NASA amend 48 CFR parts 12, 13, 15, 16 and 37 as set forth below: ■ 1. The authority citation for 48 CFR parts 12, 13, 15, 16 and 37 continues toread as follows:

Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 51 U.S.C. 20113.

PART 12—ACQUISITION OF COMMERCIAL ITEMS

■ 2. Revise section 12.203 by redesignating the text as paragraph (a)and adding paragraph (b) to read asfollows:

12.203 Procedures for solicitation, evaluation, and award.

* * * * * (b) Contracting officers shall ensure

the criteria at 15.101–2(c) are met when using the lowest price technically acceptable source selection process.

PART 13—SIMPLIFIED ACQUISITION PROCEDURES

■ 3. Amend section 13.106–1 by adding paragraphs (a)(2)(v) and (a)(2)(vi) to readas follows:

13.106–1 Soliciting competition. (a) * * * (2) * * * (v) Except for DoD, contracting

officers shall ensure the criteria at 15.101–2(c)(1)–(5) are met when using the lowest price technically acceptable source selection process.

(vi) Except for DoD, avoid using thelowest price technically acceptable source selection process to acquire certain supplies and services in accordance with 15.101–2(d). * * * * * ■ 4. Amend section 13.106–3 by— ■ a. In paragraph (b)(3) introductory text, removing ‘‘statements—’’ andadding ‘‘statements, when applicable—’’ in its place;

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■ b. In paragraph (b)(3)(i), removing ‘‘; or’’ and adding ‘‘;’’ in its place; ■ c. In paragraph (b)(3)(ii), removing ‘‘supplier.’’ and adding ‘‘supplier; and’’ ■ d. Adding paragraph (b)(3)(iii).

The addition reads as follows:

13.106–3 Award and documentation.

* * * * * (b) * * * (3) * * * (iii) Except for DoD, when using

lowest price technically acceptable source selection process, justifying the use of such process. * * * * *

PART 15—CONTRACTING BY NEGOTIATION

■ 5. Amend section 15.101–2 by adding paragraphs (c) and (d) to read as follows:

15.101–2 Lowest price technically acceptable source selection process.

* * * * * (c) Except for DoD, in accordance

with section 880 of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (Pub. L. 115–232, 41 U.S.C. 3701 Note), the lowest price technically acceptable source selection process shall only be used when—

(1) The agency can comprehensively and clearly describe the minimum requirements in terms of performance objectives, measures, and standards that will be used to determine the acceptability of offers;

(2) The agency would realize no, or minimal, value from a proposal that exceeds the minimum technical or performance requirements;

(3) The agency believes the technical proposals will require no, or minimal, subjective judgment by the source selection authority as to the desirability of one offeror’s proposal versus a competing proposal;

(4) The agency has a high degree of confidence that reviewing the technical proposals of all offerors would not result in the identification of characteristics that could provide value or benefit to the agency;

(5) The agency determined that the lowest price reflects the total cost, including operation and support, of the product(s) or service(s) being acquired; and

(6) The contracting officer documents the contract file describing the circumstances that justify the use of the lowest price technically acceptable source selection process.

(d) Except for DoD, in accordance with section 880 of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (Pub. L. 115–232, 41

U.S.C. 3701 Note), contracting officers shall avoid, to the maximum extent practicable, using the lowest price technically acceptable source selection process in the case of a procurement that is predominantly for the acquisition of—

(1) Information technology services, cybersecurity services, systems engineering and technical assistance services, advanced electronic testing, audit or audit readiness services, health care services and records, telecommunications devices and services, or other knowledge-based professional services;

(2) Personal protective equipment; or (3) Knowledge-based training or

logistics services in contingency operations or other operations outside the United States, including in Afghanistan or Iraq.

PART 16—TYPES OF CONTRACTS

■ 6. Amend section 16.505 by— ■ a. Removing from the end of paragraph (b)(1)(ii) ‘‘must—’’ adding ‘‘shall—’’ in its place; ■ b. Removing from paragraph (b)(1)(ii)(D) ‘‘contract; and’’ and adding ‘‘contract;’’ in its place; ■ c. Removing from paragraph (b)(1)(ii)(E) ‘‘decision.’’ and adding ‘‘decision;’’ in its place; ■ d. Adding paragraphs (b)(1)(ii)(F) and (b)(1)(ii)(G); and ■ e. Adding paragraph (b)(7)(iii).

The additions read as follows:

16.505 Ordering.

* * * * * (b) * * * (1) * * * (ii) * * * (F) Except for DoD, ensure the criteria

at 15.101–2(c)(1)–(5) are met when using the lowest price technically acceptable source selection process; and

(G) Except for DoD, avoid using the lowest price technically acceptable source selection process to acquire certain supplies and services in accordance with 15.101–2(d). * * * * *

(7) * * * (iii) Except for DoD, the contracting

officer shall document in the contract file a justification for use of the lowest price technically acceptable source selection process, when applicable. * * * * *

PART 37—SERVICE CONTRACTING

■ 7. Amend section 37.102 by adding paragraph (j) to read as follows:

37.102 Policy.

* * * * *

(j) Except for DoD, see 15.101–2(d) for limitations on the use of the lowest price technically acceptable source selection process to acquire certain services. [FR Doc. 2020–29087 Filed 1–13–21; 8:45 am]

BILLING CODE 6820–EP–P

DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 19, 28, 32, 52, and 53

[FAC 2021–03; FAR Case 2017–003; Item III; Docket FAR–2017–0003, Sequence No. 1]

RIN 9000–AN39

Federal Acquisition Regulation: Individual Sureties

AGENCY: Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA). ACTION: Final rule.

SUMMARY: DoD, GSA, and NASA are issuing a final rule amending the Federal Acquisition Regulation (FAR) to implement a section of the National Defense Authorization Act for Fiscal Year 2016 to change the kinds of assets that individual sureties must pledge as security for their bonds. DATES: Effective: February 16, 2021. FOR FURTHER INFORMATION CONTACT: Ms. Zenaida Delgado, Procurement Analyst, at 202–969–7207 or zenaida.delgado@gsa.gov for clarification of content. For information pertaining to status or publication schedules, contact the Regulatory Secretariat Division at 202– 501–4755 or GSARegSec@gsa.gov. Please cite FAC 2021–03, FAR Case 2017–003. SUPPLEMENTARY INFORMATION:

I. Background

DoD, GSA, and NASA published a proposed rule at 85 FR 7910 on February 12, 2020, to implement section 874 of the National Defense Authorization Act for Fiscal Year 2016 (Pub. L. 114–92), codified at 31 U.S.C. 9310, Individual Sureties.

FAR subpart 28.2 requires agencies to obtain adequate security for bonds when bonds are used with a contract. A corporate or individual surety is an acceptable form of security for a bond. Corporate sureties are vetted by the Department of the Treasury to ensure

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TAB 8

BRIEFING ROOM

Executive Order on Ensuring the Future Is Made in All ofAmerica by All of America’s Workers

JANUARY 25, 2021 • PRESIDENTIAL ACTIONS

By the authority vested in me as President by the Constitution and the laws of the United

States of America, it is hereby ordered as follows:

Section 1. Policy. It is the policy of my Administration that the United States Government

should, consistent with applicable law, use terms and conditions of Federal financial assistance

awards and Federal procurements to maximize the use of goods, products, and materials

produced in, and services offered in, the United States. The United States Government should,

whenever possible, procure goods, products, materials, and services from sources that will

help American businesses compete in strategic industries and help America’s workers thrive.

Additionally, to promote an accountable and transparent procurement policy, each agency

should vest waiver issuance authority in senior agency leadership, where appropriate and

consistent with applicable law.

Sec. 2. Definitions. (a) “Agency” means any authority of the United States that is an

“agency” under section 3502(1) of title 44, United States Code, other than those considered to

be independent regulatory agencies, as defined in section 3502(5) of title 44, United States

Code.

(b) “Made in America Laws” means all statutes, regulations, rules, and Executive Orders

relating to Federal financial assistance awards or Federal procurement, including those that

refer to “Buy America” or “Buy American,” that require, or provide a preference for, the

purchase or acquisition of goods, products, or materials produced in the United States,

including iron, steel, and manufactured goods offered in the United States. Made in America

Laws include laws requiring domestic preference for maritime transport, including the

Merchant Marine Act of 1920 (Public Law 66-261), also known as the Jones Act.

(c) “Waiver” means an exception from or waiver of Made in America Laws, or the procedures

and conditions used by an agency in granting an exception from or waiver of Made in America

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Laws.

Sec. 3. Review of Agency Action Inconsistent with Administration Policy. (a) The head

of each agency shall, as soon as practicable and as appropriate and consistent with applicable

law, including the Administrative Procedure Act, consider suspending, revising, or rescinding

those agency actions that are inconsistent with the policy set forth in section 1 of this order.

(b) The head of each agency shall, as soon as practicable and as appropriate and consistent

with applicable law, including the Administrative Procedure Act, consider proposing any

additional agency actions necessary to enforce the policy set forth in section 1 of this order.

Sec. 4. Updating and Centralizing the Made in America Waiver Process. (a) The Director

of the Office of Management and Budget (OMB) shall establish within OMB the Made in

America Office. The Made in America Office shall be headed by a Director of the Made in

America Office (Made in America Director), who shall be appointed by the Director of OMB.

(b) Before an agency grants a waiver, and unless the OMB Director provides otherwise, the

agency (granting agency) shall provide the Made in America Director with a description of its

proposed waiver and a detailed justification for the use of goods, products, or materials that

have not been mined, produced, or manufactured in the United States.

(i) Within 45 days of the date of the appointment of the Made in America Director, and as

appropriate thereafter, the Director of OMB, through the Made in America Director, shall:

(1) publish a list of the information that granting agencies shall include when submitting such

descriptions of proposed waivers and justifications to the Made in America Director; and

(2) publish a deadline, not to exceed 15 business days, by which the Director of OMB,

through the Made in America Director, either will notify the head of the agency that the

Director of OMB, through the Made in America Director, has waived each review described in

subsection (c) of this section or will notify the head of the agency in writing of the result of the

review.

(ii) To the extent permitted by law and consistent with national security and executive branch

confidentiality interests, descriptions of proposed waivers and justifications submitted to the

Made in America Director by granting agencies shall be made publicly available on the

website established pursuant to section 6 of this order.

(c) The Director of OMB, through the Made in America Director, shall review each proposed

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waiver submitted pursuant to subsection (b) of this section, except where such review has been

waived as described in subsection (b)(i)(2) of this section.

(i) If the Director of OMB, through the Made in America Director, determines that issuing

the proposed waiver would be consistent with applicable law and the policy set forth in section

1 of this order, the Director of OMB, through the Made in America Director, shall notify the

granting agency of that determination in writing.

(ii) If the Director of OMB, through the Made in America Director, determines that issuing

the proposed waiver would not be consistent with applicable law or the policy set forth in

section 1 of this order, the Director of OMB, through the Made in America Director, shall

notify the granting agency of the determination and shall return the proposed waiver to the

head of the agency for further consideration, providing the granting agency with a written

explanation for the determination.

(1) If the head of the agency disagrees with some or all of the bases for the determination and

return, the head of the agency shall so inform the Made in America Director in writing.

(2) To the extent permitted by law, disagreements or conflicts between the Made in America

Director and the head of any agency shall be resolved in accordance with procedures that

parallel those set forth in section 7 of Executive Order 12866 of September 30, 1993

(Regulatory Planning and Review), with respect to the Director of the Office of Information

and Regulatory Affairs within OMB.

(d) When a granting agency is obligated by law to act more quickly than the review

procedures established in this section allow, the head of the agency shall notify the Made in

America Director as soon as possible and, to the extent practicable, comply with the

requirements set forth in this section. Nothing in this section shall be construed as displacing

agencies’ authorities or responsibilities under law.

Sec. 5. Accounting for Sources of Cost Advantage. To the extent permitted by law, before

granting a waiver in the public interest, the relevant granting agency shall assess whether a

significant portion of the cost advantage of a foreign-sourced product is the result of the use of

dumped steel, iron, or manufactured goods or the use of injuriously subsidized steel, iron, or

manufactured goods. The granting agency may consult with the International Trade

Administration in making this assessment if the granting agency deems such consultation to be

helpful. The granting agency shall integrate any findings from the assessment into its waiver

determination as appropriate.

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Sec. 6. Promoting Transparency in Federal Procurement. (a) The Administrator of General

Services shall develop a public website that shall include information on all proposed waivers

and whether those waivers have been granted. The website shall be designed to enable

manufacturers and other interested parties to easily identify proposed waivers and whether

those waivers have been granted. The website shall also provide publicly available contact

information for each granting agency.

(b) The Director of OMB, through the Made in America Director, shall promptly report to the

Administrator of General Services all proposed waivers, along with the associated descriptions

and justifications discussed in section 4(b) of this order, and whether those waivers have been

granted. Not later than 5 days after receiving this information, the Administrator of General

Services shall, to the extent permitted by law and consistent with national security and

executive branch confidentiality interests, make this information available to the public by

posting it on the website established under this section.

Sec. 7. Supplier Scouting. To the extent appropriate and consistent with applicable law,

agencies shall partner with the Hollings Manufacturing Extension Partnership (MEP),

discussed in the Manufacturing Extension Partnership Improvement Act (title V of Public Law

114-329), to conduct supplier scouting in order to identify American companies, including

small- and medium-sized companies, that are able to produce goods, products, and materials in

the United States that meet Federal procurement needs.

Sec. 8. Promoting Enforcement of the Buy American Act of 1933. (a) Within 180 days of

the date of this order, the Federal Acquisition Regulatory Council (FAR Council) shall

consider proposing for notice and public comment amendments to the applicable provisions in

the Federal Acquisition Regulation (FAR), title 48, Code of Federal Regulations, consistent

with applicable law, that would:

(i) replace the “component test” in Part 25 of the FAR that is used to identify domestic end

products and domestic construction materials with a test under which domestic content is

measured by the value that is added to the product through U.S.-based production or U.S. job-

supporting economic activity;

(ii) increase the numerical threshold for domestic content requirements for end products and

construction materials; and

(iii) increase the price preferences for domestic end products and domestic construction

materials.

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(b) The FAR Council shall consider and evaluate public comments on any regulations

proposed pursuant to subsection (a) of this section and shall promptly issue a final rule, if

appropriate and consistent with applicable law and the national security interests of the United

States.

Sec. 9. Updates to the List of Nonavailable Articles. Before the FAR Council proposes any

amendment to the FAR to update the list of domestically nonavailable articles at

section 25.104(a) of the FAR, the Director of OMB, through the Administrator of the Office of

Federal Procurement Policy (OFPP), shall review the amendment in consultation with the

Secretary of Commerce and the Made in America Director, paying particular attention to

economic analyses of relevant markets and available market research, to determine whether

there is a reasonable basis to conclude that the article, material, or supply is not mined,

produced, or manufactured in the United States in sufficient and reasonably available

commercial quantities and of a satisfactory quality. The Director of OMB, through the

Administrator of OFPP, shall make these findings available to the FAR Council for

consideration.

Sec. 10. Report on Information Technology That Is a Commercial Item. The FAR Council

shall promptly review existing constraints on the extension of the requirements in Made in

America Laws to information technology that is a commercial item and shall develop

recommendations for lifting these constraints to further promote the policy set forth in section

1 of this order, as appropriate and consistent with applicable law.

Sec. 11. Report on Use of Made in America Laws. Within 180 days of the date of this order,

the head of each agency shall submit to the Made in America Director a report on:

(a) the agency’s implementation of, and compliance with, Made in America Laws;

(b) the agency’s ongoing use of any longstanding or nationwide waivers of any Made in

America Laws, with a written description of the consistency of such waivers with the policy

set forth in section 1 of this order; and

(c) recommendations for how to further effectuate the policy set forth in section 1 of this

order.

Sec. 12. Bi-Annual Report on Made in America Laws. Bi‑annually following the initial

submission described in section 11 of this order, the head of each agency shall submit to the

Made in America Director a report on:

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(a) the agency’s ongoing implementation of, and compliance with, Made in America Laws;

(b) the agency’s analysis of goods, products, materials, and services not subject to Made in

America Laws or where requirements of the Made in America Laws have been waived;

(c) the agency’s analysis of spending as a result of waivers issued pursuant to the Trade

Agreements Act of 1979, as amended, 19 U.S.C. 2511, separated by country of origin; and

(d) recommendations for how to further effectuate the policy set forth in section 1 of this

order.

Sec. 13. Ensuring Implementation of Administration Policy on Federal Government

Property. Within 180 days of the date of this order, the Administrator of General Services

shall submit to the Made in America Director recommendations for ensuring that products

offered to the general public on Federal property are procured in accordance with the policy

set forth in section 1 of this order.

Sec. 14. Revocation of Certain Presidential and Regulatory Actions. (a) Executive Order

13788 of April 18, 2017 (Buy American and Hire American), section 5 of Executive Order

13858 of January 31, 2019 (Strengthening Buy-American Preferences for Infrastructure

Projects), and Executive Order 13975 of January 14, 2021 (Encouraging Buy American

Policies for the United States Postal Service), are hereby revoked.

(b) Executive Order 10582 of December 17, 1954 (Prescribing Uniform Procedures for

Certain Determinations Under the Buy-America Act), and Executive Order 13881 of July 15,

2019 (Maximizing Use of American-Made Goods, Products, and Materials), are superseded to

the extent that they are inconsistent with this order.

Sec. 15. Severability. If any provision of this order, or the application of any provision to any

person or circumstance, is held to be invalid, the remainder of this order and the application of

its other provisions to any other persons or circumstances shall not be affected thereby.

Sec. 16. General Provisions. (a) Nothing in this order shall be construed to impair or

otherwise affect:

(i) the authority granted by law to an executive department or agency, or the head thereof; or

(ii) the functions of the Director of the Office of Management and Budget relating to

budgetary, administrative, or legislative proposals.

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(b) This order shall be implemented consistent with applicable law and subject to the

availability of appropriations.

(c) This order is not intended to, and does not, create any right or benefit, substantive or

procedural, enforceable at law or in equity by any party against the United States, its

departments, agencies, or entities, its officers, employees, or agents, or any other person.

JOSEPH R. BIDEN JR.

THE WHITE HOUSE,

January 25, 2021.

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TAB 9

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January 4, 2021 Cost Accounting Standards Board ATTN: Mathew Blum Office of Federal Procurement Policy 725 17th Street NW Washington, DC 20503 Re: Advance Notice of Proposed Rulemaking - Conformance of the Cost Accounting Standards to

Generally Accepted Accounting Principles for Operating Revenue and Lease Accounting - Case Number CASB 2020-02

Dear Mr. Blum: The National Defense Industrial Association (NDIA) represents more than 1,600 corporate and over 80,000 individual members from small, medium, and large contractors; our members and their employees feel the impact of any policy change made to how the United States equips and supports its warfighters. As requested, we are providing our comments on the referenced Cost Accounting Standards Board (CASB) Advance Notice of Proposed Rulemaking (ANPRM) on Conformance of the Cost Accounting Standards (CAS) to Generally Accepted Accounting Principles (GAAP) for operating revenue and lease accounting. NDIA supports the CASB’s initiative to conform CAS to GAAP consistent with the National Defense Authorization Act of 2017. NDIA believes that Case 2020-02 is consistent with CASB’s conceptual framework as revised and included in CASB’s Notice on Principles and Other Matters to Guide Conformance of the Cost Accounting Standards (CAS) to GAAP published in the Federal Register on March 19, 2020.

Conforming the CAS accounting requirements for revenue and leases with GAAP will reduce the burden on contractors while protecting the interests of the Federal Government. NDIA believes that reliance on GAAP for revenue and lease accounting would materially achieve both uniformity and consistency in cost accounting without bias or prejudice to either party.

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We appreciate the Board’s prioritization of these revenue and lease issues. As the Board recognized, industry identified these issues, in response to the Board’s 13 March 2019 Staff Discussion Paper, as matters needing immediate attention. As requested, NDIA is providing comments about the ANPRM regarding:

(a) the proposed change to the definition of operating revenue in CAS 9904.403-50(c)(1)(ii) and proposed elimination of the definition of operating revenue in CAS 9904.403-30

(b) the question of whether changes to cost accounting practices to conform operating revenue to ASC 606 should be considered a required change, unilateral change or desirable change in accordance with 48 CFR 9903.201-4(a)(4)(i), (ii), or (iii), respectively

(c) the proposed clarification that right-of-use assets should be excluded from treatment as intangible capital assets and tangible capital assets including the proposed revision to the definition of intangible capital assets shown at 9904.414-30(a)(4) and 9904.417-30(a)(1), as well as the definition of tangible capital assets shown at 9904.403-30(a)(5), 9904.404-30(a)(4), 9904.409-30(a)(3), 9904.414-30(a)(5), and 9904.417-30(a)(2), and clarifying language in Appendix A to 9904.414, in the Instructions for Form CASB CMF.

Revenue

We agree with the proposed change to eliminate the definition of operating revenue from CAS 9904.403-30. The GAAP rules on revenue recognition are sufficient to protect the government when contractors apply revenue as part of cost accounting practices. Eliminating the CAS definition of operating revenue will reduce confusion over any potential differences with GAAP and allow contractors to rely on their financial accounting practices and controls. We believe the Board’s proposed change to the definition of operating revenue in CAS 9904.403-50(c)(1)(ii) should be modified to exclude the limitation for management contracts under which the contractor essentially acts as an agent of the Government in the erection or operation of Government-owned facilities. GAAP provides conceptual considerations for gross versus net revenue reporting based upon an analysis of the principal versus agent relationship, specifically addressed in ASC 606-10-55-36 through 55-40. ASC 606 does not provide a specific limitation for management contracts under which the contractor acts as an agent of the government in the erection or operation of government-owned facilities. However, the considerations in ASC 606 for only recognizing fee as revenue under certain contracts where there is an agency relationship are sufficient for determining revenue for cost accounting purposes. CAS 9904.403-40(c)(3) and 9904.403-50(d)(2) allow for the use of special allocations; both sections list a Government Owned Contractor Operated (GOCO) segment as an example to achieve equitable allocations to segments. Accordingly, we believe that there is no need to retain a specific limitation for GOCOs in CAS 9904.403-50(c)(1)(ii) because the GAAP considerations are sufficient for determining

3

revenue for GOCO contracts. The special allocation rules should be used to accommodate exceptions to GAAP when the use of GAAP for determining revenue does not result in an equitable allocation to GOCO segments.

For example, a GOCO facility contractor may agree with the government as part of the terms of the GOCO contract to limit certain home office allocations. Such an agreement may justify a special allocation of home office expenses. While NDIA believes that there is CAS and GAAP alignment as mentioned above, to avoid any unintended consequences of the proposed changes to CAS, we recommend that the Board consult with federal agencies and their GOCO contractors regarding any effect on the allocation of costs to GOCO contracts.

Type of CAS Change

The Board requested comments on whether conforming operating revenue to ASC 606 should be considered a required change, unilateral change, or desirable change. CAS 9903.201-6(a)(2) and FAR 52.230-2(a)(3) provide that required changes include changes needed to remain in compliance with CAS or to comply with any modifications and interpretations. If conforming operating revenue for cost accounting purposes to ASC 606 is considered a cost accounting practice change, we believe that is a required change needed to comply with an in-process modification to CAS.

We agree with the Board that the definition of operating revenue in GAAP is essentially equivalent to CAS. It seems logical that maintaining conformance between GAAP and CAS is consistent with the intent of the CAS. Further, under Section 820 of Public Law 114-328, Congress directed the Board to conform CAS to GAAP where practical. The Board is responding to P.L. 114-328 in Case 2020-02 with a proposed change to CAS to follow GAAP for purposes of the definition of revenue. Therefore, by following GAAP for determining revenue for cost accounting purposes, contractors are adhering to the intent of CAS and following the directed conformance set by Congress.

Cost accounting practice changes made in order to follow GAAP due to the Board’s CAS-GAAP conformance initiative are not likely to have a material effect on contract costs. Nevertheless, the volume of related administrative burden placed on both the government and contractors may be significant. To reduce the administrative costs and protect the government, the Board could add a separate exemption in CAS pertaining to CAS 9903.201-8, which would state that the contract price and cost adjustment requirements of Part 9903 are not applicable to compliant cost accounting practice changes directly associated with contractors following GAAP.

Leases

The Board proposes to change the definitions of both tangible and intangible assets to include financing leases and exclude operating leases. This approach achieves an appropriate outcome by clarifying both the requirement to exclude operating leases from the three-factor formula outlined in CAS 9904.403 and the cost of money calculations in CAS 9904.414 and 9904.417. However, the proposed changes to the

4

definitions of tangible and intangible capital assets associate all right-of-use (“ROU”) assets with operating leases. This linkage may not hold true because leases in general are associated with ROU assets. For example, ROU assets from financing leases may be reported within the property, plant and equipment asset category, whereas ROU assets from operating leases may be reported as a separate asset category.

To avoid confusion, the definitions of tangible and intangible assets should exclude only ROU operating lease assets. By making this change, ROU assets for operating leases will be inherently recognized as a separate asset category for CAS purposes – neither tangible nor intangible.

We have reviewed the comments submitted by AIA in response to CAS 2020-02 and are in general agreement with their responses.

In conclusion, we support CASB’s ongoing efforts to conform CAS to GAAP pursuant to the NDAA of 2017 and consideration of the costs of implementation. We appreciate the CASB’s consideration of our comments and are available to provide additional information as requested. If you or your staff have any questions, please contact Nick Jones, Director, Regulatory Policy, at njones@ndia.org or (703) 247-2562.

Sincerely,

Contract Finance Committee, NDIA Procurement Division Nicholas Jones, NDIA Director of Regulatory Policy

TAB 10

PIC 730.3.B.2.4 December 11, 2020 20-PIC-006(R) MEMORANDUM FOR REGIONAL DIRECTORS, DCAA

CORPORATE AUDIT DIRECTORS, DCAA ASSISTANT DIRECTORS, HQ, DCAA

SUBJECT: Audit Alert on Coronavirus Legislation and Regulations What You Need to Know This memorandum provides guidance on legislation enacted in response to the Coronavirus national emergency. It provides information on the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Families First Coronavirus Response Act (FFCRA), and other Department of Defense (DoD) guidance. What Auditors Need to Do Each contractor dealt with and many continue to deal with the impact of COVID-19 in ways that make sense for its unique circumstances. During the planning phase of an audit, the auditor should discuss with the contractor which relief opportunities, if any, the contractor chose to employ. Furthermore, the auditor should ask for any COVID-19 company policies and procedures, as well as any changes or exceptions to policies and procedures in effect before the pandemic. The audit team should be familiar with the key provisions of the legislation and regulations discussed in this memorandum to determine how an audit may be impacted. See Enclosure 1 for details of the legislation. When planning the incurred cost audit, the audit team should also refer to Enclosure 2 for frequently asked questions that address what we believe will be the more common scenarios for CARES Act provisions for loans and paid leave. Likewise, when performing forward pricing audits, the audit team should be aware that most of the relief provisions discussed in this memorandum currently expire in calendar year 2020, and may or may not have an impact on future pricing audits. See Enclosure 3 for frequently asked questions regarding forward pricing audits.

DEFENSE CONTRACT AUDIT AGENCY 8725 JOHN J. KINGMAN ROAD, SUITE 2135

FORT BELVOIR, VA 22060-6219

I N R E P L Y R E F E R T O

December 11, 2020 PIC 730.3.B.2.4 20-PIC-006(R)SUBJECT: Audit Alert on Coronavirus Legislation and Regulations

2

Questions and Further Information

FAO personnel with additional questions regarding this audit alert should contact their regional or CAD offices. Regional/CAD personnel with questions regarding this audit alert should contact Ms. Barbara Richon, Chief, Policy Incurred Cost Division or Ms. Jennifer Kang, Chief, Pricing and Special Projects Division or via e-mail at DCAAPolicyCovid19@dcaa.mil.

/Signed/ Martha E. McKune Assistant Director, Policy and Plans

Enclosures: (1) Legislation(2) Incurred Cost FAQs(3) Forward Pricing FAQs

DISTRIBUTION: E

Legislation

ENCLOSURE 1 Page 1 of 5

Coronavirus Aid, Relief, and Economic Security (CARES) Act

The CARES Act, enacted on March 27, 2020, provides aid and relief in response to the national health emergency. Major sections that could be used by contractors are:

• Paid Leave Reimbursement (Section 3610);• Paycheck Protection Program (Sections 1102 and 1106);• Employee Retention Credit (Section 2301); and• Payroll Taxes Deferral (CARES Act Section 2302).

See the table below for more details of these and other sections.

CARES Act Sections

Description Dates

1102 A Paycheck Protection Program (PPP) loan is a Small Business Administration (SBA) loan designed to provide a direct incentive for small businesses to keep their workers on the payroll. The proceeds can be used for:

• payroll costs;• costs related to the continuation of group health care benefits;• employee salaries, commissions, or similar compensations;• payments of interest on any mortgage obligation (no prepayments or

principal);• rent (including rent under a lease agreement);• utilities; and• interest on any other debt obligations that were incurred before the covered

period.• The PPP limits employee wages/salaries to $100,000, which should be

prorated based on the period involved.•

The covered period is either: • the 24-week (168-day)

period beginning on thePPP loan disbursementdate, or

• if the borrower receivedits PPP loan before June5, 2020, the borrowermay elect to use an eight-week (56-day) coveredperiod.

At this time, the covered period ends no later than December 31, 2020.

1106 The PPP loan can be forgiven if the funds are used for:

Legislation

ENCLOSURE 1 Page 2 of 5

• payroll costs, interest on mortgages, • rent, and • utilities.

At least 60 percent of the forgiven amount must have been used for payroll. Borrowers are generally eligible for forgiveness for the costs incurred during the covered period.

2301 Employee Retention Credit is a fully refundable tax credit for employers equal to 50 percent of qualified wages (including allocable qualified health plan expenses) that eligible employers pay their employees.

• Applies to qualified wages paid after March 12, 2020, and before January 1, 2021.

• The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000.

• The credit is allowed against the employer’s share of social security taxes. An eligible employer can receive both the tax credit for qualified leave wages under the FFCRA and the Employee Retention Credit under the CARES Act, but not for the same wages.

• An eligible employer may not receive the Employee Retention Credit if the eligible employer receives a PPP loan that is authorized under the CARES Act.

The credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021.

2302 Section 2302 allows employers to defer the deposit and payment of the employer's portion of Social Security taxes. An employer that receives a PPP loan is entitled to defer the payment and deposit of the employer's share of Social Security tax, even if the loan is later forgiven.

Expires December 31, 2020

3606 This section permits the tax credits in FFCRA Sections 7001 and 7003 to be advanced to employers.

Expires December 31, 2020

Legislation

ENCLOSURE 1 Page 3 of 5

3608 This section delays the minimum required contributions for single employer pension plans to January 1, 2021.

Extends the deadline for minimum contributions to January 1, 2021

3610 This Paid Leave section allows at the contracting officer discretion, but does not fund, agencies to reimburse at the minimum applicable contract billing rates (not to exceed an average of 40 hours per week):

• Any paid leave, including sick leave, a contractor provides to keep its employees or subcontractors in a ready state from March 27, 2020, through December 11, 2020, including to protect the life and safety of Government and contractor personnel, during the public health emergency declared for COVID–19.

• A contractor may only receive reimbursement if its employees or subcontractor employees cannot perform work on a government-owned, government-leased, contractor-owned, or contractor-leased facility or site approved by the Federal Government for contract performance due to closures or other restrictions, and are unable to telework because their job duties cannot be performed remotely during the public health emergency declared for COVID–19.

• Approval of reimbursements of Section 3610 paid leave is at the discretion of the contracting officer.

Paid leave period: March 27, 2020 through December 11, 2020 (not December 31).

Legislation

ENCLOSURE 1 Page 4 of 5

Families First Coronavirus Response Act (FFCRA), enacted March 18, 2020, provides relief to employees and employers through expanded employee leave and a variety of employer tax credits. FFCRA Sections:

Description Dates

3102 Employer must provide paid leave from the 11th day onward for employees who take "public health emergency leave" to care for a child because of the closure of school/child care due to a declaration made by Federal, State, or local government.

Effective April 2, 2020; Expires December 31, 2020

5102 Employees are entitled to a special class of leave for COVID-19 related illness. The leave is for personal illness, quarantine, caring for someone else who is sick, or caring for minor children. Employers may not require an employee to use other paid leave before the employee uses the paid sick time under this section.

Effective April 2, 2020; Expires December 31, 2020

7001 A 100 percent credit taken against payroll taxes for all leave given to employees under Section 5102. The credit is increased by the amount of qualified health plan expenses that are properly allocable to the qualified sick leave wages for which the credit is allowed. The credit in excess of payroll taxes is refundable. However, an employer cannot take this credit and the credit under Internal Revenue Code (IRC) Section 45S.

Expires December 31, 2020

7003 A 100 percent credit taken against payroll taxes for all leave given to employees under Section 3102 and the Family Medical Leave Act (FMLA). The credit is increased by the amount of costs incurred to maintain health plan coverage for employees.

Expires December 31, 2020

7005 The credit allowed in Sections 7001 and 7003 is increased by the amount of IRC Section 3111(b) tax paid on qualified sick leave wages or qualified family leave wages.

Expires December 31, 2020

Additional Guidance

Defense Pricing and Contracting (DPC) issued guidance, including:

Legislation

ENCLOSURE 1 Page 5 of 5

• CARES Act Section 3610 Implementation (2020-O0013, Revision 2) – This class deviation provides guidance to contractingofficers for implementing section 3610 and provides deviation clause DFARS 231.205-79 CARES Act Section 3610 –Implementation.

• Section 3610 Reimbursement Requests (2020-O0021, Revision 1) – This class deviation provides guidance to contractingofficers for reviewing and processing contractor requests for reimbursement under Section 3610, and provides three checkliststhe contracting officer may use to review the contractor’s request.

• Implementation Guidance for Section 3610 of the CARES Act, Frequently Asked Questions.• Allowability of Contractor Costs – Donation of Unused Leave in Response to the COVID-19 National Emergency.

A complete listing of DPC guidance issued in response to COVID-19 can be found at: https://www.acq.osd.mil/dpap/pacc/cc/COVID-19.html

FREQUENTLY ASKED QUESTIONS – INCURRED COST

ENCLOSURE 2 Page 1 of 3

Payroll Protection Program Loans, Loan Forgiveness, and Subsequent Credits to the Government Question 1: How should credits resulting from forgiven PPP loans be applied? Answer: The amount of a PPP loan that is forgiven will apply as a credit or cash refund under FAR 31.201-5. The credit should apply to contract costs in the same manner in which the PPP loan funds were originally spent by the contractor. For example, if a portion of the forgiven PPP loan was used to pay facility rent, the cost of facility rent should be credited. If that rent is part of an indirect cost pool, then the indirect cost pool would be reduced by the credit in the period in which the loan is forgiven. If a PPP loan was expended for direct contract cost and the contract can no longer be credited (i.e., it is complete), then the credit will be returned to the Government in a manner agreed to by the ACO. Section 1106 has strict documentation requirements and a company certification. This documentation should be available to the auditors. Question 2: Do the requirements of FAR 31.201-1, Composition of Total Cost, and FAR 31.201-5, Credits, apply to the provisions in the FFCRA and CARES Act? Answer: Yes. FAR 31.201-5, Credits, states “the applicable portion of any income, rebate, allowance, or other credit relating to any allowable cost and received by or accruing to the contractor shall be credited to the Government either as a cost reduction or by cash refund.” FAR 31.201-1, Composition of Total Cost, states that total cost is the sum of the direct and indirect costs allocable to the contract less any allocable credits. To the extent that PPP credits are allocable to costs allowed under a contract, the Government should receive a credit or a reduction in billing for any PPP loans or loan payments that are forgiven. Furthermore, any reimbursements, tax credits, etc. from whatever source that contractors receive for any COVID-19 Paid Leave costs should be treated in a similar manner and disclosed to the government. Additional Guidance

Defense Pricing and Contracting (DPC) issued guidance, including:

• CARES Act Section 3610 Implementation (2020-O0013, Revision 2) – This class deviation provides guidance to contracting officers for implementing Section 3610 and provides deviation clause DFARS 231.205-79 CARES Act Section 3610 – Implementation.

• Section 3610 Reimbursement Requests (2020-O0021, Revision 1) – This class deviation provides guidance to contracting officers for reviewing and processing contractor requests for reimbursement under Section 3610, and provides three checklists the contracting officer may use to review the contractor’s request.

• Implementation Guidance for Section 3610 of the CARES Act, Frequently Asked Questions.

FREQUENTLY ASKED QUESTIONS – INCURRED COST

ENCLOSURE 2 Page 2 of 3

• Allowability of Contractor Costs – Donation of Unused Leave in Response to theCOVID-19 National Emergency.

A complete listing of DPC guidance issued in response to COVID-19 can be found at: https://www.acq.osd.mil/dpap/pacc/cc/COVID-19.html

Question 3: If a contractor has cost-type contracts and its PPP loan is forgiven, will these contracts receive a credit due to the loan forgiveness?

Answer: Maybe. The amount of a PPP loan that is forgiven will apply as a credit or cash refund under FAR 31.201-5. The credit should apply to contract costs in the same manner in which the PPP loan funds were originally spent by the contractor. For example, if a portion of the forgiven PPP loan was used to pay facility rent, the cost of facility rent should be credited. If that rent is part of an indirect cost pool, then the indirect cost pool would be reduced by the credit in the period in which the loan is forgiven.

However, PPP loans may be used for expenses that do not include flexibly-priced contracts. For example, a business may wish to use the PPP to pay its employees for work they would have performed for commercial customers and request support under other CARES Act or FFCRA provisions for time employees would have spent supporting federal customers. In this scenario, forgiven loan amounts used solely to pay employees working on commercial effort would not create a credit or refund for the Government.

Question 4: How would a forgiven PPP loan be presented in the incurred cost proposal?

Answer: First, be aware that the loan forgiveness may not have been granted in the same accounting period as the loan issuance. The contractor may claim allowable costs in the year incurred, and provide the related credits to the government when the loan is forgiven, even if the contractor is expecting the loan forgiveness.

The presentation of credits and refunds to the Government in the incurred cost proposal depends on each contractor’s cost accounting structure and practices. PPP loan amounts that were expended on flexibly-priced Government contracts and were subsequently forgiven should be credited to those contracts in the same manner in which the original funds were expended. If a credit results due to a specific contract’s ODC costs, then that credit should be accounted for as a credit to ODCs for that contract in the incurred cost proposal for the period in which the loan is forgiven.

Question 5: How should a contractor present costs for which PPP loan forgiveness has been requested but not yet approved at the time the incurred cost proposal is due?

Answer: Until forgiven, PPP loans are a liability of the contractor and, therefore, should be on the balance sheet. Costs paid for by these loans are normal contract costs.

FREQUENTLY ASKED QUESTIONS – INCURRED COST

ENCLOSURE 2 Page 3 of 3

CARES Act Paid Leave

Question 6: How should a contractor classify COVID-19 leave costs under Section 3610?

Answer: The Department recommends that Section 3610 paid leave costs be charged to a newly created cost category, Other Direct Costs (ODC) COVID-19. Costs from ODC-COVID-19 may be allocated to the applicable contracts based on some reasonable, agreed upon allocation. In some situations, it may be more appropriate to charge these costs through indirect cost pools (overhead, G&A, etc.). In either case, the contracting officer and contractor should work together, as appropriate, to determine how the costs should be charged to the contracts.

Question 7: Does the incurrence of COVID-19 leave costs trigger a cost accounting practice change?

Answer: No. 48 CFR 9903.302-2(a) states that “the initial adoption of a cost accounting practice for the first time a cost is incurred…is not a change in cost accounting practice.” By creating a new category of costs in the Class Deviation, the Department has determined that cost accounting practices initiated to account for Section 3610 leave costs are not subject to the regulations for cost accounting practice changes set forth in FAR Part 30.603 and 30.604.

Question 8: How did the contractor seek reimbursement for CARES Act Section 3610 paid leave costs?

Answer: The process for requesting Section 3610 reimbursements for contracts with the Department of Defense is determined by agreement with the ACO and is governed by DPC Class Deviation 2020-O0021 Revision 1—Section 3610 Reimbursement Requests, dated October 14, 2020.

When auditing assertions that involve Section 3610 costs, auditors should become familiar with the agreement entered into between the contractor and Government and, if selected for testing, verify that the costs as presented in the incurred cost proposal are consistent with the methods of cost accumulation and the determinations of allowability in the agreement.

Auditors should note that CARES Act Sections 2101 through 2116 provide unemployment insurance articles. Auditors should ensure that 3610 requests for reimbursement do not include costs for which the employee received unemployment benefits. Under the CARES Act, employees do not have be laid off or furloughed to collect unemployment benefits.

FREQUENTLY ASKED QUESTIONS – FORWARD PRICING

ENCLOSURE 3 Page 1 of 4

Question 1: Do I need to be aware of the provisions of the CARES Act impact when performing an audit of forward pricing?

Answer: Yes. Most of the provisions of the CARES Act have a potential impact on forward pricing.

• The CARES Act extends to December 31, 2020. If a contractor’s FY 2021 starts prior toDecember 31, 2020, its FY 2021 indirect rates could possibly be impacted by CARESAct.

• If costs incurred during calendar year 2020 are used as part of the basis of estimate forthe proposal, the auditor needs to understand how the costs incurred are impacted by theCARES Act and what impact they have on the future estimates.

Question 2: Should a contractor’s estimates assume that the CARES Act relief provisions will be extended into calendar year 2021 and beyond when developing future estimates?

Answer: Currently, there is no enacted legislation that would extend the CARES Act into calendar year 2021. If the contractor’s estimating assumptions include extending CARES Act relief provisions beyond the dates provided in the legislation then these would represent contingencies under FAR 31.205-7. Contingencies may arise from presently known or unknown conditions that the effect of which cannot be measured so precisely as to provide equitable results to the contractor and to the Government. Contingencies should be excluded from cost estimates under the elements of cost, but should be disclosed separately (including the basis upon which the contingency is computed) to facilitate the negotiation of appropriate contractual coverage.

Question 3: Are paid leave costs for COVID-19 an allowable future cost?

Answer: Possibly. The paid leave reimbursed for COVID-19 under Section 3610 is limited to the period of March 27, 2020, to December 11, 2020. Section 3610 does not prohibit the reimbursement of paid leave prior to or after that period. Therefore, the reimbursement of the paid leave costs (other than Section 3610 paid leave) would be allowable charges to a contract if they were allowable, allocable, and reasonable per the existing regulations, contract terms, and consistent with the contractor’s accounting practices. If a contractor is proposing future paid leave for COVID-19, the auditor should obtain and review the contractor’s policy and methodology used for paid leave related to COVID-19 and evaluate it against the applicable cost principles.

Question 4: Should a contractor’s forward pricing estimates consider the impact of COVID-19?

Answer: Yes. The circumstances and manner in which each contractor’s estimates have been impacted by COVID-19 will vary. However, the contractor should consider how COVID-19 and changes in response to COVID-19 have impacted its future operations.

FREQUENTLY ASKED QUESTIONS – FORWARD PRICING

ENCLOSURE 3 Page 2 of 4

Question 5: When certified cost or pricing data is required, what is a contractor required to disclose in its proposal related to the impact of COVID-19?

Answer: The proposal data should include cost or pricing data reflecting the prospective cost required to provide the product or service during the defined period of performance. When certified cost or pricing data is submitted, the contractor is certifying that, to the best of its knowledge and belief, the cost or pricing data (as defined in FAR 2.101 and as required under FAR 15.403-4) the submissions are accurate, complete, and current as of a specific date.

The auditor must assess the disclosure requirements against the cost or pricing data definition. The key considerations include:

• Factual not judgmental;• Reasonably expect to affect price negotiations (significantly);• Verifiable – this would include the data forming the basis for judgment; and• Contributes significantly to the soundness of estimates – does not have to form the

basis of the estimate.

In assessing the proposal and expectation for disclosure, the auditor needs to be aware of the items in which a clear decision is made by someone in authority within the contractor organization to act, and the outcome is readily apparent. Generally, circumstances that may appear unclear or uncertain, but a decision has already been made by the contractor management, which have a significant potential impact on future costs, should be disclosed.

Question 6: There is an existing Forward Pricing Rate Agreement (FPRA), Forward Pricing Rate Recommendation (FPRR), or audit report on forward pricing rates that were finalized prior to the COVID-19 pandemic. What should happen now?

Answer: The auditor should be aware of changes or decisions that have a potential impact on the contractor’s indirect rates and assess the materiality of the impact on existing audit opinions expressed on the rates, FPRAs or FPRRs. Rates require updates to remain accurate, complete, and current as changes at the contractor occur. If the prior audit, FPRA, or FPRR does not consider the potential impact of COVID-19 and the impact is determined to be significant, action may be required to protect the Government’s interest. The auditor should determine if the contractor plans to submit an updated proposal and notify the contracting officer of the contractor response. The auditor should work with the contracting officer and cost monitor to develop a plan to evaluate and update the forward pricing rates.

Question 7: The DPC provided guidance on temporarily allowing the costs of donated leave. Should a contractor’s estimates assume that the costs of donated leave would be allowable in calendar year 2021 and beyond when developing future estimates?

Answer: Currently, there is no enacted legislation that would extend the allowability of donated leave to beyond December 2020. If a contractor’s estimating assumptions include extending this rule beyond the date provided in the DPC guidance they would represent contingencies under

FREQUENTLY ASKED QUESTIONS – FORWARD PRICING

ENCLOSURE 3 Page 3 of 4

FAR 31.205-7. Contingencies may arise from presently known or unknown conditions, the effect of which cannot be measured so precisely as to provide equitable results to the contractor and to the Government. Contingencies should be excluded from cost estimates under the elements of cost, but should be disclosed separately (including the basis upon which the contingency is computed) to facilitate the negotiation of appropriate contractual coverage.

Question 8: Are there other COVID-19 relief measures that I should be considering when performing forward pricing audits?

Answer: Yes. The Department of Defense’s response to the COVID-19 pandemic includes using the provisions in the CARES Act, as well as using class deviations and existing FAR and DFARS flexibilities. One key flexibility impacting forward pricing is the ability to grant no cost extensions. COVID-19 caused closures or delays can result in the Government granting no cost extensions. This shift in contract performance can result in significant impacts in a contractor’s indirect cost bases.

Question 9: Is it permissible for a contractor to insert a bottom line COVID-19 percentage adjustment without support in its proposals?

Answer: No. COVID-19 does not alleviate the responsibility of a contractor to provide sufficient support for its estimates. In accordance with FAR Part 15, a contractor’s proposal should be based on a well-supported basis of estimate (including COVID-19 costs set out as contingencies). To demonstrate reasonableness, the contractor must show how it computed the proposed COVID-19 costs while also providing the supporting data and appropriate explanations.

Question 10: Are there any common risk factor trends auditors should be aware of when auditing forward pricing?

Answer: Yes. The pandemic has resulted in changes to the way companies are doing business and is influencing management decisions related to short/long term operations and policies and procedures. Below are a few items to consider when planning forward pricing audits.

• How has the pandemic impacted current operations - How the contractor’s currentoperations were impacted by the pandemic can provide a lot of information toconsider in audits. While some contractors may experience limited disruptions,others may have been significantly impacted. Increased telework, facility closures,layoffs, changes in historical spending trends, and contract delays all provide insightinto possible impact to future operations. It is important to understand how historicaldata used as the basis for estimates was impacted and if those impacts will continueinto the future.

• What changes to the contractor’s policies and procedures occurred or are planned -Operating in a pandemic has changed how contractors function. This has resulted incontractors revising existing policies and procedures or adopting new policies and

FREQUENTLY ASKED QUESTIONS – FORWARD PRICING

ENCLOSURE 3 Page 4 of 4

procedures. We are seeing increased use of telework, revisions to leave policies, and expansion of employee benefits or company reimbursed expenditures. The allowability of such costs would be determined using the existing applicable cost principles. The auditor should be aware of the contractor’s new or pending policies and procedures to assess the impact on future estimates.

• Have production processes changed - The need for employee safeguards haveresulted in the contractor looking at its production processes and implementingchanges to protect employee health and wellbeing. These changes can influence theaccuracy of using historical information and learning curves on future estimates.

TAB 11

DCMA Manual 2201-02 Cost Accounting Standards Administration

Office of Primary Responsibility Indirect Cost Control Capability

Effective: February 7, 2019 Change 1 Effective: December 22, 2020

Releasability: Cleared for public release

Implements: DCMA-INST 2201, “Indirect Cost Control,” October 2, 2018

Reissues and Cancels: DCMA-INST 108, “Cost Accounting Standards (CAS) Administration,” April 3, 2013, as amended

Internal Control: Process flow and key controls are located on the Resource Page

Labor Codes: Located on the Resource Page

Resource Page Link: https://360.intranet.dcma.mil/Sites/Policy/IC/SitePages/DCMA-MAN%202201-02r.aspx

Approved by: David H. Lewis, VADM, USN, Director Change 1 Approved by: David G. Bassett, LTG, USA, Director

Purpose: This issuance, in accordance with the authority in DoD Directive 5105.64, “Defense Contract Management Agency (DCMA)”:

• Implements policy established in DCMA-INST 2201, "Indirect Cost Control"• Provides and defines procedures and responsibilities for the Administration of Cost

Accounting Standards

DCMA-MAN 2201-02, February 7, 2019 Change 1, December 22, 2020

Summary of Changes 2

SUMMARY OF CHANGES

This Manual has substantive changes. The most notable changes that have been incorporated are as follows:

• Revised Paragraph 3.3., to add language addressing the steps the Cognizant FederalAgency Official needs to take if there has been a change to the contractor’s CostAccounting Standards Administration status

• Rearranged Paragraphs 3.6., and 3.7., from the original DCMA-MAN 2201-02, datedFebruary 7, 2019, issuance so that the manual flows in a more logical manner

• Revised Paragraph 3.6., to add additional clarifying language for Non-Cost AccountingPractice Changes and Adequacy/Inadequacy of Disclosure Statement revisions andCBAR updates

• Added Section 4 which addresses record retention

DCMA-MAN 2201-02, February 7, 2019 Change 1, December 22, 2020

Table of Contents 3

TABLE OF CONTENTS

SUMMARY OF CHANGES………………………………………………………...……….….2 SECTION 1: GENERAL ISSUANCE INFORMATION……………………………………..5

1.1. Applicability……………………………………………………..…………………..…...5 1.2. Policy………………………………………………………………..………………..…..5 1.3. Tracking and Coordination…………………………………………………………....….5

SECTION 2: RESPONSIBILITIES……………………………………………………………7 2.1. Contract Management Office Commander/Director, Cost and Pricing Regional Command Director or Special Programs Cost and Pricing Center Director………………......7 2.2. CMO Contracts Director, Corporate/Divisional Administrative Contracting Officer Division Director, Special Programs Cost and Pricing Center Corporate/Divisional Team Supervisor……………………………...…………………………………………………..…..7 2.3. Cognizant Federal Agency Official, Administrative Contracting Officer, Divisional Administrative Contracting Officer, Corporate Administrative Contracting Officer…………8 2.4. Cost Monitor or Price/Cost Analyst…………………………...…………………….…...9 2.5. Cost & Pricing Regional Command Disclosure Statement Team……………...…….…10 2.6. Office of General Counsel……………………………...…………………………….…10

SECTION 3: PROCEDURES…………………………………………………………………11 3.1. Cost Accounting Standards Overview……………………………….............................11 3.2. Cost Accounting Standards Administration…………………………………....……….12 3.3. Verify Applicability of Cost Accounting Standards to the Particular Contract…….…..13 3.4. Determine Disclosure Statement Submission Requirements…………………...….…...17 3.5. Initial Disclosure Statement Adequacy and Compliance Review……………...….……17 3.6. Revised Disclosure Statement Adequacy and Compliance Review………...…….…….20 3.7. Changes to Disclosed or Established Cost Accounting Practices....................................24 3.8. Processing Noncompliances.............................................................................................29 3.9. Resolving Cost Impacts of Cost Accounting Practice Changes and Cost AccountingStandards Noncompliances......................................................................................................32

SECTION 4: RETENTION OF RECORDS.............................................................................36 4.1. Requirement to Establish Files.........................................................................................36 4.2. Storage, Handling, and Disposal……………………………………………....…….….36 4.3. Records Management System……………………………………….…………….……36 4.4. Protecting Classified and Controlled Unclassified Information………..……..…..….....37

GLOSSARY..................................................................................................................................38 G.1. Definitions………………….…………………………….……………………….……38 G.2. Acronyms and Initialisms...………………………………………………………….…40

REFERENCES……………………………………………………………………………….....42 . TABLES Table 1. Cost Accounting Standards………………………………………………………….....11 Table 2. Cost Accounting Standards Coverage…………………………………………………15 Table 3. Cost Accounting Standards Clauses…………………………………………………...16 Table 4. Types of Accounting Practice Changes & Adjustments……………………………….25

DCMA-MAN 2201-02, February 7, 2019 Change 1, December 22, 2020

Table of Contents 4

FIGURES Figure 1. Cost Accounting Standards Coverage and DS Requirement Determination………14

DCMA-MAN 2201-02, February 7, 2019 Change 1, December 22, 2020

Section 1: General Issuance Information 5

SECTION 1: GENERAL ISSUANCE INFORMATION

1.1. APPLICABILITY. This issuance applies to all DCMA activities unless higher-level regulations, policy, guidance, or agreements take precedence.

1.2. POLICY. This Manual expands on policy established in DCMA Instruction (DCMA- INST) 2201, “Indirect Cost Control,” to assign detailed responsibilities and provide procedures for DCMA Cost Accounting Standards (CAS) administration. DCMA administrative contracting officers (ACO) assigned as the cognizant Federal agency with responsibility for CAS administration of negotiated contracts and subcontracts must comply with Federal Acquisition Regulation (FAR) Part 30, “Cost Accounting Standards Administration,” policies and procedures in applying the Cost Accounting Standards Board (CASB) and rules and regulations (48 Code of Federal Regulations (CFR) Chapter 99 (FAR Appendix)). DCMA’s CAS administration functions will include but are not limited to:

a. Verify applicability of CAS and Disclosure Statement (DS) requirements.

b. Verify appropriate CAS clauses are incorporated in CAS-covered contracts during contractreceipt and review.

c. Verify whether a contract is subject to full CAS or modified CAS and whether a DS isrequired.

d. Monitor whether contractors are consistently following their Cost Accounting Practices(CAPs) under all of their CAS-covered contracts.

e. Ensure CAPs are disclosed in writing when required.

f. Ensure noncompliances and CAP changes are administered equitably and uniformly.

g. Issue a contracting officer’s final decision (COFD) stating the agency’s position on any CASrelated contractual issue that cannot be resolved.

h. Execute the policies and procedures in this Manual in a safe, efficient, effective, and ethicalmanner.

1.3. TRACKING AND COORDINATION. To comply with requirements to maintain contract audit follow-up system records of CAS administration actions, DCMA will:

a. Document the status of CAS coverage and the DS in the DCMA Contract Business AnalysisRepository (CBAR). See Resource Page for a link to the CBAR manual and training.

b. Create a record and document all CAS related submissions, audit memorandums and reports,and all associated contracting officer actions, in the Audit Issue Tracking (AIT) eTool (or other agency designated database tracking system). See Resource Page for AIT Guidance and Data Entry.

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Section 1: General Issuance Information 6

c. Comply with resolution and disposition requirements of CAS related audits in accordancewith (IAW) DCMA Manual (DCMA-MAN) 2201-04, “Contract Audit Follow Up,” and DoDI 7640.02, “Policy for Follow-up on Contract Audit Reports.”

d. Obtain a legal review prior to issuing a determination of CAS noncompliance, negotiating asettlement that includes a demand for payment on a CAP change or CAS noncompliance, or issuing a COFD. Promptly seeking assistance from assigned DCMA legal counsel ensures legal adequacy and, in particular, will ensure that DCMA preserves the Government’s legal right to pursue any potential claim within the 6-year Contract Disputes Act (CDA) statute of limitations. Detailed procedures for issuing and processing demands for payment are provided in DCMA-MAN 2501-10, “Contract Debts.” For detailed procedures on claims, contracting officers should review DCMA-MAN 2501-09, “Contract Claims and Disputes.”

e. Obtain Boards of Review (BoR) recommendations when applicable. The Cognizant FederalAgency Official (CFAO) must obtain appropriate management review of contracting actions before negotiating or taking action to settle an issue, including the use of a BoR when required. Guidance can be found in DCMA-INST 134, “Boards of Review,” (DCMA-INST 134 to be replaced by DCMA-MAN 2201-05, “Boards of Review”) which is found on the main Resource Page of DCMA- INST 2201, “Indirect Cost Control.”

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Section 2: Responsibilities 7

SECTION 2: RESPONSIBILITIES

2.1. CONTRACT MANAGEMENT OFFICE (CMO) COMMANDER/DIRECTOR, COST AND PRICING REGIONAL COMMAND DIRECTOR OR SPECIAL PROGRAMS COST AND PRICING CENTER DIRECTOR. The CMO Commander/Director, Center Director, or Special Programs Cost and Pricing Center Director must:

a. Ensure the organizational component performance of CAS administration for all contractsand subcontracts of a business unit under its cognizance.

b. Ensure the ACO promptly seeks legal advice from assigned DCMA legal counsel on anyCAS noncompliance issues to ensure legal adequacy and, in particular that DCMA preserves the Government’s right to pursue any potential claim within the 6-year CDA statute of limitations. (Sections 7101 through 7109 of Title 41, United States Code (U.S.C.), "Contract Disputes Act of 1978;" FAR 33.206(b)). Detailed procedures for issuing and processing demands for payment are provided in DCMA-MAN 2501-10. For detailed procedures on claims, contracting officers should review DCMA-MAN 2501-09.

c. Ensure compliance with resolution and disposition requirements of CAS noncomplianceaudits IAW DCMA-MAN 2201-04 and DoDI 7640.02.

d. Ensure AIT records, or other agency designated database tracking records, are created andstatus maintained for all CAS related submissions, audit memorandums/reports and all associated contracting officer actions in the AIT eTool, or other DCMA designated database tracking system.

2.2. CMO CONTRACTS DIRECTOR, CORPORATE/DIVISIONAL ADMINISTRATIVE CONTRACTING OFFICER (CACO/DACO) DIVISION DIRECTOR OR SPECIAL PROGRAMS COST AND PRICING CENTER CACO/DACO TEAM SUPERVISOR. The CMO Contracts Director, CACO/DACO Division Director or Special Programs Cost and Pricing Center CACO/DACO Team Supervisor must:

a. Review ACO DS adequacy and compliance determinations to ensure the determination isadequately supported and documented.

b. Review ACO determinations of contractor CAS compliance or noncompliance to ensure thedetermination is adequately supported and documented.

c. Review ACO immateriality determinations to ensure the determination is adequatelysupported and documented.

d. Review ACO cost impact on prenegotiation objectives or COFD to ensure the objective ordecision is adequately supported and documented.

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Section 2: Responsibilities 8

e. Ensure compliance with the BoR requirements, when applicable. See DCMA-INST 134Boards of Review (DCMA-INST 134 to be replaced by DCMA-MAN 2201-05) found on the main Resource Page of DCMA-INST 2201.

f. Ensure status of CAS coverage and status of the DS are documented in the CBAR eTool.

g. Ensure AIT records, or other agency designated database tracking system, are created andstatus maintained for all CAS related submissions, audit memorandums/reports and all associated contracting officer actions.

h. Ensure compliance with resolution and disposition requirements of CAS related audit reportsare documented in the DCMA Contract Audit Follow Up (CAFU) eTool (or other agency repository) IAW DCMA-MAN 2201-04 and DoDI 7640.02.

i. The CACO/DACO Division Director may delegate the above responsibilities, in writing, tothe CACO/DACO Division Team Supervisors, as appropriate.

2.3. COGNIZANT FEDERAL AGENCY OFFICIAL, ADMINISTRATIVE CONTRACTING OFFICER, DIVISIONAL ADMINISTRATIVE CONTRACTING OFFICER, CORPORATE ADMINISTRATIVE CONTRACTING OFFICER (CFAO/ACO/DACO/CACO). The CFAO within DCMA is the ACO/DACO/CACO, hereinafter referred to as ACO. The ACO must:

a. Maintain familiarity with CASB rules, regulations and standards (48 CFR Chapter 99 (FARAppendix)), as well as FAR Parts 30 and 31, the clauses at FAR 52.230 and this Manual. Request relevant training, as needed.

b. Assist the Procuring Contracting Officer (PCO) with determinations of contract CASapplicability, type of CAS coverage, and DS requirements.

c. Verify appropriate CAS clauses are incorporated in CAS-covered contracts during contractreceipt and review.

d. Determine whether there has been a change in a cost accounting practice.

e. Issue a determination on the adequacy of an initial DS, generally within 30 calendar daysafter receipt of the submission.

f. Perform reviews of DS revisions for adequacy and compliance, issue determinations on theadequacy and compliance of the revision within 60 calendar days after receipt of the submission, and process any CAP changes. See FAR 30.604.

g. Issue determinations regarding CAS noncompliances, or the contractor’s failure to follow itsdisclosed or established practices, based upon information provided by the cognizant audit office or otherwise disclosed. See FAR 30.605 and FAR 30.603-2(c)(2).

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Section 2: Responsibilities 9

h. Negotiate and resolve the cost impact of CAP changes or CAS noncompliances IAW FAR30.606(b)(1). If the ACO and the contractor do not agree on the amount of the cost impact, the ACO should issue a COFD IAW FAR 33.211 to unilaterally adjust the contract(s).

i. Coordinate with assigned legal counsel to ensure resolution and that the Government canassert any claim deriving from CAS noncompliances and cost impacts within the 6-year CDA Statute of Limitations.

j. Obtain legal review prior to issuing determinations when disagreeing with auditrecommendations. Legal review is not required when the auditor provides a written statement of concurrence to the ACO’s determination. Send a copy of the Defense Contract Audit Agency (DCAA) audit in the request for legal review.

k. Document and maintain the status of CAS coverage and status of the DS in the DCMACBAR eTool.

l. Create and maintain a current record in the AIT eTool (or other agency designated databasetracking system) for all CAS related activities (e.g., DS submissions, CAS related audit reports/memorandums, reviews of DS, cost impacts, and ACO final actions), closing the record only after all steps of the process are complete and the submission or issue is negotiated, determined immaterial or a COFD issued. A demand for payment may be applicable when issuing a COFD and if applicable, must be forwarded to legal counsel for review.

m. Document the resolution and disposition of CAS related audit reports in the DCMA CAFUsystem IAW DCMA-MAN 2201-04 and DoDI 7640.02.

n. Document in a Memorandum for Record (MFR) all applicable positions/determinations asdescribed in this Manual. MFRs are required to be reviewed and concurred by management at the appropriate level IAW Paragraph 2.2., to ensure the position/determination is adequately supported and documented.

o. Obtain legal review of External Restructuring Advanced Agreements and ensure compliancewith BoR requirements. See DCMA-INST 134 (DCMA-INST 134 to be replaced by DCMA-MAN 2201-05).

2.4. COST MONITOR OR PRICE/COST ANALYST. The Cost Monitor or Price/Cost Analyst must:

a. Maintain a familiarity with the CASB rules, regulations, and standards (48 CFR Chapter 99(FAR Appendix)), as well as FAR Part 30, FAR Part 31 and relevant FAR clauses, and this Manual. Request relevant training, as appropriate.

b. Develop a working knowledge of the DS for use in performing proposal pricing evaluationsand cost monitoring, identifying potential noncompliances, and assisting the ACO with DS adequacy and compliance reviews and determinations.

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Section 2: Responsibilities 10

c. Assist the ACO with coordinating timely audit report due dates with the cognizant auditoffice.

d. Assist the ACO with review and evaluation of contractor cost impact submissions to resolvethe cost impact of CAP changes or CAS noncompliances.

2.5. COST & PRICING REGIONAL COMMAND DISCLOSURE STATEMENT TEAM (DST). When requested by the ACO, the DST must support ACO DS adequacy and compliance reviews as follows:

a. Upon receipt of an ACO written request for assistance, the Cost & Pricing RegionalCommand’s DST Team Lead will assign the request to a DST member.

b. The DST member will assist the ACO in reviewing a contractor’s DS revision(s) foradequacy and/or compliance. The rationale of the DST recommendations or guidance must be included in the communication back to the ACO.

2.6. OFFICE OF GENERAL COUNSEL. Assigned legal counsel must:

a. Review all ACO final decisions and determinations of CAS noncompliance.

b. Review all ACO demands for payment to ensure proper statement of a claim by theGovernment.

c. Review determinations of CAS noncompliance, Government demands for payment,Government settlement positions, COFDs, and other ACO determinations, actions and notifications that address actual or potential contractor liability, IAW this Manual and the CAS Process and Decision Matrix found on this Manual’s Resource Page.

d. Review all ACO decisions that disagree with audit recommendations unless the ACOreceives a written statement from DCAA confirming that DCAA does not have any reservation with the CFAO’s decision/determination.

e. Advise the ACO of the date a potential Government accrual of a claim occurred, assuringprotection of the Government's rights, on the basis of a contractor’s CAS noncompliance, and whether the CAS noncompliance constituted a continuing CAS noncompliance, and a continuing claim.

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Section 3: Procedures 11

SECTION 3: PROCEDURES

3.1. CAS OVERVIEW.

a. CAS. CAS is a set of 19 rules and standards promulgated by the CASB for use indetermining the treatment of costs on negotiated contracts and subcontracts that are not otherwise exempt IAW 48 CFR 9903.201-1(b). 48 CFR Chapter 99 (FAR Appendix) contains the CASB Standards, and the preambles. Table 1 provides a list of the current Standards.

Table 1. Cost Accounting Standards Overall Cost Accounting Matters CAS 401 Consistency in Estimating, Accumulating and Reporting Costs CAS 402 Consistency in Allocating Costs Incurred for the Same Purpose CAS 405 Accounting for Unallowable Costs CAS 406 Cost Accounting Period Classes, Categories or Elements of Costs CAS 404 Capitalization of Tangible Assets CAS 407 Use of Standard Costs for Direct Material and Direct Labor CAS 408 Accounting for Costs of Compensated Personal Absence CAS 409 Depreciation of Tangible Capital Assets CAS 411 Accounting for Acquisition Costs of Materials CAS 412 Composition & Measurement of Pension Costs CAS 413 Adjustment & Allocation of Pension Costs CAS 414 Cost of Money as an Element of the Cost of Facilities Capital CAS 415 Accounting for the Cost of Deferred Compensation CAS 416 Accounting for Insurance Costs CAS 417 Cost of Money as an Element of the Cost of Capital Assets under

Construction Indirect Cost Pools CAS 403 Allocation of Home Office Expenses to Segments CAS 410 Allocation of Business Unit General & Administrative Expenses to Final Cost

Objectives CAS 418 Allocation of Direct and Indirect Costs CAS 420 Accounting for IR&D and B&P Costs

b. CASB. CASB is an independent statutorily-established (41 U.S.C. §1502) board andfunction located within the Office of Federal Procurement Policy (OFPP). The Board has the exclusive authority to make, promulgate, and amend CAS and interpretations designed to achieve uniformity and consistency in the CAPs governing the measurement, assignment, and allocation of costs to contracts with the United States Government. The CASB regulations are codified at 48 CFR, Chapter 99 (FAR Appendix). FAR 30.201-4 prescribes the appropriate CAS FAR 52.230 contract clauses.

c. FAR Part 30. FAR Part 30 describes the policies and procedures for applying the CASB rulesand regulations to negotiated contracts and subcontracts. The CASB standards are required for use

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Section 3: Procedures 12

by certain contractors and subcontractors in estimating, accumulating, and reporting costs in connection with pricing and administration of, and settlement of disputes concerning, all negotiated contract and subcontracts with the United States Government in excess of the Truthful Cost or Pricing Data threshold and not otherwise exempt IAW 48 CFR 9903.201-1(b), as adjusted for inflation. Contractors and subcontractors are required to comply with CAS, disclose their practices in writing and consistently follow their Cost Accounting Practices. See FAR 30.101. Contracts and subcontracts exempted from CASB’s Standards, rules and regulations include sealed bid contracts and contracts with small business concerns (See 48 CFR 9903.201-1 (FAR Appendix) and Figure 1 for these and other exemptions).

3.2. CAS ADMINISTRATION.

a. The CAS requirements must, to the maximum extent practicable, be administered by thecognizant Federal agency responsible for a particular contractor organization or location. The cognizant Federal agency should take the lead role in administering the requirements and coordinating CAS administrative actions (48 CFR 9903.201-7, “Cognizant Federal agency responsibilities”).

b. The ACO must perform CAS administration for all contracts and subcontracts of a businessunit, even when the PCO retains other administration functions. The ACO must make all CAS related determinations, as identified in Paragraph 2.3., of this Manual. The ACO should review applicable CAS, CASB rules and regulations, and FAR provisions throughout the process of administering each CAS related activity.

c. If DCMA is not administering any contracts of a business unit, but has accepted a request fordelegation of CAS administration responsibility from a procuring activity, the ACO must perform CAS administration and make all CAS related determinations for all contracts and subcontracts of the business unit. Otherwise, the procuring activity is responsible for the CAS administration.

d. The ACO should refer questions and requests for assistance regarding CAS interpretation,implementation, or administration to the cognizant auditor or internal team of advisors, e.g., supervisor, assigned legal counsel, Contractor Insurance and Pension Review (CIPR) team, Cost & Pricing Regional Command DST, and other subject matter experts.

(1) The ACO must request audit assistance from the audit servicing agency for review ofevery initial DS. All initial DSs must be reviewed by audit for both adequacy and compliance.

(2) The ACO must perform the review of DS revisions for adequacy and compliance, butmay request assistance from the cognizant audit office or from DST, as appropriate. Examples where assistance may be requested include, but are not limited to, DS revisions of a complex nature or those that involve a major reorganization.

(3) The ACO may request audit or DST assistance for CAS noncompliance and accountingchange cost impact reviews, as appropriate.

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Section 3: Procedures 13

(4) If audit or DST assistance is requested for DS revisions or CAS noncompliances, butcannot be provided in a timely manner to support resolution of potential issues, the ACO must proceed to complete the review.

(5) The ACO may request assistance from the DST outlying DS concerns, when needed.Requests for assistance from the DST may be made by the ACO through an email request to the designated DST coordinator. The request should include the ACO’s written summary of the issue(s) on which assistance is desired. The ACO and DST may decide DCAA assistance is necessary. Information, history, and clarifications regarding the DS revision can also be requested of DCAA. See the Resource Page for contact information on the DST.

(6) A DS contains contractor proprietary data. The ACO must coordinate with the assignedlegal counsel and the Office of Congressional and Public Affairs on any requests to the Government for release of information contained in a contractor’s DS.

(7) The ACO should request assistance from other technical and functional specialists orsubject matter experts, as needed.

3.3. VERIFY APPLICABILITY OF CAS TO THE PARTICULAR CONTRACT.

a. Pursuant to Section 1502 of Title 41, United States Code, CAS are mandatory for use bycontractors and subcontractors in certain negotiated contracts with the Federal Government. Pursuant to FAR 30.202-6(a), the PCO is responsible for determining CAS applicability, and for inserting the appropriate CAS clauses in the solicitation and contract award. The PCO must ensure that where CAS applies, the offeror complies with all required solicitation certifications and submits any required DS. Under special circumstances, the head of the agency for the procuring contracting activity may waive applicability of CAS for a particular contract or subcontract if the conditions set out in FAR 30.201-5(b) are met. See Defense Federal Acquisition Regulation Supplement (DFARS) 230.201-5, “Waiver,” for conditions and requirements applicable to DoD waivers of CAS coverage.

b. There are two types of CAS coverage; full or modified. Figure 1 and Table 2 provide criteriafor determining if full or modified CAS coverage applies. Note that contractors with smaller dollar-value CAS-covered contracts may elect application of the less stringent modified coverage.

(1) FAR solicitation clause 52.230-1 allows offerors to elect modified CAS coverage bychecking a box. If an eligible business concern does not claim modified CAS coverage in responding to the solicitation as outlined in FAR 52.230-1, the offeror agrees to be subject to full CAS coverage.

(2) Contracts and subcontracts with foreign concerns are only subject to CAS 401 and CAS402. See 48 CFR 9903.201-2(e). 48 CFR 9903.201-1(b)(4) exempts contracts and subcontracts withforeign governments or their agents or instrumentalities from all CAS requirements.

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Figure 1. CAS Coverage and DS Requirement Determination

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Table 2. CAS Coverage CAS Coverage (48 CFR 9903.201-1) (See exemptions in Figure 1)

Coverage Type

Application Coverage requires that the business unit:

Full Required of contractor business units that:

Receive a single CAS-covered contract award of $50 million or more; or

Received $50 million or more in net CAS- covered awards during its most recent cost accounting period.

Note: Net awards means the total value of negotiated CAS-covered prime contract and subcontract awards, including the value of contract options, received during the reporting period minus cancellations, terminations, and other related credit transactions (48 CFR 903.301(a)). Transfers from one business segment to another are considered subcontract awards for the purpose of measuring CAS- covered awards (48 CFR 9903.201-2(d)).

Comply with all Standards that are in effect on the date of contract award and with any Standards that become applicable because of later award of a CAS-covered contract.

In addition, the business unit must submit and maintain a DS of its CAPs.

Modified If the offeror certifies that it is eligible for and elects to use modified coverage, it may be applied to a CAS-covered contract of:

Less than $50 million awarded to a business unit that received less than $50 million in net CAS- covered awards in the immediately preceding cost accounting period.

Comply with CAS 401, 402, 405, and 406.

Note: A contract awarded with modified CAS coverage must remain subject to modified coverage throughout its life regardless of changes in the business unit’s CAS status during subsequent cost accounting periods.

Foreign Concerns

Contracts and subcontracts with foreign concerns (48 CFR 9903.201-2(e))

(48 CFR 9903.201-1(b)(4) exempts contracts and subcontracts with foreign governments, their agents or instrumentalities from CAS requirements.)

Must comply with CAS 401 and 402.

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c. During contract receipt and review, the ACO must ensure/verify the applicable CAS clausesare incorporated into the contract and notify the CFAO of the existence of the CAS- covered contract. The CAS requirements are implemented through inclusion of various CAS clauses in the contract or subcontract, as summarized in Table 3. See FAR 30.201-4 for guidance on prescription of the appropriate FAR 52.230 clauses.

d. If the appropriate clauses are not included in the contract, the ACO must initiate a contractdeficiency report (CDR) IAW DCMA-MAN 2501-01, “Contract Receipt and Review.” These clauses have mandatory flow down provisions requiring the prime contractor to include the substance of the applicable clauses in all CAS-covered subcontracts at any tier (FAR 52.230- 2(d)). If a prime contract is not subject to CAS, any subcontracts awarded under it will not be subject to CAS because there will be no CAS clauses to “flow down.”

Table 3. CAS Clauses FAR Clause Negotiated Contracts Subject To or With …. 52.230-2, Cost Accounting Standards Full CAS Coverage 52.230-3, Disclosure and Consistency of Cost Accounting Practices

Modified CAS Coverage (CAS 401, 402, 405, 406)

52.230-4, Disclosure and Consistency of Cost Accounting Practices – Foreign Concerns

Foreign Concerns (non-govt) - Unless Exempt

52.230-5, Cost Accounting Standards – Educational Institution

Educational Institutions

52.230-6, Administration of Cost Accounting Standards

Any Contracts Containing Above Clauses

52.230-7, Proposal Disclosure – Cost Accounting Practice Changes

Contract award results in a CAP change

e. Generally, contract modifications made under the terms and conditions of the contract do notaffect its status with respect to CAS applicability. Therefore, if CAS was applicable to the contract, it will apply to the modification. Conversely, if the contract was exempt from CAS, the modification will also be exempt regardless of the amount of the modification. However, if the contract modification adds new work, or adds increased quantities beyond those provided for in a contract option, it must be treated for CAS purposes as if it were a new contract. In this case, if the modification exceeds the threshold, it will be CAS-covered. The ACO should seek advice from the assigned DCMA legal counsel to assist in determining whether a contract modification is in-scope or out-of-scope. Criteria exempting negotiated contracts or subcontracts from CAS coverage can be found in Figure 1.

(1) The contractor must take all steps necessary to ensure CAS compliance in accounting forthe work that is the subject of the modification. Costs incurred to support the modification must be segregated from other costs that are not CAS-covered.

(2) Subsequent contract modifications will be subject to CAS coverage if: (a) themodification adds work within the scope of an existing CAS-covered contract modification, or

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the modification adds new, out-of-scope work and, if awarded as a new contract, would be subject to CAS coverage pursuant to 48 CFR 9903.201-1.

f. If CAS coverage and a DS are not required, the contractor is not absolved from complyingwith FAR/DFARS guidance and applicable regulations.

g. If there has been a change to the contractor’s CAS status (e.g., no CAS coverage to full ormodified CAS coverage; or modified to full CAS coverage) the ACO must prepare an MFR documenting the rationale for the change and upload to CBAR or Agency designated replacement tool. First line supervisor review and concurrence of the MFR is required. Additionally, the ACO should provide a copy of the MFR to DCAA.

3.4. DETERMINE DISCLOSURE STATEMENT SUBMISSION REQUIREMENT.

a. A DS is a written description of a contractor’s CAPs and procedures that relate to themethods or techniques for measuring, assigning and allocating costs, and is particularly important for understanding how the contractor estimates, accumulates and reports costs. The contractor is required to submit the DS using Form CASB DS-1, “Cost Accounting Standards Board Disclosure Statement Required by Public Law 100-679” or, for educational institutions, Form CASB DS-2, “Cost Accounting Standards Board Disclosure Statement Required by Public Law 100-679 Educational Institutions.” The contractor must provide in these forms information on its operations and specific information on the contractor’s accounting for specific types of costs.

b. 48 CFR 9903.202-1 provides detailed guidance on when a DS is required.

c. Each corporate or other home office, to include all levels of intermediate home offices, whichallocates costs to one or more disclosing segments performing CAS-covered contracts must submit a completed Part VIII of the DS. Reference 48 CFR 9903.202-9 CASB DS-1 for applicable instructions.

d. When a DS is required, it is the PCO’s responsibility to ensure an offeror submits a DS. TheACO, however, should verify whether the contractor has submitted the DS, or assist the PCO in obtaining it, if necessary.

e. IAW 48 CFR 9903.202-1(e) and FAR 30.202-8, foreign contractors and subcontractors whoare required to submit a DS may, in lieu of filing a Form CASB DS-1, make disclosure by using a disclosure form prescribed by an agency of its Government, provided that the CASB determines that the information disclosed by that means will satisfy the objectives of 41 U.S.C. §1502. The use of alternative forms has been approved for the contractors of the followingcountries: Canada, Federal Republic of Germany, and the United Kingdom.

3.5. INITIAL DISCLOSURE STATEMENT ADEQUACY AND COMPLIANCE REVIEW.

a. Contract Award. At the time of award of a contract that has been determined to be CAS- covered, the contractor may already have disclosed CAPs and submitted a DS. If not, submission of an initial DS is required as stated in Paragraph 3.4. The cognizant audit office is responsible for conducting an adequacy and compliance review of the contractor’s initial DS and of revisions that

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constitute complete updates of the contractor’s DS. The ACO is responsible for issuing the written determinations to the contractor. If there is any question whether the submission is a complete update, the ACO should discuss with the contractor and the auditor. The review and ACO determinations on the initial DS is a two-step process. The first step is for the ACO to review and determine the adequacy of the DS. The second step is for the ACO to determine whether the disclosed CAPs comply with CAS and FAR Part 31.

b. Audit. Upon receipt of a contractor’s initial DS, the ACO must submit a request for audit tothe cognizant audit office. The audit office reviews the initial DS to ascertain whether it is current, accurate, and complete. DCAA will not issue an audit report on the adequacy of an initial DS, but will issue a memorandum on whether the contractor’s initial DS submission is adequate and acceptable to perform an audit of the disclosed practices for compliance with CAS and FAR Part 31. Once the ACO affirms a determination of adequacy on the initial DS, based on the memorandum/report and discussion between the parties, DCAA will review and report on whether the initial DS is in compliance with CAS and FAR Part 31. The ACO must issue the written adequacy determination before DCAA can release the audit report on compliance.

c. AIT (or other Agency designated tracking system). The ACO must also ensure that a recordis created in the AIT eTool (or other agency designated tracking system) of the initial DS and must document and maintain current the status of review and other actions in the AIT record. The AIT Guidance & Data Entry instructions from the Resource Page must be used when entering information into the AIT records. AIT records should not be deleted upon closure.

(1) The ACO must coordinate with assigned legal counsel to establish the estimated accrualdate for a Government claim. The accrual date is different for initial and revised DSs versus CAS noncompliances. Generally, the accrual date is the effective date of the initial or revised DS. CAS noncompliance should be coordinated with assigned legal counsel. The date should be entered in the “Notice of Accounting Change/Noncompliance Date” field of the AIT record or other agency designated tracking system.

(2) Once a date has been entered in the “Notification of Accounting Change/CASNoncompliance Date” for the accrual date for a Government claim, DO NOT change the date, regardless of the number of contractor reissuances in trying to satisfy the adequacy requirement. DO NOT close or delete the record if the DS is determined to be inadequate; the same record should just be updated when a corrected DS is submitted. The claim accrual date will not change unless the ACO coordinates with the assigned DCMA legal counsel, and DCMA legal counsel recommends a revised accrual date.

d. DS Adequacy. Upon receipt and review of the memorandum or advice from DCAAdocumenting its recommendations on the adequacy of the DS, the ACO should discuss any adequacy issues with the contractor in order to facilitate the correction of the adequacy issue(s). Upon such resolution, the ACO must request the contractor to resubmit the initial DS that incorporates the adequacy corrections which replaces the original initial DS in its entirety. Generally, pursuant to FAR 30.202-7(a)(3), the CFAO should furnish the contractor notification of adequacy within 30 calendar days after receiving the DS. The ACO determination of adequacy should be based upon the initial DS submission as supplemented by the revised initial submission. To be considered adequate, a DS must be current, accurate, and complete.

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(1) If the contractor is unwilling to resolve adequacy issues as identified in the review of theinitial DS on a timely basis, the ACO should issue a written determination that the initial DS is not adequate.

(2) If the initial DS is adequate, the ACO must notify the contractor in writing and provide acopy to the auditor, as well as the PCO if the DS submission was triggered by a proposal. The notice must comply with the requirements of FAR 30.202-7(a)(2).

(3) See the Resource Page for a template of the ACO’s determination of adequacy of aninitial Disclosure Statement Submission letter.

e. Compliant DS. Once the ACO makes a determination that the contractor’s initial or revisedand updated DS is adequate, the ACO will request the cognizant audit office to conduct a detailed compliance review.

(1) The auditor’s review will ascertain whether or not the disclosed practices comply withall applicable CAS and FAR Part 31 requirements and report audit findings to the ACO.

(2) The ACO, with assistance of the Cost Monitor or Price/Cost Analyst, must review theaudit report and document the ACO’s position/determination on both the adequacy and compliance of the initial DS with the MFR.

f. DS Compliance MFR. The supporting MFR must provide an affirmative statement that theACO agreed or disagreed with each of the audit and functional specialist findings. In documenting the ACO’s decision, the MFR must include the appropriate level of rationale to support and/or resolve each audit or technical specialist recommendation. The rationale must demonstrate the ACO considered all appropriate laws, regulations, and DCMA issuances related to the issues raised. The ACO will then make a determination regarding the initial DS compliance with CAS and FAR Part 31. Noncompliances with FAR Part 31 must be processed separately.

(1) Compliant DS. If the initial DS is compliant, the ACO must notify the contractor of thedetermination in writing, with copies to the cognizant auditor office and the affected PCO if the DS submission was triggered by a proposal. See the Resource Page for the template, “ACO’s Determination of Compliance of an initial Disclosure Statement Submission.”

(2) Noncompliant DS. If the ACO agrees with the auditor and determines the initial DS isnoncompliant with CAS and/or FAR Part 31, the ACO must take action regarding the noncompliance IAW FAR 30.605(b) and issue a notice of potential noncompliance within 15 calendar days of receiving the audit report. Pursuant to FAR 30.202-7(b)(2), the ACO should issue a notice to the contractor requesting a revised DS that corrects the CAS noncompliance. See Paragraph 3.8., on Processing CAS Noncompliances. Noncompliances with FAR Part 31 must be processed separately.

g. Management Review. Prior to the ACO issuing an adequacy or compliance determination,the determination letter, along with all supporting documentation, including the supporting MFR, must be reviewed and concurred with by management to ensure the determination is adequately supported and documented. Management review and concurrence is performed by the CMO

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Contracts Director or Director of the CACO/DACO Division. The Director of the CACO/DACO Division may delegate management review and concurrence no lower than the team supervisor.

h. ACO Audit Follow up. The ACO must resolve and disposition any audit reports on the DScompliance upon issuance of the written determination to the contractor IAW DCMA-MAN 2201-04 and DoDI 7640.02.

i. Updating CBAR (or other Agency designated tracking system). The ACO must documentand maintain the status of CAS coverage and status of the DS in the DCMA CBAR eTool or other Agency designated tracking system.

j. Subcontractor DS. Adequacy and compliance determinations of the subcontractor DS mustbe made by the cognizant subcontractor ACO and be provided to the prime or next higher-tier subcontractor ACO. The higher-tier ACO must not change the determination of the lower-tier ACO (FAR 30.202-8).

3.6. REVISED DISCLOSURE STATEMENT ADEQUACY AND COMPLIANCE REVIEW.

a. Amended or revised DS. The contractor is free to amend or revise its DS at any time,including changing its disclosed or established CAP. However, the contractor must submit a revised DS to the ACO whenever it makes a change to its DS. The ACO is responsible for processing any revisions to the DS that result in CAP changes and resolving the associated cost impact to affected CAS-covered contracts and subcontracts. Pursuant to FAR 30.603 and FAR 52.230-6, the contractor shall provide notification of any revision to the DS at least 60 calendar days prior to implementation.

b. ACO Receipt of DS Revision. Upon receipt of a revised DS, the ACO must review therevisions, and may request a meeting with the contractor to walk through the revisions and invite the cognizant auditor or functional specialist to attend. The goal of the walk through meeting is for the Government to obtain an understanding of what is being revised and why. The ACO must determine if the revision includes a CAP change and if so, is it due to a correction of a noncompliance, supersedes or is otherwise related to a previous revision. Individual revisions to a DS can consist of both CAP changes and non-CAP changes. See Paragraph 3.7., for the definition of a CAP change and the CAP change process.

c. Non-CAP Changes. Non-CAP changes are administrative in nature and/or enhance thedescription of the contractor’s CAPs as described below:

(1) Non-CAP (formerly referred to as Admin Changes). Non-substantive changes do notaffect the description of a cost accounting practice. These changes do not alter the assignment, allocation or measurement of cost as defined at 48 CFR 9903.302-1. Examples of non-CAP changes include name and address changes, change in point of contact, additional language for clarification, pagination updates, punctuation changes, and level of CAS-covered government sales in Part 1 of the DS, some organizational changes, and initial adoption or elimination of cost, functions, or segments. The ACO will review the DS to ensure that the changes made are purely administrative in nature and are not enhancements of existing descriptions of cost accounting practices. If purely administrative, the ACO will acknowledge the submission by providing a notification letter

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to the contractor, but will not provide a determination of adequacy or compliance as there have been no enhancements or changes in description of cost accounting practices and the DS was previously determined adequate and compliant. A notification template is located on the DCMA-MAN 2201-02 Resource Page.

(2) Description Enhancements. Description enhancements may be provided by thecontractor at any time. These include changes in CAP descriptions with the goal of improving the adequacy of descriptions of accounting practices which have already been determined adequate and compliant. These enhancements do not alter the assignment, allocation or measurement of cost as defined at 48 CFR 9903.302-1. An ACO adequacy determination of enhanced descriptions should be made after consideration of the enhanced description. An adequacy determination template is provided on the Resource Page. A determination of compliance is not considered necessary as the cost accounting practice has not changed and has already been determined compliant.

(3) Initial Adoptions: An initial adoption of a cost accounting practice is not considered acost accounting practice change however because a determination of adequacy and compliance of the practice has not been made in the past as part of the initial DS review or any subsequent revisions it should be reviewed for both adequacy and compliance and an ACO determination should be issued. A review for adequacy and compliance may be necessary for other organizational changes depending on the circumstance. An adequacy and compliance determination template is provided on the Resource Page.

NOTE: Many Disclosure Statements include a combination of the above and the templates may be tailored to fit the situation. It is not necessary to provide two separate determinations.

d. AIT (or other Agency designated tracking system). The ACO must also ensure that a recordof the DS revision documenting the CAP change is created in the AIT eTool (or other DCMA designated database tracking system) upon receipt of the submission and must document and maintain the current status of review and other actions in the AIT record. A single AIT record is maintained and updated throughout the entire business process (e.g., one AIT record per DS effective date).

e. ACO Determination. The ACO must review the description of the DS revision for adequacyand compliance and issue a written determination to the contractor within 60 calendar days from receipt of the submission so that issues may be resolved prior to implementation of any changes, to the maximum extent feasible. The ACO may request assistance in reviewing the revision from team advisors, or the cognizant audit office, as determined appropriate. The ACO does not test the contractor’s implementation of the DS language as part of the compliance determination. Testing of the contractor’s actual practices is performed by the cognizant auditor as part of other routine audits, and by the ACO, Cost Monitor, or Price/Cost Analyst as part of routine activities.

(1) Adequacy of DS Revision. A DS revision is adequate if it is current, accurate andcomplete. Reviews for adequacy are based solely on the descriptions in the DS revision itself, unless the contractor refers to other documents, such as policies, procedures, accounting manuals or desk procedures. The DS logic tools, “Conformity of Disclosure Statement with General Instructions,” and the “Internal Consistency of Disclosed Practices in a Disclosure Statement” from the Resource Page must be used in determining adequacy of the revised DS.

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(a) A DS is current if it describes the CAPs that the contractor intends to follow forestimating, accumulating, and reporting costs associated with CAS-covered contracts. The DS, therefore, could possibly include practices that are currently in use; will be instituted at some future specified date; will be followed with the incurrence of a new cost; or a combination of these.

(b) A DS is accurate if it correctly, clearly, and distinctly describes the actual CAPs theprime contractor or subcontractor uses or intends to use on contracts subject to 41 U.S.C. §1502.

(c) A DS is complete if it includes all significant CAPs the contractor intends to use andprovides enough information for the Government to fully understand the CAPs described.

(2) Inadequacy of DS Revision. If the description of the change is inadequate, the ACOshould discuss the inadequacies with the contractor. If the contractor is not willing to correct the inadequacies on the basis of the ACO’s verbal request, the ACO must notify the contractor in writing that the revision is not adequate and request a revised description of the new CAP by a specified date. If a noted inadequacy does not preclude a compliance review, the ACO should proceed with the compliance review, concurrent with waiting for the contractor to correct the inadequacy.

NOTE: If the ACO notifies the contractor in writing that a revision under consideration is inadequate, the ACO should not change the CBAR status to “Inadequate,” unless the contracting officer withdraws the initial determination of adequacy. CAUTION: This, obviously, will disrupt and delay normal procurement processes and such action should, therefore, not be taken unless it is based on substantive issues.

(3) Compliance. A DS revision is compliant if the CAPs described in the revision complieswith all applicable CAS and FAR Part 31. While actual practices are not tested by the ACO as part of the compliance review, the ACO should not ignore available information that indicates there could be a compliance issue and should request assistance, as appropriate, from the cognizant auditor or internal team advisors (supervisor, assigned legal counsel, CIPR team, Cost & Pricing Regional Command DST, and other subject matter experts).

(4) DST and Audit Services. See Paragraph 3.2.d.(5) of this Manual for DST assistancerequest requirements. Generally the ACO will seek assistance from the DST if needed. If it is of a highly complex nature the ACO may request the cognizant audit office to review the revised practices for the DS revision.

(5) MFR. Upon completion of the adequacy and compliance review, the ACO must preparea supporting memorandum to file in the Agency’s approved record management system and in compliance with approved taxonomy. MFRs are required to be reviewed and concurred by management at the appropriate level IAW Paragraph 2.2., to ensure the position/determination is adequately supported and documented. If an audit report has been issued, the memorandum must contain an affirmative statement that the ACO agreed or disagreed with each audit recommendation and other technical specialist findings, and include sound rationale to support and/or resolve each audit or technical specialist recommendation. The rationale must demonstrate that the ACO has considered all relevant laws, regulations, and DCMA issuances related to the issues raised.

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(6) Adequacy and Compliance Determination. If a DS revision is both adequate andcompliant, the ACO must notify the contractor in writing, using the ACO Determination of Adequacy and Compliance letter template from the Resource Page, and request the contractor to submit a cost impact proposal if the revision included a CAP change(s). Prior to requesting a cost impact proposal, the ACO must review the contractor’s written statement and supporting rationale that the cost impact of the change is immaterial. Request the advice of the auditor as needed. See Paragraph 3.7., for processing CAP changes.

(7) DS Revision Noncompliance. If the described change is noncompliant and the changewas not yet implemented, the ACO should discuss the noncompliance with the contractor. If the contractor is not willing to correct the noncompliance on the basis of the ACO’s verbal request or the change has already been implemented, the ACO must notify the contractor in writing that, if implemented, the CAP will be determined noncompliant and will be processed accordingly. See Paragraph 3.8., for Processing CAS Noncompliances. If the described change is noncompliant and the cost impact is immaterial, pursuant to FAR 30.605(b)(4), the ACO must inform the contractor in writing that the change is noncompliant, and: “(A) The noncompliance should be corrected; and (B) If the noncompliance is not corrected, the Government reserves the right to make appropriate contract adjustments should the noncompliance become material in the future.” The ACO should periodically request data from the contractor to evaluate whether the cost impact has become material.

(8) Materiality Determination. See Paragraph 3.9.k., for guidance regarding materialitydeterminations. If the cost impact is immaterial, the ACO must notify the contractor in writing and conclude the cost impact process with no contract adjustments. The ACO will provide the auditor with a copy, if applicable, and close the action in the AIT eTool (or other DCMA designated database tracking system). It should be noted that materiality determinations should not be made until the CAP change has been determined to be adequate and compliant/ noncompliant. The CMO Contracts Director or CACO/DACO Division Director/Cost and Pricing Regional Command CACO/DACO Team Supervisor or Special Programs Cost and Pricing Center CACO/DACO Team Supervisor must review and concur with the immateriality determination to ensure it is adequately supported and documented prior to the ACO issuing the determination.

f. Order of Review. Normally the ACO should review DS revisions in sequential order. Incircumstances where DS revision reviews cannot be completed in sequential order, the ACO should consider interrelationships between the revision being reviewed and previous or subsequent revisions. Determination letters in such circumstances must be carefully qualified to state that previous revisions not yet reviewed should not be deemed adequate or compliant. The ACO should encourage the contractor to number revisions, and corrections or supplements to revisions, in a logical manner that facilities documentation and review of the DS (Ex: Revision 3, corrected or supplemented by 3a, and 3b if necessary, and so on).

g. Supporting Documentation. ACOs should use discretion in determining the extent ofsupporting documentation required to convey the rationale and sound business judgment of their determination of adequacy and compliance (e.g., memorandums for record, peer/supervisory reviews, legal review.) ACOs should consider the complexity, high-risk, controversial, or precedent-setting nature of the contracting action when making decisions on the extent of supporting documentation required and request assistance from the team of advisors (See Paragraph 3.2.d.).

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h. Management Review. Prior to the ACO issuing an adequacy or compliance determination,the determination, along with all supporting documentation which will include the supporting memorandum to file, must be reviewed and concurred with by management. Management review and concurrence is performed by the CMO Contracts Director or Director of the CACO/DACO Division. The Director of the CACO/DACO Division may delegate management review and concurrence no lower than the team supervisor. The reviewer must ensure the determination is adequately supported and documented.

i. CAFU & CBAR eTool/Tracking System. The ACO must resolve and disposition any auditreports associated with the DS revision (e.g., DS adequacy and compliance reviews, CAS noncompliance audits, cost impact reviews) IAW DCMA-MAN 2201-04 and DoDI 7640.02. When DS Revisions are determined to be adequate and/or compliant, the status of DS Adequacy and Compliance determinations must be updated in the CBAR eTool or Agency designated replacement tool. To avoid confusing the buying activities with different Adequacy and Compliance dates in CBAR, use the latest determination date of the most recent DS Revision.

NOTE: If the ACO notifies the contractor in writing that a revision under consideration is inadequate, the ACO should not change the CBAR status to “Inadequate,” unless the contracting officer withdraws the initial determination of adequacy. CAUTION: This, obviously, will disrupt and delay normal procurement processes and such action should, therefore, not be taken unless it is based on substantive issues.

3.7. CHANGES TO DISCLOSED OR ESTABLISHED COST ACCOUNTING PRACTICES.

a. CAP Change Notification. Pursuant to FAR 30.603-1(c)(2), not less than 60 calendar days(or other mutually agreed to date) before implementation of a CAP change, the contractor must submit to the ACO a description of the CAP change. Pursuant to FAR 30.603-2(c), the contractor is required to submit rationale to the ACO to support any contractor written statement that the cost impact of the change is immaterial. If the contractor implements a CAP change without submitting the required notice, pursuant to FAR 30.603-2(c)(2), the ACO may determine the change a failure to follow disclosed or established CAP consistently and process as a noncompliance. See Paragraph 3.8., for information on processing noncompliances.

b. CAP Definition. Pursuant to 48 CFR 9903.302-1 a CAP is defined as any disclosed orestablished accounting method or technique used for the allocation of cost to cost objectives, assignment of cost to cost accounting periods, or measurement of cost. The following are exceptions to CAP changes:

• Initial adoption for the first time a cost is incurred or a function is created;• Partial or total elimination of a cost or cost of a function;• Revision of a CAP for a cost which previously had been immaterial

Organizational changes may result in CAP changes. Assistance is available from the DST or DCAA in determining whether a CAP change has been made.

c. AIT (or other Agency designated tracking system). The ACO must also ensure that a recordof the DS revision documenting the CAP change is created in the AIT eTool (or other DCMA

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designated database tracking system) upon receipt of the submission and must document and maintain the current status of review and other actions in the AIT record. See Paragraph 3.5.c.

d. Types of CAP Changes. FAR 30.603 discusses the three types of CAP changes; required,unilateral and desirable. These changes and the associated cost adjustments are summarized in Table 4. Please note that corrections to CAS noncompliances are not to be treated as CAP changes as defined at FAR 30.603.

Table 4. Types of Accounting Practice Changes & Adjustments

Full Coverage Modified Coverage

Type of Contract Clause/ Contract Clause/ Accounting Provision Provision Adjustment/ Change 9903.201-4(a) 9903.201-4(c) Description Cost Impact

Required (a)(4)(i) (a)(3)(i)

Required to comply with a new or modified Standard issued by the CAS Board, or to remain in compliance with any Standard when award of a contract would require an offeror to change its cost accounting practices, or a former practice was in compliance with applicable CAS and the change is necessary to remain in compliance.

Equitable Adjustment - the

ACO must negotiate an

equitable adjustment (upward or

downward) on one or more

existing CAS-covered

contracts, for any material cost impact.

Unilateral (a)(f)(ii) (a)(3)(ii) The change is unilateral unless the ACO determines the change is desirable to the Government.

No increased costs in the aggregate

paid by US Govt. plus daily

compound interest.

Desirable (a)(4)(iii) (a)(3)(ii)

The Contractor makes a unilateral change, but the ACO determines that the change is desirable and not detrimental to the Government.

Equitable Adjustment – see

note above for Required change.

NOTE: A correction of a CAS noncompliance IS NOT treated as a CAP change. However, for purposes of cost adjustment, continuation of the clause provision includes the following:

CAS Noncompliance (a)(5) (a)(4)

The contractor's disclosed (DS) or established accounting practices are in noncompliance with CAS, or the contractor fails to follow its disclosed practices.

No increased costs in the aggregate

paid by US Govt. Recovery of

increased costs plus daily compound

interest.

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(1) Required Accounting Change. A required change is a CAP change that a contractor isrequired to make to comply with applicable standards, modifications, or interpretations thereto, that subsequently become applicable to an existing CAS-covered contract due to the receipt of another CAS-covered contract or subcontract. It also includes a prospective change to a disclosed or established CAP when the ACO determines that former practice was in compliance with applicable CAS and the change is necessary for the contractor to remain in compliance. This type of change may require an equitable adjustment, but only to those CAS-covered contracts priced and awarded before the effective date of the new or modified standard. See FAR 30.603-1, for requirements for pricing proposals, DS submission and to provide support of immaterial cost impact.

(a) FAR 52.230-7 requires offerors to check “yes” in its proposal if the contract awardwill result in a required or unilateral change in CAP, including unilateral changes requested to be desirable changes. If contract award would require a change, the offeror must submit a description of the change as pricing support for the proposal.

(b) When a contractor elects to implement a required change to comply with a new ormodified standard prior to the applicability date of the standard, the ACO must administer the change as a unilateral change (see Paragraph 3.7.d.(2)). Pursuant to FAR 30.603-1(d)(2), “Contractors shall not receive an equitable adjustment that will result in increased costs in the aggregate to the Government prior to the applicability date” unless the ACO “determines that the unilateral change is a desirable change.”

(2) Unilateral change. A unilateral change is a CAP change from one compliant practice toanother compliant practice that a contractor elects to make, that has not been deemed desirable by the ACO. Pursuant to FAR 30.603-2(a)(1), “The Government shall not pay any increased cost, in the aggregate, as a result of the unilateral change.” Accordingly, correction of CAS noncompliances by definition cannot be classified as CAP changes as defined at FAR 30.603-2. For unilateral changes, the ACO must limit upward contract price adjustments to affected contracts to the amount of downward contract price adjustments of other affected contracts, e.g., no net upward contract price adjustment must be permitted. (48 CFR 9903.201-6(b)(3)).

(3) Desirable change. A desirable change is a unilateral CAP change that the ACO finds isdesirable and not detrimental to the Government, and is, therefore, not subject to the no-increased-cost-prohibition provisions of CAS-covered contracts affected by the change. The ACO’s finding need not be based solely on the cost impact that a proposed practice change will have on a contractor's or subcontractor's current CAS-covered contracts. The CAP change may be determined to be desirable even though existing contract prices and/or cost allowances may increase. The determination that the CAP change is desirable should be made on a case-by-case basis. (FAR 30.603-2(b)).

(a) The ACO must promptly evaluate a contractor’s request for a desirable change assoon as practical and notify the contractor in writing whether the change is desirable or the request is denied. If the change is determined desirable, the ACO must negotiate an equitable adjustment as provided in the Changes clause of the contract. Associated management actions that also have an impact on contract costs should be considered when negotiating adjustments (48 CFR 9903.201-6(c)(3)). If the ACO determines the CAP change is not a desirable change, the change must be

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considered to be and processed as a unilateral change for which the Government will not pay increased costs, in the aggregate.

(b) Some factors to consider in making a desirability determination (FAR 30.603-2(b)(3)) include, but are not limited to whether:

1. The contractor must change the CAPs to remain compliant with the provisions ofFAR Part 31.

2. The contractor is initiating management actions directly associated with thechange that will result in cost savings for segments with CAS-covered contracts and subcontracts over a period for which forward pricing rates are developed, or for five contractor fiscal years, whichever is shorter, and the cost savings are reflected in the forward pricing rates. Please note that the CAP change must be integral to such savings (for example, the savings could not have occurred but for the CAP change).

3. Funds are available if the determination would result in an upward adjustment ofcontract cost or price.

e. Processing CAP Changes. After receiving the contractor’s notification of a revision to theDS, pursuant to FAR 30.604, the ACO should first review the proposed change concurrently for adequacy and compliance see Paragraph 3.6., of the Manual, revised Disclosure Statement Adequacy and Compliance Review. If the description is both adequate and compliant, and if the ACO determines the revision is a unilateral CAP change, the ACO must request the contractor to submit a General Dollar Magnitude (GDM) proposal, unless the ACO determines the cost impact is immaterial. If the cost impact is immaterial, the ACO must notify the contractor in writing and conclude the cost-impact process with no contract adjustments, with a copy to the auditor. See Paragraph 3.9.k., of this Manual regarding the materiality determination.

(1) The GDM is intended to provide an estimated overall impact of the change on affectedCAS-covered contracts and subcontracts that were awarded based on the pre-change CAP, and assist the ACO in determining whether individual contract price or cost adjustments are required. The contractor may, if it chooses, submit a Detailed Cost Impact (DCI) proposal in lieu of a GDM proposal. See FAR 30.604 for full descriptions of GDM and DCI requirements relating to CAP changes. Additionally, when requested by the ACO, the contractor must identify all affected CAS-covered contracts and subcontracts (see FAR 52.230-6(d)).

(2) FAR 30.604(d)-(h) prescribes the detailed requirements of the GDM and cost impactcalculation for a unilateral change.

(3) IAW FAR 30.604, the ACO must promptly evaluate the GDM proposal. The ACOshould request assistance with evaluating the GDM proposal from the cognizant auditor or internal team of advisors, e.g., supervisor, assigned legal counsel, CIPR team, Cost & Pricing Regional Command DST, and other subject matter experts, as appropriate. If an audit is requested, the ACO should obtain a commitment date, monitor the status, and update the AIT eTool (or other DCMA designated database tracking system) throughout the process.

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(4) Unless the ACO determined the cost impact is immaterial, the ACO must negotiate and resolve the cost impact (see Paragraphs 3.7., 3.8., and 3.9., of the Manual and FAR 30.606). The contractor must agree to appropriate contract adjustments IAW FAR 52.230-2(a)(5) and FAR 52.230-3(a)(4). If the contractor fails to agree, the ACO may unilaterally adjust the contractor’s CAS-covered contracts. The inability to reach a negotiated settlement of the cost impact does not deprive the Government of any remedy. Under the CAS clause in the contract, the contractor undertakes an affirmative obligation, among other obligations, to comply with all CAS in effect. (5) Prior to making any contract price or cost adjustments as a result of a unilateral change, IAW FAR 30.605, the ACO must determine that the contemplated contract price or cost adjustments will protect the Government from the payment of the estimated increased costs, and the net effect of the contemplated adjustments will not result in the recovery of more than the increased costs to the Government, in the aggregate.

f. Remedies for Contractor Failure to Submit. IAW FAR 30.604(i), if the contractor fails to submit the CAP change description or required GDM or DCI proposal within the time specified by the ACO, the ACO must:

(1) Estimate the GDM of the cost impact on affected CAS-covered contracts and subcontracts, with the assistance of the auditor and other team advisors (as appropriate); and (2) Take one or both of the following actions: (a) Withhold an amount not to exceed 10 percent of each subsequent payment on the contractor’s CAS-covered contracts (up to the estimated GDM of the cost impact), until the contractor furnishes the required information. If the CFAO decides not to implement the withhold, the rationale supporting the decision to not withhold must be reviewed by the CMO Contracts Director, CACO/DACO Division Director/Cost and Pricing Regional Command CACO/DACO Team Supervisor or Special Programs Cost and Pricing Center CACO/DACO Team Supervisor. (b) Issue a COFD and unilaterally adjust a single contract, or several but not all contracts, or all contracts, or any other suitable method, by the estimated amount of the cost impact. See FAR 30.604(i), Remedies and FAR 30.606(a)(2).

g. Materiality Determination. See Paragraph 3.9.k., for guidance regarding materiality determinations. If the cost impact is immaterial, the ACO must notify the contractor in writing and conclude the cost-impact process with no contract adjustments. The ACO will provide the auditor with a copy, if applicable, and close the action in the AIT eTool (or other DCMA designated database tracking system). It should be noted that materiality determinations should not be made until the CAP change has been determined to be adequate and compliant/noncompliant. The CMO Contracts Director or CACO/DACO Division Director/Cost and Pricing Regional Command CACO/DACO Team Supervisor or Special Programs Cost and Pricing Center CACO/DACO Team Supervisor must review and concur with the immateriality determination to ensure it is adequately supported and documented prior to the ACO issuing the determination.

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h. Retroactive Changes. The CAS clauses FAR 52.230-2 and 52.230-3 require the contractor to apply any CAP changes prospectively only to subject contracts. FAR 30.603-2(d) permits retroactive unilateral changes if approved by the ACO, but only back to the beginning of the contractor’s fiscal year in which the request for the change is made. In such cases, the change would then be applied prospectively from the ACO-approved effective date of the change. i. External Restructuring Activities. The requirements for contract price and cost adjustments do not apply to compliant CAP changes that are directly associated with external restructuring activities, and that are subject to and meet the requirements of 10 U.S.C. §2325. However, FAR 30.603-2(e) states that the disclosure requirements in FAR 52.230-6(b) must be followed. Consult with local legal counsel or DST prior to requesting GDMs for CAP changes in connection with External Restructuring. Guidance on negotiating advance agreements resulting from external restructuring costs may be found in DFARS 231.205-70, PGI 231.205-70, and the External Restructuring Guidebook located on the main DCMA-INST 2201 Resource Page. 3.8. PROCESSING NONCOMPLIANCES a. Noncompliance Identified. A contractor’s failure to comply with CAS may be identified during the ACO or auditor review of the DS or at any time during the performance of a CAS-covered contract or subcontract. A noncompliance can also be identified by cognizant audit services, functional specialists or other contracts personnel. The ACO must review any alleged noncompliance to determine what action(s) may be necessary. b. Notice of Potential Noncompliance. Within 15 calendar days of receipt of a report of alleged noncompliance from an auditor, the ACO must either notify the auditor in writing that the ACO disagrees with the alleged noncompliance or issue a written notice of potential noncompliance to the contractor and provide a copy to the auditor. A copy of the notice to auditor or contractor must be maintained in the contract file. See FAR 30.605(b)(1). The notice of potential noncompliance must notify the contractor of the exact nature of the noncompliance and request a response within 60 calendar days. The contractor must concur with the notice or provide reasons why the existing practices are in compliance and must submit its rationale to support any contractor-written statement that the cost impact of the noncompliance is immaterial. See FAR 30.605(b)(2). c. AIT (or other Agency designated tracking system). The ACO must also ensure that a record of the alleged CAS noncompliance review or audit report is created in the AIT eTool (or other DCMA designated database tracking system) and must document and maintain current the status of review in the AIT record. See Paragraph 3.5.c. d. Review of Contractor Response. The ACO and Cost Monitor or Price/Cost Analyst, with assistance from the cognizant audit office and other team advisors as appropriate (see Paragraph 3.2.d.), must review the contractor’s response and prepare a MFR in preparation for issuing a determination of CAS compliance or noncompliance. The memorandum will contain an affirmative statement that the ACO agreed or disagreed with each audit recommendation and other technical specialist findings, and include sound rationale to support and/or resolve each audit or technical specialist recommendation. The rationale must demonstrate that the ACO has considered all relevant laws, regulations, and DCMA issuances related to the issues raised.

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e. ACO Determination. The ACO must make a written determination of compliance ornoncompliance consistent with the content requirements for a determination set out in FAR 1.704 that fully describes the basis for the determination and provide a copy of the determination to the contractor and auditor. See the Resource Page for the CAS Noncompliance letter template, which should be modified for the circumstances. The ACO must negotiate and resolve the cost impact associated with a noncompliance determination.

(1) Immaterial Noncompliance. If the ACO makes a noncompliance determination and thecost impact is immaterial (see Paragraph 3.9.k., regarding materiality determination), the ACO must proceed pursuant to FAR 30.605(b)(4)6. The ACO must inform the contractor in writing the noncompliance should be corrected and if the noncompliance is not corrected, the Government reserves the right to make appropriate contract adjustments should the noncompliance become material in the future. The ACO concludes the cost impact process with no contract adjustments. The AIT record can be closed, but not deleted.

(2) Noncompliance. Pursuant to FAR 30.605(b)(4) and (c through h), if the ACO makes anoncompliance determination that is not accompanied by an immateriality determination, the written determination must request the contractor to submit a description of any CAP change required to correct the noncompliance within 60 calendar days. (If the proposed description is found to be inadequate, request a revised description of the CAP). Once the CAS noncompliance has been resolved, the ACO must request the contractor to submit a GDM proposal within 60 calendar days. The contractor may submit a DCI proposal in lieu of a GDM proposal, but is only required to submit a DCI if the ACO determines the GDM is insufficient to resolve the cost impact. If the CAP change is determined to be CAS non-compliant, the ACO must notify the contractor that if the described CAP is implemented the ACO will determine the described CAP to be CAS non-compliant and process it accordingly.

f. GDM and DCI Requirements. See FAR 30.605 for full descriptions of GDM and DCIrequirements relating to CAS noncompliances. When requested by the ACO, the cost impact proposal must include all open and closed affected CAS-covered contracts and subcontracts regardless of the fiscal year in which the costs were incurred. Pursuant to FAR 30.605(h)(1) and (2) the cost impact may be combined for all affected CAS-covered contracts and subcontracts for allsegments, if the effect of a change results in costs flowing between those segments. Affectedcontracts do not include future contracts. In addition, the ACO should ensure the contractor correctsthe noncompliant practice prior to exercising any future options on current contracts.

g. Cost Impact Evaluation. IAW FAR 30.605(e), the ACO must promptly evaluate the GDMproposal. The ACO should request assistance with evaluating the GDM proposal from the cognizant auditor or internal team of advisors, as appropriate (see Paragraph 3.2.d(5)). The ACO must negotiate and resolve the cost impact. See FAR 30.606.

h. Remedies. If the contractor does not correct the noncompliance or submit the CAP changedescription or a required GDM/DCI proposal within the time specified by the ACO, the ACO can issue a COFD (see Paragraph 3.8.j.) or may apply a withhold not to exceed 10 percent of estimated GDM, IAW the procedures at FAR 30.605(i).

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i. Management and Legal Counsel Review. The written noncompliance determination must becoordinated with and reviewed by assigned local legal counsel to include the Contract Law Group Steering Committee (CLG SC) and Contract Dispute Resolution Center (CDRC) IAW DCMA-MAN 2501-09 and appropriate management, prior to issuance to the contractor. The ACO must allow a minimum of 60 days for the multiple legal reviews. Assigned local counsel will coordinate the additional reviews with the CLG and CDRC. Management review and concurrence is performed by the CMO Contracts Director or Director of the CACO/DACO Division. The Director of the CACO/DACO Division may delegate management review and concurrence no lower than the team supervisor. Management review must ensure the determination is adequately supported and documented. Promptly seeking assistance from assigned DCMA legal counsel ensures legal adequacy and, in particular, will ensure that DCMA preserves its legal right to pursue any potential Government claim within the 6-year CDA statute of limitations. Where the CAS noncompliance was a continuing practice, assigned counsel will determine whether the practice constituted a continuing CAS noncompliance for a claim.

j. COFD. The U.S. Court of Federal Claims and the Armed Services Board of Contract Appeals(ASBCA) have each ruled that a Contracting Officer-issued determination of CAS noncompliance, which was not determined to be immaterial, and includes a demand for the contractor to change its noncompliant practice, constitutes a Government claim which is appealable by the contractor. If a determination of CAS noncompliance is issued to a contractor, and not determined to be immaterial, it must be followed up with a timely-issued COFD asserting a Government claim and debt demand for any cost impact of the CAS noncompliance.

k. Contract Cost or Price Adjustments. Prior to making any contract price or cost adjustmentsunder FAR 52.230-2, FAR 52.230-3, or FAR 52.230-6, the ACO must determine that:

• The contemplated contract price and cost adjustments will protect the Government frompaying increased costs, in the aggregate

• The net effect of the adjustments being made will not result in the recovery of more than theincreased costs to the Government, in the aggregate

l. Interest. The contractor must agree to an adjustment in contract price or cost allowance if thecontractor or subcontractor fails to comply with an applicable CAS or to follow any CAP consistently and such failure results in increased cost to the Government. Such adjustment must provide for recovery of the increased costs together with interest. The ACO must separately identify interest on any increased cost paid, in the aggregate, as a result of a CAS noncompliance or the contractor’s unilateral CAP change. The interest is computed, compounded daily, from the date of overpayment by the Government, using the interest rate in 26 U.S.C. §6621(a)(2), IAW 41 U.S.C. 1502(f), and FAR 30.605(g).

m. Subcontract Noncompliance. A Government claim for CAS noncompliance of asubcontractor cannot be asserted directly against the subcontractor because there is no privity of contract between the subcontractor and the Government. In the case of a subcontractor CAS noncompliance, any Government claim must be asserted against the relevant prime contractor; the Government’s remedy for a subcontractor’s CAS noncompliance is to adjust the price or cost allowance of the prime contract. If a subcontractor refuses to submit a GDM or DCI proposal, remedies are made at the prime contractor level.

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n. FAR Part 31 Noncompliances. Noncompliances that only pertain to FAR Contract CostPrinciples should be resolved IAW FAR Part 31.

o. CAFU Tracking. The ACO must disposition CAS noncompliance audit reports in the CAFUeTool (or other DCMA designated database tracking system) upon issuing a determination of compliance/noncompliance IAW DCMA-MAN 2201-04 and DoDI 7640.02. In the event the CAFU eTool is superseded, use the applicable subsequent agency designated database.

3.9. RESOLVING COST IMPACTS OF CAP CHANGES & CAS NONCOMPLIANCES.

a. Increased Costs to the Government. CAP changes and/or CAS noncompliances can result inincreased costs to the Government. The Government should pay increased costs only in limited circumstances: equitable adjustments related to a required accounting change or a unilateral change determined to be desirable (see Paragraph 3.7.). In all other cases, the Government should be reimbursed for any material overpayment related to a unilateral CAP change or a CAS noncompliance. Cost impacts identify these increased costs. The ACO must coordinate with the affected contracting officers before negotiating and resolving a cost impact when the estimated cost impact on any of their contracts is at least $100,000. However, pursuant to FAR 30.606(a), the ACO has the sole authority for negotiating and resolving the cost impact.

b. Cost Impact Proposal. A cost impact proposal, GDM or DCI, is required for all CAP changesand CAS noncompliances unless a determination of immateriality is made. See Paragraph 3.9.k., regarding materiality determination. The contractor must also identify all affected CAS-covered contracts and subcontracts when requested by the ACO. See FAR 30.604 and 30.605 for full descriptions of GDM and DCI requirements relating to CAP changes and CAS noncompliances. The contractor is required to provide a cost impact proposal or CAP descriptions by the date specified by the ACO or request an extension. If the contractor does not provide the required CAP change descriptions or adequate cost impact proposals the ACO, with cognizant audit or DST assistance as appropriate, must estimate the GDM of the cost impact (often referred to as a Rough Order of Magnitude (ROM)) on affected CAS-covered contracts and apply the remedies prescribed at FAR 30.604(i) and Paragraph 3.8.h., of the Manual. See ROM Best Practices on the Resource Page.

c. Cost Impact Resolution. The ACO must negotiate and resolve cost impacts on behalf of allGovernment agencies with impacted contracts. The ACO will prepare a pre-negotiation objectives memorandum (PNOM) in preparation for, and a price negotiation memorandum (PNM) at the conclusion of negotiations. The ACO must send copies to the auditor and affected contracting officers. The ACO may request the assistance of the Cost Monitor, Price/Cost Analyst and other functional specialists to develop a negotiation plan, if necessary. See the Resource Page for templates on CAS related documentation.

d. Resolution Methods. Pursuant to FAR 30.606(a)(2), the ACO “may resolve a cost impactattributed to a change in cost accounting practice or a noncompliance by adjusting a single contract, several but not all contracts, all contracts, or any other suitable method," including the issuance of a COFD and demand for payment.

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(1) The ACO must adhere to the restrictions on the combining of cost impacts of differenttypes of changes and/or noncompliances and other requirements prescribed by FAR 30.606(a), when resolving cost impacts.

(2) The ACO must follow the provisions set forth in FAR 30.606(c) when selecting andadjusting contracts.

(3) Pursuant to FAR 30.606(d) the ACO “may use an alternate method instead of adjustingcontracts to resolve the cost impact, provided the Government will not pay more, in the aggregate, than would be paid if the CFAO did not use the alternate method and the contracting parties agree on the use of that alternate method.”

(4) Whatever form of contract adjustment is selected by the ACO to be used to effectuate anadjustment, it must be timely claimed by the ACO.

e. PNOM Preparation. The ACO must prepare a PNOM in preparation for negotiation andresolving a cost impact resulting from a CAP change or a CAS noncompliance. The PNOM must:

(1) Provide an affirmative statement that the ACO agrees or disagrees with each audit andtechnical specialist finding and include sound rationale to support or resolve each audit or technical specialist recommendation. The rationale must demonstrate the ACO considered all appropriate laws, regulations, and DCMA issuances related to the issues raised. The ACO must also document any preliminary deliberations or material disagreements and proper resolution regarding settlement issues.

(2) Be reviewed and concurred with by management to ensure the negotiation position isadequately supported and documented. Management review and concurrence is performed by the CMO Contracts Director or Director of the CACO/DACO Division. The Director of the CACO/DACO Division may delegate management review and concurrence no lower than the team supervisor.

(3) Be subject to a DCMA BoR, the DCMA-INST 134 (DCMA-INST 134 to be replaced byDCMA-MAN 2201-05) is found on the main Resource Page of DCMA-INST 2201.

f. PNM Preparation. Upon negotiation completion, the CFAO must prepare a PNM and makecontract price adjustments, or any other suitable methodology, to resolve the cost impact IAW FAR 30.606. If the parties negotiate a settlement, its terms should be memorialized in a settlement agreement signed by the ACO and the contractor.

(1) The PNM must include documentation of any deliberations, material disagreements, andproper resolution of settlement issues.

(2) The PNM must adequately document the outcome of the negotiation.

(3) The PNM must be reviewed and concurred with by management to ensure thenegotiation is adequately supported and documented. Management review and concurrence is performed by the CMO Contracts Director or Director of the CACO/DACO Division. The Director

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of the CACO/DACO Division may delegate management review and concurrence no lower than the team supervisor.

g. Unsuccessful Negotiation of Settlement. If negotiations are not successful, the ACO mustissue a COFD with coordination of assigned legal counsel IAW FAR 33.211. Additionally, as required by FAR 30.606 (c)(6)(ii), the ACO should unilaterally take action by adjusting a single contract, several but not all contracts, all contracts, or some other suitable method to recover the estimated amount of the cost impact. IAW DCMA MAN 2501-10, the ACO must forward a copy of the COFD and evidence of the contractor’s receipt of the final decision to the auditor, Defense Finance and Accounting Service (DFAS) and DCMA Contract Dispute Resolution Center (CDRC).

h. Tolling Agreements. One potential tool that can be used by the Government and a contractorto protect the interests of both parties against the premature running of the 6-year CDA statute of limitations is a procedural tolling agreement. The tolling agreement is entered into by both parties prior to the expiration of the 6-year CDA statute of limitations in order to suspend the imposition of the statutory time bar for a specified time period. This means that the specified period of time in the tolling agreement is excluded when determining whether the Government’s claim is time-barred under the CDA statute of limitations. In appropriate cases, an ACO's use of a procedural tolling agreement will be in the Government's best interest. See the Resource Page of DCMA-INST 2201, for additional guidance.

i. Review by Assigned Legal Counsel. The ACO must coordinate with assigned legal counselto ensure adequacy of the claim and, in particular, that the Government can pursue any claims resulting from cost impacts within the CDA Statute of Limitations. Coordination must include assigned DCMA legal counsel review of determinations of CAS noncompliances, settlement agreements with demands for payment, COFDs, demand for payment letters to ensure proper statement and settlement of a claim by the Government. For the aforementioned actions, the ACO must allow a minimum of 60 calendar days for assigned local legal counsel and CLG SC/CDRC review.

j. CAFU Tracking. Upon settlement of the cost impact or issuance of the COFD, the ACO mustdisposition any associated cost impact audit reports in the CAFU eTool (or other DCMA designated database tracking system) IAW DCMA-MAN 2201-04 and DoDI 7640.02. In the event the CAFU eTool is superseded, use the applicable subsequent agency designated database.

k. Materiality Determination. A materiality determination of a cost impact may be made beforea GDM has been submitted if sufficient cost information is available. If the cost impact is immaterial, the ACO must make a written determination that the cost impact resulting from the CAP change or CAS noncompliance is immaterial and the business process is complete.

(1) Materiality determinations (FAR 30.602) must be made using the criteria in 48 CFR9903.305 which includes:

(a) The absolute dollar amount involved. The larger the dollar amount, the more likelyit will be material.

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(b) The amount of contract cost compared with the amount under consideration. The larger the proportion of the amount under consideration to contract cost, the more likely it is to be material. (c) The relationship between a cost item and a cost objective. Direct cost items, especially if the amounts are themselves part of a base for allocation of indirect costs, will normally have more impact than the same amount of indirect costs. (d) The impact on Government funding. Changes in accounting treatment will have more impact if they influence the distribution of costs between Government and non-Government cost objectives than if all cost objectives have Government financial support. (e) The cumulative impact of individually immaterial items. Consider whether such impacts tend to offset one another or tend to be in the same direction and accumulate into a material amount. (f) The cost of administrative processing of the price adjustment modification must be considered. If the cost to process adjustments exceeds the amount to be recovered, it is less likely that the amount will be material. (2) Management must review immateriality determinations to ensure they are adequately supported and documented prior to the ACO issuing the determination. Management review and concurrence is performed by the CMO Contracts Director or Director of the CACO/DACO Division. The Director of the CACO/DACO Division may delegate management review and concurrence no lower than the team supervisor. l. Issuance of COFD/Demand for Payment. ACOs must ensure compliance with DCMA-MAN 2501-10 to include the Demand Letter Worksheet and DFAS Contract Debt System (CDS) Submission Checklist.

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SECTION 4: RETENTION OF RECORDS

4.1. REQUIREMENT TO ESTABLISH FILES.

a. The CMO Commander/Director, CACO/DACO Division Director, or DCMA SpecialPrograms DACO supervisor must ensure that files are established and contain the official contract records for actions taken regarding DS, CAS Noncompliances, and Cost Impacts. The ACO must follow the DCMA Records Management and Retention policy and procedures as identified under DCMA-INST 809, “Records Management” (DCMA-INST 809 to be replaced by DCMA-MAN 4501-04, Volume 1, “Records and Information Management Program”). The DCMA Records Management policy provides guidance for the requirement to establish files containing the official records of all contractual actions as they relate to DS, CAS Noncompliances, and Cost Impacts IAW FAR 4.801(a).

b. The documentation in the file must, IAW FAR 4.801(b), be sufficient to constitute acomplete history of the transaction for the purposes of:

(1) Providing a complete background as a basis for informed decisions at each step in theanalysis process.

(2) Supporting actions taken.

(3) Providing information for reviews and investigations.

(4) Furnishing essential facts in the event of litigation or congressional inquiries.

c. The examples of the records normally contained in contract files, if applicable, are listed inFAR 4.803.

d. ACO files should include documents supporting reviews, negotiation positions, anddeterminations to include: Adequacy and Compliance review of initial and revised DS, determinations regarding CAS Noncompliances, PNOM/PNM for Cost Impacts of CAP changes or CAS Noncompliances, and COFDs. Additionally, the file will include any MFRs relating to DS reviews, management and legal reviews, contractor responses, change in contractor’s CAS status, and any other conditions deemed necessary. The ACO will update and continually maintain the file.

4.2. STORAGE, HANDLING, AND DISPOSAL. Reference the DCMA Records Management and Retention policy and procedures identified under DCMA-INST 809 (DCMA-INST 809 to be replaced by DCMA-MAN 4501-04, Volume I), and the DCMA-MAN 4501-04, Volume 2, “Records Retention Schedule.” Retention of file documentation is the responsibility of the ACO.

4.3. RECORDS MANAGEMENT SYSTEM. The DCMA Records Management and Retention Policy and Procedures as identified under DCMA-INST 809 (DCMA-INST 809 to be replaced by DCMA-MAN 4501-04 Volume 1) provides an orderly system for organizing records for filing and eventual disposition. The responsibility for maintaining historical documentation of transactions that occur during a work process rests primarily with the functional specialist executing that process. The ACO and all functional specialists will store official contract files in the approved Agency

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document repository. Documents that would normally be filed in hardcopy folders, as referenced in the FAR, will be uploaded to the Agency-approved document repository after final approval of the action. ACOs and functional specialists will properly categorize documents for electronic retrieval and records retention purposes using specific metadata when uploading documents into the document repository. 4.4. PROTECTING CLASSIFIED AND CONTROLLED UNCLASSIFIED INFORMATION (CUI). Protecting information is critical and integral when conducting the processes associated with this Manual. DCMA personnel are responsible for protecting classified and CUI entrusted to them. DCMA personnel must take prudent steps to ensure final disposition of classified and CUI per DCMA and DoD policy. These procedures vary based on the type, access, and nature of the material involved. Refer to DCMA-MAN 3301-08, ‘Information Security,” for guidance in the control, transmission, destruction, and storage of such material.

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GLOSSARY G.1. DEFINITIONS. Affected CAS-Covered Contract or Subcontract. (FAR 30.001). Contract or subcontract subject to CAS rules and regulations for which a contractor or subcontractor used one CAP to estimate costs and a changed CAP to accumulate and report costs under the contract or subcontract; or used a noncompliant practice for purposes of estimating or accumulating and reporting costs under the contract or subcontract. Calendar Day. A calendar day is defined as any 24- hour period between Sunday through Saturday to include U.S. public holidays and weekends. CAP (48 CFR 9903.302-1). A CAP is defined as any disclosed or established accounting method or technique which is used for allocation of cost to cost objectives, assignment of cost to cost accounting periods, or measurement of cost. CFAO (FAR 30.001). Contracting officer assigned by the cognizant Federal agency to administer CAS. Desirable Change. (FAR 30.001). A compliant change to a contractor’s established or disclosed CAPs that the CFAO finds is desirable and not detrimental to the Government and is, therefore, not subject to the no-increased-cost prohibition provisions of CAS-covered contracts and subcontracts affected by the change. DCI Proposal (FAR 30.604 regarding CAP changes and FAR 30.605 regarding CAS noncompliances). A proposal that calculates the cost impact including all affected CAS-covered contracts and subcontracts regardless of their status (open or closed) or the fiscal year(s) in which the costs are incurred (whether or not the final indirect rates have been established). DS (48 CFR 9903.202-1, 48 CFR 9903.202-5). A written description of a contractor’s CAPs and procedures. The statement is required to be submitted using a Form CASB DS-1 or CASB DS-2 for educational institutions. External Restructuring Activities (DFARS 231.205-70). Restructuring activities occurring after a business combination that affect the operations of companies not previously under common ownership or control. They do not include restructuring activities occurring after a business combination that affect the operations of only one of the companies not previously under common ownership or control, or, when there has been no business combination, restructuring activities undertaken within one company. External restructuring activities are a direct outgrowth of a business combination. They normally will be initiated within 3 years of the business combination. GDM Proposal (FAR 30.604 regarding CAP changes and FAR 30.605 regarding CAS noncompliances). Provides information on the estimated overall impact of a change in CAP on affected CAS-covered contracts and subcontracts that were awarded based on the previous CAP.

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Noncompliance. (FAR 30.001). A failure in estimating, accumulating, or reporting costs to comply with applicable CAS or consistently follow disclosed or established CAPs.

Required Change. (FAR 30.001). A change in CAP that a contractor is required to make in order to comply with applicable Standards, modifications or interpretations thereto, that subsequently becomes applicable to an existing CAS-covered contract or subcontract due to receipt of another CAS-covered contract or subcontract; or a prospective change to a disclosed or established CAP when the CFAO determines that the former practice was in compliance with applicable CAS and the change is necessary for the contractor to remain in compliance.

Truthful Cost or Pricing Data. (FAR 30.001). Historical title of prior act was Truth in Negotiations Act (TINA). 41 U.S. C. 35 changed the title to Truthful Cost or Pricing Data (reference FAR 1.110).

Unilateral Change. (FAR 30.001). A change in CAP from one compliant practice to another compliant practice that a contractor with CAS-covered contract(s) or subcontract(s) elects to make that has not been deemed a desirable change by the CFAO and for which the Government will pay no aggregate increased costs.

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GLOSSARY

G.2. ACRONYMS AND INITIALISMS

ACO Administrative Contracting Officer AIT Audit Issue Tracking

BoR Boards of Review

CACO Corporate Administrative Contracting Officer CAFU Contract Audit Follow Up CAP Cost Accounting Practices CAS Cost Accounting Standards CASB Cost Accounting Standards Board CASB DS-1 Cost Accounting Standards Board Disclosure Statement Required by Public Law

100-679 (Form)CASB DS-2 Cost Accounting Standards Board Disclosure Statement Required by Public Law

100-679 Educational Institution (Form)CBAR Contract Business Analysis RepositoryCDA Contract Disputes Act (known as Disputes Statute IAW FAR Subpart 33.2)CDRC Contract Dispute Resolution CenterCFAO Cognizant Federal Agency OfficialCFR Code of Federal RegulationsCIPR Contractor Insurance and Pension ReviewCMO Contract Management OfficeCOFD contracting officer’s final decisionCUI Controlled Unclassified Information

DACO Divisional Administrative Contracting Officer DCAA Defense Contract Audit Agency DCI Detailed Cost Impact DCMA-INST DCMA Instruction DCMA-MAN DCMA Manual DS Disclosure Statement DST Disclosure Statement Team

FAR Federal Acquisition Regulation

GDM General Dollar Magnitude

IAW in accordance with

MFR Memorandum for Record

PCO Procuring Contracting Officer PNM Price Negotiation Memorandum PNOM Pre-Negotiation Objectives Memorandum

DCMA-MAN 2201-02, February 7, 2019 Change 1, December 22, 2020

Glossary: Acronyms and Initialisms 41

ROM Rough Order of Magnitude

U.S.C. United States Code

DCMA-MAN 2201-02, February 7, 2019 Change 1, December 22, 2020

References 42

REFERENCES

Code of Federal Regulations, Title 48 DCMA Instruction 134, “Boards of Review,” October 15, 2012, as amended DCMA Instruction 809, “Records Management,” May 1, 2011 DCMA Manual 2201-04, “Contract Audit Follow Up,” March 3, 2019 DCMA Manual 2201-05, “Boards of Review,” TBD DCMA-Manual 2401-01, “Negotiation Intelligence Procedures,” December 20, 2018 DCMA Manual 2501-01, “Contract Receipt and Review,” March 24, 2019 DCMA Manual 2501-09, “Contract Claims and Disputes,” March 26, 2018 DCMA Manual 2501-10, “Contract Debt,” April 13, 2018 DCMA Manual 3301-08, “Information Security,” January 21, 2019 DCMA Manual 4501-04, Volume 1, “Records and Information Management Program,” TBD DCMA Manual 4501-04, Volume 2, “Records Retention Schedule,” TBD Defense Federal Acquisition Regulation Supplement 230.201-5 DoD Directive 5105.64, “Defense Contract Management Agency (DCMA),” January 10, 2013 DoD Instruction 7640.02, “Policy for Follow-up on Contract Audit Reports,” April 15, 2015 FAR 1.110 FAR 1.704 FAR Part 30 FAR 30.001 FAR 30.101 FAR 30-201-4 FAR 30.201-5(b) FAR 30.202 FAR 30.202-6(a) FAR 30.202-7(a)(2) FAR 30.202-7(b)(2) FAR 30.202-8 FAR 30.602 FAR 30.603 FAR 30.603-1 FAR 30.603-1(c)(2) FAR 30.603-1(d)(2) FAR 30.603-2 FAR 30.603-2(a)(1) FAR 30.603-2(b) FAR 30.603-2(b)(3) FAR 30.603-2(c) FAR 30.603-2(c)(2) FAR 30.603-2(d) FAR 30.603-2(e) FAR 30.604 FAR 30.604(d)-(h) FAR 30.604(i) FAR 30.605 FAR 30.605(b)

DCMA-MAN 2201-02, February 7, 2019 Change 1, December 22, 2020

References 43

FAR 30.605(b)(1) FAR 30.605(b)(2)FAR 30.605(b)(4) FAR 30.605(b)(4) and (c through h) FAR 30.605(b)(4)(i)(ii) FAR 30.605(e) FAR 30.605(g) FAR 30.605(h)(1) and (2) FAR 30.605(i) FAR 30.606 FAR 30.606(a) FAR 30.606(a)(2) FAR 30.606(b)(1) FAR 30.606(c) FAR 30.606(d) FAR Part 31 FAR 32.206(b) FAR 33.211 FAR 52.230 FAR 52.230-1 FAR 52.230-2 FAR 52.230-2(a)(5) FAR 52.230-2(d) FAR 52.230-3 FAR 52.230-3(a)(4) FAR 52.230-4 FAR 52.230-5 FAR 52.230-6 FAR 52.230-6(b) FAR 52.230-6(d) FAR 52.230-7 United States Code, Title 10, Section 2325 United States Code, Title 26, Section 6621 United States Code, Title 41

TAB 12

ACQUISITION AND SUSTAINMENT

OFFICE OF THE UNDER SECRETARY OF DEFENSE 3000 DEFENSE PENTAGON

WASHINGTON, DC 20301-3000

MEMORANDUM FOR COMMANDER, UNITED STATES CYBER COMMAND (ATTN: ACQUISITION EXECUTIVE)

COMMANDER, UNITED STATES SPECIAL OPERATIONS COMMAND (ATTN: ACQUISITION EXECUTIVE)

COMMANDER, UNITED STATES TRANSPORTATION COMMAND (ATTN: ACQUISITION EXECUTIVE)

DEPUTY ASSISTANT SECRETARY OF THE ARMY (PROCUREMENT)

DEPUTY ASSISTANT SECRETARY OF THE NAVY (PROCUREMENT)

DEPUTY ASSISTANT SECRETARY OF THE AIR FORCE (CONTRACTING)

DEFENSE AGENCY AND DOD FIELD ACTIVITY DIRECTORS

SUBJECT: Interim Defense Federal Acquisition Regulation Supplement Rule, 2019-D041, Assessing Contractor Implementation of Cybersecurity Requirements

The purpose of this memorandum is to ensure workforce awareness and understanding of the requirements of interim Defense Federal Acquisition Regulation Supplement (DF ARS) rule, 2019-D041, Assessing Contractor Implementation of Cybersecurity Requirements, which was published in the Federal Register (85 FR 61505) on September 29, 2020, and is effective on November 30, 2020.

The interim rule implements the National Institute of Standards and Technology (NIST) Special Publication (SP) 800-171 DoD Assessment Methodology and the Cybersecurity Maturity Model Certification (CMMC) Framework. The interim rule requires contracting officers to take specific actions prior to awarding contracts, task or delivery orders, or exercising an option period or extending the period of performance, on or after November 30, 2020. The executive summary (Attachment 1) provides an overview of the interim DFARS rule, and the Under Secretary of Defense for Acquisition and Sustainment memorandum, dated August 4, 2020, (Attachment 2) implements CMMC within the Department.

My point of contact is Lt Col Bryan Lamb, who is available by phone at 703-693-0497, or by email at bryan.d.lamb.mil@mail.mil.

Attachments: As stated

TENAGLIA. JOHN.M.11 54945926

Digitally signed by TENAGLIA.JOHN.M. 1154945926 Date: 2020.11 .25 12:21 :07 -05'00'

John M. Tenaglia Principal Director,

Defense Pricing and Contracting

EXECUTIVE SUMMARY INTERIM DFARS RULE, 2019-D041, ASSESSING CONTRACTOR IMPLEMENTATION OF

CYBERSECURITY REQUIREMENTS DoD published the interim DFARS rule 2019-D041, Assessing Contractor Implementation of

Cybersecurity Requirements, on September 29, 2020, with an effective date of November 30, 2020.

o The interim rule implements the National Institute of Standards and Technology (NIST) Special Publication (SP) 800-171 DoD Assessment Methodology and the Cybersecurity Maturity Model Certification (CMMC) framework, and requires contracting officers to take specific actions prior to awarding contracts, task or delivery orders, or exercising an option period or extending the period of performance, on and after November 30, 2020.

o In accordance with FAR 13.201(d), neither the CMMC nor the NIST SP 800-171 DoD Assessment requirements are required for purchases at or below the micro-purchase threshold. FAR 13.201(d) reads as follows: “Micro-purchases do not require provisions or clauses, except as provided at 13.202 and 32.1110. This paragraph takes precedence over any other FAR requirement to the contrary, but does not prohibit the use of any clause.” The interim rule did not add to the clause identified at DFARS 232.1110, and therefore does not impose requirements for micro-purchases.

NIST SP 800-171 DoD Assessment: On or after November 30, 2020, the contracting officer shall, prior to awarding a contract, task order, or delivery order to, or exercising an option period or period of performance with, an offeror or contractor that is required to implement NIST SP 800-171 in accordance with the clause at DFARS 252.204-7012, verify that the summary level score of a current NIST SP 800-171 DoD Assessment (i.e., not more than 3 years old, unless a lesser time is specified in the solicitation) is posted in Supplier Performance Risk System (SPRS) for each covered contractor information system that is relevant to an offer, contract, task order, or delivery order.

o Contracting officers should refer to DFARS PGI 204.7303 for additional information on

Safeguarding Covered Defense Information and Cyber Incident Reporting requirements. o The requiring activity is responsible for identifying aspects of the contract requirement that

involve operationally critical support or covered defense information, and that have the potential for generation or use of covered defense information during the period of performance. However, contracting officers should understand these terms as defined in DFARS Clause 252.204-7012, and be familiar with the CUI categories described in the Controlled Unclassified Information (CUI) Registry.

CMMC: On or after November 30, 2020, when a requiring activity identifies a requirement for a contract, task order, or delivery order to include a specific CMMC level, the contracting officer shall not award to an offeror that does not have a CMMC certificate at the level required by the solicitation, or exercise an option or extend any period of performance on a contract, task order, or delivery order unless the contractor has a CMMC certificate at the level required by the contract Contracting officers shall use Supplier Performance Risk System (SPRS) to verify an offeror or contractor’s CMMC level.

o To implement a phased rollout, CMMC requirements will apply only to certain new contracts,

task orders, or delivery orders awarded from November 30, 2020, through September 30, 2025. During this time period, inclusion of a CMMC requirement must be approved by the Undersecretary of Defense for Acquisition and Sustainment (USD(A&S)).

Executive Summary Interim DFARS Rule 2019-D041

Page 2 of 3

o The USD(A&S) memorandum, “Implementing the Cybersecurity Maturity Model Certificationwithin the Department of Defense,” dated August 4, 2020, details the phased application ofCMMC beginning intended for no more than 15 prime contracts in Fiscal Year 2021 as CMMCpilot program efforts.

o On or after October 01, 2025, CMMC requirements will apply to all solicitations and contracts ortask orders or delivery orders, except for solicitations and contracts or orders solely for theacquisition of commercially available off-the-shelf (COTS) items.

o The CMMC level to be required for subcontractors is the level that is appropriate for theinformation that is being flowed down to the subcontractor.

DFARS provision 252.204-7019, Notice of NIST SP 800-171 DoD Assessment Requirements.On or after November 30, 2020, use the new provision at DFARS 252.204-7019 in all solicitations,including solicitations using FAR part 12 procedures for the acquisition of commercial items, exceptfor solicitations solely for the acquisition of COTS items.

DFARS clause 252.204-7020, NIST SP 800-171 DoD Assessment Requirements.On or after November 30, 2020, use the new clause at DFARS 252.204-7020 in all solicitations andcontracts, task orders, or delivery orders, including those using FAR part 12 procedures for theacquisition of commercial items, except for those that are solely for the acquisition of COTS items.This clause is required to be flowed down to subcontracts and other contractual instruments,including subcontracts for the acquisition of commercial items (excluding COTS items).

DFARS clause 252.204-7021, Cybersecurity Maturity Model Certification Requirements.Inclusion of the clause at DFARS 252.204-7021 will be phased in according to the dates below:

o November 30, 2020, through September 30, 2025, use the new clause at DFARS 252.204-7021in solicitations and contracts or task orders or delivery orders, including those using FAR part 12procedures for the acquisition of commercial items, except for solicitations and contracts ororders solely for the acquisition of COTS items, if the requirement document or statement ofwork, as determined by the requiring activity and approved by OUSD(A&S), requires acontractor to have a specific CMMC level.

o In order to implement a phased rollout of CMMC, inclusion of a CMMC requirement in asolicitation, prior to September 30, 2025, must be approved by OUSD(A&S).

o On or after October 1, 2025, use the clause at DFARS 252.204-7021 in all solicitations andcontracts or task orders or delivery orders, including those using FAR part 12 procedures for theacquisition of commercial items, except for solicitations and contracts or orders solely for theacquisition of COTS items.

o This clause is required to be flowed down to all subcontracts and other contractual instruments,including subcontracts for the acquisition of commercial items, excluding COTS items.

Executive Summary Interim DFARS Rule 2019-D041

Page 3 of 3

Relevant URLs: Link to Interim DFARS Rule 2019-D041, Federal Register Notice:

https://www.govinfo.gov/content/pkg/FR-2020-09-29/pdf/2020-21123.pdf

Link to Interim DFARS Rule 2019-D041, DFARS Text: https://www.acq.osd.mil/dpap/dars/dfars/changenotice/2020/20200929/2019-D041%20(i)%20DFARS%20Text%20LILO.docx

Supplier Performance Risk System (SPRS) https://www.sprs.csd.disa.mil/

National Archives - Controlled Unclassified Information (CUI) Registry

https://www.archives.gov/cui/registry/category-list.html

Attachment 2

ACQUISITION AND SUSTAINMENT

THE UNDER SECRETARY OF DEFENSE 3010 DEFENSE PENTAGON

WASHINGTON, DC 20301·3010

MEMORANDUM FOR SERVICE ACQUISITON EXECUTIVES COMPONENT ACQUISTION EXECUTIVES

AUG n 4 2020

SUBJECT: Implementing the Cybersecurity Maturity Model Certification within the Department of Defense

The Department of Defense released Cybersecurity Maturity Model Certification (CMMC) version 1.0 on January 31 , 2020. The model consists of maturity processes and cybersecurity best practices from multiple cybersecurity standards, frameworks, and other references. Additionally, it encompasses the basic safeguarding requirements specified in the Federal Acquisition Regulation clause 52.204-21 and the security requirements for Controlled Unclassified Information (CUI) specified in the National Institute of Standards and Technology Special Publication 800-171 per the Defense Federal Acquisition Regulation Supplement (DF ARS) clause 252.204-7012. The current version of the model and additional information is available at the CMMC website (www.acq.osd.mil/cmmc).

My office recently submitted a proposed change to the DF ARS which is proceeding through the Office of Management and Budget rulemaking process. To facilitate a smooth transition of this new requirement across the Department, I am providing the following implementation guidance.

I am implementing CMMC using a phased-in approach. For FY 2021, I intend to limit the number of solicitations specifying a CMMC requirement to no more than 15 prime contracts, which will be CMMC pilot program efforts. Pursuant to this approach, I direct all Program Managers and Contracting Officers to avoid including CMMC as a requirement in Requests for Information and Requests for Proposals unless coordinated through the nomination process set forth in this memorandum.

To support the pilot program and initial implementation, I request the following:

• Each Service Acquisition Executive nominate three acquisitions with an expected contract award date in FY 2021.

• Each Component Acquisition Executive nominate a single acquisition with an expected contract award date in FY 2021.

• Each nomination should be for a mid-sized program that require the contractor to process or store basic CUI. This requirement aligns to CMMC level three.

Attachment 2

• Do not nominate acquisitions that are solely for provision of commercial-off-the­shelf products, or for operational technology systems supporting industrial or manufacturing operations.

• Please submit your nominations to my point of contact, Ms. Stacy Bostjanick, at stacy.s.bostjanick.civ@mail.mil no later than August 15, 2020.

For subsequent fiscal years, the Department intends to incorporate CMMC Levels 4 and 5 while increasing the quantity of acquisitions that include a CMMC requirement. The phase in targets are:

• Year 2: 7 5 new acquisitions

• Year 3: 250 new acquisitions

• Year 4: 325 new acquisitions

• Year 5: 475 new acquisitions

• Year 6 and beyond: All new acquisitions and other transactions issued under authority of section 23 71 (b) of title 10, United States Code.

The Department is committed to working with our Defense Industrial Base partners to mitigate cybersecurity threats that target our supply chain and seek to undercut our technological advantages. The CMMC framework represents a key step to enhance the protection of intellectual property and sensitive unclassified information. If you have any questions regarding the CMMC implementation, please contact the Chief Information Security Officer for Acquisition, Ms. Katie Arrington, at katherine.e.arrington.civ@mail.mil or (703) 695-9332.

Ellen M. Lord

2

TAB 13

United States Court of Appeals for the Federal Circuit

______________________

BGT HOLDINGS LLC, Plaintiff-Appellant

v.

UNITED STATES, Defendant-Appellee

______________________

2020-1084 ______________________

Appeal from the United States Court of Federal Claims

in No. 1:18-cv-00178-PEC, Judge Patricia E. Campbell-Smith.

______________________

Decided: December 23, 2020 ______________________

MILTON C. JOHNS, Executive Law Partners, PLLC, Ma-

nassas, VA, argued for plaintiff-appellant. BORISLAV KUSHNIR, Commercial Litigation Branch, Civil Division, United States Department of Justice, Wash-ington, DC, argued for defendant-appellee. Also repre-sented by JEFFREY B. CLARK, ELIZABETH MARIE HOSFORD, ROBERT EDWARD KIRSCHMAN, JR.

______________________

Before PROST, Chief Judge, BRYSON and STOLL, Circuit Judges.

Case: 20-1084 Document: 55 Page: 1 Filed: 12/23/2020

BGT HOLDINGS LLC v. UNITED STATES 2

BRYSON, Circuit Judge. BGT Holdings LLC appeals from a decision of the

United States Court of Federal Claims (“the Claims Court”) dismissing its claims arising from the U.S. Navy’s with-holding of certain government-furnished equipment under a fixed-price contract. The dismissal followed the court’s ruling that BGT had contractually waived its claims of con-structive change through ratification, official change through waiver, and breach for failure to award an equita-ble adjustment. The court also held that BGT insuffi-ciently alleged a breach of the implied duty of good faith and fair dealing. We affirm the dismissal of the breach of good faith and fair dealing claim but vacate the court’s dis-missal of the remaining claims.

I A

In 2014, BGT contracted with the Navy to construct and deliver a gas turbine generator. The Navy agreed to supply certain government-furnished equipment (“GFE”) that BGT would use to construct the generator. Two of the GFE items identified in the contract—an exhaust collector and engine mounts—are relevant to this appeal because the Navy ultimately did not deliver those items to BGT. The withdrawal of those items and the Navy’s failure to compensate BGT for that withdrawal are the source of the dispute in this case.

The contract incorporated various clauses from the Federal Acquisition Regulation (“FAR”). For convenience, we cite to the FAR when referencing those contract clauses. One such clause, the “government property” clause, pro-vides as follows in relevant part:

Case: 20-1084 Document: 55 Page: 2 Filed: 12/23/2020

BGT HOLDINGS LLC v. UNITED STATES 3

(d) Government-furnished property. (1) The Government shall deliver to the Contractor the Government-furnished property described in this contract. . . . (2) The delivery and/or performance dates specified in this contract are based upon the expectation that the Government-furnished property will be suita-ble for contract performance and will be delivered to the Contractor by the dates stated in the con-tract. (i) If the property is not delivered to the Contractor by the dates stated in the contract, the Contracting Officer shall, upon the Contractor’s timely written request, consider an equitable adjustment to the contract. . . . (3)(i) The Contracting Officer may by written no-tice, at any time— (A) Increase or decrease the amount of Govern-ment-furnished property under this contract; . . . (C) Withdraw authority to use property. (ii) Upon completion of any action(s) under para-graph (d)(3)(i) of this clause, and the Contractor’s timely written request, the Contracting Officer shall consider an equitable adjustment to the con-tract. . . . (i) Equitable adjustment. Equitable adjustments under this clause shall be made in accordance with the procedures of the Changes clause. However,

Case: 20-1084 Document: 55 Page: 3 Filed: 12/23/2020

BGT HOLDINGS LLC v. UNITED STATES 4

the Government shall not be liable for breach of contract for the following: (1) Any delay in delivery of Government-furnished property. (2) Delivery of Government-furnished property in a condition not suitable for its intended use. (3) An increase, decrease, or substitution of Gov-ernment-furnished property.

48 C.F.R. § 52.245-1. To summarize, subsection (d)(1) of the government

property clause requires the Navy to deliver the designated GFE; subsection (d)(2)(i) provides that the Navy “shall con-sider” an equitable adjustment if it does not deliver the des-ignated GFE by the agreed-upon date; subsection (d)(3)(i) gives the Navy the right to modify its GFE commitments; and subsection (d)(3)(ii) provides that the Navy “shall con-sider” an equitable adjustment if it modifies those GFE commitments. Separately, subsection (i) requires that eq-uitable adjustments be made according to the procedures in the contract’s changes clause. Subsection (i) also pro-vides that neither the Navy’s modifications to its GFE com-mitments nor its untimely delivery of GFE will constitute a breach of the contract.

The contract incorporates the standard FAR changes clause for fixed-price contracts, 48 C.F.R. § 52.243-1. The fixed-price changes clause covers the Navy’s modifications to the method of shipment, the method of packing, the place of delivery, and the “[d]rawings, designs, or specifications” for specially manufactured items. Id. The clause provides that if the Navy makes any of those modifications, the con-tracting officer “shall make an equitable adjustment.” Id.

The contract also incorporates a changes clause from outside the FAR that defines “authorized changes” for the entire contract. That clause is unique to the Naval Surface

Case: 20-1084 Document: 55 Page: 4 Filed: 12/23/2020

BGT HOLDINGS LLC v. UNITED STATES 5

Warfare Center Carderock Division and is referred to as the NSWCCD changes clause. It states as follows:

(a) Except as specified in paragraph (b) below, no order, statement, or conduct of Government per-sonnel who visit the Contractor’s facilities or in any other manner communicates with Contractor per-sonnel during the performance of this contract shall constitute a change under the “Changes” clause of this contract. (b) The Contractor shall not comply with any order, direction or request of Government personnel un-less it is issued in writing and signed by the Con-tracting Officer, or is pursuant to specific authority otherwise included as a part of this contract. The NSWCCD changes clause lists the contact infor-

mation for the contracting officer, Mr. John Stefano, and declares that “[t]he Contracting Officer is the only person authorized to approve changes in any of the requirements of this contract.” The clause then warns that “any change at the direction of any person other than the Contracting Officer . . . will be considered to have been made without authority and no adjustment will be made in the contract price to cover any increase in charges incurred as a result thereof.”

B We recount the facts according to BGT’s factual allega-

tions in its amended complaint, which we accept as true for purposes of the Navy’s motion to dismiss. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

A few months into the contract performance, the Navy procurement team—including Ms. Suzanne Onesti, the procurement manager—informed BGT that the Navy would not deliver the exhaust collector and engine mounts unless BGT provided a “cost savings” to the Navy, i.e., a decrease in the contract price commensurate with the

Case: 20-1084 Document: 55 Page: 5 Filed: 12/23/2020

BGT HOLDINGS LLC v. UNITED STATES 6

amount BGT would save by not having to procure the ex-haust collector and engine mounts on its own. When asked about cost savings at oral argument, neither the govern-ment nor BGT identified a contract provision giving the Navy the right to demand a cost savings in exchange for supplying the designated items of GFE.

BGT declined to offer a cost savings for the exhaust col-lector and engine mounts that were to be provided as GFE. The Navy then notified BGT that the exhaust collector and engine mounts had been reallocated as fleet assets and would no longer be made available to BGT. To continue performing under the contract, BGT purchased those items on the commercial market at a cost of $610,775. BGT then submitted a request for an equitable adjustment for the cost of those items. In early 2017, BGT delivered the com-pleted gas turbine generator to the Navy. The Navy ac-cepted the generator but rejected BGT’s request for an equitable adjustment for the cost of the exhaust collector and engine mounts.

According to BGT, the Navy’s request for a cost savings and the Navy’s final notice of GFE withdrawal were com-municated at the direction of the contracting officer, Mr. Stefano. BGT does not allege, however, that the contract-ing officer issued a signed order concerning either commu-nication.

Instead, BGT alleges facts that circumstantially con-nect the contracting officer to the GFE negotiations. Ac-cording to BGT, the Navy instructed BGT to direct all communications to Navy employees Ms. Onesti and Ms. Carolyn McCloskey, “the conduits to the larger Navy team.” BGT also alleges that it was the “usual course of performance” for the contracting officer’s decisions to be communicated through Ms. Onesti or Ms. McCloskey. For example, Ms. Onesti communicated a directive that BGT should use its own testing data to size the water treatment system for the gas turbine. Mr. Stefano later

Case: 20-1084 Document: 55 Page: 6 Filed: 12/23/2020

BGT HOLDINGS LLC v. UNITED STATES 7

acknowledged that “when Ms. Onesti advised BGT that [the Navy] agreed that the water test results provided by BGT were to be used in sizing water treatment system for the [turbine], it could be construed as being tantamount to acceptance and authorization to proceed with the contrac-tor’s intended revisions.”

Furthermore, according to BGT, the contracting officer must have directed the Navy’s communications regarding the exhaust collector and engine mounts because he was the only person with authority to withdraw those GFE items and reallocate them as fleet assets. Relatedly, BGT alleges that the contracting officer “knew or should have known” of the Navy’s request for a cost savings and the Navy’s threatened withdrawal of GFE because BGT com-municated those issues in progress reports that were regu-larly distributed to the contracting officer.

C BGT organized its amended complaint into five counts.

Two of those counts, Counts IV and V, are not at issue in this appeal.

A fair reading of the allegations in Counts I through III reveals five possible grounds for relief: First, the complaint alleges that the Navy’s decision to withdraw the exhaust collector and engine mounts constituted a constructive change of the GFE provision for which BGT is entitled to an equitable adjustment. Although the contracting officer did not issue a signed order withdrawing those items of GFE, the complaint alleges that the contracting officer rat-ified the Navy’s decision to withdraw those items by real-locating them as fleet assets, thus providing the requisite authority for a constructive change.

Second, the complaint alleges that the contracting of-ficer waived the Navy’s rights under the NSWCCD changes clause, thus converting the Navy’s decision to decrease

Case: 20-1084 Document: 55 Page: 7 Filed: 12/23/2020

BGT HOLDINGS LLC v. UNITED STATES 8

GFE into an official change for which BGT is entitled to an equitable adjustment.

Third, the complaint alleges that the Navy breached its contractual duty to deliver the exhaust collector and engine mounts, and that BGT is entitled to contract damages for that breach.

Fourth, the complaint alleges that the Navy breached its contractual duty to provide BGT an equitable adjust-ment after failing to deliver those GFE items, and that BGT is entitled to contract damages for that breach.

Fifth, the complaint alleges that the Navy breached its implied duty of good faith and fair dealing by intentionally withholding those GFE items and thus obstructing BGT’s performance under the contract. BGT contends that it is entitled to an award of damages for that breach.

Under each of its theories of liability, BGT seeks an award of $610,775, the cost BGT incurred in purchasing the exhaust collector and engine mounts on the commercial market.

The Claims Court dismissed Counts I through III of BGT’s amended complaint and entered a final judgment on those counts under Rule 54(b) of the Rules of the Court of Federal Claims. BGT Holdings, LLC v. United States, 142 Fed. Cl. 474, 484 (2019). The Rule 54(b) judgment entitled BGT to take an immediate appeal from the dismissal of those counts.

The Claims Court consolidated its analysis of BGT’s first two claims—constructive change through ratification and official change through waiver. The court held that neither claim entitled BGT to an equitable adjustment, be-cause “the specific contract language at issue here pre-cludes [BGT’s] arguments relating to ratification and waiver.” Id. at 479–80, 482 (citing the NSWCCD changes clause and subsection (i) of the government property clause).

Case: 20-1084 Document: 55 Page: 8 Filed: 12/23/2020

BGT HOLDINGS LLC v. UNITED STATES 9

The court held BGT’s claim of breach for failure to de-liver the exhaust collector and engine mounts to be pre-cluded by subsection (i) of the government property clause, which states that “the Government shall not be liable for breach of contract for . . . [a]n increase, decrease, or substi-tution of [GFE].” Id. at 482–83. Likewise, the court held that the contract precluded BGT’s claim of breach for fail-ure to provide an equitable adjustment, rejecting that claim based on its analysis of BGT’s first two claims. Id. at 482. The court rejected BGT’s final claim, alleging breach of the implied duty of good faith and fair dealing, given the Navy’s right to decrease or withdraw GFE under the con-tract. Id. at 483–84.

II On appeal, BGT does not challenge the court’s holding

that the government property clause precludes BGT’s claim of breach for failure to deliver the exhaust collector and engine mounts. See 48 C.F.R. § 52.245-1(i) (precluding claims of breach for the increase, decrease, substitution, or delay in delivery of GFE). BGT challenges the dismissal of its remaining claims, however. With respect to rights aris-ing under the contract, BGT argues that it is entitled to an equitable adjustment under both the government property clause and the fixed-price changes clause. In addition, BGT contends that it is entitled to compensation because the government breached its implied duty of good faith and fair dealing by withdrawing GFE items and then refusing to compensate BGT for that withdrawal through an equi-table adjustment.

A The most straightforward claim in BGT’s amended

complaint is that the Navy breached the government prop-erty clause, 48 C.F.R. § 52.245-1, by failing to provide an equitable adjustment after it withheld the GFE items it had agreed to deliver under the contract.

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BGT HOLDINGS LLC v. UNITED STATES 10

While the Navy was entitled to withdraw GFE under the government property clause, it was not free to do so without consequence. Two subsections of the government property clause are applicable to withdrawals of GFE. First, under subsection (d)(3)(i) of that clause, the contract-ing officer “may, by written notice, at any time—(A) In-crease or decrease the amount of Government-furnished property under this contract; . . . .” In that event, subsec-tion (d)(3)(ii) requires that the contracting officer “shall consider an equitable adjustment to the contract.” Second, under subsection (d)(2)(i) of the government property clause, if the GFE promised under the contract “is not de-livered to the Contractor by the dates stated in the con-tract, the Contracting Officer shall, upon the Contractor’s timely written request, consider an equitable adjustment to the contract.” Those two subsections cover cases in which GFE is not delivered, either by formal order of the contracting officer or otherwise. In either event, the rem-edy is the same: The contracting officer must consider an equitable adjustment.

BGT pleaded facts sufficient to support a claim of breach under the government property clause. Count II of the amended complaint alleges that the Navy’s “refusal to provide an equitable adjustment was a material breach of the Contract.” J.A. 33. Count II also incorporates facts from earlier portions of the amended complaint, including that the Navy withdrew certain GFE items, that BGT was forced to purchase those items on the commercial market because they were not delivered, that BGT requested an equitable adjustment in a timely manner, and that the Navy denied that request.

Even assuming that the contracting officer is not chargeable—through ratification or otherwise—with hav-ing ordered the withdrawal of the exhaust collector and en-gine mounts, the Claims Court erred by not considering the pathway to relief under subsection (d)(2)(i) of the govern-ment property clause. That pathway is available

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regardless of whether the contracting officer executed a written authorization for withdrawing items of GFE iden-tified in the contract.

If relief under subsection (d)(2)(i) were not available, and the contractor could seek relief only under subsection (d)(3)(ii), the government could avoid liability for reneging on its GFE commitments in any case simply by withdraw-ing GFE items without a written notice from the contract-ing officer. The availability of relief under subsection (d)(2)(i) provides a backstop against such a ploy.

The government argues that BGT’s claim under sub-section (d)(2)(i) is untenable because the contracting officer was required only to “consider BGT’s request for an equi-table adjustment—not to grant the adjustment to BGT.” Appellee’s Br. 27.1 Under the government’s theory, the phrase “shall consider” gave the contracting officer discre-tion to grant or deny an equitable adjustment and imposed no duty to grant an adjustment even if BGT could prove financial loss due to the government’s withdrawal of the exhaust collector and engine mounts.

We reject the government’s interpretation of the term “shall consider” because it would produce absurd results under the government property clause. See United States v. Winstar Corp., 518 U.S. 839, 907 (1996) (avoiding a con-tract interpretation that “would be absurd”); Keepseagle v.Perdue, 856 F.3d 1039, 1047 (D.C. Cir. 2017) (interpretingan ambiguous contract term in order to avoid an absurdresult). To illustrate, assume that the committed GFE inthis case had a total value nearing $5 million, well over halfof the contract price of $8.25 million. See J.A. 24–25. If the

1 While the government asserted this argument in connection with subsection (d)(3)(ii), its logic would extend to subsection (d)(2)(i) because that subsection also includes the “shall consider” phrase.

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Navy had withdrawn all GFE, as the contract allows, it would be implausible to posit that the Navy’s only obliga-tion would be merely to “think over” BGT’s request for an equitable adjustment before denying it. It is dubious, to say the least, that the drafters of the FAR’s government property clause, 48 C.F.R. § 52.245-1, envisioned that the government would essentially have an unfettered right to withdraw promised GFE from a contract without conse-quence.

The correct interpretation of “shall consider” in this contract setting does not give the government absolute dis-cretion, but instead holds the government to a duty of good faith and reasonableness. See Goldstein v. Johnson & Johnson, 251 F.3d 433, 444 (3d Cir. 2001) (“Ordinary con-tract principles require that, where one party is granted discretion under the terms of the contract, that discretion must be exercised in good faith—a requirement that in-cludes the duty to exercise the discretion reasonably.” (cit-ing the Restatement (Second) of Contracts § 205 & cmt. a)); Walsh v. Zurich Am. Ins. Co., 853 F.3d 1, 14 (1st Cir. 2017) (stating the same under New Hampshire law); Stokes v. DISH Network, L.L.C., 838 F.3d 948, 952 (8th Cir. 2016) (stating the same under Colorado law). Moreover, the FAR demands that the contracting officer exercise impartiality, fairness, and equitable treatment when considering re-quests for equitable adjustments. See 48 C.F.R. § 1.602-2 (“Contracting officers shall . . . (b) Ensure that contractors receive impartial, fair, and equitable treatment; . . . .”). The government’s interpretation of “shall consider” would in-vite subversion of that responsibility.

Accordingly, we vacate the dismissal of BGT’s claim that the Navy breached its duty to provide an equitable ad-justment after it failed to deliver the exhaust collector and engine mounts. On remand, the Claims Court must deter-mine whether BGT is entitled to an equitable adjustment as fair compensation for the failure to deliver those GFE items.

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B Apart from subsection (d)(2)(i) of the government prop-

erty clause, BGT argues that it is entitled to an equitable adjustment under either subsection (d)(3)(ii) of the govern-ment property clause or the fixed-price changes clause. The Claims Court rejected that claim on the ground that the Navy’s withdrawal of GFE was not communicated in a writing signed by the contracting officer, as required by the NSWCCD changes clause, and therefore was not compen-sable under the contract.2

In response, BGT argues that the Navy’s withdrawal of the exhaust collector and engine mounts constituted a con-structive change to the contract because that withdrawal was ratified by the contracting officer after the fact. In the alternative, BGT argues that the Navy’s withdrawal of those GFE items constituted an official change to the

2 The government argues that BGT waived its claim for an equitable adjustment based on a constructive change because the amended complaint did not contain a citation to the changes clause, 48 C.F.R. § 52.243-1. Rule 9(k) of the Rules of the Court of Federal Claims, on which the gov-ernment relies, requires a party pleading a claim founded on a contract to identify the substantive provisions of the contract on which the party relies or annex to the com-plaint a copy of the contract, indicating the relevant por-tions. BGT annexed a copy of the contract to its amended complaint, and its claim of constructive change effectively identified the changes clause as the source of its asserted right to an equitable adjustment. See J.A. 31. Moreover, the government waived this argument by not raising it be-fore the Claims Court. The government’s only reference to Rule 9(k) before the Claims Court related to the govern-ment property clause, not the changes clause. See J.A. 180.

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contract because the Navy waived any requirement that the change be approved in writing by the contracting of-ficer.3

1 To demonstrate a constructive change, a plaintiff must

show (1) that it performed work beyond the contract’s re-quirements, and (2) that the additional work was ordered, expressly or impliedly, by the government. Bell/Heery v. United States, 739 F.3d 1324, 1335 (Fed. Cir. 2014). As to the second element, the directive ordering the additional work must come from an individual having actual author-ity to bind the government. RMA Eng’g S.A.R.L. v. United States, 140 Fed. Cl. 191, 234 (2018) (citing Winter v. Cath-dr/Balti Joint Venture, 497 F.3d 1339, 1344 (Fed. Cir. 2007)). A clause that explicitly and exclusively assigns modification authority to a contracting officer ensures that other employees are not deemed to have implied authority to modify the contract. Winter, 497 F.3d at 1346. In this case, the NSWCCD changes clause assigned modification authority exclusively to the contracting officer. As a result,

3 Because both parties treat the NSWCCD changes clause as applicable to the withdrawal of the GFE in this case, we accept that premise for purposes of the changes clause arguments. It is not clear, however, that the changes clause applies with full force to a case such as this one, in which the government is not directing the contrac-tor to make changes but is unilaterally making the changes itself. In that setting, it makes little sense to say that the contractor should not undertake to make changes other than as directed in a written order by the contracting of-ficer, since the contractor has no way to decline to make a change that was made unilaterally by the government, whether directed by the contracting officer or otherwise.

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other Navy employees, including Ms. Onesti, did not have actual or implied authority to modify the contract.

BGT does not allege that Ms. Onesti or any other Navy employee acted with actual or implied authority when com-municating the Navy’s decision to withdraw the exhaust collector and engine mounts. Instead, BGT alleges ratifi-cation as a substitute for actual authority. See Northrop Grumman Sys. Corp. v. United States, 140 Fed. Cl. 249, 277 (2018) (analyzing ratification as a substitute for actual au-thority within the context of constructive change); see also Winter, 497 F.3d at 1346; Restatement (Third) of Agency § 4.01 (2006) (“Ratification is the affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting with actual authority.”).

According to BGT’s amended complaint, the contract-ing officer ratified the Navy’s informal decision to decrease the GFE because the contracting officer had knowledge of that decision from submitted progress reports and affirmed that decision by reallocating the exhaust collector and en-gine mounts as fleet assets. Assuming that a constructive change did occur, BGT has a plausible path to a remedy under either subsection (d)(3)(ii) of the government prop-erty clause or the fixed-price changes clause. See NavCom Def. Elecs., Inc. v. England, 53 F. App’x 897, 900 (Fed. Cir. 2002) (noting that the remedy for a constructive change is “an equitable adjustment under the ‘changes’ provision of the contract” (quoting Ets-Hokin Corp. v. United States, 420 F.2d 716, 720 (Ct. Cl. 1970))).

In dismissing BGT’s claim of constructive change, the Claims Court did not reach the merits of BGT’s ratification theory, i.e., whether BGT alleged sufficient facts to support a plausible claim of constructive change through ratifica-tion. See BGT Holdings, 142 Fed. Cl. at 479–82. Rather, the court held that BGT had contractually waived its right to assert ratification by agreeing to the NSWCCD changes clause. Id. at 481–82. The court noted that the NSWCCD

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changes clause warned BGT not to comply “with any order, direction or request” from anyone other than the contract-ing officer and that it put BGT on notice that “no adjust-ment will be made in the contract price to cover any increase in charges incurred as a result” of unauthorized orders. Id. at 482. According to the court, that unambigu-ous language precludes ratification, and by agreeing to that clause, BGT waived its right to assert ratification in future litigation. Id.

BGT argues that the language of the NSWCCD changes clause does not address ratification and thus does not preclude a finding of ratification in this case. We agree. Our decision in Winter v. Cath-dr/Balti Joint Venture, 497 F.3d 1339 (Fed. Cir. 2007), provides strong support forBGT’s argument on this issue. The changes clause in thecontract at issue in Winter is quite similar to the NSWCCDchanges clause in this case. And in spite of the changesclause in Winter, we effectively endorsed the possibility ofratification in Winter by remanding the case for a more de-tailed analysis of the plaintiff’s ratification theory.

The government argues that Winter is distinguishable because the changes clause in that case contained addi-tional language stating that unauthorized modifications would not bind the government “unless formalized by proper contractual documents executed by the Contracting Officer prior to completion of this contract.” Winter, 497 F.3d at 1345. According to the government, that clauseprovided a contractual basis for the plaintiff’s ratificationtheory in Winter that is not present here. Second, the gov-ernment points out that contract-based waiver was not as-serted in the Winter case. As a result, the governmentargues that Winter did not resolve the issue of contract-based waiver.

We disagree with the government’s first argument. The “unless” clause in Winter did not grant the contracting officer in that case any additional authority to ratify

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changes relative to the contracting officer’s authority in this case. It is clear that none of the contract provisions in this case—including the NSWCCD changes clause and sub-section (d)(3)(i) of the government property clause—re-strict the contracting officer’s authority to ratify an unauthorized change after the fact. If anything, relative to this case, the “unless” clause in Winter had the effect of lim-iting ratification authority by specifying the circumstances in which the contracting officer could ratify a prior action by an unauthorized government employee. The contract in Winter is thus not distinguishable from the contract in this case in a way that undermines BGT’s ratification argu-ment.

As for the government’s second argument, it is true that Winter did not address contractual waiver and thus does not represent binding precedent as to that issue. Nonetheless, by recognizing the availability of ratification in the face of contract provisions similar to those in this case, Winter at least casts doubt on the proposition that contract language that is silent as to ratification, such as the language in the NSWCCD changes clause, is sufficient to bar a contractor’s ratification theory.

In light of our decision in Winter, the language of the NSWCCD changes clause, and the contract as a whole, we hold that BGT did not contractually waive its ratification theory. The contract in this case does not mention “ratifi-cation.” Nor does the contract otherwise expressly limit the contracting officer’s authority to ratify prior actions that were not made in full compliance with procedures required by the contract. Contrary to the government’s contention, the NSWCCD changes clause simply does not address the fact pattern of ratification—an unauthorized employee communicating a change in the first instance, and the con-tracting officer taking affirmative steps to confirm that change.

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Accordingly, we vacate the dismissal of BGT’s claim that the Navy’s decision to decrease GFE was a construc-tive change through ratification. We remand for the Claims Court to determine whether BGT pleaded facts suf-ficient to support its ratification theory and, if so, whether BGT can prove that the contracting officer ratified the withdrawal of the exhaust collector and engine mounts.

2 In addition to pleading ratification, BGT alleges that

the contracting officer waived the requirement that changes be made only through a signed writing, thus mak-ing the Navy’s decision to withdraw GFE an official change under the contract. If BGT prevails on its theory of official change through waiver, it would have a plausible path to a remedy under either subsection (d)(3)(ii) of the government property clause or the fixed-price changes clause.

BGT asserts that the contracting officer waived the Navy’s rights under the NSWCCD changes clause through a pattern of conduct. In particular, BGT alleges that the contracting officer, by virtue of his position of authority, knew of the Navy’s right to make changes exclusively through a signed writing. BGT further alleges that the contracting officer relinquished that right when he author-ized the withdrawal of GFE—which only he had the au-thority to do—and did so other than through a signed, written order. Finally, BGT alleges that the contracting officer waived that right when he characterized a previous communication from Ms. Onesti as being “tantamount to acceptance and authorization” of a requested operating procedure.

As with BGT’s claim of constructive change, the Claims Court did not address whether BGT alleged sufficient facts to support a plausible claim of change through waiver. See BGT Holdings, 142 Fed. Cl. at 479–82. Rather, the court dismissed BGT’s claim of waiver for the same reasons it dismissed BGT’s claim of constructive change: It held that

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BGT had contractually waived its right to assert waiver by agreeing to the NSWCCD changes clause, which was “un-ambiguously and diametrically opposed” to BGT’s waiver theory. Id. at 481–82.

BGT argues that the language of the NSWCCD changes clause does not address waiver and thus does not preclude its waiver theory. The government takes the op-posite position. Neither party cites precedent that is di-rectly relevant to the issue. And our decision in Winter did not address the type of waiver theory that BGT asserts.

We hold that BGT did not contractually waive its waiver theory. The NSWCCD changes clause has nothing to say about the fact pattern of waiver, i.e., an authorized individual with knowledge of a contract right taking ac-tions that evince an intent to abandon that right.

The NSWCCD changes clause warns BGT not to com-ply with any order “unless it is in writing and signed by the Contracting Officer.” To be sure, that language addresses actions by the contracting officer, an authorized individual with knowledge of contract rights. But the purpose of that language is to warn BGT to disregard orders from unau-thorized personnel, not to prevent the contracting officer (or some other high-level official) from intentionally waiv-ing the government’s rights as to how changes must be or-dered.

The government argues that BGT’s waiver theory con-tradicts the NSWCCD changes clause because that clause “unambiguously states that any directive by unauthorized Government personnel ‘will be considered to have been made without authority.’” Appellee’s Br. 21. Relatedly, the government argues that BGT’s waiver theory would con-tradict the settled principle that actions by unauthorized government employees do not bind the government.

The government’s arguments miss the point. BGT is not asserting that lower-level employees waived the Navy’s

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rights. Nor could it make such an assertion, because the doctrine of waiver assumes that the individual committing waiver has authority to waive a right in the first instance. See Molton, Allen & Williams, Inc. v. Harris, 613 F.2d 1176, 1178 (D.C. Cir. 1980) (analyzing “whether the gov-ernment agent dealing with appellant had authority to and in fact did waive [a contract] provision”); Globe Indem. Co. v. United States, 102 Ct. Cl. 21, 38 (1944) (holding that the government’s engineer and architect did not have author-ity to waive certain contract rights). Rather, BGT is assert-ing that the contracting officer waived the Navy’s rights, which does not contradict the settled principle that actions by unauthorized government personnel cannot bind the government. See Winter, 497 F.3d at 1344.

Because we disagree with the Claims Court’s ruling that BGT’s waiver theory was precluded by the contract, we vacate the dismissal of BGT’s claim of official change through waiver. We remand for the court to determine whether BGT pleaded facts sufficient to support its waiver theory and, if so, whether the contracting officer waived the requirement that changes be made only by a written order of the contracting officer.

C The final claim for relief in BGT’s amended complaint

is that the Navy breached its implied duty of good faith and fair dealing by intentionally withholding the exhaust col-lector and engine mounts and by communicating its deci-sion to withhold those GFE items in an unsanctioned manner. BGT alleges that the Navy’s conduct frustrated BGT’s ability to perform its contractual obligations by forc-ing it to incur $610,775 in excess costs.

In dismissing BGT’s claim, the Claims Court consid-ered the express language of the contract, which gives the Navy the ability to decrease or withdraw GFE and pre-cludes a claim of breach for such actions. BGT Holdings, 142 Fed. Cl. at 483–84 (citing subsections (d)(3)(i)(A),

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(d)(3)(i)(A)(C), and (i)(3) of the government property clause). As a result, the court held that the Navy’s with-drawal of GFE did not violate its implied duty of good faith and fair dealing. Id.

We agree with the Claims Court that the implied duty of good faith and fair dealing provides no basis for extra-contractual relief in this case. The contract unquestionably gives the Navy the right to decrease or withdraw GFE. BGT cannot use the doctrine of good faith and fair dealing to complain of the very conduct that the contract expressly permits. See Precision Pine & Timber, Inc. v. United States, 596 F.3d 817, 831 (Fed. Cir. 2010) (“The implied duty of good faith and fair dealing cannot expand a party’s contractual duties beyond those in the express contract or create duties inconsistent with the contract’s provisions.”).

For the reasons set forth in parts II-A and II-B above, the contract itself provides other avenues of relief for BGT that preempt the need to invoke the doctrine of good faith and fair dealing. BGT’s complaints regarding the Navy’s practice of communicating directives other than through the contracting officer’s signed writing are fully addressed by BGT’s alternative theories for relief under the govern-ment property clause and the fixed-price changes clause as we have construed them. See Hickcox-Huffman v. US Air-ways, Inc., 855 F.3d 1057, 1066 (9th Cir. 2017) (“[Appel-lant] has sufficiently alleged that [appellee] breached an express provision of terms of transportation and thus need not rely on this interpretive doctrine [of good faith and fair dealing].”); Cruz v. FXDirectDealer, LLC, 720 F.3d 115, 125 (2d Cir. 2013) (finding good faith and fair dealing redun-dant “when a breach of contract claim, based upon the same facts, is also pled”); CFS Int’l Cap. Corp. v. United States, 118 Fed. Cl. 694, 701 (2014) (same). Moreover, be-cause the application of the “shall consider” language in the government property clause already imposes a duty of good faith on the Navy, there is no justification for invoking an

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extra-contractual duty of good faith that would be redun-dant of the duty imposed by that clause.

Although BGT relies on the doctrine of good faith and fair dealing as a separate ground for relief, that claim is based on the same set of facts as BGT’s other claims. The contract itself defines the parties’ respective rights in light of those facts. If the contract had expressly authorized the Navy to withdraw the GFE without consequence, the par-ties’ rights would be settled by the contract, and the duty of good faith and fair dealing would have no role to play in resolving this dispute. Because we interpret the contract to provide BGT a mechanism for obtaining compensation for the withdrawal of GFE, BGT’s rights are likewise gov-erned by the contract, and the doctrine of good faith and fair dealing cannot be employed to readjust those rights. We therefore affirm the dismissal of BGT’s claim of breach of good faith and fair dealing.

III In sum, we vacate the Claims Court’s dismissal of

BGT’s claims of constructive change through ratification, official change through waiver, and breach for failure to provide an equitable adjustment, and we remand on those claims for further proceedings consistent with this opinion. We affirm the Claims Court’s dismissal of BGT’s claim of breach of the implied duty of good faith and fair dealing.

No costs. AFFIRMED IN PART, VACATED IN PART, AND

REMANDED

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TAB 14

No. 19-673C

(Filed: December 30, 2020) * * * * * * * * * * * * * * * * * * * * * * ZAFER CONSTRUCTION COMPANY, Plaintiff, v. THE UNITED STATES, Defendant. * * * * * * * * * * * * * * * * * * * * * * Sam Z. Gdanski, Teaneck, NJ, for plaintiff. Robert R. Kiepura, Trial Counsel, United States Department of Justice, Civil Division, Commercial Litigation Branch, Washington, DC, with whom were Ethan P. Davis, Acting Assistant Attorney General, Robert E. Kirschman, Jr., Director, and Steven J. Gillingham, Assistant Director, for defendant. James D. Stephens, United States Army Corps of Engineers, Engineer Trial Attorney, of counsel.

OPINION BRUGGINK, Judge. This is an action brought by plaintiff, Zafer Construction Company (“Zafer”), a government contractor, pursuant to the Contract Disputes Act (“CDA”). 41 U.S.C. §§ 7101-7109 (2012). Pending is defendant’s motion to dismiss plaintiff’s complaint for failure to state a claim upon which relief can be granted. The motion is fully briefed. Oral argument is unnecessary. For the reasons explained below, we grant the government’s motion to dismiss because plaintiff did not present its claim to the contracting officer for decision within the limitations period of the CDA.

Contracts; Contract Disputes Act, 41 U.S.C. §§ 7101-7109 (2018); delay; disruption; changes; limitations period for making claims.

2

BACKGROUND

On June 24, 2008, the United States, acting through the Army Corps of Engineers (“USCE”) entered into a contract with Zafer Construction Company for the Bagram Public Works Utilities Contract on the Bagram Air Base in Bagram, Afghanistan (“project”).1 Under the project, Zafer was to design and build base-wide public work utilities including storm water collection systems, wastewater collection transmission systems, and water distribution and transmission systems for a contract price of $40,720,493.00.

Following completion of the project, Zafer submitted to the

Contracting Officer (“CO”) a Request for Equitable Adjustment (“REA”) on September 10, 2013, and an amended REA on December 17, 2014, seeking additional payments in the total amount of $6,791,155.63. Four years later, on February 7, 2018, Zafer filed a certified claim with the CO. Complaint Ex. 4 at 1 (ECF No. 1-4 at 1). The CO’s final decision (“COFD”), submitted on May 9, 2018, denied the relief requested because the officer found that the claim was time-barred under 41 U.S.C. § 7103(a)(4)(A), which requires that claims must be submitted to the CO within six years of accrual.

Zafer filed its complaint here on May 7, 2019, basing its claim on the

CDA. The government has filed a motion to dismiss under Rule 12(b)(6), alleging that Zafer failed to meet the presentment requirement of the CDA because it neglected to submit a certified claim within six years of claim accrual.

Zafer has extensive experience with other contracts in Bagram, Afghanistan. In its complaint, Zafer describes the unique difficulties of working on projects there. The timing of construction and the shipment of materials had to be perfect to avoid going over budget. The materials were often shipped from the United States, and once the materials entered Afghanistan, had to make their way through border and base security, a process could take weeks or months. Zafer alleges that it suffered damages in the current contract for similar delays, along with constructive changes attributable to the United States.

Zafer divides its claimed delays into four different periods,

corresponding to its Critical Path Method (“CPM”) schedule updates or project milestone events. The four periods are as follows:

1 The contract number is W917ER-08-C-0027.

3

1. Period 1: September 24, 2009 Baseline Schedule through April 13, 2010 CPM schedule update. Zafer alleges that delays in this period added 10 days to the schedule.

2. Period 2: April 13, 2010 CPM schedule update through September 24, 2010 CPM Project status update. Zafer alleges that delays during this period added 178 days to the schedule;

3. Period 3: September 24, 2010 CPM Project status through June 29, 2011. Zafer alleges that delays in this period added 207 days to the schedule; and

4. Period 4: June 29, 2011 through July 3, 2012, actual Project completion. Zafer alleges that delays in period 4 added 224 days to the schedule.

Complaint at 4.2

In total, the four periods embraced an additional 619 days of claimed

delay to the project. Zafer contends that the government agreed in writing to time extensions totaling 378 days covering the period from October 23, 2010 to November 22, 2011. These time extensions were incorporated in the contract through three separate Contract Modifications: Modification B0006 (Bilateral) for 133 days, Modification B0014 (Bilateral) for 98 days, and Modification P0002 (Unilateral) for 147 days.

According to Zafer, the USCE issued the modifications to add time to

the schedule while specifically reserving for a later date the parties’ negotiating positions concerning pricing of overhead and other delay costs. Zafer attached Modifications B0006 and B0014 as exhibits to its complaint. Although Zafer alleges that Modification B0006 states that “related impacts costs . . . will be negotiated at a later date,” Complaint at 6, the page with this statement is not included in the exhibit. Modification B0014 does include language stating that related impacts costs will be negotiated at a later date. Zafer states that Modification P0002 also included language that the parties would negotiate overhead costs at a later date, although that modification is not included as an exhibit.

Zafer alleges that there were further delays, for which Zafer is not responsible, and which were not covered by the contract modifications listed above. Many of these delays allegedly took place in period four and are blamed on the government’s failure to accept the turnover of the project at

2 Neither the complaint nor the attached materials explain what triggers the ends and the beginnings of these four periods.

4

completion or to outside causes including terrorism and protests, for which Zafer alleges the government is contractually responsible.

Zafer also alleges in its complaint that constructive changes arose as a result of the government’s direction that Zafer perform additional change order work which required Zafer to adhere to government demands which were not within the scope of the contract. In Zafer’s amended REA, these constructive changes have been listed under the following categories, among others: utility diggings, relocation of sewer main, repair of damages by others to completed works, additional works beyond contract scope, additional travel and extended service durations by supervisors, additional communication line, PVC Air distribution pipes, operation and maintenance of completed construction.

Zafer initially submitted an REA on September 10, 20133 and then an amended one on December 17, 2014. Zafer explains that the amended REA “combines the initial REA documents and all subsequent revisions, documents, backups, further clarifications/analysis prepared and submitted by Zafer.” Complaint Ex. 1 at 9 (December 2014 REA).4 The September and December REA both included the following language, “This REA is submitted so that the parties can engage in immediate discussions and negotiations to mutually amicably resolve this request” to resolve the extended overhead costs for the delays and constructive changes. Complaint Ex. 1 at 9.5 Both REAs contain the following certification, “I, Önder Tümer, certify this REA of $6.791.155,63 submitted in a Request for an Equitable Adjustment under Contract No. W912ER-08-C-0027 is made in good faith; that the supporting data are accurate and complete to the best of my knowledge and belief; that the amount requested accurately reflects the contract adjustment for which the Contractor believes the Government is liable; and that I am duly authorized to certify the claim on behalf of the Contractor.” Complaint Ex. 1 at 167.

3 Serial Letter No: 0143. 4 Zafer did not attach the September 2013 REA as an exhibit with its complaint. Zafer only attached a copy of the amended REA submitted in December 2014. 5 Because Zafer stated that the initial REA document submitted as the 2013 REA was included in the amended 2014 REA, we can assume that the same language was included in both REAs.

5

It is undisputed that for the next four and a half years, from December 29, 2013, to May 9, 2018, the parties engaged in negotiations and communicated back and forth over requests by the government for additional information. The government also conducted an audit of Zafer. Complaint at 14-19.

Zafer eventually filed a certified claim, which the government

received on February 7, 2018.6 As characterized in the complaint, the certified claim “consists of a single-page narrative and CDA claims certification.” Complaint Ex. 4 at 2. Attached to the certified claim, however, was the December 17, 2014 amended REA along with serial contract letters between the parties. On May 9, 2018, the COFD denied the relief requested in the certified claim because the officer concluded that the claim was time barred.

The CDA requires a contractor to file a claim against the Federal

Government within 6 years after accrual of the claim. Any claim that accrues outside of this limitations period is barred. 41 U.S.C. § 7103(a)(4)(A). The COFD determined that Zafer had not filed a certified CDA claim until February 7, 2018 and that the previous submissions had merely been requests for equitable adjustments. The COFD stated that any claim that accrued prior to February 7, 2012, six years prior to submitting the claim, would be barred.

The COFD found that out of the 619 days of alleged delay described

in Zafer’s claim, the first 479 days accrued before February 7, 2012. Therefore, the COFD found, however, that because Zafer did not file a certified CDA claim relating to these alleged delays until February 7, 2018, the claim for these first 479 days was time-barred. The CO found that the remaining 140 days of the alleged delay period were barred due to untimeliness because Zafer failed to provide a proper time impact analysis and schedule updates, and thus, the CO was unable to evaluate whether the government caused any delay to critical path activities.

In addition, the COFD found that the claims regarding constructive

changes were also barred.7 Although the COFD found that the continuing

6 Zafer submitted the certified claim on February 6, 2018. Gov’t Reply Brief Ex. 1. 7 The CO found that only one claim of constructive changes, involving four alleged repairs completed by Zafer, was not time-barred, as the alleged repairs were completed within six years of Zafer’s submission of the

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claim doctrine applied to Zafer’s constructive changes claim, the COFD still found that the statute of limitations had run on each individual “liability-creating event” listed in Zafer’s certified claim. Complaint Ex. 4 at 15. The COFD also found that the time-barred portion of Zafer’s claim was not subject to equitable tolling because Zafer failed to demonstrate that it pursued its claim diligently or that it had alleged any extraordinary circumstance preventing it from filing its CDA claim on a timely basis.

DISCUSSION

I. The Accrual Date of Zafer’s Claim

Plaintiff’s claim is separated into two categories of damages: delay and constructive changes. The limitations period for any type of CDA claim is set by the claim’s accrual date: “Each claim by a contractor against the Federal government relating to a contract . . . shall be submitted within 6 years after the accrual of the claim.” 41 U.S.C. § 7103(a)(4)(A). Thus, plaintiff’s claim is timely either if it accrued within six years of February 2018, when it filed what the government concedes is a proper CDA claim, or if the 2013 and 2014 REAs constitute claims. To address the first possibility, we must first determine the accrual date of plaintiff’s claim, the date “when all events that fix the alleged liability of either the Government or the contractor and permit assertion of the claim, were known or should have been known. For liability to be fixed, some injury must have occurred. However, monetary damages need not have been incurred.” 48 C.F.R. § 33.201 (2019).

Plaintiff’s argues that its 2018 claim was timely asserted because it did not accrue until Zafer received the COFD in May 2018, which refused compensation of plaintiff’s claims. Zafer contends that prior to receiving the COFD, plaintiff and the government were involved in negotiations to resolve plaintiff’s claims through the REA process, and thus, no claim accrued during negotiations because there was not yet any live dispute giving rise to a cause of action. Zafer asserts that it worked together with the government from December 29, 2013, to May 9, 2018, to negotiate compensation of plaintiff’s claims and that it complied with the contract and the government’s modifications during this time.8

February 7, 2018 certified claim. The CO, nevertheless, denied this claim on the merits.

8 Zafer argues that it was lulled into negotiations through the REA process because it anticipated payment, as the government’s modification letters agreed to negotiation of Zafer’s time impact related costs at a later date.

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Defendant responds that both types of claims accrued in 2009 or 2010, when the circumstances outlined in the two REAs began what plaintiff claims was government-caused delay. For reasons set out below, we agree with the government.

With respect to delay damages, although the complaint separates the delay into four continuous periods of time, for aught that appears, they are separated arbitrarily, as each period relies on the same initial triggering events, namely that the government had not “(1) demined Coyote Creek, (2) provided Zafer flight line access, or (3) removed obstacles from the storm water system route of construction; and as a result, storm water system work delayed completion of the Project by 10 calendar days from 23 October 2010 to 2 November 2010.” Complaint Ex. 1 at 26. Even though the delay damages here cumulate through each period, they do not constitute subsequent new events.

Plaintiff suggests that the continuing claim doctrine applies to its delay claim. We disagree. The continuing claim doctrine “operates to save parties who have pled a series of distinct events - each of which gives rise to a separate cause of action - as a single continuing event.” Ariadne Fin. Servs. Pty. v. United States, 133 F.3d 874, 879 (Fed. Cir. 1998). It “does not apply to a claim based on a single distinct event which has ill effects that continue to accumulate over time.” Id. at 879. Instead, a cause of action accrues when at the first point that all the events that fix liability are apparent and entitle the plaintiff to institute an action. See id. The doctrine only applies if the claim is “inherently susceptible to being broken down into a series of independent and distinct events or wrongs, each having its own associated damages.” Brown Park Estates-Fairfield Development Co. v. U.S., 127 F.3d 1449, 1456 (Fed. Cir. 1997). The continuing claim doctrine does not apply here to plaintiff’s delay damages because the REAs make plain that the events triggering delay were fixed by September 24, 2009, which is the date on which plaintiff’s period one delay began. Moreover, even if we applied the doctrine, it would not save plaintiff’s delay claim from being barred by the statute of limitations because the fourth period still began before February 7, 2012, which is too late, given our conclusion below that the REAs did not constitute claim submissions, as will be discussed further below.9

9 We find it unnecessary to rely on the government’s alternative waiver theory that plaintiff’s failure to challenge the government’s assertions of the accrual date resulted in a waiver of the argument.

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With respect to plaintiff’s assertion of ten categories of constructive changes, although the complaint does not provide dates regarding the asserted changes, the December 2014 REA shows that all were ordered prior to February 7, 2012.10 Each event accrued as soon as Zafer knew or should have known of alleged damages and by its own admission, as reflected in the REAs,11 the most recent accrual date for any of the constructive changes was August 1, 2011.

II. Statute of Limitations

Having determined that the accrual date for plaintiff’s claim of delay damages was September 24, 2009, and that the accrual date for constructive changes was no later than August 1, 2011, the CDA statute of limitations for either claim ended no later than August 1, 2017. See 41 U.S.C. § 7103(a)(4)(A). The next issue involves resolving when plaintiff submitted a CDA claim.

It is clear that Zafer’s February 7, 2018 submission meets the requirements of a CDA claim. It included the proper certification under 48 C.F.R. § 52.233-1(d)(2)(iii) (2019). It stated a sum certain ($6,791,155.63),and it provided the basis for the claim by attaching the December REA andall other relevant serial letters discussing the matters for contract adjustment.Finally, and crucially, the 2018 submission demanded a final decision: “Ihereby request a contracting officer's final decision on this Contract DisputesAct Claim.” Def’s Reply Ex. 1 at 2. Thus, the 2018 claim satisfies therequirements for submission of a CDA claim. Based on the accrual dates wearrived at above, however, it came too late.

The only remaining question is whether Zafer’s December 17, 2014 REA should be treated as a CDA claim. To qualify as a claim under the

10 In the COFD, the CO found that all of the constructive changes occurred prior to February 7, 2012, except for four repairs which were completed later. It appears that the CO considered the completion date of these latter four repairs as the accrual date of the claims covering them instead of the date when Zafer knew or should have known of its cause of action for them, i.e., the date they were ordered.

11 Each constructive change listed in the 2014 REA details an event in which plaintiff notifies the government by letter or meeting of an issue which presented a constructive change to the contract. For example, the most recent event that occurred shows that plaintiff sent a letter to the government addressing a constructive change to the contract on August 1, 2011.

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CDA, there must be “a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to the contract.” M. Maropakis Carpentry, Inc. v. U.S., 609 F.3d 1323, 1327 (Fed. Cir. 2010) (internal quotation omitted). The written demand must be nonroutine and contain a “clear and unequivocal statement that gives the contracting officer adequate notice of the basis and amount of the claim.” Contract Cleaning Maint., Inc. v. U.S., 811 F.2d 586, 592 (Fed. Cir. 1987). Although a contractor is not required to explicitly request a final decision, to qualify as a claim under the CDA, the contractor must show that “what the contractor desires by its submissions is a final decision.” Maropakis, 609 F.3d at 1327-28 (quoting James M. Ellett Constr. Co. v. U.S., 93 F.3d 1537, 1543 (1996)).

Zafer argues that the December 2014 REA is a CDA claim because it “was for specific amounts of compensation with a sworn statement attesting to the truth of its submission and included detailed factual bases for its alleged losses which were for a sum certain.” Pl’s Response at 6 (ECF 16 at 6). Zafer’s support for this allegation is the following language from the REA, “I, Önder Tümer, certify this REA of $6.791.155,63 . . . is made in good faith; that the supporting data are accurate and complete to the best of my knowledge and belief; that the amount requested accurately reflects the contract adjustment for which the Contractor believes the Government is liable; and that I am duly authorized to certify the claim on behalf of the Contractor.” Complaint Ex. 1 at 167. We agree in part: Zafer’s 2014 REA includes an amount certain, a sworn statement, and a factual basis for its loss. What was missing, however, was any indication that Zafer was expecting a final decision. Indeed, the wording and the parties’ subsequent conduct is inconsistent with treating the REA as a final demand for a decision and payment.

The December 17, 2014 REA (which incorporates the 2013 request), lacks a request for a final decision. Instead, it asks for negotiations and is void of any indication that Zafer was asserting a claim: “[t]his REA is submitted so that the parties can engage in immediate discussions and negotiations to mutually amicably resolve this request.” Complaint Ex. 1 at 9. This language plainly is not a current demand for payment but is a proposal for negotiations. This is further emphasized when Zafer “requests the opportunity to meet with and negotiate this matter so it may be resolved amicably by the parties without the necessity of pursuing additional avenues of relief available.” Complaint Ex. 1 at 16 (stated in both the 2013 and 2014 REA). Zafer explains the purpose of the REA when it discusses the REA preparation costs: “Government contract principles have long recognized

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that REA preparation costs incurred for the purpose of materially furthering the negotiation process is allowable.” Complaint Ex. 1 at 167. In closing, Zafer reiterates that the REA’s purpose is to negotiate the matter further, “As stated in the outset we trust that immediate negotiations will ensue. ZAFER is prepared to engage in meaningful dialogue on site to further this process. ZAFER knows that the USACE is committed to use good faith in resolving a REA.” Complaint Ex. 1 at 167 (ECF No. 1-1 at 167). Finally, the actions of the parties for more than three years following the submission of the amended REA show that the REA’s intent was to trigger negotiations.

Zafer responds to this by relying on the Federal Circuit decision in Hejran Hejrat Co. v. United States Army Corps of Eng’rs, 930 F.3d 1354, 1358-59 (Fed. Cir. 2019), for the proposition that any deficiency in the styling of the REA does not disqualify it as a CDA claim. In Hejran, the contractor had submitted an REA, which the contracting officer treated as a final decision and denied. Hejran appealed to the Board of Contract Appeals, which found that it lacked jurisdiction because it could not conclude that the REA was not submitted as a request for a final decision. On appeal, the Federal Circuit reversed, finding no statute of limitations issue. Hejran was still well within the six-year limitations period and any defect could be cured on remand. Moreover, the court found that the REA did seek a final decision. The contractor had submitted a previous REA and had subsequently let the contracting officer know that it would resubmit the REA with the proper certification to convert it to a CDA claim. Once the contractor provided the missing certification, the contracting officer treated the submission as a request for a final decision.

The controlling rule of Hejran, however, is that although “a CDA claim need not be submitted in any particular form or use any particular wording,” the claim must still “indicate to the contracting officer that the contractor is requesting a final decision.” Id. Hejran emphasized that a claim “must indicate to the contracting officer that the contractor is requesting a final decision” to qualify as a CDA claim. Id. Here, Zafer went to some lengths to emphasize that it wanted negotiations, not a final decision. Nor can Zafer cure any defect on remand.

In sum, while the February 7, 2018 submission met the requirements for a CDA claim, the earlier REAs did not. Zafer’s claims accrued no later than August 1, 2011, and thus a CDA claim must have been filed within six years, on August 1, 2017, for the claim to be timely. The 2018 submission to the CO came too late.

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CONCLUSION

For the reasons stated above, we find that Zafer’s claim did not comply with the requirements of the CDA, and thus the complaint fails to state a claim upon which this court may grant relief. Therefore, we grant the government’s motion to dismiss. The Clerk is directed to enter judgment accordingly. No costs.

s/Eric G. Bruggink ERIC G. BRUGGINK Senior Judge

TAB 15

ARMED SERVICES BOARD OF CONTRACT APPEALS Appeal of - ) ) Anis Avasta Construction Company ) ASBCA No. 61926 ) Under Contract No. H92237-11-C-0830 ) APPEARANCE FOR THE APPELLANT: Mr. Shujah Mowafaq President and CEO

APPEARANCES FOR THE GOVERNMENT: Jeffrey P. Hildebrant, Esq. Air Force Deputy Chief Trial Attorney Isabelle P. Cutting, Esq. Trial Attorney

OPINION BY ADMINISTRATIVE JUDGE WILSON ON THE GOVERNMENT’S MOTION FOR SUMMARY JUDGMENT

Anis Avasta Construction Company (appellant) brings this appeal alleging the

United States Air Force (government) failed to pay appellant for work performed. The government moves for summary judgment, arguing that the claim is barred by the six year statute of limitations set forth in the Contract Dispute Act’s (CDA) 41 U.S.C. §§ 7101-7109, and also that the appeal is barred by the doctrine of laches. Appellant counters that there are material facts in dispute that preclude summary judgment. We grant the government’s motion.

STATEMENT OF FACTS (SOF) FOR PURPOSES OF THE MOTION

1. On July 27, 2011, the government awarded appellant a contract to construct a 200 meter water well in Ahmed Kheyl, Afghanistan1 (app. supp. R4, signed contract at 1-32).

2. FAR 52.232-5, PAYMENTS UNDER FIXED PRICE CONSTRUCTION CONTRACTS (SEPT 2002), was incorporated into the contract (app. supp. R4, signed contract at 14). FAR 52.232-5(h) requires that the government shall pay the amount due the 1 Appellant submitted a copy of the signed contract (app. supp. R4, contract document).

The government claims to not have any record of the contract (R4, tab 2). As the government is not contesting the existence of the contract in this motion, the Board accepts the existence of the executed contract at issue in this appeal.

2 Appellant submitted several attachments to the Board with its complaint. Due to appellant’s pro se status and the difficulty of internet connectivity and mail coming from Afghanistan, the Board accepted the attachments as appellant’s supplemental Rule 4 file. As the attachments do not have a sufficient tabbing or numbering system, reference will be made to the document name and page.

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contractor under this contract after completion and acceptance of all work; presentation of a properly executed voucher; and, presentation of release of all claims against the government arising by virtue of the contract.

3. Pursuant to the terms of the contract, on August 1, 2011, appellant signed a notice to proceed and had 30 calendar days to complete the contract work (app. supp. R4, contract document at 3; notice to proceed).

4. On September 12, 2011, appellant contacted the contracting officer (CO) via email, stating that the water well construction was complete (app. supp. R4, email dtd. September 12, 2011). On September 24, 2011, the contracting officer’s representative (COR) replied, stating that the government would send the “paperwork to SOTF” (app. supp. R4, email dtd. September 24, 2011).

5. The record contains no evidence of communication between September 24, 2011 and September 5, 2012.3

6. On September 5, 2012, email correspondence reflects that appellant reached out to the combined joint special operations task force – Afghanistan (CJSOTF-A) via email, and stated appellant still did not “have the COR and the person to sign and process the invoice” (app. supp. R4, email dtd. September 15, 2012).

7. On September 10, 2012, appellant again reached out to the CJSOTF-A via email, asking “do you have any information of this contract from site” (app. supp. R4, email dtd. September 10, 2012).

8. On September 13, 2012, a government official identified as Mr. Barden, responding from the CJSOFT-A email address, contacted appellant and stated, “I have discussed the issue with the COR and TSgt Ladd in our payment section. You are clear to submit for payment [to the payments email address].” (App. supp. R4, email dtd. September 13, 2012)

9. On September 18, 2012, appellant emailed the CJSOTF-A payments email address, as directed by Mr. Barden in the September 13, 2012 email, regarding the invoice (app. supp. R4, emails dtd. September 13, 2012, September 18, 2012). Later on September 18, 2012, TSgt Ladd responded from the CJSOTF-A payments email address stating that she would 3 The record includes an email seemingly dated February 8, 2012 from the government

representative. However, the email address is one clearly used by the personnel in that position and not the individual themselves and the date and context aligns more with the emails dated in 2011 and not 2012. As such, the Board finds that the next communication between the parties after the September 24, 2011 email from the government to appellant to be the September 5, 2012 email from appellant, requesting information on how to receive payment. (App. supp. R4, email dtd. February 8, 2012)

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submit the payment and would copy appellant (app. supp. R4, email dtd. September 18, 2012).

10. On October 31, 2012, appellant reached back out to the government at theCJSOFT-A payments email address requesting a status of the payment as he had not yet received a copy (app. supp. R4, email dtd. October 31, 2012). On November 7, 2012, appellant again emailed the CJSOTF-A payments email address, specifically to TSgt Ladd, and stated that per their phone conversation the invoice was attached (app. supp. R4, email dtd. November 7, 2012). The record contains no evidence of the contents of the referenced phone conversation.

11. On November 14, 2012, TSgt Ladd responded that a signed DD250 wasnecessary to process payment (app. supp. R4, email dtd. November 14, 2012). Later on November 14, 2012, appellant responded and stated that he could not “find the COR to sign the invoice” and to talk to “Mr. Barden he will tell you the status” (app. supp. R4, email dtd. November 14, 2012).

12. The record contains no correspondence between November 14, 2012 andOctober 29, 2018.

13. On October 29, 2018, appellant filed a claim dated October 28, 2018 in theamount of $72,000 with the current SOJTF-A CO, 1LT Maxwell Marsenison, via email, for payment for the Ahmed Kheyl water well project (R4, tab 14 at 3-4; app. supp. R4, email dtd. October 29, 2018).

14. By email dated October 30, 2018, appellant requested that 1LT Marsenisonconfirm he had received appellant’s claim (app. supp. R4, email dtd. October 30, 2018). An email exchange on October 31, 2018 shows that appellant communicated with the Director of Contracting at SOJTF-A, MAJ Agyemang. MAJ Agyemang requested clarification as to whether appellant was referring to payment for the water well project or a pole barn project, as appellant submitted documentation for the pole barn project at the same time. Appellant stated he was seeking payment for the water well project but submitted the pole barn contracting officer’s final decision (COFD) because he had “received the pole barn invoice . . . and attached the COFD” for reference. On November 1, 2018, MAJ Agyemang replied that the government had no record of the water well contract or that it had been performed, which was required for payment. (App. supp. R4, emails dtd. October 31, 2018, November 1, 2018)

15. On November 2, 2018, appellant replied to MAJ Agyemang’s email, stating hewas forwarding the email traffic from September 5, 2012 indicating that the work was complete, along with the email traffic from November 4 and 14, 2012, regarding appellant’s submission of the invoice (app. supp. R4, email dtd. November 2, 2018). Appellant referenced the statement in the November 14, 2012 email from TSgt Ladd indicating that he was “still waiting for the DD250 from the COR” (app. supp. R4, email dtd. November 2, 2018).

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16. On December 8, 2018, contract specialist Rebecca Raish replied to appellant’s

email of November 2, 2018 and advised appellant that pursuant to 31 U.S.C. § 3702(b) and 5 C.F.R. § 178.104, appellant could not file a claim against the government after six years had passed (app. supp. R4, email dtd. December 8, 2018).

17. Appellant replied later on December 8, 2018 and stated he submitted a copy of the contract, the notice to proceed, and email traffic, which reflects that the contract was performed and completed. Appellant also asserted that he “continuously asked the issue and followed up with the contracting office until 2013” and never got a result. (App. supp. R4, email dtd. December 8, 2018) The record reflects that prior to October 2018, the last communication between appellant and the government, was on November 14, 2012, with TSgt Ladd, the CJSOFT-A payments contact. In that communication, TSgt Ladd replied that a signed DD250 was required to issue payment for the contract and appellant responded that he was unable to “find the COR to sign the invoice.” (App. supp. R4, email dtd. November 14, 2012)

18. Appellant filed a notice of appeal at the Board on January 2, 2019 and on January 3, 2019 it was docketed as ASBCA No. 61926.

19. The government filed a notice of appearance in this appeal on January 7, 20194 and on February 7, 2019 the government issued a COFD in this matter and denied appellant’s claim, asserting “[t]he government does not have any official evidence to support a completion of such contract and as such makes no admission that an enforceable contract exists” (R4, tab 16 at 2).

20. The current CO at SOJTF-A, MAJ Kwame Agyemang, submitted a signed declaration dated January 28, 2019. MAG Agyemang declared, in pertinent part:

a. That after extensive search he has found no record of the appellant contractor before January 24, 2017;

b. That there is no record of the contract work being completed or accepted

by that office;

c. The security situation at the site of alleged contract performance makes it impossible for the government to verify the existence of the water well.

(R4, tab 2)

4 The notice of appearance in the record is dated “7 January 2018”, but was received by

the Board on January 7, 2019.

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DECISION

The government moves for summary judgment, contending that appellant’s claim is barred by the statute of limitations established by the CDA, and also that appellant’s claim has lain dormant for so long that it is barred by the doctrine of laches (gov’t mot. at 2).

A party is entitled to summary judgment if it, as the moving party, has shown that there are no genuine issues of material fact and it is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Mingus Constructors, Inc. v. United States, 812 F.2d 1387, 1390 (Fed. Cir. 1987). Irrespective of the type of claim being raised, the applicable substantive law identifies which facts are material and might affect the outcome of the appeal, thus precluding the entry of summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute is genuine only if, on the entirety of the record, a reasonable factfinder could resolve a factual matter in favor of the non-movant. In other words, the burden on the movant is not to produce evidence showing the absence of a genuine issue of material fact, but to point out that there is an absence of evidence to support the nonmoving party’s case. Sweats Fashions, Inc. v. Pannill Knitting Co., 833 F.2d 1560, 1562-63 (Fed. Cir. 1987).

We view such facts in the light most favorable to the non-moving party, accepting its version of facts as true and drawing all reasonable factual inferences in its favor. Liberty Lobby, 477 U.S. at 255; C. Sanchez and Son, Inc. v. United States, 6 F.3d 1539, 1541 (Fed. Cir. 1993). However, the non-moving party must set forth specific facts showing the existence of a genuine factual dispute; conclusory statements and bare assertions are not sufficient. Mingus, 812 F.2d at 1390-91; Pure Gold, Inc. v. Syntex (U.S.A.), Inc., 739 F.2d 624, 626 (Fed. Cir. 1984). Our job is not “‘to weigh the evidence and determine the truth of the matter,’ but rather to ascertain whether material facts are disputed and whether there exists any genuine issue for trial.” Holmes & Narver Constructors, Inc., ASBCA Nos. 52429, 52551, 02-1 BCA ¶ 31,849 at 157,393 (quoting Liberty Lobby, 477 U.S. at 249). Statute of Limitations

The government first asserts that appellant’s claim is precluded as a matter of law because appellant waited “seven years, one month and 18 days” after the claim accrued in order to enforce its right to payment (gov’t mot. at 5). The CDA provides that “[e]ach claim by . . . the Federal Government against a contractor relating to a contract shall be submitted within 6 years after the accrual of the claim.” 41 U.S.C. § 7103(a)(4)(A). A claim accrues “when all events, that fix the alleged liability of . . . the contractor and permit assertion of the claim, were known or should have been known.” FAR 33.201. The events fixing liability “should have been known” when they occurred unless they were either concealed or inherently unknowable at the time. Alion Science and Tech. Corp., ASBCA No. 58992, 15-1 BCA ¶ 36,168 at 176,489 (citing Raytheon Missile Sys., ASBCA No. 58011, 13 BCA ¶ 35,241 at 173,017). Only facts that could not reasonably

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be known by the claimant postpone claim accrual. Id. (citing United States v. Commodities Export Co., 972 F.2d 1266, 1272 (Fed. Cir. 1992)). Failure to meet a statute of limitations is an affirmative defense, for which appellant bears the burden of proof. Kellogg Brown & Root Servs., Inc., ASBCA No. 58175, 15-1 BCA ¶ 35,988 at 175,823 (citing FED. R. CIV. P. 8(c); Bridgestone/Firestone Research, Inc. v. Automobile Club de L ‘Quest de la France, 245 F.3d 1359, 1361 (Fed. Cir. 2001)).

For the purposes of this motion, the Board accepts that the contract existed and the work was complete on September 12, 2011, the date appellant contacted the government and stated that the work was finished (SOF ¶ 4). On that date, the facts leading to appellant’s claim for payment for work completed were objectively and reasonably knowable by the parties. Alion Science and Tech. Corp., 15-1 BCA ¶ 36,168 at 176,489 (citing Raytheon, 13 BCA ¶ 35,241 at 173,017).

Therefore, September 12, 2011 is the date on which the clock starts in order to calculate the statute of limitations. 41 U.S.C. § 7103(a)(4)(A). The record reflects that following appellant’s email of September 12, 2011, the government responded on September 24, 2011 and then appellant sent a follow up over a year later, on September 5, 2012 (SOF ¶¶ 5-6). The parties then engaged in a consistent flow of emails between September 2012 and November 2012 (SOF ¶¶ 6-11). On November 14, 2012, the government representative indicated that appellant would need to submit a completed DD250 for payment to be issued (SOF ¶ 11).

Later on that same date, appellant directed the government to speak with “Mr. Barden” and that appellant could not “find the COR to sign the invoice” (SOF ¶ 11). The record contains no additional communication, or paperwork as requested by the government, from appellant on this matter until October 29, 2018, when appellant submitted a certified claim to the government (SOF ¶¶ 12-13). On February 7, 2019, the government denied the claim (SOF ¶ 19).

Based upon the evidence of record, 7 years and 54 days passed from the date the claim accrued to the date appellant filed its claim with the current CO. Appellant first argues that it has only been 5 years, 10 months, and 16 days and as such, the claim is not barred by the CDA statute of limitations (app. resp. at 4). Appellant asserts that November 14, 2012, the date of the last email correspondence with the government payments contact, wherein he was directed to submit the DD250, is the date when the statute of limitations clock starts ticking (SOF ¶¶ 11, 15; see also app. resp. at 4).

We established above that the contract was completed on the date appellant emailed the government representative and stated the project was complete, September 12, 2011, and therefore that is the date the claim accrued (SOF ¶ 4; see also FAR 33.201). Appellant implies that the date of accrual is the date of the last communication with the government payments representative on November 14, 2012 (SOF ¶¶ 11, 15). However, appellant offers no further explanation as to why accrual should be November 14, 2012 instead of September 5, 2011. The contents of the

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November 14, 2012 email requests that appellant submit a DD250 to prove completion and acceptance of the government at the contract site (SOF ¶ 11). The undisputed facts are that the contract was complete on September 12, 2011 (SOF ¶ 4). Therefore, appellant’s passive assertion that the date of the email requesting the DD250 – November 14, 2012 – is the date of accrual is no more than a bare assertion of a disputed fact. Mingus, 812 F.2d at 1390-91; Pure Gold, 739 F.2d at 626. As such, there are no material facts in dispute regarding the accrual date of the claim or when appellant submitted said claim to the government.

Appellant also submits that it “regularly followed up” and that the CO already had “confirmed the invoice” (app. resp. at 3 ¶ 11). However, this assertion does not negate that appellant had six years from the date the claim accrued to file the claim with the government for payment. Only facts that could not reasonably be known by the claimant postpone claim accrual. Alion Science and Tech. Corp., 15-1 BCA ¶ 36,168 at 176,489 (citing United States v. Commodities Export Co., 972 F.2d at 1272). Appellant presents no facts or argument that would support the notion that appellant could not have reasonably known that its claim had accrued. While the Board views the facts in the light most favorable to the non-moving party, the non-movant must set forth specific facts showing the existence of a genuine dispute, not a conclusory or bare assertion. Liberty Lobby, 477 U.S. at 255; C. Sanchez and Son, 6 F.3d at 1541; Mingus, 812 F.2d at 1390-91; Pure Gold, 739 F.2d at 626.

The parties agree that appellant and the government had a gap in communication between September 2011 and September 2012 and then again from November 2012 to October 2018. The Board does not consider this to be consistent or continuous communication, but most pertinently, appellant’s argument is nothing more than a bare assertion that the government failed to respond to appellant’s request for payment without providing facts to support that allegation. Mingus, 812 F.2d at 1390-91; Pure Gold, 739 F.2d at 626.

Finally, appellant also argues that the government had enough documentation to prove the existence of the contract and the completed work, as provided by appellant (app. resp. at 3 ¶¶ 8-12). However, the undisputed facts reflect that the last communication in November 2012 from the government requested a document from appellant, who, in response, told the government to “talk with Mr. Barden” (SOF ¶ 11). Appellant did not present the signed document as requested and did not follow up on this matter again until October 2018 (SOF ¶ 13). Appellant has not provided any additional facts to dispute this or to support its allegations that it was the government’s responsibility to still issue payment without submitting the requested documents. This argument is also no more than a bare assertion of a disputed fact and is not sufficient to prohibit summary judgment. Mingus, 812 F.2d at 1390-91; Pure Gold, 739 F.2d at 626.

As such, on the government’s motion that appellant’s claim is barred by the statute of limitations, the Board finds that summary judgment is warranted. Because we find

8

that the government is entitled to summary judgment based upon the CDA’s six-year statute of limitations, we do not need to consider the government’s laches argument.

CONCLUSION

The government’s motion for summary judgment is granted and the appeal is denied.

Dated: November 18, 2020

OWEN C. WILSON Administrative Judge Vice Chairman Armed Services Board of Contract Appeals

I concur

RICHARD SHACKLEFORD Administrative Judge Acting Chairman Armed Services Board of Contract Appeals

I concur

MICHAEL T. PAUL Administrative Judge Armed Services Board of Contract Appeals

I certify that the foregoing is a true copy of the Opinion and Decision of the Armed Services Board of Contract Appeals in ASBCA No. 61926, Appeal of Anis Avasta Construction Company, rendered in conformance with the Board’s Charter.

Dated: November 18, 2020

PAULLA K. GATES-LEWIS Recorder, Armed Services Board of Contract Appeals

TAB 16

ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeal of - ))

DynCorp International LLC ) ASBCA No. 61950 )

Under Contract No. W52P1J-07-D-0007 )

APPEARANCES FOR THE APPELLANT: Holly A. Roth, Esq. Elizabeth Leavy, Esq. William T. Kirkwood, Esq. Reed Smith, LLP Washington, DC

APPEARANCES FOR THE GOVERNMENT: Arthur M. Taylor, Esq. DCMA Chief Trial Attorney Srikanti Schaffner, Esq. Trial Attorney Defense Contract Management Agency Carson, CA

ORDER OF DISMISSAL

The Board received DynCorp’s December 30, 2020 Motion to Dismiss its Motion for Reconsideration in the subject appeal. The government does not object to the Motion to Dismiss. Accordingly the appeal is Dismissed with prejudice.

Dated: January 7, 2021

CRAIG S. CLARKE Administrative Judge Armed Services Board of Contract Appeals

2

I certify that the foregoing is a true copy of the Order of Dismissal of the Armed Services Board of Contract Appeals in ASBCA No. 61950, Appeal of DynCorp International LLC, rendered in conformance with the Board’s Charter.

Dated: January 8, 2021

PAULLA K. GATES-LEWIS Recorder, Armed Services Board of Contract Appeals

TAB 17

Boeing Company v. Secretary of Air Force, --- F.3d ---- (2020)

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2020 WL 7484750 Only the Westlaw citation is currently available. United States Court of Appeals, Federal Circuit.

The BOEING COMPANY, Appellant v.

SECRETARY OF the AIR FORCE, Appellee

2019-2147 |

Decided: December 21, 2020

Synopsis Background: Contractor appealed from final judgment of Armed Services Board of Contract Appeals after denying contractor summary judgment regarding legend that contractor marked on noncommercial technical data delivered to Air Force in performance of two contracts.

Holdings: The Court of Appeals, Lourie, Circuit Judge, held that: marking requirements regulation applies only when contractor seeks to assert restrictions on government’s rights, and factual dispute remained as to whether contractor’s legend restricted government’s rights.

Reversed, vacated, and remanded.

Appeal from the Armed Services Board of Contract Appeals in Nos. 61387, 61388, Administrative Judge J. Reid Prouty, Administrative Judge Michael N. O’Connell, Administrative Judge Richard Shackleford.

Attorneys and Law Firms

Scott M. Mccaleb, Wiley Rein, LLP, Washington, DC, argued for appellant. Also represented by Scott A. Felder, Craig Smith, Wesley Edenton Weeks; Suzette Derrevere, The Boeing Company, Arlington, VA.

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Corinne Anne Niosi, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington, DC, argued for appellee. Also represented by Jeffrey B. Clark, Robert Edward Kirschman, Jr., Patricia M. Mccarthy.

Matthew James Dowd, Dowd Scheffel PLLC, Washington, DC, for amici curiae Chamber of Commerce of the United States of America, Professional Services Council. Also represented by Robert James Scheffel.

Before Newman, Lourie, and Chen, Circuit Judges.

Opinion

Lourie, Circuit Judge.

*1 The Boeing Company (“Boeing”) appeals from the final judgment of the Armed Services Board of Contract Appeals (the “Board”). Appeals of Boeing Co., Nos. 61387, 61388, 2019 WL 1487313, 2019 ASBCA LEXIS 87 (Mar. 18, 2019) (“Final Judgment”). The Board entered final judgment after denying Boeing’s motion for summary judgment regarding the legends that Boeing may mark on technical data it delivers to the United States Air Force under certain government contracts. See Appeals of Boeing Co., Nos. 61387, 61388, 2018 WL 6705542, 2018 ASBCA LEXIS 352 (Nov. 28, 2018) (“Summary Judgment Decision”). For the reasons explained below, we reverse the Board’s denial of summary judgment, we vacate the Board’s entry of final judgment, and we remand to the Board for further proceedings consistent with this opinion.

Background

This case involves the allocation of technical data rights between the government and a contractor that delivers technical data to the government in performance of a government contract. More specifically, it involves the legends that a contractor may mark on any such technical data pertaining to noncommercial items.

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I. Statutory and Regulatory Framework

By federal statute, the Secretary of Defense “shall prescribe regulations to define the legitimate interest of the United States and of a contractor or subcontractor in technical data pertaining to an item or process.” 10 U.S.C. § 2320 (“Rights in technical data”). Under the law, “[s]uch regulations may not impair any right of the United States or of any contractor or subcontractor with respect to patents or copyrights or any other right in technical data otherwise established by law.” Id. at § 2320(a)(1). The statute requires that the regulations account for different scenarios in which technical data might be developed exclusively with federal funds, exclusively at private expense, or with mixed funding. Id. at § 2320(a)(2). For example, for items or processes developed exclusively with federal funds, the statute requires that under the regulations:

[T]he United States shall have the unlimited right to—

(i) use technical data pertaining to the item or process; or

(ii) release or disclose the technical data to persons outside the government or permit the use of the technical data by such persons.

Id. at § 2320(a)(2)(A). The Department of Defense (“DoD”) has issued regulations that implement 10 U.S.C. § 2320 with respect to technical data as part of the Defense Federal Acquisition Regulation Supplement (“DFARS”), which is codified in 48 C.F.R. Chapter 2. The specific regulations most relevant to this appeal that govern the allocation of technical data rights between contractors and the government appear in DFARS parts 227 and 252. DFARS 227.7103 addresses data rights in noncommercial items or processes. The regulation establishes four government licenses for noncommercial technical data: (1) unlimited rights; (2) government purpose rights; (3) limited rights; and (4) specifically negotiated license rights. See DFARS 227.7103-5(a)–(d). The regulation also mandates that the government incorporate a particular contract clause into any contract in which noncommercial technical data will be delivered to the government. DFARS 227.7103-6(a). The language of that contract clause is provided in DFARS 252.227-7013, and the clause is thus referred to as the “-7013 clause.” *2 The -7013 clause is incorporated into government contracts to address the contractor’s and the government’s respective rights in noncommercial technical data, as well as the contractual obligations for protecting those rights. For example, the -7013 clause specifies that the contractor grants the government one of the four licenses enumerated in DFARS 227.7103-5. See DFARS 252.227-7013(b). The -7013 clause also makes clear, however, that the contractor retains all rights not granted to the government. See DFARS 252.227-7013(c). Of particular relevance to this appeal are the marking requirements in the -7013 clause. The

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-7013 clause “[r]equires a contractor that desires to restrict the Government’s rights in technical data to place restrictive markings on the data, provides instructions for the placement of the restrictive markings, and authorizes the use of certain restrictive markings.” DFARS 227.7103-10(b). The instructions and authorizations of the markings appear in paragraph (f) of the -7013 clause (“Subsection 7013(f)”), which begins:

(f) Marking requirements. The Contractor, and its subcontractors or suppliers, may only assert restrictions on the Government’s rights to use, modify, reproduce, release, perform, display, or disclose technical data to be delivered under this contract by marking the deliverable data subject to restriction. Except as provided in paragraph (f)(5) of this clause, only the following legends are authorized under this contract: the government purpose rights legend at paragraph (f)(2) of this clause; the limited rights legend at paragraph (f)(3) of this clause; or the special license rights legend at paragraph (f)(4) of this clause; and/or a notice of copyright as prescribed under 17 U.S.C. [§§] 401 or 402.

DFARS 252.227-7013(f) (emphases added). Subsection 7013(f) proceeds to describe the general marking instructions for conspicuously and legibly marking the appropriate legend on technical data, see id. at 252.227-7013(f)(1), as well as the specific authorized markings pertaining to each category of rights the government may have in technical data delivered under the contract. See id. at 252.227-7013(f)(2) (government purpose rights markings); id. at 252.227-7013(f)(3) (limited rights markings); id. at 252.227-7013(f)(4) (special license rights markings). The DFARS also gives the government the “right to establish conformity of markings” on technical data delivered by a contractor. See DFARS 227.7103-12. Under the regulations, the government may reject “nonconforming markings.” In relevant part, the regulation states:

Authorized markings are identified in [Subsection 7013(f) ]. All other markings are nonconforming markings.

Id.; see also DFARS 252.227-7013(h) (“Removal of unjustified and nonconforming markings”).

II. Factual Background and Procedural History

As relevant to this appeal, Boeing entered into two contracts with the United States Air Force to provide work under the F-15 Eagle Passive/Active Warning Survivability System.1 Both contracts require Boeing to deliver technical data to the Air Force with “unlimited rights,” which means that the government has the right to “use, modify, reproduce, perform, display, release, or disclose [the] technical data in whole or in part, in any manner, and for any purpose whatsoever, and to have or authorize others to do so.” See DFARS 252.227-7013(a)(16) (defining “unlimited rights”). It is undisputed that, notwithstanding the government’s unlimited rights, Boeing retains

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ownership of any technical data it delivers to the government under the contracts. See Summary Judgment Decision, 2018 WL 6705542, at *––––, 2018 ASBCA LEXIS 352, at *2. *3 As required by the DFARS, both contracts incorporated the -7013 clause, including the marking requirements in Subsection 7013(f).2 In the course of its performance of the contracts, Boeing marked each technical data deliverable that it submitted to the Air Force with a legend that purports to describe Boeing’s rights in the data as they pertain to third parties:

See J.A. 170. The government rejected Boeing’s technical data deliverables due to the legend that Boeing placed on the data. Boeing requested a Contracting Officer Final Decision (“COFD”) regarding the propriety of its markings, and while that request was pending, Boeing proposed an alternative legend:

J.A. 171. The government rejected Boeing’s proposed alternative legend as well. On July 31, 2017, the Air Force issued a COFD for each of the contracts, confirming the rejection of technical data marked with Boeing’s legend. See J.A. 165–71, 172–78. The Procurement Contracting Officer (“PCO”) found that Boeing’s legend is a nonconforming marking because it is not in the format authorized by the contracts pursuant to Subsection 7013(f). The COFDs directed Boeing to correct the markings at Boeing’s expense. Id. Boeing appealed the COFDs to the Board. Boeing moved for early summary judgment based on its position that the first sentence of Subsection 7013(f) makes clear that, as a matter of law,

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Subsection 7013(f) only applies to legends that restrict the government’s rights in technical data. Boeing argued that Subsection 7013(f) is categorically inapplicable to legends like Boeing’s that only restrict the rights of third parties. Boeing thus argued that Subsection 7013(f) does not apply in this case, and its legend cannot be nonconforming. The Board denied Boeing’s summary judgment motion. See Summary Judgment Decision, 2018 WL 6705542, 2018 ASBCA LEXIS 352. The Board agreed with the government that, after stating the words “only the following legends are authorized under this contract,” Subsection 7013(f) lists four specific legends, and it is undisputed that Boeing’s legend is not one of the listed legends. Id. at *–––– – ––––, 2018 ASBCA LEXIS 352 at *5–6. In rejecting Boeing’s argument that Subsection 7013(f) does not apply to legends that restrict third party rights, the Board noted that Subsection 7013(f) refers to a notice of copyright that does limit the actions of third parties. Id. The parties agreed that “the Board’s decision on Boeing’s motion for summary judgment decided the only issue presented,” and they jointly requested that the Board enter final judgment denying Boeing’s appeals of the COFDs. See Final Judgment, 2019 WL 1487313, at *––––, 2019 ASBCA LEXIS 87, at *1. The Board entered final judgment, and Boeing appealed to this court. We have jurisdiction under 28 U.S.C § 1295(a)(10) and 41 U.S.C. § 7107(a)(1)(A).

Discussion

The “interpretation of a contract by [the Board] is a question of law that is reviewed without deference on appeal.” England v. Contel Advanced Sys., Inc., 384 F.3d 1372, 1377 (Fed. Cir. 2004). The interpretation of agency regulations is also a question of law. See Gose v. U.S. Postal Serv., 451 F.3d 831, 836 (Fed. Cir. 2006). And the interpretation of a contract clause in the DFARS that is incorporated into a government contract is similarly a question of law. See Forman v. United States, 329 F.3d 837, 841 (Fed. Cir. 2003); Aydin Corp. v. Widnall, 61 F.3d 1571, 1577 (Fed. Cir. 1995). “This court reviews the Board’s conclusions of law without deference.” Grumman Aero. Corp. v. Wynne, 497 F.3d 1350, 1356 (Fed. Cir. 2007) (citing Rex Sys., Inc. v. Cohen, 224 F.3d 1367, 1371 (Fed. Cir. 2000)). *4 The primary question presented in this case is the interpretation of Subsection 7013(f), which has been incorporated into Boeing’s two contracts with the Air Force. We review that question de novo.

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I

We begin, as we must, with the plain language of Subsection 7013(f). Am. Airlines, Inc. v. United States, 551 F.3d 1294, 1299 (Fed. Cir. 2008) (“In construing a statute or regulation, we begin by reviewing its language to ascertain its plain meaning.”); Lockheed Corp. v. Widnall, 113 F.3d 1225, 1227 (Fed. Cir. 1997) (“To interpret a regulation we must look at its plain language and consider the terms in accordance with their common meaning.”). The disputed language is contained in the first paragraph of Subsection 7013(f). That paragraph contains two sentences. The first sentence states:

The Contractor, and its subcontractors or suppliers, may only assert restrictions on the Government’s rights to use, modify, reproduce, release, perform, display, or disclose technical data to be delivered under this contract by marking the deliverable data subject to restriction.

DFARS 252.227-7013(f) (emphasis added). The second sentence states:

Except as provided in paragraph (f)(5) of this clause, only the following legends are authorized under this contract: the government purpose rights legend at paragraph (f)(2) of this clause; the limited rights legend at paragraph (f)(3) of this clause; or the special license rights legend at paragraph (f)(4) of this clause; and/or a notice of copyright as prescribed under 17 U.S.C. [§§] 401 or 402.

Id. (emphasis added). Each party contends that the plain language supports its position.

Boeing argues that there is a natural relationship between the two consecutive sentences in the first paragraph of Subsection 7013(f). According to Boeing, the first sentence clearly demonstrates the context in which Subsection 7013(f) applies: when a contractor elects to “assert restrictions on the Government’s rights.” In a situation in which a contractor does not seek to restrict the Government’s rights in any way, Boeing argues that Subsection 7013(f) is silent on what legends the contractor may or may not mark on its data.

The government responds that the Board correctly interpreted the second sentence of the paragraph to mean exactly what it says: “only the following legends”—i.e., and no other legends—“are authorized under this contract.” Thus, the government argues, a contractor may not mark the data with any legend other than those specifically enumerated in Subsection 7013(f).

When interpreting regulations, we apply the same interpretive rules we use when analyzing the language of a statute. Mass. Mut. Life Ins. Co. v. United States, 782 F.3d 1354, 1365 (Fed. Cir. 2015) (citing Tesoro Haw. Corp. v. United States, 405 F.3d 1339, 1346 (Fed. Cir. 2005)). And it

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is well established that, when interpreting statutes or regulations, “[t]he plain meaning that we seek to discern is the plain meaning of the whole statute [or regulation], not of isolated sentences.” Beecham v. United States, 511 U.S. 368, 372, 114 S.Ct. 1669, 128 L.Ed.2d 383 (1994) (citations omitted).

Here, we have a paragraph in a regulation that contains two sentences, and a proper interpretation must give meaning to both. See Shea v. United States, 976 F.3d 1292, 1300 (Fed. Cir. 2020) (“[I]t is a ‘cardinal principle of statutory construction that courts must give effect, if possible, to every clause and word of a statute ....’ ” (quoting Williams v. Taylor, 529 U.S. 362, 364, 120 S.Ct. 1495, 146 L.Ed.2d 389 (2000))); see also Sierra Club v. EPA, 536 F.3d 673, 680 (D.C. Cir. 2008) (“It is a court’s duty to give effect, if possible, to every clause and word of a statute. The same is true for regulations.” (quotations and citations omitted)). The plain language of the first sentence in Subsection 7013(f) makes clear that the two sentences together are describing the way in which a contractor “may assert restrictions on the Government’s rights.” Thus, we agree with Boeing that Subsection 7013(f) is only applicable in that context, and it is silent on any legends that a contractor may mark on its data when it seeks to restrict only the rights of non-government third parties.

*5 Under the Board’s reading, the first sentence would be entirely unnecessary to the regulation,and the scope of Subsection 7013(f) would be exactly the same even without that sentence. If, asthe Board concluded, the second sentence of Subsection 7013(f) operates to prevent contractorsfrom placing any and all markings on technical data even if those markings have no impact onthe government’s rights, then Subsection 7013(f) could have simply begun with the secondsentence which introduces the authorized legends. But that is not how the regulation is written,and we cannot disregard the first sentence. See, e.g., TRW Inc. v. Andrews, 534 U.S. 19, 32, 122S.Ct. 441, 151 L.Ed.2d 339 (2001) (“It is a ‘cardinal principle of statutory construction’ that ‘astatute ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence,or word shall be superfluous, void, or insignificant’ .... We are ‘reluctant to treat statutory terms as surplusage in any setting.’ ” (quoting Duncan v. Walker, 533 U.S. 167, 174, 121 S.Ct. 2120, 150 L.Ed.2d 251 (2001))); Sullivan v. McDonald, 815 F.3d 786, 790 (Fed. Cir. 2016) (“[W]e attempt to give full effect to all words contained within that statute or regulation, thereby rendering superfluous as little of the statutory or regulatory language as possible.” (quoting Glover v. West, 185 F.3d 1328, 1332 (Fed. Cir. 1999))).

The Board was persuaded that Subsection 7013(f) precludes even legends that restrict only third-party rights because it authorizes a “notice of copyright that would, in fact, provide notice to or limit the actions of third parties.” Summary Judgment Decision, 2018 WL 6705542, at *––––, 2018 ASBCA LEXIS 352, at *18. But the fact that an authorized restriction might also restrict the rights of third parties in addition to the government’s rights is immaterial. It is sufficient for inclusion in Subsection 7013(f) that a notice of copyright would restrict the government’s rights, notwithstanding any other effects of the notice of copyright. The government insists that a notice of copyright does not actually restrict the government’s rights

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because the government automatically obtains a copyright license that is coextensive with its technical data rights license. See DFARS 227.7103-4(a); DFARS 227.7103-9(a)(1). But that argument is self-defeating; indeed, the government’s need for a copyright license serves as the very indication that the government could, under certain circumstances, be subject to a suit for copyright infringement under 28 U.S.C. § 1498 if it exceeds the scope of its license. See Jacobsen v. Katzer, 535 F.3d 1373, 1380 (Fed. Cir. 2008) (“If ... the licensee acts outside the scope [of a copyright license], the licensor can bring an action for copyright infringement.” (citing S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081, 1087 (9th Cir. 1989) and Nimmer on Copyright, § 1015[A] (1999))). Thus, a notice of copyright is a legend that restricts the government’s rights, and Subsection 7013(f)’s authorization of such a notice of copyright is consistent with our interpretation.

Our interpretation of Subsection 7013(f) also remains faithful to the overall purpose of the -7013 clause and the broader technical data rights regulations in DFARS parts 227 and 252, all of which govern the allocation of data rights between contractors and the government. The government cites nothing in the DFARS (or anywhere else) to suggest that the DoD intended the technical data rights regulations—or specifically intended Subsection 7013(f)—to have a broader impact that could affect a contractor’s relationship with third parties.

For example, the policy set forth in DFARS 227.7103-1 pertains only to the government’s acquisition of rights in technical data, and limitations and restrictions on the government’s rights. See DFARS 227.7103-1(a) (“DoD policy is to acquire only the technical data, and the rights in that data, necessary to satisfy agency needs.”); see also id. at 227.7103-1(c), (d). Moreover, in describing the purpose of Subsection 7013(f), the DFARS states:

The clause at 252.227-7013, Rights in Technical Data-Noncommercial Items ... [r]equires a contractor that desires to restrict the Government’s rights in technical data to place restrictive markings on the data, provides instructions for placement of the restrictive markings, and authorizes the use of certain restrictive markings.

*6 DFARS 227.7103-10(b)(1) (emphases added). As indicated by the added emphases, thatprovision uses the term “restrictive markings” three times in a single sentence pertaining to acontractor that “desires to restrict the Government’s rights in technical data.” The first usage ofthe term “restrictive markings” indisputably refers to markings that restrict the government’srights. Similarly, the second usage of the term “restrictive markings” is preceded by the word“the,” clearly indicating that it refers back to those markings that restrict the government’srights. And while the last usage of the term “restrictive markings” is not expressly qualified by aword to indicate that the first two usages are its antecedent, one would have to strain to read thatthird usage as referring to some other set of restrictive markings different from the first twousages. The only reasonable interpretation of the provision is consistent with Boeing’s argumentthat Subsection 7013(f) “authorizes the use of certain restrictive markings” for the purpose ofrestricting the government’s rights.

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Therefore, we conclude that the plain language of Subsection 7013(f) demonstrates that it applies only in situations when a contractor seeks to assert restrictions on the government’s rights. And our interpretation is confirmed by the language of the -7013 clause and the other provisions of the technical data rights regulations in the DFARS.

II

The government makes a number of arguments—beyond the nine isolated words in the second sentence—to support its position that Subsection 7013(f) prevents contractors from marking noncommercial technical data with any legend other than those listed. The government bases those arguments on a variety of sources, including language in Subsection 7013(f), language in other paragraphs of the -7013 clause, other technical data rights provisions in the DFARS, and the regulatory history of the technical data rights regulations. We address many of the government’s arguments below. Regarding the language of Subsection 7013(f) itself, the government contrasts the word “marking” in the first sentence with the word “legends” in the second sentence. But, as the government concedes, the word “marking” in the first sentence is a verb, while the word “legends” in the second sentence is a noun, and it is thus not surprising that the words are different. Moreover, we see no evidence that the word “legends” in the second sentence of Subsection 7013(f) is anything but a synonym of the noun form of the word “markings” used elsewhere in the technical data rights provisions of the DFARS. See, e.g., DFARS 227.7103-12 (“restrictive markings”). Regardless, such a word choice is not sufficient to destroy the natural relationship between the opening sentence of the paragraph and the sentence that immediately follows it. As for other paragraphs in the -7013 clause, the government argues that the “authorized” legends enumerated in Subsection 7013(f) are distinct from the “nonconforming markings” described in Subsection 7013(h)(2). See DFARS 252.227-7013(h)(2) (“A nonconforming marking is a marking placed on technical data delivered or otherwise furnished to the Government under this contract that is not in the format authorized by this contract.”); see also DFARS 227.7103-12(a)(1) (“Authorized markings are identified in [Subsection 7013(f) ]. All other markings are nonconforming markings.”). The government argues, as the Board concluded, that legends that restrict third-party rights are necessarily “nonconforming” because they are not specifically authorized by Subsection 7013(f). See Summary Judgment Decision, 2018 WL 6705542, at *–––– – ––––, 2018 ASBCA LEXIS 352, at *18–19 (citing DFARS 252.227-7013(h)(2), and noting “[a]ccordingly, any legend not specified in the contract is

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nonconforming”). But the government’s argument relies on circular reasoning because it must assume, as its premise, that Subsection 7013(f) is applicable to legends that restrict only third-party rights. Yet that assumed premise is precisely the question before us in this case, and, as explained above, we disagree with it. Because we conclude that Subsection 7013(f) is not applicable to legends that restrict only third-party rights, its silence regarding any such legends is not meaningful. *7 The government also compares the -7013 clause to other contract clauses set forth in DFARS 252.227. For example, the government contrasts the limited number of authorized legends for noncommercial data with the more flexible rules for marking commercial data embodied in other contract clauses. See DFARS 252.227-7015; DFARS 252.227-7025. We agree with Boeing, however, that the legends available for contractors to restrict the government’s rights in commercial data do not inform the meaning of the two sentences in Subsection 7013(f). That is particularly true because the default license rights that the government obtains in unmarked commercial data are far more limited to begin with, see DFARS 252.227-7015(2); DFARS 227.7102-2(a), compared to the default “unlimited rights” that the government obtains in unmarked noncommercial data. And it is the first sentence of Subsection 7013(f) that establishes that default set of rights for unmarked noncommercial data. Thus, by design, the provisions pertaining to commercial data rights do not have a counterpart to the first sentence of Subsection 7013(f), nor do those sections require a counterpart to the second sentence. Turning to the regulatory history, the government identifies a number of comments from the DoD that were published in the Federal Register in connection with the promulgation of the technical data rights regulations in 1995. As an initial matter, because we hold that the plain language of Subsection 7013(f) does not support the government’s position, the government’s reliance on regulatory history brings with it a heavy burden. See, e.g., Garcia v. United States, 469 U.S. 70, 75, 105 S.Ct. 479, 83 L.Ed.2d 472 (1984) (“Only the most extraordinary showing of contrary intentions from [the legislative history] would justify a limitation on the ‘plain meaning’ of the statutory language.”); Massing v. Sec’y of HHS, 926 F.2d 1133, 1135 (Fed. Cir. 1991) (holding that in order to construe the statute contrary to its plain meaning, petitioner “must show clear legislative history supporting its asserted construction”). The government’s arguments in this case fail to meet that burden. For example, the government points to comments relating to the markings that may be placed on noncommercial software pursuant to DFARS 252.227-7014(f), which is a different, albeit similar, contract clause. See Rights in Technical Data, 60 Fed. Reg. 33,465 (June 28, 1995). There, the DoD noted that a contractor “might consider using ... a marking agreed to by the contracting officer, to protect its commercial interests ....” Id. But the DoD’s comment related to a specific circumstance of “derivative software created by integrating commercial computer software with computer software developed with Government funds ....” Id. We decline to infer from that narrowly focused comment a general principle broadly applicable to other provisions like Subsection 7013(f).

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The government also relies on regulatory history to support its argument that “the two sentences [in Subsection 7013(f) ] address two separate issues,” and should therefore not limit each other. Appellee Br. 34. According to the government, whereas prior to the existence of Subsection 7013(f) there were multiple ways for a contractor to restrict the government’s rights in technical data, the first sentence of Subsection 7013(f) established marking as the only way to restrict the government’s rights and created a default rule that the government obtains unlimited rights in technical data delivered without any markings. Id. at 35 (citing Bell Helicopter Textron, ASBCA No. 21192, 85-3 BCA ¶ 18,415 (Sept. 23, 1985)). In contrast, the government argues, the second sentence serves a distinct purpose of eliminating confusion about the government’s rights by setting forth a limited universe of authorized legends. Id. at 36 (citing 60 Fed. Reg. 33465). While we recognize the complicated history of the technical data rights regulations, and many sentences in the regulations likely address a variety of “purposes” and “issues,” none of the history persuades us to drive a wedge between the two sentences in the one paragraph in Subsection 7013(f), which is essentially what the government asks us to do. *8 As explained, we are unpersuaded by the government’s arguments. Ultimately, the government fails to convince us to abandon what we hold to be the plain language interpretation of Subsection 7013(f).

III

We next address the policy-based arguments presented by the parties. Boeing asserts that the Board’s interpretation of Subsection 7013(f) will have far-reaching consequences that will impair contractors’ abilities to protect their rights in their technical data and threaten the willingness of technology innovators to do business with the government. The government responds that allowing contractors unbridled freedom to mark technical data with self-created legends of their choosing is inconsistent with the DFARS and would encumber unrestricted information with unclear markings that make it difficult for the government to exercise its license rights. To be clear, neither party presents any policy arguments that would be sufficient to overcome the plain language of Subsection 7013(f), as explained above. In any event, we decide this case on the regulation, not policy. See First Interstate Bank v. United States, 61 F.3d 876, 879 (Fed. Cir. 1995) (“The government’s policy argument, however, cannot override the plain language of the agreement and the implementing regulations.”); see also Artuz v. Bennett, 531 U.S. 4, 10, 121 S.Ct. 361, 148 L.Ed.2d 213 (2000) (“Whatever merits these and other policy arguments may

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have, it is not the province of this Court to rewrite the statute to accommodate them. We hold as we do because respondent’s view seems to us the only permissible interpretation of the text—which may, for all we know, have slighted policy concerns on one or the other side of the issue as part of the legislative compromise that enabled the law to be enacted.”); Dominion Res., Inc. v. United States, 641 F.3d 1359, 1363 (Fed. Cir. 2011) (“[T]hese policy arguments do not trump the plain language of the statute.”). But our interpretation of the plain language of Subsection 7013(f) has the added benefit of alleviating some of Boeing’s policy concerns.

Neither party disputes that, when a contractor delivers technical data to the government, the contractor maintains ownership of the data and at least some rights in the data. For example, in this case, both parties agree that, notwithstanding the Air Force’s unlimited rights in technical data Boeing delivers, Boeing still owns those data. Our interpretation of Subsection 7013(f) allows Boeing a bare minimum of protection for the data, namely, the ability to notify the public of its ownership. A contrary interpretation would result in Boeing de facto losing all rights in any technical data it delivers to the government. See Summary Judgment Decision, 2018 WL 6705542, at *–––– – ––––, 2018 ASBCA LEXIS 352, at *19–20 (citing academic commentary discussing the risks of delivering unlimited rights data to the government).

The Board noted that Boeing had ample warning that its proprietary legend was not authorized under the regulations, and “[a] prudent contractor would have sought clarification prior to entering the contract, if it interpreted the clause differently.” Id. The government echoes that sentiment by arguing that Boeing should have negotiated “special license rights” as envisioned by Subsection 7013(f)(4). But the special license is reserved for “unusual situations” in which “the standard[ ] rights may not satisfy the Government’s needs.” DFARS 227.7103-5. Neither party suggests that we have that situation here. In fact, Boeing concedes that it is not attempting to provide the government with anything less than the default “unlimited rights.”

*9 Moreover, we find the logical extension of the Board’s and the government’s reasoning to beeven more problematic. If we were to agree with the government and the Board that Boeingshould have foreseen this dispute and negotiated special contract provisions up front, we caneasily envision that every contractor will be incentivized to negotiate a special license ratherthan submitting to the standard provisions set forth in the DFARS contract clauses. At that point,the special license would cease to be “special” and the standardized contract clauses would nolonger be useful. The technical data rights regulations, and specifically the contract clausesprovided in the DFARS, are intended to avoid such a result.

Turning to the government’s policy arguments, we are not persuaded that allowing contractors to mark technical data with proprietary legends will lead to an epidemic of confusion that would broadly prevent the government from exercising its license rights under government contracts. Neither party provided us with a clear explanation why this issue has never before arisen since Subsection 7013(f) was put in place in 1995. See Oral Arg. at 12:14, 25:13, http://oralarguments.cafc.uscourts.gov/default.aspx?fl=19-2147_11042020.mp3. But Boeing

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represented that it has been marking noncommercial technical data with proprietary legends under government contracts since as early as 2002 without objection from any government contracting officer. See Oral Arg. at 12:59; J.A. 220–21. The government was unable to counter that representation with compelling evidence that confusion from unclear markings has created serious burdens for the government. Even the Board found the government’s evidence on this point, which consisted of one declaration from one first-line supervisor in Georgia, to be tenuous at best. See Summary Judgment Decision, 2018 WL 6705542, at *–––– – ––––, 2018 ASBCA LEXIS 352, at *13–14. Moreover, in this case, Boeing offered to compromise by marking its data with a legend that would have removed all confusion by explicitly acknowledging the government’s “unlimited rights,” yet the government rejected that offer. Under these circumstances, we do not find that the government’s policy concerns are sufficiently problematic to impact our interpretation of the plain language of Subsection 7013(f).

IV

Finally, we must address the government’s argument that Boeing’s legend does, in fact, restrict the government’s rights. As explained above, if the legend does restrict the government’s rights, then it is improper because it fails to conform to the authorized legends of Subsection 7013(f). In contrast, if it does not restrict the government’s rights, then it is proper because it is not subject to the requirements of Subsection 7013(f). The PCO found that Boeing’s proprietary legend “does restrict the Government’s rights as it will restrict the distribution of the data and allows Boeing to be an authority for its further use and disclosure.” J.A. 175. The Board, on the other hand, noted that:

The Air Force further contends that “ ‘[a]uthorizing’ a third party to use and distribute the data, as Boeing purports to require, would be highly burdensome on the Government and, therefore [would be] inconsistent with its unlimited rights” .... Despite this contention, the [-7013] clause speaks of this very thing, defining unlimited rights to mean “rights to use, modify ... and to have or authorize others to do so.” DFARS 252.227-7013(a)(16).

Summary Judgment Decision, 2018 WL 6705542, at *––––, 2018 ASBCA LEXIS 352, at *15. As this is a factual question, we review the Board’s decision with deference. See 41 U.S.C. § 7107. By statute:

[T]he decision of the agency board on a question of fact is final and conclusive and may not be set aside unless the decision is—

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*10 (A) fraudulent, arbitrary, or capricious;

(b) so grossly erroneous as to necessarily imply bad faith; or

(C) not supported by substantial evidence.Id.; see also J.C. Equip. Corp. v. England, 360 F.3d 1311, 1315 (Fed. Cir. 2004) (“Under the Contract Disputes Act, however, Board decisions on factual questions are final unless, among other things, they are not supported by substantial evidence.”).

In light of that statutory framework for our review, before we can reach the merits of the parties’ arguments about the factual dispute over whether Boeing’s proprietary legend restricts the government’s rights, we must first determine whether the Board made a “decision” on that factual question. If the Board did not reach that factual question then, quite simply, we have nothing to review on appeal.

To be sure, the Board expressed doubt that Boeing’s proprietary legend places any meaningful restrictions on the government’s rights. See Summary Judgment Decision, 2018 WL 6705542, at *––––, 2018 ASBCA LEXIS 352, at *15. But the Board did so only to the extent that it found there was a live dispute between the parties in this case. See id. What the Board did not do, and what Boeing’s summary judgment motion could not have asked the Board to do, was resolve factual disputes between the parties over whether Boeing’s legend does or does not restrict the government’s rights. The Board may not resolve such factual disputes at the summary judgment phase. See id. at *–––– – ––––, 2018 ASBCA LEXIS 352, at *5–6 (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247–48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) and Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)).

Therefore, although we reverse the Board’s denial of summary judgment with respect to the legal proposition set forth in Subsection 7013(f), an unresolved factual dispute remains between the parties regarding whether Boeing’s proprietary legend, in fact, restricts the government’s rights. As the reviewing appellate court, we are not in a position to resolve that dispute, and we must remand the case to the Board.

Conclusion

We have considered the parties’ remaining arguments but we find them unpersuasive. Therefore, we reverse the Board’s denial of summary judgment with respect to the interpretation of Subsection 7013(f), we vacate the Board’s entry of final judgment, and we remand the case to the Board for further proceedings consistent with this opinion.

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REVERSED, VACATED, AND REMANDED

Costs

Costs to Boeing.

All Citations

--- F.3d ----, 2020 WL 7484750

Footnotes

1 The two contracts are Contract No. F33657-01-D-0026 and Contract No. FA8634-17-C-2650.

2 One contract incorporated the November 1995 version of the clause, while the other contract incorporated the February 2014 version of the clause. For purposes of this appeal, neither party has argued that there is a meaningful difference between the 1995 version and the 2014 version. See Summary Judgment Decision, 2018 WL 6705542, at *––––, 2018 ASBCA LEXIS 352, at *7.

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TAB 18

Raytheon Company v. United States, Not Reported in Fed.Cl. (2020)

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2020 WL 6482175 Only the Westlaw citation is currently available.

United States Court of Federal Claims.

RAYTHEON COMPANY, Plaintiff, v.

The UNITED STATES of America, Defendant.

No. 19-883C |

(Filed: November 4, 2020)

Attorneys and Law Firms

Steven M. Masiello, Dentons US LLP, Denver, CO, for Plaintiff. Gale R. Monahan, Dentons US LLP, Denver, CO, Of Counsel.

Domenique Kirchner, Senior Trial Counsel, Commercial Litigation Branch, Civil Division, U.S. Department of Justice, Washington, DC, for Defendant, with whom were Patricia M. McCarthy, Assistant Director, Robert E. Kirschman, Jr., Director, and Jeffrey Bossert Clark, Acting Assistant Attorney General.

Keywords: Motion to Compel; Protective Order; Request for Production; RCFC 26(b)(1); Defense Contract Audit Agency.

OPINION AND ORDER

KAPLAN, Judge.

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*1 This breach of contract case is currently before the Court on plaintiff’s motion for a protective order, ECF No. 37, and the government’s motions to compel responses to its first and second set of discovery requests, ECF Nos. 42, 45. For the reasons set forth below, Raytheon’s motion for a protective order is DENIED and the government’s motions to compel are GRANTED.

BACKGROUND

Plaintiff Raytheon Company (“Raytheon”) and the United States Army Contracting Command-Redstone (“the Army”) are parties to a series of contracts for engineering services in support of the Patriot weapon system. Compl. ¶ 2, ECF No. 1. This case arose out of a dispute between them concerning the restrictive markings that Raytheon placed on vendor lists it was contractually obligated to supply to the Army under the 2009 and 2014 Contracts. Id. ¶¶ 4, 22, 85.1 A detailed discussion of the background of the dispute is set forth in this Court’s January 14, 2020 opinion denying the government’s motion to dismiss Count I of the complaint. ECF No. 25. As described therein, the dispute culminated in a June 21, 2018 contracting officer’s final decision (“COFD”) in which the contracting officer found that the restrictive markings Raytheon had affixed to the vendor lists were improper. Id. at 3–5. Specifically, the CO concluded: 1) that the vendor lists constituted “technical” data for purposes of Department of Defense Federal Acquisition Regulation Supplement (“DFARS”) 48 C.F.R. § 252.227-7013; 2) that the government held “government purpose rights” licenses for the data; and 3) that Raytheon must replace the proprietary markings it had placed on the vendor lists with the legend for government purpose rights prescribed by DoD regulations. Id. at 4–5; see DFARS § 252.227-7013(b)(2), (h)(2). Raytheon challenges the COFD on several grounds including, as relevant to the discovery disputes currently before the Court, an argument that even if the vendor lists are “technical” data, the Army is entitled to only “limited rights” to the data because Raytheon allegedly developed the lists entirely at its own expense. Compl. ¶ 5; see 10 U.S.C. § 2320(a)(2)(B) (providing—with exceptions not relevant here—that where “an item or process ... is developed by a contractor ... exclusively at private expense, the contractor ... may restrict the right of the United States to release or disclose technical data pertaining to the item or process to persons outside the government, or permit the use of the technical data by such persons”); see also DFARS 252.227-7013(a)(8) (“Developed exclusively at private expense means development was accomplished entirely with costs charged to indirect cost pools, costs not allocated to a

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government contract, or any combination thereof.”). *2 On February 3, 2020, a few weeks after the Court denied the government’s motion to dismiss, the Defense Contract Audit Agency (“DCAA”) emailed Raytheon to notify it that the Army had asked DCAA “to look into how the costs are being charged for the development” of the vendor lists under four contracts, including the 2009, 2014, and 2017 Contracts. Pl.’s Mot. for Protective Order (“Pl.’s Mot.”) Ex. 1, at 3, ECF No. 37-1. “To get started,” DCAA requested that Raytheon “provide a walk-through to demonstrate how these costs are identified and accumulated in the accounting system (to include identifying cost centers, NWAs, etc.) and how they are charged to the Government.” Id. Raytheon responded in an email of February 13, 2020 in which it “respectfully decline[d] to participate [in the audit] so that this matter can be handled through the litigation process.” Id. at 2. More than five months later, on July 30, 2020, DCAA sent Raytheon a letter which it dubbed a “Formal Request for Access to Records Pertaining to Audit of Integrated Defense Systems (IDS) Costs Incurred to Prepare Source Vendor Listings on PATRIOT Engineering Services Contracts.” Pl.’s Mot. Ex. 5, at 2–3, ECF No. 37-5. In the letter, DCAA stated that it had decided that it could not proceed with an audit without access to the information it had requested in the February 3 email. Id. at 2. It further stated that the letter represented DCAA’s “final request for this information.” Id. at 3. Raytheon responded by letter of August 7, 2020. App. to Def.’s Resp. to Pl.’s Mot. (“App. to Def.’s Resp.”) at 21–23, ECF No. 38-1. In that letter, Raytheon posed a series of objections to DCAA’s authority to compel it to have its personnel participate in a “walk-through” and, more generally, to whether DCAA had the authority to conduct any audit at all concerning the costs it incurred to develop its vendor lists. Id. at 22. Further, Raytheon advised that “to the extent that DCAA requires records relating to the 2009 Contract and 2014 Contract to support the Government’s positions in the pending litigation pursuant to FAR § 52.215-2(f)(2), these records have been requested by DOJ in the pending litigation through the litigation discovery process and are subject to the Rules and supervision of the Court.” Id. On August 17, 2020, Raytheon filed the motion for a protective order that is currently before the Court. In it, Raytheon requests that the Court issue an order “to preclude the United States ... from obtaining documents and information from Raytheon outside of the discovery process in this litigation”—i.e., through the DCAA audit. Pl.’s Mot. at 1. It also asks the Court to intervene to prevent DCAA from “interviewing Raytheon’s employees regarding such documents and information outside of the discovery process.” Id. at 3. Ten days after Raytheon filed its motion for a protective order, DCAA responded by letter of August 27, 2020 to Raytheon’s letter of August 7, 2020. App. to Def.’s Resp. at 26–28. DCAA explained that its request for a walk-through was routine and was intended to get Raytheon’s input so that it could tailor its document requests. Id. at 27. It assured Raytheon that it did not

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request the walk-through so that it could interview witnesses without counsel present and that, in fact, counsel regularly participate in DCAA walk-throughs. Id. Given that Raytheon had declined to allow a walk-through, DCAA stated, it had identified categories of accounting records whose production it requested. Id. at 27–28. DCAA advised Raytheon that failure to comply with its request by September 11, 2020 would be considered a formal denial of access to records which would be “reported to appropriate government personnel,” all the way up to the Director of DCAA, who has statutory authority to issue a subpoena. Id. at 28; see 10 U.S.C. § 2313(b)(1). In the meantime, shortly after completion of the briefing on Raytheon’s motion for a protective order, the government filed motions to compel Raytheon to respond to its first and second sets of interrogatories and requests for production of documents. Def.’s 1st Mot. to Compel, ECF No. 42; Def.’s 2d Mot. to Compel, ECF No. 45. Both motions sought orders compelling Raytheon to provide information and documents regarding the costs of assembling the vendor lists it supplied to the Army under the 2017 Contract. Def.’s 1st Mot. to Compel at 5–6; Def.’s 2d Mot. to Compel at 2. Raytheon has objected to the interrogatories and document requests that relate to the 2017 Contract because, in its view, the June 21, 2018 COFD covered only claims concerning the lists supplied under the 2009 and 2014 Contracts. Pl.’s Resp. in Opp’n to Def.’s 1st Mot. to Compel (“Pl.’s Resp.”) at 2, ECF No. 44. *3 On September 11, 2020, Raytheon responded to DCAA’s August 27 letter. ECF No. 43-1. In its response, Raytheon referenced the government’s motion to compel (which had been filed three days earlier). It observed that, if the motion were granted, and if the government was provided access to the records related to the 2017 Contract, DCAA’s requests for information to conduct its audit would be rendered “moot.” Id. Raytheon therefore asked DCAA to delay any further action concerning the audit until after the Court ruled on the government’s motions to compel. Id. Briefing on all motions is now complete. On October 22, 2020 the Court heard oral argument on the motions. At the close of oral argument, the Court advised the parties that it intended to deny Raytheon’s motion for a protective order and grant the government’s motions to compel, and that it would issue an opinion to that effect in short order.

DISCUSSION

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I. Motion for Protective Order Rule 26(c)(1) of the Rules of the Court of Federal Claims (“RCFC”) states that “[t]he court may, for good cause, issue an order to protect a party or person [from whom discovery is sought] from annoyance, embarrassment, oppression, or undue burden or expense.” The movant has the burden of demonstrating good cause. Forest Prods. N.W., Inc. v. United States, 453 F.3d 1355, 1361 (Fed. Cir. 2006). Further, “broad allegations of harm, unsubstantiated by specific examples, are insufficient.” Lakeland Partners, L.L.C. v. United States, 88 Fed. Cl. 124, 133 (2009). In this case, Raytheon contends that it “should not be subject to the burden and expense of responding to the Government’s discovery requests, and a parallel DCAA investigation, separate and apart from the discovery process and without the benefit of any oversight by the Court or the attorneys managing this litigation.” Pl.’s Mot. at 2. It further argues, on several bases, that DCAA lacks the authority to conduct an audit regarding the costs of developing the vendor lists under the relevant contracts. Id. at 9–12. The Court begins by observing that Raytheon’s motion does not, on its face, ask the Court to intervene to protect it from an oppressive or unduly burdensome discovery request. Instead, it asks the Court to impose limitations on a DCAA audit that DCAA is empowered to conduct under an independent grant of statutory authority. Id. at 6–7. Generally, of course, the Court of Federal Claims “cannot entertain claims for injunctive relief or specific performance, except in narrowly defined, statutorily provided circumstances.” Kanemoto v. Reno, 41 F.3d 641, 645 (Fed. Cir. 1994). Injunctive relief is available only if it is “incident of and collateral to” a monetary judgment, 28 U.S.C. § 1491(a)(2), which means it is “tied and subordinate to a money judgment,” James v. Caldera, 159 F.3d 573, 580 (Fed. Cir. 1998) (quoting Austin v. United States, 206 Ct. Cl. 719, 723 (1975)). Raytheon alleges that the Court nonetheless has the power to limit the DCAA audit as part of its authority to supervise the discovery process. According to Raytheon, “DOJ clearly enlisted DCAA’s audit and subpoena power to bypass the discovery process to obtain documents and information to support its claims and defenses and to subvert the discovery process’s limitations and procedural safeguards.” Pl.’s Reply to Def.’s Resp. to Pl.’s Mot. at 7, ECF No. 41; cf. N. Star Alaska Hous. Corp. v. United States, 76 Fed. Cl. 158, 212 n.71 (2007) (stating that the court was “concerned with the prospect of defendant using an investigation to supplement its discovery in a case before this court, an act that seemingly constitutes abuse of both the investigative and discovery processes”). But it is hardly “clear” that something sinister is afoot here because, among other things, the DCAA audit will not provide the government with any advantage or information that it could not secure through discovery. Pl.’s Reply at 7. *4 First, because it is voluntary, the walk-through that DCAA has requested does not enable the government to circumvent limitations imposed by the discovery rules or the ethical obligations of attorneys which preclude ex parte interviews of an opposing party’s witnesses. Further,

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DCAA has noted that it is routine for contractors to have counsel present during an entrance conference or walk-through. Def.’s Resp. to Pl.’s Mot. at 5, 15, ECF No. 38. Second, as described below, the Court is granting the government’s motion to compel responses to its first and second set of discovery requests regarding the vendor lists submitted under the 2017 Contract. It appears, therefore, that DCAA can obtain access to all of the records it seeks by requesting them from DOJ. This should avert any duplication of effort by Raytheon. Moreover, in its September 11, 2020 letter, Raytheon itself suggested that its motion for a protective order would become moot if the government’s motions to compel were granted. See ECF No. 43-1. Raytheon’s objections based on the burdens imposed by the DCAA audit therefore lack merit. Finally, and in any event, Raytheon has not established that—absent the issuance of a protective order—it would suffer any harm. At this point, DCAA has not compelled Raytheon to do anything. To be sure, the Director of DCAA has the authority to issue a subpoena, 10 U.S.C. § 2313(b)(1), where there has been a “formal denial of access to records” that has been “reported to appropriate government personnel.” DCAA Instruction No. 7640.17, Formal Reporting Procedures for Denial of Access to Contractor’s Records ¶¶ 5.1.1, 6.4.1 (Dec. 19, 2008) (requiring the field audit office manager to prepare a formal denial of access report). Here, however, there is no evidence that this matter has been elevated to DCAA’s Director, much less that he has or would approve the issuance of a subpoena. And even if the Director ultimately did so, Raytheon could either return to this Court to renew its request for a protective order or challenge the subpoena through a motion to quash in which it could raise the objections to DCAA’s authority that it would have this Court consider. For all of these reasons, Raytheon has not established the existence of good cause to grant its motion for a protective order. The motion must therefore be denied.

II. The Government’s Motions to Compel Pursuant to RCFC 26(b)(1), a party is entitled to “obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case.” Raytheon contends that the government’s motions to compel should be denied because the information and documents the government seeks—which concern the vendor lists submitted pursuant to the 2017 Contract—are not relevant to the claims before the Court. Pl.’s Resp. at 9. Specifically, Raytheon contends that the claims the COFD decided pertained only to the vendor lists supplied under the 2009 and 2014 Contracts, because those were the topics of Raytheon’s November 9, 2016 letter, as the COFD itself confirms. Id. at 11.

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The Court disagrees with Raytheon’s reading of the COFD. In the Court’s view, the COFD went beyond the claims that Raytheon made in its November 9, 2016 letter (which specifically challenged the agency’s rejection of the restrictive markings on the lists submitted under the 2009 and 2014 contracts). App. to Def.’s 1st Mot. to Compel at 68, ECF No. 42-1. It also resolved government claims under the 2017 Contract—namely the claims that the vendor lists Raytheon submitted under the 2017 Contract were technical data and that the government held government purpose rights to that data. Id.; cf. Garrett v. Gen. Elec. Co., 987 F.2d 747, 749 (Fed. Cir. 1993) (COFD that required contractor to fix defective engines resolved a government claim). Indeed, the COFD expressly stated that it was “the final determination for this contract and all future contracts requiring delivery of Source/Vendor/Foreign Lists IAW DI-MGMT-80894A.” App. to Def.’s 1st Mot. to Compel at 68. Further, the COFD explicitly warned that “[i]n the event the Government receives future data deliveries in response to DI-MGMT-80894A which still reflect the nonconforming markings, the data will be disapproved as ‘deficient upon delivery,’ and, as authorized by DFARS 252.227-7013(h)(2), the Government may remove, correct or ignore the markings.” Id. at 72. *5 The Court is not persuaded by Raytheon’s contention that the 2017 Contract is not a “future” contract within the meaning of the COFD because the 2017 Contract was already in existence as of the time that the COFD was issued. See Pl.’s Resp. at 11. While the use of the adjective “future” is not as precise as one might like, common sense and the surrounding context confirm that when the CO referenced “future contracts,” the CO was referring to contracts entered after the 2009 and 2014 contracts which required vendor lists to be developed and delivered in accordance with DI-MGMT-80894A. App. to Def.’s 1st Mot. to Compel at 67–73 (COFD). Thus, at the time the CO issued the final decision, the contracting officer representative (“COR”) had found that several of the vendor lists submitted under the 2017 Contract contained the same “non-conforming technical data markings” as the lists Raytheon supplied under the earlier contracts. Id. at 63–66 (letters dated March 29, 2018). The COR “approved” the markings, but only “pending issuance of a Final Decision Letter from the Contracting Office regarding this matter”—i.e., pending the COFD that was ultimately issued several months later, on June 21, 2018. Id. It is therefore clear that it was the agency’s intent to have the June 21, 2018 COFD address all pending submissions, including those submitted under the 2017 Contract. And, in the Court’s view, the language of the COFD reflects that intent explicitly. In short, the government’s claims regarding the vendor lists submitted under the 2017 Contract are before the Court in this action. Therefore, the information and documents that the government has requested in its first and second set of discovery requests are relevant within the meaning of RCFC 26 and must be produced. Finally, the Court notes that a party that successfully moves for an order compelling responses to its discovery requests is generally entitled to an award of expenses, including attorney’s fees. See RCFC 37(a)(5)(A). There is an exception to this rule where “the opposing party’s

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nondisclosure, response, or objection was substantially justified.” Id. at 37(a)(5)(A)(ii). Here, Raytheon’s objections to the government’s discovery requests—while ultimately found without merit—were not unreasonable, given the ambiguity of some of the language in the COFD. Its objections to the government’s discovery requests were therefore substantially justified and an award of expenses is not warranted. See Alexander v. FBI, 186 F.R.D. 144, 147 (D.D.C. 1999) (“The Supreme Court has stated that a party meets the ‘substantially justified’ standard when there is a ‘genuine dispute’ or if ‘reasonable people could differ’ as to the appropriateness of the motion.”) (quoting Pierce v. Underwood, 487 U.S. 552, 565 (1988)).

CONCLUSION

Based on the foregoing:

1) Raytheon’s motion for a protective order, ECF No. 37, is DENIED;

2) The government’s motions to compel responses to its first and second sets of interrogatoriesand requests for production of documents, ECF Nos. 42, 45, are both GRANTED;

3) Raytheon shall provide amended responses to Defendant’s First and Second Set ofInterrogatories and Defendant’s First and Second Set of Requests for Production of Documents;

4) By November 12, 2020, the parties shall jointly file a new proposed discovery schedule thatincludes a deadline for the production of the foregoing responses;

5) The parties’ outstanding joint motion to amend the discovery schedule, ECF No. 50, isDENIED as moot.

IT IS SO ORDERED.

All Citations

Not Reported in Fed.Cl., 2020 WL 6482175

Footnotes

1 The relevant contracts for purposes of the pending motions are Contract No. W31P4Q-09-C-0057 (the “2009 Contract”), Contract No. W31P4Q-14-C-0093 (the “2014 Contract”), and Contract No. W31P4Q-17-C-0073 (the “2017 Contract”). Each provides that Raytheon must provide the Army a list of all sources from which it procured subcontracted items pursuant to Source/ Vendor/

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Foreign Lists in accordance with DI-MGMT-80894A. Def.’s First Mot. to Compel at 3–4, ECF No. 42.

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TAB 19

APPEAL OF -- DOUBLESHOT, INC., ASBCA No. 61691 (2020)

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ASBCA No. 61691 (A.S.B.C.A.), 2020 WL 7135374

ASBCA

APPEAL OF -- DOUBLESHOT, INC.

Under Contract Nos. N6835-06-C-0416 W56HZV-07-C-0295 N00014-07-C-0386 N00014-08-C-0497

November 17, 2020 APPEARANCE FOR THE APPELLANT: Wayne A. Keup, Esq. Wayne A. Keup, PLLC Washington, DC APPEARANCES FOR THE GOVERNMENT: Arthur M. Taylor, Esq. DCMA Chief Trial Attorney Srikanti Schaffner, Esq. Trial Attorney Defense Contract Management Agency Carson, CA

OPINION BY ADMINISTRATIVE JUDGE O’CONNELL

Appellant, Doubleshot, Inc. (Doubleshot) has filed a motion for reconsideration of the Board’s July 22, 2020, decision denying summary judgment that the government’s claim is time barred. The Board denies the motion.

DECISION

“Motions for reconsideration do not afford litigants the opportunity to take a “second bite at the apple’ or to advance arguments that properly should have been presented in an earlier proceeding.” Dixon v. Shinseki, 741 F.3d 1367, 1378 (Fed. Cir. 2014). But if we made mistakes in our findings of fact or conclusions of law, or by failing to consider an appropriate matter, reconsideration may be appropriate. Ford Lumber & Bldg. Supply, Inc., ASBCA No. 61618, 20-1 BCA ¶ 37,487 at 182,088.

In its motion for reconsideration, Doubleshot contends that the government had all of the information it needed to assert its claim by the time the Defense Contract Audit Agency (DCAA) issued a “flash report” on April 29, 2011 (app. mot. for recon. at 2-3). Doubleshot raised this contention in its motion for summary judgment but the Board rejected it. Doubleshot,

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Inc., ASBCA No. 61691, 20-1 BCA ¶ 37,677 at 182,904-05.

In its motion and reply brief, Doubleshot acknowledges that in 2013 it submitted incurred cost proposals and does not dispute the government’s contention that as late as 2017 it was still providing financial documentation to DCAA (see, e.g., gov’t resp. at exs. G8-G11). One of the weaknesses in Doubleshot’s presentation is that none of the financial documents it produced to DCAA prior to the 2011 flash report, nor those it produced in 2016 and 2017, are in the record.

As the Board explained in the opinion, the determination of the accrual date of a government claim is a fact specific inquiry. Doubleshot, Inc., ASBCA No. 61691, 20-1 BCA ¶ 37,677 at 182,904. On summary judgment, the Board must construe the evidence in the light most favorable to the government as the non-moving party and must draw all reasonable inferences in its favor. Id. at 182,905. Thus, for example, while Doubleshot dismisses the importance of the documents it provided to DCAA in 2016 and 2017 (app. reply at 2-3), the government disagrees, pointing out that in that time period Doubleshot provided DCAA with payroll, employee checks, time cards, and bank verifications to support its purported costs (gov’t resp. at 5).

A dispute centered upon the parties’ dueling characterizations of non-record evidence is simply not appropriate for resolution on summary judgment.a1 The Board clarifies, however, that after development of a full record, the Board will make a final determination as to whether any portion of the government’s claim is barred by the statute of limitations.

CONCLUSION

Doubleshot’s motion for reconsideration is denied.

MICHAEL N. O’CONNELL Administrative Judge Armed Services Board of Contract Appeals I concur RICHARD SHACKLEFORD Administrative Judge Acting Chairman Armed Services Board of Contract Appeals I concur OWEN C. WILSON Administrative Judge Vice Chairman Armed Services Board of Contract Appeals

I certify that the foregoing is a true copy of the Opinion and Decision of the Armed Services

APPEAL OF -- DOUBLESHOT, INC., ASBCA No. 61691 (2020)

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Board of Contract Appeals in ASBCA No. 61691, Appeal of Doubleshot, Inc., rendered in conformance with the Board’s Charter.

PAULLA K. GATES-LEWIS

Recorder

Armed Services Board of Contract Appeals

Footnotes

a1 The Board acknowledges Doubleshot’s reliance on our opinion in Laguna Construction Co., Inc., ASBCA No. 58569, 14-1 BCA ¶ 35,618, but that appeal is distinguishable because, among other things, the contractor provided all of the pertinent documentation to DCAA giving rise to the government claim in the same year that the contract was awarded.

ASBCA No. 61691 (A.S.B.C.A.), 2020 WL 7135374 End of Document © 2021 Thomson Reuters. No claim to original U.S. Government

Works.

TAB 20

APPEALS OF -- ADVANCED TECHNOLOGIES GROUP, INC., ASBCA No. 59986 (2020)

© 2021 Thomson Reuters. No claim to original U.S. Government Works. 1

ASBCA No. 59986 (A.S.B.C.A.), 2020 WL 7135363

ASBCA

APPEALS OF -- ADVANCED TECHNOLOGIES GROUP, INC.

Under Contract Nos. W911QX-06-C-0068, W911W6-08-C-0043, N68335-09-C-0214, N68335-09-C-0313, N68335-11-C-0154

November 18, 2020 APPEARANCE FOR THE APPELLANT: Mr. John Justak President APPEARANCES FOR THE GOVERNMENT: Arthur M. Taylor, Esq. DCMA Chief Trial Attorney Peter M. Casey, Esq. Trial Attorney Defense Contract Management Agency Boston, MA OPINION BY ADMINISTRATIVE JUDGE HARTMAN ON APPELLANT’S MOTION FOR SUMMARY JUDGMENT AND THE GOVERNMENT’S CROSS-MOTION FOR SUMMARY JUDGMENT The Defense Contract Management Agency (DCMA) issued contracting officer (CO) final decisions asserting claims against appellant, Advanced Technologies Group, Inc. (ATGI), based upon ATGI including expressly unallowable costs (e.g., marketing and patent legal expenses) in its Fiscal Year (FY) 2007 and FY 2009 Indirect Cost Proposal (ICP), plus penalties related to its alleged inclusion of such expenses in the ICPs, ASBCA Nos. 59986 and 61092, respectively. ATGI timely appealed both final decisions to this Board and filed motions for summary judgment with respect to both appeals contending DCMA’s claims are barred by the Contract Disputes Act (CDA) six-year statute of limitations, 41 U.S.C. § 7103(a)(4)(A), because they were asserted more than six-years after the date that ATGI submitted each ICP to the Defense Contract Audit Agency (DCAA). DCMA filed a cross-motion for summary judgment with respect to each appeal asserting its claims are timely because it asserted them within six-years of the date it knew or should have known of its claim against ATGI and it is entitled to judgment as a matter of law due to ATGI’s costs claimed being expressly unallowable. STATEMENT OF FACTS FOR PURPOSES OF THE MOTIONS

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In 1998, ATGI (a two-employee company then known as Justak R&D, Inc.) received its first cost-plus Small Business Innovation Research (SBIR) contract from the National Aeronautics and Space Administration (NASA). At or near the time of this award, ATGI met with DCAA to establish an adequate accounting system and method of developing indirect rates. DCAA provided ATGI with pamphlet No. 7641.90, “Information for Contractors,” which it prepared to assist contractors in understanding applicable requirements and to help ease the contract audit process. Chapter 6 of the pamphlet, titled “Incurred Cost Proposals,” ¶ 6-201, states the contractor is required to submit an adequate final incurred cost proposal within six months after the end of its fiscal year. The pamphlet includes an illustration of a Model Incurred Cost Proposal. (App. resp. to gov’t opp’n at 10-11) ATGI consulted with DCAA regarding its accounting practices, direct and indirect rates and the methods to establish those rates from the first cost-plus contract it performed (app. resp. to gov’t opp’n at 7). ATGI used the incurred costs electronically (ICE) Excel spreadsheet model furnished by DCAA to submit its incurred cost proposals. DCAA approves the incurred cost proposal submission as adequate or not adequate after it receives the submission. Id. at 8. If inadequate, DCAA is required to notify ATGI, as DCAA did for ATGI’s FY 2006 ICP. In that year, ATGI provided three revisions to its ICP prior to DCAA deeming the ICP adequate. (Id. at 8-9) The Rule 4 file for these appeals indicates that ATGI was the recipient of four cost-plus-fixed-fee contracts during the periods relevant to these appeals (No. W911QX-06-C0068 dated February 15, 2006, No. W911W6-08-C-0043 dated September 2008, No. N68335-09-C-0214 dated May 13, 2009, and No. N68335-09-C-0313 dated June 25, 2009) (R4, tabs 1-4). All four were SBIR contracts incorporating Federal Acquisition Regulation (FAR) 52.227-11, PATENT RIGHTS — OWNERSHIP BY THE CONTRACTOR clause, specified for use in experimental, developmental, and research work contracts, FAR 27.303(b). As we discussed in CANVS Corporation, ASBCA Nos. 57784, 57987, 18-1 BCA ¶ 37,156 at 180,865, during 1982, Congress established a government-wide Small Business Innovation Research Program to assist small businesses in obtaining and performing innovative research and development (R&D) work. See Small Business Innovation Development Act of 1982, Pub. L. No. 97-219, 97thCong., sec. 4, § 9, 96 Stat. 218 (codified as amended at 15 U.S.C. § 638). The statutory purpose, as addressed in the SBA SBIR Policy Directive, is to strengthen the role of innovative small business concerns in federally-funded research development. Congress desired that small businesses be used to meet government R&D needs and increase the commercialization of innovations derived from federal funds for R&D, thereby increasing economic growth, competition, and productivity. DoD Small Business Innovation Research Desk Reference for Contracting and Payment at 54, available at https://fliphtml5.com/qaad/qnhx/basic/51-100. Since 1999, ATGI has undergone DCAA audits every year. Some annual audits require complete accounting system direct and indirect cost review. DCAA advised full, detailed

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reviews would occur only every three to five years, with less-detailed reviews occurring the other years. (App. resp. to gov’t opp’n at 11) DCAA performed a complete accounting system audit of ATGI’s indirect rates for FY 2006 (id. at 7-8). On February 27, 2009, David L. Van Dingenen, CPA, DCAA Tampa Bay Branch Office, requested an “entrance conference” to begin the audit of ATGI FY 2006 Incurred Cost Submission and asked ATGI to send him data for 13 categories of items, including: a copy of the last public voucher submitted for costs billed through December 31, 2006; an electronic copy of the job cost ledger in support of the costs billed through December 31, 2006 for each flexibly priced government contract; and a detailed electronic listing of all transactions (journal entries) in support of the claimed amount for “Legal Fees,” “G&A Salary,” “Travel,” and “Education.” (Id. at 12-13) In May 2009, ATGI and DCAA executed a rate agreement for FY 2006 based on the submission DCAA received and subsequent site visits (id. at 14). Legal and patent costs for FY 2006 were deemed acceptable as part of the G&A indirect rate (id.). FY 2007 — ASBCA No. 59986 ATGI’s 2007 ICP, Schedule B. General and Administrative (G&A) Expenses (Final Indirect Cost Pool) included a specific sum for “Marketing” expenses, “Legal Fees,” and “Travel” expenses. The ICP contained no further detail regarding those line items. (Bryan FY 2007 aff. ¶¶ 5-6; Bryan FY 2007 aff., ex 1, Schedule B — General & Administrative (G&A) Expenses Fiscal Year Ended 12/31/2007 at 261) DCAA received the 2007 ICP on May 13, 2008 (Bryan FY 2007 aff. ¶ 4). In submitting its FY 2007 ICP, ATGI did not provide DCAA any financial, accounting or other records or documents with additional information about the marketing, legal fees or travel expenses included on the G&A Schedule (Bryan FY 2007 aff. ¶ 7). On May 2, 2011, DCAA requested ATGI’s “Trial Balance,” an accounting report that itemizes credit and debit balances for each account in an entity’s general ledger. ATGI supplied that data on May 10, 2011, which indicated it incurred patent legal costs. Until DCAA received this data, it possessed no information that the G&A Schedule’s line item for “Legal Fees” in the FY 2007 ICP included patent legal cost. (Bryan FY 2007 aff. ¶¶ 8-11; Bryan FY 2007 aff., ex. 2 at 313) In response to DCAA requests after May 10, 2011, ATGI supplied some supporting documentation relating to its 2007 legal fees, marketing costs, and travel expenses claimed as allowable costs. For example, on June 21, 2011, during an on-site visit, ATGI supplied DCAA with a detailed listing of its claimed patent legal costs. DCAA subsequently described those costs as follows:

Various transaction ... were for legal fees paid to the firm of Gray, Robinson to obtain or maintain domestic and foreign patents. The contractor provided attorney invoices for each charge. The contractor considers ALL patent costs to be allowable as ATG[I] has SBIR (small business contracts) under which they assert ownership of the patent is retained by the contractor. ATG[I] stated, “As the contractor may well use the technology in multiple

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contracts, the patent costs need to be allocated as an indirect cost.” (Bryan FY 2007 aff., ex. 5A at 327, ex. 5B) DCAA informed ATGI its travel costs must be supported in accordance with FAR 31.205-46(7), e.g., identification of traveler and trip purpose (Bryan FY 2007 aff. ¶¶ 16-17; Bryan FY 2007 aff., ex. 3 at 317, ex. 4 at 319-20, ex. 6A at 332, ex. 7A at 345). DCAA made numerous requests to ATGI to provide documents to support the travel expense it claimed as allowable indirect costs in its FY 2007 ICP, but ATGI did not provide such support. On or about August 12, 2011, DCAA advised ATGI that, as a result of its failure to produce supporting documents, DCCA was questioning the total amount of travel expenses pursuant to FAR 31.205-46(a)(7), which states “Costs shall be allowable only if the following information is documented — Date and place (city, town or other similar designation) of the expenses; purpose of the trip; and [n]ame of person on trip and that person’s title or relationship to the contractor.” According to DCAA, Denise Miller of ATGI thereafter “conceded” that ATGI did not intend to support its claimed travel costs. (Bryan FY 2007 aff. ¶¶ 16-17, 20-21, 23; Bryan FY 2007 aff., ex. 4 at 320, ex. 6A at 332, 354, ex. 8 at 354, 356) During late August 2011, DCAA supervisory management determined that additional work was needed to complete the FY 2007 ICP audit. Due to DCAA workload priorities, DCAA placed the ATGI audit “on hold.” Over a year later, in September 2012, DCAA transferred the audit to Supervisory Auditor Judy J. Bryan and her team for completion. (Bryan FY 2007 aff. ¶¶ 24-26; Bryan FY 2007 aff., ex. 8 at 356) On August 21, 2013, DCAA senior auditor Arnold Schloss held an audit exit conference for the FY 2007 ICP audit with John Justak, ATGI President and CEO, Lucy Fribourg, CPA, and Louis Surette, ATGI Chief Strategy Officer (Bryan FY 2007 aff., ex. 9 at 366-67). During the conference, auditor Schloss advised ATGI of the sum of costs identified as questionable and that more than half that sum related to its claimed travel expenses (Bryan FY 2007 aff. ¶ 28; Bryan FY 2007 aff., ex. 9 at 367). On September 20, 2013, Supervisory Auditor Bryan transmitted to ATGI a draft copy of the results of DCAA’s audit of ATGI’s FY 2007 ICP and requested a written response by September 25, 2013 (Bryan FY 2007 aff. ¶¶ 29-30; Bryan FY 2007 aff., ex. 10). On or about September 25, 2013, DCAA received ATGI’s written response to the draft audit findings, which asserted in part that: it first learned in the exit conference it had not produced support for its disputed travel expenses; DCAA had addressed its travel requests to an administrative assistant no longer employed by ATGI; and ATGI was appending copies of expense reports for 2007 relating to $38,116.77 in travel expenses. (Bryan FY 2007 aff. ¶¶ 31-32; Bryan FY 2007 aff., ex. 11 at 385) On October 11, 2013, DCAA auditors Schloss and Bryan met with Mr. Justak at ATGI’s facility to discuss ATGI’s response to the draft audit results. The next day, ATGI sent DCAA additional

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invoices in support of travel costs it claimed as allowable in its FY 2007 ICP. DCAA reviewed and evaluated the additional data, and amended its draft findings to reduce the amount of costs it questioned as unallowable. (Bryan FY 2007 aff. ¶¶ 33-35; Bryan FY 2007 aff., ex. 6A at 332, ex. 7A at 345, ex. 9 at 365) After conducting a second exit conference for the audit on August 7, 2014, DCAA “finalized” its FY 2007 ICP audit and report thereon dated August 29, 2014, which it issued to DCMA Administrative Contracting Officer (ACO) Ron Souto (Bryan FY 2007 aff. ¶¶ 36-37; Bryan FY 2007 aff., ex. 12 at 388). In the final audit report, DCAA determined at pages 10 and 15 that ATGI claimed expressly unallowable costs for certain indirect general and administrative expenses (marketing, legal and travel), and the costs were subject to a level one penalty in accordance with FAR Part 31.2 and FAR 42.709 (Souto aff. ¶¶ 8-10). The final report reduced by more than half the costs DCAA had questioned as expressly unallowable in its draft findings (Bryan FY 2007 aff. ¶ 38; Bryan FY 2007 aff., ex. 10 at 377, ex. 12 at 405). The DCAA reductions were for the most part based on information ATGI provided DCAA during or after September 2013, i.e., more than five years after ATGI had submitted its 2007 ICP (Bryan FY 2007 aff. ¶¶ 38-39; Bryan FY 2007 aff., ex. 12). After August 29, 2014, ACO Souto reviewed DCAA’s FY 2007 Audit Report and other information, including information ATGI first provided to DCAA in 2013, and made an independent determination to allow $7,004 in marketing expense, which DCAA had questioned, thereby reducing the amount of costs subject to penalty under FAR 42.709-1(a)(1). Otherwise, he adopted DCAA’s determination of expressly unallowable cost and issued an April 13, 2015 final decision asserting a claim against ATGI with respect to those costs and related penalties. (Souto aff. ¶¶ 8-10) The final decision identified as expressly unallowable certain marketing costs, travel expenses, and legal costs (relating to patents). With respect to the disputed costs, 80.78% were allocable to government contracts. ATGI timely appealed to this Board the April 13, 2015 final decision asserting a claim for inclusion of “expressly unallowable” costs in its FY 2007 indirect cost rate proposal, plus associated penalties. (Gov’t opp’n and cross mot. at 24) FY 2009 — ASBCA No. 61092 ATGI furnished its FY 2009 ICP to DCAA on or about June 15, 2010 (App. mot. ¶ 2; gov’t opp’n and cross mot. at 8; Bryan FY 2009 aff. ¶ 4; Bryan FY 2009 aff., ex. 1; R4, tab 6). In November 2013, DCAA classified ATGI’s FY 2009 ICP as “low risk” and determined not to conduct audit procedures thereon in accordance with Generally Accepted Government Accounting Standards and Defense Contract Audit Manual (2013) § 6-104.1 (Bryan FY 2009 aff. ¶ 5; see Bryan FY 2009 aff., ex.3). During December 2015, after ATGI filed its appeal with this Board regarding its 2007 FY ICP, DCAA reclassified ATGI’s 2009 ICP as “high risk” due to concerns relating to unallowable marketing and patent costs (Bryan FY 2009 aff. ¶ 6; Bryan FY 2009 aff., ex. 2). DCAA, however, still considered the 2009 ICP to be an adequate submission (Bryan FY 2009 aff., ex. 2).

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The same month DCAA reclassified ATGI’s 2009 ICP as “high risk,” DCAA decided to “disengage” from an audit of the FY 2009 ICP as a result of its inability to complete an audit by the end of the month, i.e. December 31, 2015 (Bryan FY 2009 aff. ¶ 7). On December 22, 2015, DCAA sent an email to DCMA ACO Souto stating that it was “disengaging” from the ATGI audit “because we are unable to complete the audit due to time constraints” (Bryan FY 2009 aff. ¶ 8; Bryan FY 2009 aff., ex. 2; Fernandez aff. ¶ 3; Fernandez aff., ex. 1). The same day, DCCA sent an email to ATGI requesting that ATGI send accounting records for legal and marketing expenses for FY 2009. The next day, on December 23, 2015, DCAA’s Branch Manager sent a memorandum advising DCMA that DCAA was withdrawing from auditing ATGI’s FY 2009 ICP (Bryan FY 2009 aff. ¶ 9; Bryan FY 2009 aff., ex. 3, ex. 4 at 846; Fernandez aff. ¶ 3; Fernandez aff., ex. 1). Supervisory Auditor Bryan believed DCMA wanted DCAA to complete an audit of the FY 2009 ICP by December 31, 2015, in order to give DCMA opportunity to meet its own internal requirements for finalizing establishment of FY 2009 indirect cost rates (to which she was not privy) (Bryan FY 2009 aff. ¶ 13). According to Supervisory Auditor Bryan, at the time of DCAA’s withdrawal from audit of the FY 2009 ICP, DCAA had not obtained documentation or other information to assess the allowability or non-allowability of costs claimed by ATGI in its FY 2009 ICP (Bryan FY 2009 aff. ¶¶ 11-12; Bryan FY 2009 aff., ex. 5 at 1). ATGI responded to DCAA’s request to send accounting records for legal and marketing expenses for FY 2009 on February 29, 2016, by sending Auditor Bryan an email attaching separate Excel spreadsheets for ATGI legal and marketing expenses (Bryan FY 2009 aff. ¶ 10; Bryan FY 2009 aff., ex. 4). On April 12, 2016, DCAA sent DCMA a copy of the FY 2009 ICP by email. DCAA additionally sent DCMA a copy of ATGI’s February 29, 2016 email and attachments sent to DCAA in response to Supervisory Auditor Bryan’s December 2015 information request. (Fernandez aff. ¶¶ 4-5; Fernandez aff., exs. 2-3) Nine days later, on April 21, 2016, ACO Souto sent ATGI an email asking it to provide DCMA with supporting documentation for ATGI’s Excel spreadsheets (ledger accounts) for FY 2009 legal and marketing costs in order to determine the allowability of such costs (Fernandez aff. ¶ 6; Fernandez aff., ex. 4). The following day, on April 22, 2016, DCAA’s Supervisory Auditor, Judy Bryan, sent ATGI an email stating:

Thank you for providing the universe of 2009 Legal and Marketing Expenses. Due to statute of limitations time constraints, our office issued a disengagement memorandum and will not be auditing ATG’s 2009 ICE submission. However, we provided the Legal and Marketing information to Mr. Ron Souto, DCMA ACO and Mr. Antonio Fernandez, DCMA Team Lead.

(App. resp. to gov’t opp’n and app. resp. to gov’t cross mot. at 14; Bryan FY 2009 aff. ¶¶ 7-9; Bryan FY 2009 aff., ex. 3; gov’t XSJM at 10)

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On May 11, 2016, ACO Fernandez assumed responsibility for ATGI’s contracts. On or about May 12, 2016, in response to DCMA’s April 21 request, ACO Fernandez received a package with documents supporting ATGI’s claimed legal and marketing expenses (Fernandez aff. ¶ 8; Fernandez aff., ex. 6). According to ACO Fernandez, prior to May 12, 2016, DCMA did not know or possess information from any source showing or indicating (or from which it could determine) that costs claimed in ATGI’s FY 2009 ICP were unallowable (Fernandez aff. ¶¶ 9-10; Fernandez aff., ex. 7). In sum, prior to May 12, 2016, DCMA did not possess informationrelating to ATGI’s FY 2009 ICP from which it could have known that costs claimed in ATGI’sICP were unallowable.

After receipt of the information from ATGI on or about May 12, 2016, DCMA undertook to evaluate the propriety of the costs ATGI claimed in its FY 2009 ICP and determine the appropriate final indirect cost rates for ATGI’s FY 2009 (Fernandez aff. ¶ 7; Fernandez aff., ex. 6). Over eight months later, DCMA ACO Fernandez issued a final decision and demand for payment with respect to FY 2009 asserting ATGI included expressly unallowable costs in its 2009 final indirect cost rate (Fernandez aff. ¶¶ 10-11; Fernandez aff., exs. 7-8; app. mot. ¶ 1; gov’t opp’n and cross mot. at 8).

DECISION

Both parties have moved for summary judgment in these appeals. The standards set forth in FED. R. CIV. P. 56 guide us in resolving motions for summary judgment. Dongbuk R&U Engineering Co., Ltd., ASBCA No. 58300, 13 BCA ¶ 35,389 at 173,637; J. W. Creech, Inc., ASBCA Nos. 45317, 45454, 94-1 BCA ¶ 26,459 at 131,661. We will grant a summary judgment motion only if there are no genuine issues as to any material fact, and the moving party is entitled to judgment as a matter of law. A party seeking summary judgment has the burden of demonstrating both elements. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Mingus Constructors, Inc. v. United States, 812 F.2d 1387, 1390 (Fed. Cir. 1987); Comptech Corp., ASBCA No. 55526, 08-2 BCA ¶ 33,982 at 168,082. Further, we draw all reasonable inferences in favor of the party opposing the motion for summary judgment. Scott v. Harris, 550 U.S. 372, 378 (2007).

The fact that both parties have moved for summary judgment does not mean that we must grant judgment as a matter of law for one side or the other. Each party’s motion is evaluated by us on its own merits and properly denied if there is a dispute regarding a material fact. Mingus Constructors, 812 F.2d at 1391. A material fact is one which may make a difference in the outcome of the case, that is, the finding of the fact is relevant and necessary to the proceeding. A genuine dispute exists with respect to the fact if sufficient evidence is presented that a reasonable fact finder could decide the question in favor of the non-moving party. E.g., Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-50 (1986); Opryland USA, Inc. v. Great American Music Show, Inc., 970 F.2d 847, 849-50 (Fed.Cir.1992).

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ATGI asserts in its motion for summary judgment that the government’s claims against it are barred by the CDA’s six-year statute of limitations. According to ATGI, the claims against it accrued on the dates it submitted its ICP to DCAA for its 2007 and 2009 cost years, i.e., respectively, on May 31, 2008, and on or about June 15, 2010. ATGI contends the government does not dispute it issued ACO final decisions asserting claims against it for the cost years at issue more than six-years after the date ATGI submitted its ICP for the cost year and therefore it is entitled to judgment as a matter of law. While the government does not dispute that the two ACO final decisions here asserting claims against ATGI were issued more than six-years after the date ATGI submitted its ICP for the respective cost year (gov’t opp’n and cross mot. at 9), it asserts the decisions were issued within six years of the accrual dates for those claims. According to the government, the statute does not begin to run, unless and “until the claimant ‘learns or reasonably should have learned’ of his cause of action.” The government contends its claims against ATGI accrued only when it obtained information showing the costs claimed by ATGI to be unallowable. ATGI had four SBIR cost-plus-fixed fee (CPFF) contracts for research and development during the period at issue. Those contracts contained standard FAR clauses governing the payment of their costs by the government. As we explained in Technology Systems, Inc., ASBCA No. 59577, 17-1 BCA ¶ 36,631 at 178,378, in a typical CPFF contract, subject to the standard FAR clauses included here,

[t]he government compensates a contractor for two types of costs, direct and indirect. FAR 52.216-7(b). ... Indirect costs are overhead costs that the company incurs during the time of contract performance that cannot be allocated to a single “cost objective.” FAR 31.203(b). They are allocated to the contract on a pro rata basis, based upon the direct costs incurred during the base time period, typically the contractor’s fiscal year (FY). FAR 31.203(b)-(g) .... Whether a cost claimed by the contractor is compensated by the government is dependent upon both whether the costs claimed are allowable under the contract (which is controlled by the FAR) and whether they are satisfactorily proved to have been incurred as shown in the records maintained by the contractor. FAR 52.216-7(b)(1)(ii)(F).

Indirect costs are billed and initially paid at estimated rates. FAR 52.216-7(e). Within six-months of the end of the contractor’s fiscal year, it is required to submit to the CO and the CO’s auditor (DCAA) a “final indirect cost rate proposal” or ICP based upon the actual indirect costs incurred during the fiscal year. FAR 52.216-7(d)(2)(i)-(iii). DCAA auditors typically select portions of the ICP for review and concentrate their review on them because it is not practical to closely audit the entire ICP. Technology Systems, Inc., 17-1 BCA ¶ 36,631 at 178,378. While ATGI submitted its ICP to DCAA for its 2007 and 2009 cost years, on May 31, 2008, and on or about June 15, 2010, respectively, neither ICP provided details for the categories of expenses set forth. In submitting its FY 2007 and 2009 ICPs, ATGI did not provide DCAA any financial, accounting or other records or documents with specific information regarding the

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marketing, legal fees or travel expenses included in the G&A Schedules (Bryan FY 2007 aff. ¶ 7; Fernandez aff. ¶¶ 9-10; Fernandez aff., ex. 6). For example, DCAA did not obtain data showing or from which it could have known of the unallowability of the patent costs identified as expressly unallowable in the FY 2007 COFD until after May 10, 2011. (Bryan FY 2007 aff. ¶¶ 5-11; Bryan FY 2007 aff., ex. 1 (Schedule B), ex. 2) As set forth above, on May 2, 2011, DCAA requested ATGI’s ““Trial Balance,” an accounting report that itemizes credit and debit balances for each account in an entity’s general ledger. ATGI supplied that data on May 10, 2011, which indicated it incurred patent legal costs. Until DCAA received this data, it possessed no information that the G7A Schedule’s line item for “Legal Fees” in the FY 2007 ICP included patent legal cost. (Bryan FY 2007 aff. ¶¶ 8-11; Bryan FY 2007 aff., ex. 2 at 313) DCAA did not obtain data showing or from which it could have known of the unallowability of the ATGI costs identified as expressly unallowable in the FY 2009 COFD until after May 11, 2016 (Fernandez aff. ¶ 8; Fernandez aff., ex. 6). In sum, prior to May 2011 and May 2016, respectively, DCMA did not possess information relating to ATGI’s FY 2007 and 2009 ICPs from any source pursuant to which it could have known the disputed costs claimed in ATGI’s ICPs were unallowable. (Bryan FY 2007 aff. ¶¶ 8-11; Bryan FY 2007 aff., ex. 2 at 313; Souto aff. ¶¶ 5-7; Souto aff., exs. 2-3) ATGI disputes that DCMA did not possess information from which it should have known costs claimed in the ICPs were unallowable. ATGI asserts that DCAA knew at the time it accepted the ICPs what types of costs were incurred “based on all previous incurred cost proposals submitted, accepted and audited by DCAA for the full history of ATGI” (app. resp. to gov’t reply at 1). In support of this assertion, ATGI cites only emails exchanged regarding DCAA’s full audit of ATGI’s 2006 cost year. While ATGI’s assertions suggest that the 2007 and 2009 disputed ICP costs were also set forth in its 2006 claimed costs, such as costs depreciated or amortized over a term of years that included multiple cost years, that is not the case here. For example, the patent legal costs are discrete costs for legal services provided during FY 2007 and 2009 incurred and claimed during FY 2007 and 2009 (see Bryan FY 2007 aff., ex. 5A at 327, ex. 5B; R4, tab 8) Under the CDA, “each claim by the Federal Government against a contractor relating to a contract shall be submitted within 6 years after the accrual of th[at] claim.” 41 U.S.C. § 703(a)(4)(A). FAR 33.201 defines “accrual of a claim” as: “the date when all events that fix the alleged liability of either the Government or the contractor and permit assertion of the claim, were known or should have been known.” Sikorsky Aircraft Corp. v. United States, 773 F.3d 1315, 1320 (Fed. Cir. 2014); Flour Corp., ASBCA No. 57852, 14-1 BCA ¶ 35,472 at 173,929. In evaluating when a claimed liability was fixed, we first examine the legal basis of the claim. Gray Personnel, Inc., ASBCA No. 54652, 06-2 BCA ¶ 33,378 at 165,475. In these appeals, the legal basis for the government’s claims are ATGI’s inclusion of “expressly unallowable expenses” for reimbursement among costs set forth for ATGI’s FY indirect costs. Events fixing liability should be known when they occur unless they are either concealed or

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inherently unknowable at the time. Alion Science & Technology Corp., ASBCA No. 58992, 15-1 BCA ¶ 36,168 at 176,489; Raytheon Missile Sys., ASBCA No. 58011, 13 BCA ¶ 35,241 at 173,017. In Holmes v. United States, 657 F.3d 1303 (Fed. Cir. 2011), the United States Court of Appeals for the Federal Circuit applied a “knew or should have known” of the claim test interchangeably with a “concealed or inherently unknowable” test for claim accrual stating that its alternate statement of the test includes an intrinsic reasonableness component. Id. at 1320; accord Martinez v. United States, 333 F.3d 129 (Fed. Cir. 2003) (en banc). Accordingly, claim accrual may be postponed where facts of a claim are not reasonably known by the claimant. United States Commodities Export Co., 972 F.2d 1266, 1271-72 (Fed. Cir. 1992), citing 28 U.S.C. §§ 2415, 2416; Alion Science, 15-1 BCA ¶ 36,168 at 176,489-90. In assessing when a claim has accrued under the CDA, this Board has applied the “knew or should have known” accrual standard in various appeals. Kellogg Brown & Root Services, Inc., 16-1 BCA ¶ 36,408 at 177,523; Alion Science, 15-1 BCA ¶ 36,168 at 176,489; Raytheon Co., Space & Airborne Systems, ASBCA No. 57801 et al., 13 BCA ¶ 35,319 at 173,376; Raytheon Missile Systems, 13 BCA ¶ 35,241 at 173,017. Prior decisions by a panel of this Board are deemed to be “binding precedent” in another ASBCA appeal unless the decision has been reversed or otherwise modified by the Board’s Senior Deciding Group or by an appellate court reviewing our decision. E.g., SWR, Inc., ASBCA No. 56708. 15-1 BCA ¶ 35,832 at 175,220; PCA Health Plans of Texas, Inc., ASBCA No. 48711, 98-2 BCA ¶ 29,900 at 148,014, aff’d, 191F.3d 1353 (Fed. Cir. 1999). Failure to meet the statute of limitations is an affirmative defense, for which the invoking party (ATGI) bears the burden of proof. DRS Global Enterprise Solutions, Inc., ASBCA No. 61368, 18-1 BCA ¶ 37,131 at 180,696; Bridgestone Firestone Research, Inc. v. Automobile Club de L’Ouest de la France, 245 F.3d 1359, 1361 (Fed. Cir. 2001); see FED. R. CIV. P. 8(c). The statute of limitations thus cannot bar government claims asserted more than six years after government receipt of the ICPs here, absent proof by ATGI that the government knew or should have known at time of receipt of the ICPs facts sufficient or material to assertion of the government claims. ATGI essentially asserts here that, at time of receipt of its ICPs, the government had access to its accounting system and could verify it was billing the government for the costs billed. ATGI therefore concludes the government ““should have known” the material facts of the claims it asserts against ATGI. The government denies that it knew or should have known at time of its receipt of the ICPs information necessary for assertion of its ACO’s claims. The government presents affidavits of its officials testifying the ICPs did not identify the specific cost transactions forming the basis for its claims. According to the government, while it knew ATGI was billing costs to the government, it did not know facts sufficient to conclude that some of those costs were expressly unallowable and created a cause of action. We determined in Sparton DeLeon Springs, LLC, ASBCA No. 60416, 17-1 BCA ¶ 36,601, that a claim accrued when the contractor submitted its ICP to the government. Our determination in

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that appeal, however, resulted from admissions by the government in its brief regarding the type of information it received from the contractor at time of ICP submission, i.e., undisputed facts (id. at 178,311; DRS Global Enterprise Solutions, Inc., ASBCA No. 61368, 18-1 BCA ¶ 37,131 at 180,698). In these appeals, we have no such admissions of knowledge of facts material to assertion of the government claims.

Our precedent demonstrates we must consider the unique facts of each appeal in determining when the government reasonably should have known of its claim Sparton DeLeon Springs, LLC, 17-1 BCA ¶ 36,601 at 178,311. The record in these appeals, as developed, lacks undisputedfacts demonstrating the government knew or should have known of its claims at time of receiptof the ICPs. Viewing the record here in the light most favorable to the non-moving party (thegovernment), as we must on a motion for summary judgment, we conclude that there is agenuine issue of material fact as to whether the ICPs contained sufficient data for thegovernment to know of its claims asserted in these appeals. ATGI therefore has not met itsburden of establishing the requisite factual predicate for invoking the statute of limitations as abar to the government’s claims.

I. Government Cross-motion for Summary Judgment

In its cross-motion for summary judgment, the government asserts that “the Board should grant summary judgment in the Government’s favor” because the government asserted its claims in final decisions issued shortly after those claims accrued. According to the government, the Board therefore “should grant summary judgment in the Government’s favor and dismiss” the ASBCA appeals challenging ACO final decisions asserting government claims against ATGI. (Gov’t opp’n and cross mot. at 24-27)

As discussed above, the ACO’s final decisions here assert claims that ATGI sought recovery of expressly unallowable costs. It is well-established that the government has the burden of demonstrating that costs are unallowable. Johnson Controls World Services, Inc., ASBCA Nos. 46674, 47296, 96-2 BCA ¶ 28,464 at 142,166. In these appeals, ATGI contends that facts relating to the disputed costs demonstrate that they are allowable expenses. The government has not presented any evidence regarding the disputed costs showing that they are expressly unallowable. For example, with respect to patent costs, the government appears to contend that all legal costs relating to patents are expressly unallowable. FAR 31.205-30(c), PATENT COSTS, however, provides simply: “Other than those for general counseling services, patent costs not required by the contract are unallowable.” FAR 31.205-30(b) defines general counseling services related to patents as including “advice on patent laws, regulations, clauses, and employee agreements.” Legal costs for general counseling services regarding patents and those required by the contract thus are allowable costs for reimbursement pursuant to the terms of the FAR. The government has not shown that the patent legal costs claimed are not legal costs for general counseling services.

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The government also has not shown that the patent legal costs claimed are not required by the contracts at issue. SBIR contracts, such as the four here, generally contain a patent rights clause specifying the rights retained by the contractor and the rights granted the government in inventions developed under the SBIR contract. E.g., FAR 27.303(b), 52.227-11. As found above, all four SBIR contracts here incorporate by reference FAR 52.227-11.

Generally, a contractor can retain title to patents granted for inventions conceived or first developed when performing work under a SBIR contract if the contractor (1) discloses the invention to the government within specified times; (2) elects in writing to retain title within specified times; and (3) files either a provisional or nonprovisional patent application within specified periods. E.g., FAR 52.227-11(b)(1) & (2)(i), (c)(1) & (3). If a contractor fails to satisfy these requirements, the government can claim title to any patent awarded for the invention. FAR 52.227-11(d)(1)(i), (ii). If a contractor satisfies the foregoing requirements, it retains title to its patent, but must grant the government a nontransferable license to practice the invention. FAR 52.227-11(d)(2). In sum, the government may practice the contractor’s invention on its own behalf or authorize others to practice it for the government’s benefit throughout the world. Id.

The patent rights clause in ATGI’s SBIR contracts expressly requires it to protect the government’s interests. Specifically, the contractor is to have executed and delivered to the government all instruments necessary to establish or confirm the rights throughout the world that the government has in an SBIR funded invention for which ATGI possesses title, including notifying the CO of any decisions not to file a nonprovisional patent application, continue the prosecution of a patent application, pay maintenance fees, or defend in a reexamination or opposition proceeding upon the patent in any country before expiration of the response or filing period required by the relevant patent office. FAR 52.227-11(e)(1)(i), (3). In sum, the contractor obtaining a patent and granting a use license to the government ensures that the government or other potential competitor cannot use the invention for “commercial purposes” or to produce future technical procurement specifications that diminish the contractor’s rights (and resultant business opportunities) while at the same time protecting the government by allowing the government the degree of access needed to evaluate the contractor’s work and effectively utilize the results.

While we do not decide the issue today, it appears the requirements of FAR 52.227-11(c) place a contractual obligation upon a contactor to perform the effort described in FAR 31.205-30(a)(1), (a)(2), and (a)(3). If that is so, it appears that related patent legal costs would be allowable. See FAR 31.205-30(c). According to the DoD Small Business Innovation Research Desk Reference for Contracting and Payment at 83, available at https://fliphtml5.com/qaad/qnhx/basic/51-100, under FAR 52.227-11, a contractor is assured that it will at least receive partial compensation for its incurred patent costs.

Because the record before us primarily contains terse legal bills specifying money due for patent legal work without a detailed description of the legal work actually performed (Bryan FY 2007

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aff., ex. 5A at 327, ex. 5B; R4, tab 8) and the government has not presented evidence regarding the disputed costs showing that they are expressly unallowable, we currently do not have a factual basis to grant summary judgment to the government that ATGI’s patent legal costs are “expressly unallowable.” Because the government has not developed the facts sufficiently here, the issue of allowability of the disputed costs cannot now be resolved by summary judgment. See, e.g., Kellogg Brown & Root Services, Inc., 16-1 BCA ¶ 36,408 at 177,528. Simply put, there are genuine issues of material fact that bar us from granting the government’s cross-motion. CONCLUSION The appellant’s motion for summary judgment is denied. The government’s cross-motion for summary judgment is also denied.

TERRENCE S. HARTMAN Administrative Judge Armed Services Board of Contract Appeals I concur RICHARD SHACKLEFORD Administrative Judge Acting Chairman Armed Services Board of Contract Appeals I concur OWEN C. WILSON Administrative Judge Vice Chairman Armed Services Board of Contract Appeals

I certify that the foregoing is a true copy of the Opinion and Decision of the Armed Services Board of Contract Appeals in ASBCA Nos. 59986, 61092, Appeals of Advanced Technologies Group, Inc., rendered in conformance with the Board’s Charter. PAULLA K. GATES-LEWIS Recorder Armed Services Board of Contract Appeals

ASBCA No. 59986 (A.S.B.C.A.), 2020 WL 7135363 End of Document

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TAB 21

MISSION SUPPORT ALLIANCE, LLC, APPELLANT v...., CBCA 6476 (2020)

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CBCA 6476 (Civilian B.C.A.), 2020 WL 7866679

CBCA

Civilian Board of Contract Appeals

MISSION SUPPORT ALLIANCE, LLC, APPELLANT v.

DEPARTMENT OF ENERGY, RESPONDENT

GRANTED: December 8, 2020 THIS OPINION WAS INITIALLY ISSUED UNDER PROTECTIVE ORDER AND IS BEING RELEASED TO THE PUBLIC IN ITS ENTIRETY ON DECEMBER 17, 2020

Marisa M. Bavand and Allison L. Murphy of Groff Murphy PLLC, Seattle, WA, counsel for Appellant. Paul R. Davis and Andrew J. Unsicker, Office of Chief Counsel, Department of Energy, Richland, WA, counsel for Respondent.

Before Board Judges SOMERS (Chair), LESTER, and CHADWICK. SOMERS, Board Judge.

Pending before us is a motion for summary judgment by Mission Support Alliance, LLC (MSA). MSA seeks a ruling as a matter of law that the Department of Energy (DOE) is not entitled to disallow $11,424,602 in Parent Office Support Plan (POSP) costs reimbursed by DOE during fiscal years (FYs) 2009-2012 and $5,247,135 during FYs 2013-2018. DOE opposes the motion, contending genuine issues of material fact preclude summary judgment. We agree with MSA and grant the motion and the appeal. Background In April 2009, DOE and MSA entered into a performance-based cost-plus-award-fee contract with a value of $3,059,369,580. Under the contract, MSA provided infrastructural support to the Hanford Site, a decommissioned nuclear production complex located adjacent to the Columbia River in Washington State. The scope of work required MSA to provide, among other things, laboratory services, security services, transportation infrastructure, utilities, telecommunications and IT support, and various business administrative services. MSA subcontracted a portion of the work. As a cost-reimbursement contract awarded under Federal Acquisition Regulation (FAR) part 15 (48 CFR pt. 15 (2008)), the contract included various clauses from the FAR and Department of Energy Acquisition Regulation (DEAR) requiring MSA to document and support its costs. For

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example, FAR 31.201-2(d) required MSA to “account for costs and maintain records, including supporting documentation, adequate to demonstrate that the costs claimed have been incurred, are allocable to the Contract, and comply with the applicable cost principles.” 48 CFR 31.201-2(d). In addition, the contract provided a mechanism whereby MSA, a joint venture, could receive technical support from its parent organizations:1

H.39 Parent Organization Support2 (a) For on-site work, U.S. Department of Energy (DOE) fee generally provides adequate compensation for parent organization expenses incurred in the general management of this Contract. The general construct of this Contract results in minimal parent organization investment (in terms of its own resources, such as labor, material, overhead, etc.) in the Contract work. The Contract is largely financed by DOE advance payments, and DOE provides government-owned facilities, property, and other needed resources. Accordingly, allocations of parent organization expenses are unallowable for the prime contractor, major subcontractors, and/or teaming partners, unless authorized by the Contracting Officer in accordance with this Clause. (b) The Contractor may propose, or DOE may require, parent organization support to:

(1) Monitor safety and performance in the execution of Contract requirements; (2) Ensure achievement of Contract environmental clean-up and closure commitments; (3) Sustain excellence of Contract Key Personnel; (4) Ensure effective internal processes and controls for disciplined Contract execution; (5) Assess Contract performance and apply parent organization problem-solving resources on problem areas; and (6) Provide other parent organization capabilities to facilitate Contract performance.

© The Contracting Officer may, at its unilateral discretion, authorize parent organization support, and the corresponding indirect or direct costs, if a direct-benefiting relationship to DOE is demonstrated. All parent organizational support shall be authorized in advance by the Contracting Officer. (d) If parent organization support is proposed by the Contractor or required by DOE, the Contractor shall submit for DOE review and approval, an annual Parent Organization Support Plan (POSP). The Contractor shall submit its initial POSP 60 days prior to: (1) the end of the Contract Transition Period; or (2) the commencement date of parent organization support proposed by the Contractor or required by the Government. Any subsequent POSP shall be submitted 90 days prior to the start of each year of Contract performance.

In June 2012, MSA submitted a POSP to DOE (the “2013 POSP”). The 2013 POSP identified MSA’s parent organizations and enumerated the ways in which the parent organizations would support MSA’s mission. The 2013 POSP included two forms of parent organization involvement. One included a “members committee,” comprised of executive level leaders from the parent organizations, which would provide advice and oversight of MSA’s activities. The

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second also contemplated the use of “direct support” from the parent organization, which would enable MSA to gain expert assistance from the parent organizations on an as-needed basis. In August 2012, DOE approved the 2013 POSP, authorizing the use of the members committee and direct support totaling $5,732,298. A similar process happened in FYs 2014-2018. Once DOE authorized the POSPs, MSA billed against the total authorized POSP costs, allocating the cost of parent organization support, as billed to MSA by the parents, to the contract. DOE approved POSPs for all years relevant to this dispute. DOE required MSA to maintain records, with supporting documentation, adequate to demonstrate that any costs claimed were incurred, were allocable to the contract, and complied with the applicable cost principles. MSA implemented a cost-review system of the invoices from the POSPs. At various times during performance, MSA asked the parent organizations to confirm that no unallowable costs were being billed or had been billed in the past. External audits conducted by KPMG led MSA to respond by identifying what corrective action would be applied to any items requiring corrective action. MSA alleges that it interpreted the results of the audits to indicate that MSA’s use of the POSPs met contract requirements. MSA notes in a brief that “none of the audits suggested either that MSA’s use of the POSP was problematic or that visibility into the parent organizations’ rate buildup was a necessary precondition to avoid 100% disallowance of costs.” In August 2018, MSA provided DOE with an internal audit of the POSP for fiscal year 2017. A DOE employee asked the MSA director of internal audit whether MSA had obtained payroll cost information for each person in the POSP and what audit steps MSA had taken to ensure that the costs billed by the parent organizations were defensible. Discussions between DOE and MSA commenced. DOE exchanged internal emails concerning the POSP costs. DOE received email inquiries from the parent organizations regarding the data sought. Ultimately, while discussions continued, DOE issued a contracting officer’s decision on February 19, 2019, withholding $1,046,467 in parent organization support costs for FY 2010, $5,346,183 in parent organization support costs for FY 2011, $4,354,859 in parent organization support costs for FY 2012, and estimated general and administrative costs of $677,093. MSA appealed this decision in May 2019 (CBCA 6476). In March 2020, DOE issued a subsequent final decision, disallowing $5,247,136 in POSP costs reimbursed by DOE during FYs 2013-2018. MSA appealed that decision as well (CBCA 6811), and we granted a joint motion to consolidate the appeals. MSA filed the instant motion in March 2020. Discussion Summary judgment is appropriate when “there is no genuine issue as to any material fact (a fact that may affect the outcome of the litigation) and the moving party is entitled to judgment as a matter of law.” Marine Metal, Inc. v. Department of Transportation, CBCA 537, 07-1 BCA ¶

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33,554 (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986)). We must view all inferences in a light most favorable to the non-movant. See Walker Development & Trading Group Inc. v. Department of Veterans Affairs, CBCA 5907, 19-1 BCA ¶ 37,376 (citing Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 599 (1986)). Here, although the parties disagree sharply about a variety of facts, we agree with MSA’s legal argument, and it follows from our legal conclusion that any facts in dispute are immaterial. MSA contends that the “various rules and contract provisions” on which DOE relies “contain[] no requirement that MSA provide” the parent-entity cost information that DOE has demanded. MSA states that because the parent organizations are distinct from MSA, “any audits would need to be performed by a cognizant auditing agency and would need to come from an audit request from DOE, not MSA, with the findings of the audit delivered to DOE, not MSA.” In response, DOE contends that the record “is replete with conflicting evidence about whether MSA’s performance conformed with contract requirements, and conflicting evidence about what MSA reasonably knew, didn’t know, or could have known about the costs being charged by its parent organizations.” DOE cites five regulatory provisions and two contract sections in its brief to support its position that “MSA must verify that the costs charged by its Parent Organizations are at cost only and do not include either expressly unallowable profit/fee or expressly unallowable Parent Organization allocations.” We see no such requirement set forth in the language cited by DOE. Four of the cited regulations—three FAR provisions, 48 CFR 31.201-2(d), 52.215-2, and 52.216-7 (2012); and one DEAR clause, id. 970.5232-3— require MSA to maintain cost records to support its invoices and to make those records available to the agency on request. Such record keeping rules do not, in and of themselves, make any incurred costs either allowable or unallowable as a matter of law. Moreover, MSA undisputedly has the records of its own costs. DOE argues that allowability further depends on records of costs that other companies incurred when selling services to MSA. The DEAR cost regulation does obligate MSA in many instances to “either conduct an audit of [a] subcontractor’s costs or arrange for such an audit to be performed by the cognizant government audit agency through the Contracting Officer.” Id. 970.5232-3(c). We are not certain that an approved POSP creates a ““subcontractor” relationship within the scope of this regulation—indeed, in a supplemental brief, DOE expressly denies that MSA’s parents are its ““subcontractors.” We need not decide that point, however, since even if the DEAR applies here, the fact remains that MSA has elected the second option under the regulation by encouraging the agency to conduct its own audits.3 The fifth regulatory provision cited by DOE is the cost principle of FAR 31.205-26(e), requiring that “[a]llowance for” sales or transfers “between any divisions, subdivisions, subsidiaries, or affiliates of the contractor under a common control shall be on the basis of cost incurred,” with specified exceptions. 48 CFR 31.205-26(e). This rule is generally understood as “limit[[ing] profits on sales between ‘divisions, subdivisions or affiliates’ under the common control of a

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contractor.” United States ex rel. Kholi v. General Atomics, 2003 WL 21536816, at *2 n.3 (S.D. Cal. 2003) (emphasis added). The ““contractor” in this case is MSA. 41 U.S.C. § 7101(7) (2018). This case does not involve an entity under MSA’s “control.” The term in the cost principle that describes the relationship between MSA and its parents is “affiliate[s].” See Securus Technologies Inc. v. Global Tel*Link Corp., 676 F. App’x 996, 999 (Fed. Cir. 2017) (defining the term “affiliate” as including parent corporations); Materials Science Corp., ASBCA 47067, 96-2 BCA ¶ 28,329 (“[The principle] applies to sales or transfers of a service from an affiliate under common control.”), modified in non-relevant part on reconsideration, 96-2 BCA ¶ 28,532. We agree with MSA that this cost principle would need to be phrased differently to reflect an intent to require a joint venture to audit prices that it pays (as its incurred costs) to affiliates that control the contractor but that the contractor does not control. We turn then to the contract, which “we must interpret ... as it is written, not as one party wishes in retrospect that it should have been written.” Sigal Construction Corp. v. General Services Administration, CBCA 508, 10-1 BCA ¶ 34,442; see also Turner Construction Co. v. Smithsonian Institution, CBCA 2862, et al., 17-1 BCA ¶ 36,739 (“Smithsonian cannot reap the benefits of a bargain it wishes it had struck.”). From its arguments, it seems that DOE would have us discern, by piecing together separate provisions of the contract, an overarching policy requiring MSA to produce the cost information that DOE says it needs. The difficulty for DOE is that none of the contract language quite says what DOE wishes it said. DOE first notes that section B.11 “expressly disallows separate additional fee for individual team members or affiliates of team members.” This is true, but since MSA does not seek a “fee” for its parents, section B.11 is irrelevant. The heart of DOE’s argument relies on contract section H.39. This section permits DOE, “at its unilateral discretion, [to] authorize parent organization support, and the corresponding indirect or direct costs, if a direct-benefiting relationship to DOE is demonstrated.” (Emphasis added.) In short, section H.39 provides the mechanism for DOE to approve or disapprove parent office support. This section would have been the obvious location in the contract to say so expressly, had DOE intended to place on the joint-venture contractor the unusual burden to audit and document the “indirect or direct costs” behind the parent entities’ authorized support prices. Under this section, DOE probably could have chosen in its discretion to condition approval of parent office support on MSA’s performing audits of its parents’ costs. But that is not what DOE did. Instead, DOE affirmatively approved each of MSA’s POSPs from 2013 through 2018. Having granted the approvals as it did, DOE cannot now retroactively impose the condition it wishes existed. If DOE wanted to impose a requirement to produce a non-contractor’s cost information, it needed to say so expressly, as such a requirement will not be implied or inferred. See generally Kellogg, Brown & Root Services, Inc. v. Secretary of the Army, 973 F.3d 1366, 1371 (Fed. Cir. 2020) (“As the government conceded at oral argument, the amounts paid ... were ‘costs’ under

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the prime contract, and there is no provision in the prime contract that required [the contractor] to submit the actual costs incurred by its subcontractor .... While the failure to collect and submit [subcontractor] costs bears on the reasonableness of the payments, submission of the subcontractor’s costs is not a separate requirement.”). DOE has approved the POSP costs as reasonable. Because DOE’s allowability argument rests solely on legal authorities we find do not support it, we grant MSA’s motion and appeal.

Decision

The Board GRANTS MSA’s motion for summary judgment.

JERI KAYLENE SOMERS Board Judge We concur: HAROLD D. LESTER, JR. Board Judge KYLE CHADWICK Board Judge

Footnotes

1 Originally, the parent organizations were Lockheed Martin Integrated Technology (LLC) (Lockheed Martin); Jacobs Engineering Group, Inc. (Jacobs); and Wackenhut Services, Inc. (Wackenhut). During FYs 2013-2018, the parent organizations’ corporate identities changed. Lockheed Martin became known as Leidos. Wackenhut became G4S and then Centerra. As a result, over FYs 2013-2018, Jacobs, Wackenhut, Centerra/G4S, Lockheed Martin, and Leidos all billed MSA pursuant to the POSPs.

2 DOE summarizes section H.39 as follows: “[The clause] allows MSA to utilize services from its Parent Organizations to perform Contract work under certain limited circumstances, and expressly provides that Parent Organization allocation costs are unallowable.”

3 DOE’s argument that MSA failed in its obligation under the DEAR clause to “arrange for ... the cognizant government audit agency” to audit its parents’ costs fails. Because MSA has no power itself to order an audit from a government audit agency, the DEAR clause recognizes that the contractor must ““arrange for” any audit “through the Contracting Officer.” 48 CFR 970.5232-3(c). FAR 42.102 provides the contracting officer with the authority to “request audit services directly from the responsible audit agency cited in the Directory of Federal Contract Audit Offices.” Id. 42.102(a). Under the language in the DEAR clause and in light of the contracting officer’s exclusive authority to request a government audit, it appears that a contractor has done all that it can do to “arrange for” a government audit of its subcontractor once it asks the contracting officer to set up that audit; at the very least, DOE has not identified any other actions that the contractor would need or be able to take. In making the request, the contractor effectively shifts responsibility for arranging the audit to the contracting officer. The contracting officer’s election in this case not to make that request does not mean that MSA is required to find a different way to access and audit its parent companies’ cost records—parent companies that are separate legal entities from MSA and that MSA does not control—outside the context of a government audit. The contracting officer’s election means only that DOE cannot rely on the absence of an audit to challenge MSA’s parent company costs under the DEAR clause.

CBCA 6476 (Civilian B.C.A.), 2020 WL 7866679 End of Document © 2021 Thomson Reuters. No claim to original U.S. Government

MISSION SUPPORT ALLIANCE, LLC, APPELLANT v...., CBCA 6476 (2020)

© 2021 Thomson Reuters. No claim to original U.S. Government Works. 7

Works.

TAB 22

ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeal of - ))

Lockheed Martin Corporation ) ASBCA No. 62377 )

Under Contract No. N00019-11-C-0083 et al. )

APPEARANCES FOR THE APPELLANT: Nicole J. Owren-Wiest, Esq. Catherine Shames, Esq. Eric Ransom, Esq. Crowell & Moring LLP Washington, DC

APPEARANCES FOR THE GOVERNMENT: Arthur M. Taylor, Esq. DCMA Chief Trial Attorney Peter M. Casey, Esq. Debra E. Berg, Esq. Trial Attorneys Defense Contract Management Agency Hanscom AFB, MA

OPINION BY ADMINISTRATIVE JUDGE SWEET

This appeal is a declaratory action regarding whether the Fly America Act, 49 U.S.C. § 40118 (FAA) and Federal Acquisition Regulation (FAR) 52.247-63 only apply to direct personnel performing direct work on covered contracts, or also apply to indirect personnel or indirect travel. On August 3, 2020, the government moved to dismiss this appeal, arguing that we do not possess jurisdiction because appellant Lockheed Martin Corporation (Lockheed Martin) did not submit a claim seeking a sum certain to the Corporate Administrative Contracting Officer (CACO), and the contract the government allegedly breached was not a contract within the meaning of the Contract Disputes Act, 41 U.S.C. § 7101 et seq. In the alternative, the government argues that we should exercise our discretion, and decline to grant declaratory relief because there is no live dispute. Lockheed Martin disputes each of those arguments.

For the reasons discussed below, we decline to grant declaratory relief because there is no live dispute. Therefore, we do not address the government’s alternative arguments, grant the motion to dismiss, and dismiss this appeal without prejudice to file a new appeal in the event a live dispute arises.

2

STATEMENT OF FACTS (SOF) FOR PURPOSES OF THE MOTION

1. On April 10, 1997, the government and Lockheed Martin executed amemorandum of understanding (MOU), under which the parties agreed that the FAA only applied to direct personnel performing direct work on covered contracts, and did not apply to indirect personnel or indirect travel (R4, tab 2).

2. On April 25, 2019, the CACO sent Lockheed Martin a letter, stating that thegovernment was withdrawing from the MOU because the MOU misinterpreted FAR 52.247-63 (withdrawal letter) (R4, tab 15).

3. In a declaration, Chad F. Connell—Lockheed Martin’s Vice President ofGovernment Finance and Compliance—states that the government has not denied payment or disallowed any indirect costs of international transport on the basis of noncompliance with the FAA and FAR 52.247-63 (app. resp. at ex. 1, Connell decl. ¶ 9). Moreover, Lockheed Martin “has not made any change whatsoever to its billing, accounting, or international air transportation practices” (id. ¶ 8). Indeed, Lockheed Martin “did not perceive the withdrawal letter as mandating any action be taken to [align] Lockheed Martin’s accounting or international air transportation practices with the Government’s newly advanced interpretation of the FAA and FAR 52.247-63” (id. ¶ 7). We have carefully searched this declaration for a statement about any way that the government’s withdrawal from the MOU has affected Lockheed Martin and we have found nothing.

4. On June 27, 2019, Lockheed Martin submitted a claim to the CACO,requesting an interpretation of the FAA and FAR 52.247-63 (R4, tab 16 at 310-11). The claim indicated that Lockheed Martin would continue to operate in compliance with the MOU (id. at 316).

5. On October 30, 2019, the CACO issued a final decision on Lockheed Martin’sclaim, interpreting the FAA and FAR 52.247-63 as applying to indirect costs of international transportation (R4, tab 18).

6. Lockheed Martin appealed that decision to the Board, seeking a declaration thatthe FAA and FAR 52.247-63 only apply to direct foreign air transportation costs, and do not apply to indirect costs (compl. ¶ 47).

DECISION

Assuming, without deciding, that we possess jurisdiction over Lockheed Martin’s claim for declaratory relief, we decline to grant such relief because there is no live dispute between the parties. We may decline to grant declaratory relief if (1) the claim does not involve a live dispute between the parties; (2) a declaration will not resolve that dispute;

3

or (3) the legal remedies available to the parties are adequate to protect their interests. Alliant Techsystems, Inc. v. United States, 178 F.3d 1260, 1271 (Fed. Cir. 1999). A live dispute exists where a disagreement clearly exists, has significant ramifications, and continues to impact the contractor. Kellogg Brown & Root Services, Inc., ASBCA No. 58578, 13 BCA ¶ 35,411 at 173,712 (holding that a live dispute existed when the Defense Contract Audit Agency (DCAA) issued a Notice of Contract Costs Suspended and/or Disapproved Form stating that DCAA disapproved the costs, the contracting officer (CO) sent a letter indicating that contractor’s interpretation of the contract was based upon bad assumptions, and there was a qui tam action pending against the contractor regarding its interpretation of the contract).

Here, Lockheed Martin argues that, under Kellogg Brown & Root, the withdrawal letter has had significant ramifications for, and a continuing impact upon, Lockheed Martin. However, unlike in Kellogg Brown & Root, there was no DCAA Notice of Contract Costs Suspended and/or Disapproved Form stating that DCAA disapproved the costs, or a qui tam action. Moreover, the withdrawal letter in this case is different than the CO letter in Kellogg Brown & Root because—contrary to Lockheed Martin’s argument that the government’s interpretation of the FAA and FAR 52.247-63 requires Lockheed Martin to change its international air transportation or cost accounting systems, processes, policies, and employee training (app. resp. 23-24; app. supp. resp. 8-9)— Mr. Connell declares that Lockheed Martin has not made “any change whatsoever to its billing, accounting, or international air transportation practices” as a result of the withdrawal letter (SOF ¶ 3). Indeed, Mr. Connell concedes that Lockheed Martin does not even view the withdrawal letter as mandating that it take any action (SOF ¶ 3).* Therefore, Mr. Connell’s declaration establishes that any dispute has not had significant ramifications for, or a continuing impact upon, Lockheed Martin. As a result, unlike in Kellogg Brown & Root, this appeal does not involve a live dispute, and we exercise our discretion by declining to grant declaratory relief. Alliant Techsystems, 178 F.3d at 1270-71; Kellogg Brown & Root Services, 13 BCA ¶ 35,411 at 173,711-13.

* It is not necessary for the government to disallow costs in order for there to be a live

dispute. TRW, Inc., ASBCA Nos. 51172, 51530, 99-2 BCA ¶ 30,407 at 150,330-32. However, here, not only has the government failed to disallow any costs (SOF ¶ 3), but Lockheed Martin has not even taken any action in response to the withdrawal letter, and does not view the withdrawal letter as mandating any action (SOF ¶ 3).

4

CONCLUSION

For the reasons discussed above, we exercise our discretion and decline to grant declaratory relief because there is not a live dispute. Therefore, the motion is granted, and we dismiss this appeal without prejudice to file an appeal, if and when a live dispute arises.

Dated: January 7, 2021

JAMES R. SWEET Administrative Judge Armed Services Board of Contract Appeals

I concur I concur

RICHARD SHACKLEFORD Administrative Judge Acting Chairman Armed Services Board of Contract Appeals

J. REID PROUTYAdministrative JudgeVice ChairmanArmed Services Boardof Contract Appeals

I certify that the foregoing is a true copy of the Opinion and Decision of the Armed Services Board of Contract Appeals in ASBCA No. 62377, Appeal of Lockheed Martin Corporation, rendered in conformance with the Board’s Charter.

Dated: January 8, 2021

PAULLA K. GATES-LEWIS Recorder, Armed Services Board of Contract Appeals

TAB 23

Case 3:21-cr-00011-L Document 1 Filed 01/05/21 Page 1 of 12 PageID 1Case 3:21-cr-00011-L Document 1 Filed 01/05/21 Page 1 of 12 PageID 1

ORiGHJAi. UNITED STATES DISTRICT COURT

. I. T C"' J .Jr ,,

FOR THE NORTHERN DISTRICT OF TEXAS I J , _ S

DALLAS DIVISION . p;, 4: 03

UNITED STATES OF AfvffiRICA

V.

SURGICAL CARE AFFILIATES, LLC and SCAI HOLDINGS, LLC

Defendants.

§ § § § § § § § §

INDICTMENT

The Grand Jury charges that:

No: 3 - 2 1 CR O O 1 1 - L

1. SURGICAL CARE AFFILIATES, LLC and SCAI HOLDINGS, LLC are

hereby indicted and made defendants on both Counts contained in this Indictment.

COUNT ONE Conspiracy in Restraint of Trade to Allocate Employees

(Violation of 15 U.S.C. § 1)

At times relevant to this Count:

2. Defendant SURGICAL CARE AFFILIATES, LLC was a company

organjzed and existing under the laws of Delaware with its principal places of business in

Birmingham, Alabama and Deerfield, Illinois. Defendant SCAI HOLDINGS, LLC was a

company organized and existing under the laws of Delaware, and was the successor

entity to Surgical Care Affiliates, Inc. Collectively, the defendants did business as

Surgical Care Affiliates ("SCA"). SCA owned and operated outpatient medical care

Indictment - Page 1 of 11

Case 3:21-cr-00011-L Document 1 Filed 01/05/21 Page 2 of 12 PageID 2Case 3:21-cr-00011-L Document 1 Filed 01/05/21 Page 2 of 12 PageID 2

facilities across the United States. SCA employed individuals to operate its business at

its headquarters locations and at other locations across the United States.

3. Individual 1 served as the Chief Executive Officer ("CEO") of SCA.

4. Company A was a company organized and existing under the laws of

Delaware with its principal place of business in Dallas County within the Northern

District of Texas. Company A owned and operated outpatient medical care facilities

across the United States and employed individuals to operate its business at its

headquarters location and at other locations across the United States.

5. Individual 2 served as the CEO of Company A.

6. SCA and Company A were competitors in the recruitment and retention of

senior-level employees across the United States.

7. Various companies and individuals, not made defendants in this Count,·

participated as co-conspirators in the offenses charged herein and performed acts and

made statements in furtherance thereof.

8. Whenever in this Count reference is made to any act, deed, or transaction of

any company, the allegation means that the company engaged in the act, deed, or

transaction by or through its officers, directors, agents, employees, or other

representatives while they were actively engaged in the management, direction, control,

or transaction of its business or affairs.

9. Beginning at least as early as May 20 IO and continuing until at least as late

as October 2017, the exact dates being unknown to the Grand Jury, in part in the

Northern District of Texas and elsewhere, SCA and Company A entered into and

Indictment - Page 2 of 11

Case 3:21-cr-00011-L Document 1 Filed 01/05/21 Page 3 of 12 PageID 3Case 3:21-cr-00011-L Document 1 Filed 01/05/21 Page 3 of 12 PageID 3

engaged in a conspiracy to suppress competition between them for the services of senior­

level employees by agreeing not to solicit each other's senior-level employees. The

conspiracy engaged in by SCA and co-conspirators was a per se unlawful, and thus

unreasonable, restraint of interstate trade and commerce in violation of Section 1 of the

Sherman Act (15 U.S.C. § 1).

10. The charged conspiracy consisted of a continuing agreement,

understanding, and concert of action among SCA and its co-conspirators, the substantial

terms of which were that SCA and Company A would allocate senior-level employees by

not soliciting each other's senior-level employees across the United States.

MEANS AND METHODS OF THE CONSPIRACY

11. For the purpose of forming and participating in the charged conspiracy,

SCA and its co-conspirators, among other things, did the following:

(a) participated in meetings, conversations, and communications with co­

conspirators to discuss the solicitation of senior-level employees of

defendant and Company A, including specific senior-level employees of

defendant and Company A-for example, on or about May 14, 20 I 0,

Individual 2 emailed other employees of Company A, stating "I had a

conversation w [Individual 1] re people and we reached agreement that we

would not approach each other's proactively";

(b) agreed during those meetings, conversations, and communications not to

solicit each other's senior-level employees;

Indictment - Page 3 of 11

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( c) instructed certain executives, employees, and recruiters not to solicit senior­

level employees of each other's companies-for example, on or about

November 11, 2013, a senior human resources employee at Company A

instructed a recruiter "Please do not schedule a call w/[ candidate], thanks.

She would have had to apply for the job first. We cannot reach out to SCA

folks. Take any SCA folks off the list.";

( d) monitored compliance with the agreement by requiring senior-level

employees of defendant and Company A who applied to the other company

to notify their current employer that they were seeking other employment in

order for their applications to be considered-for example, on or about

October 16, 2015, Individual 1 emailed a human resources executive at

SCA: "Putting two companies in italics ([Company A] and [Company B]) -

we can recruit junior people (below Director), but our agreement is that we

would only speak with senior executives if they have told their boss already

that they want to leave and are looking.";

(e) informed senior-level employees of SCA and Company A who were

candidates for employment at the other company that they were required to

provide such notice to their current employer-for example, on or about

November 1, 2013, employees of Company A discussed whether to

interview a candidate employed by SCA in light of the "verbal agreement

with SCA to not poach their folks ... " Individual 2 replied "We do have

that agreement and want to stick by it. If [candidate] indeed did approach

Indictment - Page 4 of 11

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us, and is willing to tell [Individual I] that I'm ok." The senior human

resources employee at Company A commented "Yikes, she is not going to

want to do that. But I will check.";

(f) alerted co-conspirators about instances of recruitment of employees of SCA

and Company A and took steps to remedy violations of the agreement-for

example, on or about December 8, 2015, Individual 2 informed Individual I

"Just wanted to let you know that [recruiting company] is reaching out to a

couple of our execs. I'm sure they are not aware of our understanding."

Individual 1 instructed other executives of SCA: "We should continue to

flag [Company A] on our 'do not call' list to recruiters - is OK ifwe get an

inbound inquiry and the leader has communicated within [Company A] that

they want to leave, but outbound calls should not be occurring."; and

(g) refrained from soliciting each other's senior-level employees-for example,

believing a candidate to be employed by SCA, a human resources employee

of Company A emailed a recruiting coordinator for Company A on or about

July 17, 2017, that although the candidate "look[ ed] great" she "can't poach

her."

TRADE AND COMMERCE

12. The business activities of SCA and its co-conspirators that are the subject

of this Count were within the flow of, and substantially affected, interstate trade and

commerce. For example:

Indictment - Page 5 of 11

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(a) SCA and Company A employed senior-level employees in various states

across the United States; and

(b) the conspiracy would restrict the interstate movement of senior-level

employees between SCA and Company A.

ALL IN VIOLATION OF TITLE 15, UNITED STATES CODE, SECTION I.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

Indictment - Page 6 of 11

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COUNT TWO Conspiracy in Restraint of Trade to Allocate Employees

(Violation of 15 U.S.C. § 1)

At times relevant to this Count:

13. Paragraphs 2, 3, 7, and 8 are realleged and incorporated herein.

14. Company B was a company organized and existing under the laws of

Delaware with its principal place of business in Denver, Colorado. Company B owned

and operated outpatient medical care facilities across the United States and employed

individuals to operate its business at its headquarters location and at other locations

across the United States.

15. Individual 3 served as the CEO of Company B.

16. SCA and Company B were competitors in the recruitment and retention of

senior-level employees across the United States.

17. Beginning at least as early as February 2012 and continuing until at least as

late as July 2017, the exact dates being unknown to the Grand Jury, in part in the

Northern District of Texas and elsewhere, SCA and Company B entered into and engaged

in a conspiracy to suppress competition between them for the services of senior-level

employees by agreeing not to solicit each other's senior-level employees. The conspiracy

engaged in by SCA and co-conspirators was a per se unlawful, and thus unreasonable,

restraint of interstate trade and commerce in violation of Section 1 of the Sherman Act

(15 U.S.C. § 1).

18. The charged conspiracy consisted of a continuing agreement,

understanding, and concert of action among SCA and its co-conspirators, the substantial

Indictment - Page 7 of 11

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terms of which were that SCA and Company B would allocate senior-level employees by

not soliciting each other's senior-level employees across the United States.

MEANS AND METHODS OF THE CONSPIRACY

19. For the purpose of forming and participating in the charged conspiracy,

SCA and its co-conspirators, among other things, did the following:

(a) participated in meetings, conversations, and communications with co­

conspirators to discuss the solicitation of senior-level employees of

defendant and Company B, including specific senior-level employees of

defendant and Company B-for example, on or about October 20, 2014,

Individual 3 emailed Individual 1 that "Someone called me to suggest they

reach out to your senior biz dev guy for our corresponding spot. I explained

I do not do proactive recruiting into your ranks.";

(b) agreed during those meetings, conversations, and communications not to

solicit each other's senior-level employees;

( c) instructed certain executives, employees, and recruiters not to solicit senior­

level employees of each other's companies-for example, on or about

December 12, 2015, SCA' s human resources executive emailed a recruiter

stating that "note that [Company A] and [Company B] are off limits to

SCA.";

( d) monitored compliance with the agreement not to solicit employees by

requiring senior-level employees of defendant and Company B who applied

to the other company to notify their current employer that they were

Indictment - Page 8 of 11

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seeking other employment in order for their applications to be considered­

for example, on or about October 16, 2015, Individual 1 emailed SCA's

human resources executive: "Putting two companies in italics ([Company

A] and [Company B]) - we can recruit junior people (below Director), but

our agreement is that we would only speak with senior executives if they

have told their boss already that they want to leave and are looking.";

(e) informed senior-level employees of SCA and Company B who were

candidates for employment at the other company that they were required to

provide such notice to their current employer-for example, on or about

April 26, 2016, SCA's human resources executive emailed a candidate

from Company B who was based in Dallas, Texas, that she could not

recruit from Company B "unless candidates have been given explicit

permission by their employers that they can be considered for employment

with us.";

( f) alerted co-conspirators about instances of recruitment of employees of SCA

and Company B and took steps to remedy violations of the agreement-for

example, on or about June 13, 2016, an employee of SCA relayed a

recruitment noting that "I thought there was a gentlemen's agreement

between us and [Company B] re: poaching talent." An executive for SCA

replied "There is. Do you mind if I share with [Individual 1 ], who has most

recently addressed this with [Individual 3]." Individual 1 relayed the

instance of recruitment to Individual 3 who replied "Will check it out"; and

Indictment - Page 9 of 11

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(g) refrained from soliciting each other's senior-level employees-for example,

on or about April 7, 2017, Individual 1 was contacted by a consultant

regarding his interest in a candidate employed by Company B, and

Individual 1 responded: "In order to pursue [candidate], he would need to

have already communicated that he is planning to leave [Company B] -

that's the relationship that we have with [Company B]." The consultant

responded, " ... I'm glad you arrived at that agreement with [Individual 3]."

TRADE AND COMMERCE

20. The business activities of SCA and its co-conspirators that are the subject

of this Count were within the flow of, and substantially affected, interstate trade and

commerce. For example:

(a) SCA and Company B employed senior-level employees in various states

across the United States; and

(b) the conspiracy would restrict the interstate movement of senior-level

employees between SCA and Company B.

ALL IN VIOLATION OF TITLE 15, UNITED STATES CODE, SECTION 1.

Indictment - Page 10 of 11

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Assistant Attorney General

RICHARD A. POWERS Deputy Assistant Attorney General

MARVIN N. PRICE, JR. Director of Criminal Enforcement

Chief, Washington Criminal II Section

Antitrust Division U.S. Department of Justice

ERIN NEALY COX UNITED STATES ATTORNEY

~!!!~ -RYALTERS

Assistant United States Attorney Texas State Bar No. 24003138 1100 Commerce Street, Third Floor Dallas, Texas 75242-1699 Telephone: 214-659-8600 Fax: 214-659-8812 Email: mary. walters@usdoj.gov

Indictment - Page 11 of 11

Assistant Chief DC Bar No. 500720 Telephone: 202-598-8145 Fax: 202-514-9082 Email: megan.lewis@usdoj.gov

Trial Attorney DC Bar No. 997316 Telephone: 202-353-2411 Fax: 202-514-9082 Email: william. vigen@usdoj.gov

Antitrust Division U.S. Department of Justice Washington Criminal II Section 450 5th Street NW Washington, DC 20001

Case 3:21-cr-00011-L Document 1 Filed 01/05/21 Page 12 of 12 PageID 12Case 3:21-cr-00011-L Document 1 Filed 01/05/21 Page 12 of 12 PageID 12

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

THE UNITED STATES OF AMERICA

V.

SURGICAL CARE AFFILIATES, LLC and SCAI HOLDINGS, LLC

INDICTMENT

15 u.s.c. § 1 Conspiracy in Restraint of Trade to Allocate Employees

(Counts 1 and 2)

2 Counts

A true bill rendered

DALLAS

Filed in open court this _5__ day of January, 2021.

No Warrant Needed

UNITED STATES MAGISTRATE JUDGE

No Criminal Matter Pending

l • lo

------

TAB 24

SETTLEMENT AGREEMENT

This Settlement Agreement (“Agreement”) is entered into among the United

States of America, acting through the United States Department of Justice and on behalf

of the United States Department of the Navy and the United States Special Operations

Command (“USSOCOM”) (collectively the “United States”); Insitu, Inc. (“Insitu”); and

Relator D R O’Hara (“O’Hara” or “Relator”) (hereafter the United States, Insitu, and

O’Hara are sometimes referred to individually as a “Party” and collectively referred to as

the “Parties”), through their authorized representatives.

RECITALS

A. Insitu is a wholly owned subsidiary of The Boeing Company and is

headquartered in Bingen, Washington. Insitu designs, develops, produces, and operates

unmanned aircraft systems (“UAS”). Between January 1, 2009 and December 31, 2017,

as relevant for the purposes of this Agreement, Insitu entered into the following

contracts/subcontracts with the United States Naval Air Systems Command (“NAVAIR”)

and the USSOCOM for the operation of UAS at various sites identified in the following

contracts: H92222-13-D-0005 (“MEUAS 1.5”); H92222-16-D-0031 (“MEUAS 1.5B”);

N00019-11-C-0061 (“LD3 and Badger Surge”); N00019-12-D-0011 DO-0002

(“Trenton”); N00019-12-D-0011 DO-0004 (“LD3 Firefly”); N00019-12-D-0011 DO-

0005 (“USAF1”); and N00019-09-C-0050 (“LD3 Prime”) (collectively the “Subject

Contracts”).

B. On September 25, 2015, O’Hara filed a qui tam action in the United States

District Court for the Western District of Washington captioned United States ex rel.

O’Hara v. The Boeing Company and Insitu, Inc. (Civil Action No. 15-01527), pursuant to

2

the qui tam provisions of the False Claims Act, 31 U.S.C. § 3730(b) (the “Civil Action”).

O’Hara alleged that Insitu improperly (1) used recycled, refurbished, reconditioned, and

reconfigured parts on government contracts, and improperly proposed inflated costs of

recycled, refurbished, reconditioned, and reconfigured parts on government contracts,

leading to inflated prices on those contracts (Compl. ¶¶ 46-54); (2) resold excess parts

(id. ¶¶ 55-65); (3) converted models to alleviate inventory issues (id. ¶¶ 66-74); (4) and

failed to disclose the existence of “bulk discounts” on its cost of parts on government

contracts (id. ¶¶ 75-81). O’Hara further alleged he was discriminated against and

terminated in violation of the anti-retaliation provisions of the False Claims Act, 31

U.S.C. § 3730(h).

C. The United States intends to partially intervene in the Civil Action

subsequent to the execution of this Agreement.

D. The United States contends that it has certain civil claims against Insitu for

knowingly inducing, through false statements and omissions concerning cost and pricing

data for the Subject Contracts, award of the Subject Contracts at inflated prices, by

(1) proposing to supply new parts and materials while planning to and/or in fact using

recycled, refurbished, reconditioned, and/or reconfigured parts to perform the Subject

Contracts; (2) inaccurately describing its methodology for estimating and pricing

recycled, reconditioned, and/or reconfigured parts to perform the Subject Contracts;

(3) failing to disclose all cost and pricing data related to the use of recycled, refurbished,

reconditioned, and/or reconfigured parts to perform the Subject Contracts between

submitting proposals for those contracts and submitting the respective certifications

required under the Truth in Negotiations Act, 10 U.S.C. § 2306a; and (4) using estimating

3

methodologies that inflated or otherwise misstated part count estimates for the Subject

Contracts. As a result of this conduct, the United States contends further that Insitu

submitted falsely inflated claims under the Subject Contracts from January 2009 through

December 31, 2017. The conduct set forth in in this paragraph is referred to below as the

“Covered Conduct.”

E. Insitu denies the United States’ allegations in Paragraph D and O’Hara’s

allegations in the Civil Action.

F. This Agreement is neither an admission of liability by Insitu nor a

concession by the United States or O’Hara that their claims are not well-founded.

G. O’Hara claims entitlement under 31 U.S.C. § 3730(d) to a share of the

proceeds of this Agreement and to O’Hara’s reasonable expenses, attorneys’ fees, and

costs.

To avoid the delay, uncertainty, inconvenience, and expense of protracted

litigation of the above claims, and in consideration of the mutual promises and

obligations of this Agreement, the Parties agree and covenant as follows:

TERMS AND CONDITIONS

1. Insitu shall pay to the United States $25,000,000.00 (Settlement Amount),

of which $12,800,000.00 is restitution, by electronic funds transfer pursuant to written

instructions to be provided by THE OFFICE OF THE UNITED STATES

ATTORNEY FOR THE WESTERN DISTRICT OF WASHINGTON no later than

January 8, 2021.

2. Conditioned upon the United States receiving the Settlement Amount from

Insitu and as soon as feasible after receipt, the United States shall pay $4,625,000.00 to

4

O’Hara by electronic funds transfer (“Relator’s Share”) pursuant to written instructions to

be provided by O’Hara’s counsel.

3. Insitu and O’Hara agree that O’Hara is entitled to payment, by Insitu, of

O’Hara’s reasonable expenses, plus reasonable attorneys’ fees and costs, pursuant to this

Agreement and 31 U.S.C. § 3730(d)(1) and caselaw interpreting same. These expenses,

fees and costs shall be in addition to the Relator’s Share set forth in Paragraph 2. O’Hara

and Insitu hereby agree to negotiate in good faith the resolution of these fees and costs

and, if they are unable to reach agreement after no longer than thirty (30) days after the

Effective Date of this Agreement, to request that the Court determine the amount.

Without admitting that any such rights do or do not exist, O’Hara and Insitu reserve any

and all rights they may have regarding the following, as well as the right to oppose the

following: (1) the right to request limited and reasonable discovery regarding the

claimed fees and costs; (2) the right to seek attorneys’ fees and costs incurred in

connection with the negotiation of expenses, attorneys’ fees and costs; (3) the right to

seek attorneys’ fees and costs in connection with any motion or request to the Court

related to the entitlement to or determination of expenses, attorneys’ fees or costs; and

(4) the right of O’Hara to recover reasonable expenses, attorneys’ fees and costs under 31

U.S.C. § 3730(h).

4. Subject to the exceptions in Paragraph 6 (concerning reserved claims)

below, and conditioned upon Insitu’s full payment of the Settlement Amount, the United

States releases Insitu, together with its current and former parent corporations; direct and

indirect subsidiaries; brother or sister corporations; divisions; current or former corporate

owners; and the corporate successors and assigns of any of them (collectively “Related

5

Entities”), from any civil or administrative monetary claim the United States has for the

Covered Conduct under the False Claims Act, 31 U.S.C. §§ 3729-3733; the Program

Fraud Civil Remedies Act, 31 U.S.C. §§ 3801-3812; the Truth in Negotiations Act, 10

U.S.C. § 2306a; or the common law theories of breach of contract, payment by mistake,

unjust enrichment, and fraud.

5. Subject to the exceptions in Paragraphs 3 and 5 regarding the payment of

O’Hara’s reasonable expenses, attorneys’ fees, and costs, and conditioned upon Insitu’s

full payment of the Settlement Amount, O’Hara, for himself and for his heirs, successors,

attorneys, agents, and assigns, releases Insitu and Related Entities from each and every

claim, demand, liability, debt, or cause of action that O’Hara, his heirs, successors,

attorneys, agents, and assigns have asserted, could have asserted, or may in the future

assert against Insitu or Related Entities. Notwithstanding the foregoing, O’Hara only

releases Insitu from any obligation Insitu may have to pay O’Hara’s reasonable expenses,

attorneys’ fees, and costs, as set forth in Paragraph 3, when the amount either agreed

between O’Hara and Insitu or ordered by the Court under Paragraph 3 has been paid by

Insitu. O’Hara expressly intends this Agreement to bar any civil monetary claim O’Hara

has individually or on behalf of the United States under the False Claims Act, 31 U.S.C.

§§ 3729-3733. The Settlement Amount does not include any payment for the alleged

violation of the anti-retaliation provisions of the False Claims Act, 31 U.S.C. § 3730(h);

however, O’Hara does not admit that his claim for violation of the anti-retaliation

provision lacks merit. O’Hara expressly waives any and all rights and benefits conferred

upon O’Hara by any law, statute, or judicial decision that provides that a general release

6

does not extend to claims which a plaintiff does not know or suspect to exist in his favor

at the time of executing a release.

6. Notwithstanding the releases given in Paragraphs 4 and 5 of this

Agreement, or any other term of this Agreement, the following claims and rights of the

United States are specifically reserved and are not released:

a. Any liability arising under Title 26, U.S. Code (Internal Revenue

Code);

b. Any criminal liability;

c. Except as explicitly stated in this Agreement, any administrative

liability or enforcement right, including the suspension and

debarment rights of any federal agency;

d. Any liability to the United States (or its agencies) for any conduct

other than the Covered Conduct;

e. Any liability based upon obligations created by this Agreement;

f. Any liability of individuals; and

g. Any liability for personal injury or property damage or for other

consequential damages arising from the Covered Conduct.

7. O’Hara and his heirs, successors, attorneys, agents, and assigns shall not

object to this Agreement but agree and confirm that this Agreement is fair, adequate, and

reasonable under all the circumstances, pursuant to 31 U.S.C. § 3730(c)(2)(B).

Conditioned upon O’Hara’s receipt of the payment of Relator’s Share described in

Paragraph 2, O’Hara and his heirs, successors, attorneys, agents, and assigns fully and

finally release, waive, and forever discharge the United States, its agencies, officers,

7

agents, employees, and servants, from any claims arising from the filing of the Civil

Action or under 31 U.S.C. § 3730, and from any claims to a share of the proceeds of this

Agreement and/or the Civil Action.

8. Insitu waives and shall not assert any defenses Insitu may have to any

criminal prosecution or administrative action relating to the Covered Conduct that may be

based in whole or in part on a contention that, under the Double Jeopardy Clause in the

Fifth Amendment of the Constitution, or under the Excessive Fines Clause in the Eighth

Amendment of the Constitution, this Agreement bars a remedy sought in such criminal

prosecution or administrative action.

9. Insitu fully and finally releases the United States, its agencies, officers,

agents, employees, and servants, from any claims (including attorney’s fees, costs, and

expenses of every kind and however denominated) that Insitu has asserted, could have

asserted, or may assert in the future against the United States, its agencies, officers,

agents, employees, and servants, related to the Covered Conduct or the United States’

investigation or prosecution thereof.

10. Upon the Effective Date, Insitu and the Related Entities, and each of them,

as well as their respective heirs, successors, assigns, officers, directors, managing

members, employees, attorneys, shareholders, and agents release, remiss, discharge, and

acquit O’Hara, and his heirs, successors, assigns, attorneys and agents from and against

any and all liabilities, claims, suits, actions, causes of action, debts, accounts, bonds,

damages, expenses, fees, losses, royalties, or demands in law, equity or otherwise, that

arose prior to this Agreement, whether known or unknown, accrued or unaccrued, legal,

equitable or of any other sort. The releasing parties hereby knowingly and voluntarily

8

waive and relinquish any and all rights and benefits conferred by any law of the United

States or any state or territory of the United States, or any principle of common law that

governs or limits a person’s release of unknown claims.

11. a. Unallowable Costs Defined: All costs (as defined in the Federal

Acquisition Regulation, 48 C.F.R. § 31.205-47) incurred by or on behalf of Insitu and

Related Entities, and their present or former officers, directors, employees, shareholders,

and agents in connection with:

(1) the matters covered by this Agreement;

(2) the United States’ audit(s) and civil investigation(s) of the

matters covered by this Agreement;

(3) Insitu’s and Related Entities’ investigation, defense, and

corrective actions undertaken in response to the United

States’ audit(s) and civil investigation(s) in connection with

the matters covered by this Agreement (including

attorney’s fees);

(4) the negotiation and performance of this Agreement;

(5) the payment Insitu makes to the United States pursuant to

this Agreement and any payments that Insitu may make to

O’Hara, including costs and attorneys’ fees, are

unallowable costs for government contracting purposes

(hereinafter referred to as “Unallowable Costs”).

b. Future Treatment of Unallowable Costs: Unallowable Costs will

be separately determined and accounted for by Insitu and Related Entities, and they shall

9

not charge such Unallowable Costs directly or indirectly to any contract with the United

States.

c. Treatment of Unallowable Costs Previously Submitted for

Payment: Within 90 days of the Effective Date of this Agreement, Insitu shall identify

and repay by adjustment to future claims for payment or otherwise any Unallowable

Costs included in payments previously sought by Insitu or any of their subsidiaries or

affiliates from the United States. Insitu agrees that the United States, at a minimum, shall

be entitled to recoup from Insitu any overpayment plus applicable interest and penalties

as a result of the inclusion of such Unallowable Costs on previously submitted requests

for payment. The United States, including the Department of Justice and/or the affected

agencies, reserves its rights to audit, examine, or re-examine Insitu’s books and records

and to disagree with any calculations submitted by Insitu or any of its subsidiaries or

affiliates regarding any Unallowable Costs included in payments previously sought by

Insitu, or the effect of any such Unallowable Costs on the amount of such payments.

12. Insitu agrees to cooperate fully and truthfully with the United States’

investigation of individuals and entities not released in this Agreement. Upon reasonable

notice, Insitu shall encourage, and agrees not to impair, the cooperation of its directors,

officers, and employees, and shall use its best efforts to make available, and encourage,

the cooperation of former directors, officers, and employees for interviews and testimony,

consistent with the rights and privileges of such individuals. Insitu further agrees to

furnish to the United States, upon request, complete and unredacted copies of all non-

privileged documents, reports, memoranda of interviews, and records in its possession,

10

custody, or control concerning any investigation of the Covered Conduct that it has

undertaken, or that has been performed by another on its behalf.

13. This Agreement is intended to be for the benefit of the Parties only.

14. Upon receipt of the payment described in Paragraphs 1 and 3 above, the

Parties shall promptly sign and file in the Civil Action a Joint Stipulation of Dismissal of

the Civil Action pursuant to Rule 41(a)(1). The Stipulation shall be with prejudice to

O’Hara with respect to any claims against Insitu or Related Entities, and with prejudice to

the United States to the extent of the Covered Conduct, but otherwise without prejudice

to the United States.

15. Except as set forth in Paragraph 3 above, each Party shall bear its own

legal and other costs incurred in connection with this matter, including the preparation

and performance of this Agreement.

16. Each Party and signatory to this Agreement represents that it freely and

voluntarily enters into this Agreement without any degree of duress or compulsion.

17. This Agreement is governed by the laws of the United States. The

exclusive jurisdiction and venue for any dispute relating to this Agreement is the United

States District Court for the Western District of Washington. For purposes of construing

this Agreement, this Agreement shall be deemed to have been drafted by all Parties to

this Agreement and shall not, therefore, be construed against any Party for that reason in

any subsequent dispute.

18. This Agreement constitutes the complete agreement between the Parties.

This Agreement may not be amended except by written consent of the Parties.

19. The undersigned counsel represent and warrantthat they are fully

authorized to execute this Agreement on behalf of the persons and entities indicated

below.

20. This Agreement may be executed in counterparts, each of which

constitutes an original and all of which constitute one and the same Agreement.

21. This Agreement is binding on Insitu's successors, transferees, heirs, and

assigns.

22. This Agreement is binding on O'Hara's successors, transferees, heirs, and

assigns.

23. All Parties consent to the United States' disclosure of this Agreement, and

information about this Agreement, to the public.

24. This Agreement is effective on the date of signature of the last signatory to

the Agreement ("Effective Date" of this Agreement). Facsimiles of signatures shall

constitute acceptable, binding signatures for purposes of this Agreement.

THE UNITED STATES OF AMERICA

DATED: 12.23.2020 BY: DONALD WILLIAMSON Digitally signed by DONALD WILLIAMSON Qate: 2G2G.12.2:il 19:08:35 -05'00' --------

DON WILLIAMSON Senior Trial Counsel Commercial Litigation Branch Civil Division U.S. Department of Justice

.;;i,nrl Digitally signed by CATHARINA CATHARINA :5TA'1'-lMAN STAHMAN

Date: 2020.12.23 16:16:52 -08'00'

KAYLAC. STAHMAN Assistant United States Attorney United States Attorney's Office Assistant United States Attorney

11

 

INSITU, INC.

DATED: ,::(t.3)'1,o BY: _ __..,:v/4--..t.~....:..........~.:__' .:__I;'~ __ , _- -­TIIOMAS J.'k:OBERTS

DATED: _____ BY:

Chief Counsel, Boeing Defense, Space & Security On behalf oflnsitu, Inc.

-----------STEVEY.KOH MICHAELE. SCOVILLE LEIGH E. SYLVAN Perkins Coie LLP Counsel for lnsitu, Inc.

RELATOR

DATED: ___ __,BY: __________ _ DRO'Hara

DATED: ___ __,BY: _________ _ Robert Rhodes Counsel for Relator

12

12

INSITU, INC. DATED: BY: _____________________________ THOMAS J. ROBERTS Chief Counsel, Boeing Defense, Space & Security On behalf of Insitu, Inc.

DATED: 12/23/2020 BY: STEVE Y. KOH MICHAEL E. SCOVILLE LEIGH E. SYLVAN Perkins Coie LLP Counsel for Insitu, Inc.

RELATOR DATED: BY: _____________________________ D R O’Hara DATED: BY: _____________________________ Robert Rhodes Counsel for Relator

INSITIJ, INC.

DATED: ____ BY: __________ _ THOMAS J. ROBERTS Chief Counsel, Boeing Defense, Space & Security On behalf of Insitu, Inc.

DATED: ___ __,BY: __________ _ STEVEY.KOH MICHAELE. SCOVILLE LEIGH E. SYLVAN Perkins Coie LLP Counsel for Insitu, Inc.

RELATOR

DATED:%,.&a.zoav: Q_,A".'.'..-g~,o::::;,-----_ ' ;> DRO'Hara

DATED,~/7<.l/,wBY: ~ ~ RobertRbodes -­Counsel for Relator

12

TAB 25

I N T E G R I T Y I N D E P E N D E N C E E XC E L L E N C E

Inspector GeneralU.S. Department of Defense

Report No. DODIG-2021-030

D E C E M B E R 9 , 2 0 2 0

Audit of Department of Defense Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act

DODIG-2021-030 (Project No. D2020-D000AH-0137.000) │ i

Results in BriefAudit of Department of Defense Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act

ObjectiveThe objective of this audit was to assess the DoD’s implementation of section 3610 as authorized by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), including whether contracting officers properly authorized and reimbursed contractor costs. The CARES Act did not provide specific appropriations for section 3610, but instead authorized agencies to use any legally available funds.

BackgroundThe President declared a U.S. national emergency on March 13, 2020, and signed the CARES Act into law on March 27, 2020. Section 3610, “Federal Contractor Authority,” of the CARES Act authorized agencies to reimburse contractors for any paid leave, including sick leave, they provide to keep their employees or subcontractor employees in a “ready state,” including to protect the life and safety of Government and contractor personnel. A ready state is defined as a contractor’s ability to mobilize and resume performance in a timely manner.

In order to qualify, contractors must not have been able to work due to closures or other restrictions, and must have job duties that cannot be performed remotely. Contractors can only request the minimum applicable contract billing rates up to an average of 40 hours per week until December 11, 2020.

December 9, 2020 ResultsIn general, DoD contracting officers complied with the Office of Management and Budget and DoD guidance to support rational decisions that were in the best interest of the Government when implementing section 3610 of the CARES Act. For the 37 contracts reviewed, we found that the majority of contracting officers ensured that contractors provided necessary supporting documentation, claimed only 40 hours per week for each employee, charged billing rates in line with the contract rates, and excluded profit from their request for reimbursement. In addition, the majority of contracting officers justified that contractors needed to be kept in a ready state and obtained information from the contractors on other relief claimed or received.

However, we identified some challenges that the DoD faced while implementing section 3610 that extended beyond our sample. Specifically:

• Contracting officers had to rely on contractors to self-certify that the section 3610 costs claimed were the only reimbursement that contractors were receiving for the paid leave and that contractors were not being reimbursed from any other source of other coronavirus disease–19 relief for the same leave expenses.

• The DoD’s use of section 3610 authority was limited; as of September 30, 2020, only 96 of the 781 DoD affected contractors received assistance through section 3610.

• Tracking and identifying DoD contracts using section 3610 was not easy. Not all contracts using section 3610 authority were clearly identified in DoD information systems and some contracts were mislabeled as using section 3610 authority when they did not use it.

DODIG-2021-030 │ iii

December 9, 2020

MEMORANDUM FOR DISTRIBUTION

SUBJECT: Audit of Department of Defense Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act (Report No. DODIG-2021-030)

This report provides an assessment of the DoD’s implementation of section 3610 as authorized by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This report also includes the results of our review of a nonstatistical sample of 37 contracts with $28.3 million in section 3610 requests. In total, we identified 135 contracts with $68.3 million in section 3610 requests as of September 30, 2020.

In general, DoD contracting officers complied with the Office of Management and Budget and DoD guidance to support rational decisions that were in the best interest of the Government when implementing section 3610 of the CARES Act. However, we identified challenges that the DoD faced while implementing section 3610, including that contracting officers had to rely on contractors to self-certify their use of other coronavirus disease–19 (COVID-19) relief programs. Ultimately, we found that the use of section 3610 authority was limited within the DoD when compared to the total number of contractors affected by COVID-19 closures and restrictions.

We conducted this audit from May 2020 through November 2020 in accordance with generally accepted government auditing standards.

If you have any questions or would like to meet to discuss the audit, please contact me at We appreciate the cooperation and assistance received

during the audit.

Theresa S. HullAssistant Inspector General for AuditAcquisition, Contracting, and Sustainment

INSPECTOR GENERALDEPARTMENT OF DEFENSE

4800 MARK CENTER DRIVE

ALEXANDRIA, VIRGINIA 22350-1500

iv │ DODIG-2021-030

Distribution:UNDER SECRETARY OF DEFENSE FOR ACQUISITION AND SUSTAINMENTDIRECTOR, JOINT STAFFCHIEF, NATIONAL GUARD BUREAUCOMMANDERS OF THE COMBATANT COMMANDSDIRECTORS OF DEFENSE AGENCIESAUDITOR GENERAL, DEPARTMENT OF THE NAVYAUDITOR GENERAL, DEPARTMENT OF THE ARMYAUDITOR GENERAL, DEPARTMENT OF THE AIR FORCE

DODIG-2021-030 │ v

Audit of DoD Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act ................................................................................................................................................................................................1Objective ...........................................................................................................................................................................................................................1

CARES Act Section 3610 “Federal Contractor Authority” ......................................................................................1

The DoD’s Use of Section 3610 ................................................................................................................................................................2

Section 3610 Contracts and Sample .................................................................................................................................................5

The DoD’s Implementation of Section 3610 ............................................................................................................................6

Summary ...................................................................................................................................................................................................................... 15

AppendixesAppendix A. Scope and Methodology .........................................................................................................................................16

Use of Computer-Processed Data.......................................................................................................................................... 20

Use of Technical Assistance......................................................................................................................................................... 20

Prior Coverage ............................................................................................................................................................................................ 21

Appendix B. Summary of 3610 Criteria and Guidance.......................................................................................... 22

Appendix C. The Number and Dollar Value of Section 3610 Contracts by DoD Component ......................................................................................................................................................................................... 25

Acronyms and Abbreviations ................................................................................................................ 26

Contents

DODIG-2021-030 │ 1

Audit of DoD Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act

Audit of DoD Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act

ObjectiveThe objective of this audit was to assess the DoD’s implementation of section 3610 as authorized by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), including whether contracting officers properly authorized and reimbursed contractor costs. The CARES Act did not provide specific appropriations for section 3610, but instead authorized agencies to use any legally available funds. See Appendix A for a discussion of the scope and methodology and for prior coverage.

CARES Act Section 3610 “Federal Contractor Authority”The President declared a U.S. national emergency on March 13, 2020, and signed the CARES Act into law on March 27, 2020. Section 3610, “Federal Contractor Authority,” of the CARES Act authorized agencies to reimburse contractors for any paid leave, including sick leave, they provide to keep their employees or subcontractor employees in a “ready state,” including to protect the life and safety of Government and contractor personnel. A ready state is defined as a contractor’s ability to mobilize and resume performance in a timely manner. In order to qualify, contractors must not have been able to work due to closures or other restrictions, and must have job duties that cannot be performed remotely. Contractors can only request the minimum applicable contract billing rates up to an average of 40 hours per week until December 11, 2020.1 The Office of Management and Budget (OMB) and the DoD issued guidance for the implementation of section 3610.

OMB GuidanceOMB’s mission is to assist the President in meeting his policy, budget, management, and regulatory objectives. OMB Memorandum M-20-22, “Preserving the Resilience of the Federal Contracting Base in the Fight Against the Coronavirus Disease 2019,” April 17, 2020, outlines some guiding principles for implementing section 3610. The OMB memorandum states that using the guidelines will support “rationally based decisions that reflect the best interest of the Government in any given situation, fully supported by contractor records that are subject to oversight, and that safeguard the taxpayers funding these efforts.” Specifically, the memorandum provides the following guidance.

1 Section 3610, “Federal Contractor Authority,” of the CARES Act’s original deadline of September 30, 2020, was extended to December 11, 2020, by the “Continuing Appropriations Act, 2021 and Other Extensions Act,” October 1, 2020.

Audit of DoD Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act

2 │ DODIG-2021-030

• Consider whether reimbursing paid leave to keep the contractor in a ready state is in the best interest of the Government for meeting current and future needs.

• Reimburse at contractor billing rates, which might include certain overhead costs in addition to labor, but “shall not include profit or fees.”

• Maintain mission focus and evaluate use of section 3610 in the broader context of all strategies to promote contractor resiliency.

• Be mindful of the challenges faced by small businesses.

• Work with the contractor to secure necessary documentation to support reimbursement and prevent duplication of payment.

• Track section 3610 by modifying contracts to implement section 3610 and enter “COVID-19 3610” on the contract action report (CAR).

DoD GuidanceThe Office of the Under Secretary of Defense for Acquisition and Sustainment (OUSD[A&S]) is responsible for all matters pertaining to acquisition, including contract administration, the acquisition workforce, and the defense industrial base. The OUSD(A&S) issued several memorandums providing criteria and guidance on how the DoD acquisition workforce should implement section 3610 of the CARES Act, including, “Class Deviation-CARES Act Section 3610 Implementation,” April 8, 2020.2 The class deviation to Federal Acquisition Regulation (FAR) Part 31, “Contract Cost Principles and Procedures,” established Defense Federal Acquisition Regulation Supplement (DFARS) 231.205-79, “CARES Act Section 3610 - Implementation.”3 The OUSD(A&S) memorandum and DFARS 231.205-79 guidance parallel the OMB memorandum guidance closely.4 However, the OUSD(A&S) memorandum requires that section 3610 costs also be segregated and identifiable in the contractor’s records so that compliance with all terms of section 3610 can be reasonably ascertained. See Appendix B for a full list of additional DoD-specific criteria and guidance for the CARES Act.

The DoD’s Use of Section 3610Contracting officers implemented section 3610 on a variety of contracts, including services performed by aircraft and vehicle mechanics, engineers, intelligence agency contractors, recruiters, and clergy. We found that the majority of contracts

2 The OUSD(A&S) revised its memorandum on October 14, 2020, to reflect the extension of section 3610 to December 11, 2020.

3 The Principal Director of Defense Pricing and Contracting issues class deviations when necessary to allow organizations to deviate from the FAR and DFARS.

4 OMB Memorandum M-20-22, “Preserving the Resilience of the Federal Contracting Base in the Fight Against the Coronavirus Disease 2019,” April 17, 2020.

DODIG-2021-030 │ 3

Audit of DoD Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act

for which contracting officers implemented section 3610 authority were for contractor employees working at Government-owned facilities.5 As worksite closures and restrictions occurred, contracting officers used section 3610 authority to keep employees with special training and skills or security clearances in a ready state. Contracting officers also approved requests for paid leave for contractor employees required to quarantine after returning from overseas assignments or after being exposed to someone with coronavirus disease–19 (COVID-19).

For example, an Army contracting officer used section 3610 authority to approve the request for reimbursement of leave costs totaling $9.2 million for 110 employees (90 of whom worked for small businesses) who were unable to travel overseas because of COVID-19 travel restrictions. The contracting officer stated that the employees needed to deploy immediately once travel restrictions were lifted.

A request for reimbursement under section 3610 differs from a traditional request for equitable adjustment. Under requests for equitable adjustment, contractors can request compensation for contract adjustments for which the contractor believes the Government is liable. However, section 3610 gave the option to reimburse contractors for leave costs where neither the DoD nor the contractor was at fault. Overall, contracting officers stated that section 3610 authority was beneficial. Contracting officers stated that section 3610 authority:

• allowed contractor employees to come back quickly rather than having them take other jobs;

• allowed the DoD to retain critical employees who had already gone through a lengthy vetting process or had already obtained security clearances;

• benefited small businesses that were not able to obtain other financial assistance;

• retained workers to accomplish the DoD’s mission; and

• prevented contractor employees from losing their security clearances because of financial hardships.

The number of contracts using section 3610 authority has increased steadily since the President signed the CARES Act. Using the Federal Procurement Data System-Next Generation (FPDS-NG), beta.SAM.gov, and a DoD Office of Inspector General (DoD OIG) data call, we identified 135 contracts where contracting officers

5 The Defense Contract Management Agency provides contract administration services for the DoD and is an essential part of the acquisition process from pre-award to sustainment; they also oversee contractors at contractor facilities. As of September 15, 2020, Defense Contract Management Agency representatives stated that they have not yet approved any section 3610 requests.

Audit of DoD Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act

4 │ DODIG-2021-030

used section 3610 authority to authorize reimbursement to contractors for up to $68.3 million in leave costs as of September 30, 2020.6 See Appendix C for the summary of the 135 contracts that implemented section 3610 by DoD Component.

In addition, through the data call, we identified 157 contracts where the contracting officers planned to use section 3610.7 Although not all contracting officers gave us estimated dollar values, we were able to identify at least $49.9 million in potential future costs associated with section 3610 as shown in Table 1.

Table 1. Number and Estimated Dollar Value of Pending Section 3610 Contracts

DoD Component Number of Contracts Dollar Value of Section 3610 Costs (thousands)*

Army 65 $15,814

Air Force 27 26,559

Defense Counterintelligence and Security Agency 1 0

Defense Health Agency 1 75

Defense Logistics Agency 1 6,939

U.S. Cyber Command 1 142

Missile Defense Agency 2 331

U.S. Special Operations Command 59 0

Total 157 $49,860 * Because contracting officers had not completed their reviews of these section 3610 requests, the dollar value

is subject to change. The Army did not indicate the dollar value for 39 of the 65 contracts, so this dollar value represents 26 contracts. In addition, the Air Force did not indicate the dollar value for 23 of the 27 contracts, so this dollar value represents 4 contracts. The Defense Counterintelligence and Security Agency and the U.S. Special Operations Command did not indicate a dollar value at all. The Director of Policy, Deputy Assistant Secretary of the Navy (Procurement), stated that Navy contracting offices and contractors were waiting to submit section 3610 requests until the OUSD(A&S) had published additional guidance; therefore, the Navy had no pending requests for reimbursement.

Source: The DoD OIG.

6 FPDS-NG is a web-based tool for Federal agencies to report contract actions. The FAR requires contracting officers for most agencies to populate, complete, and submit CARs on all contract actions, including award and modifications, in FPDS-NG. The CAR is the information about the contract action that the contracting office submits to FPDS-NG.

Beta.SAM.gov is managed by the General Services Administration, which manages Federal acquisition and awards processes in 10 online websites that are now being merged into one. This site will become the official U.S. Government website for people who make, receive, and manage Federal awards.

7 The audit team reconciled the pending actions reported through the data call with the issued section 3610 contracts as of September 30, 2020. The audit team did not count a pending action if the contract has been issued since the data call.

DODIG-2021-030 │ 5

Audit of DoD Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act

We also identified 12 contract actions where the contractor requested reimbursement for section 3610 costs, but the contracting officer denied the request. Specifically, contracting officers denied the requests because:

• the contractor did not need to be put in a “ready state”;

• the contractor employee was placed in quarantine after returning frompersonal travel, but the contracting officer determined that the employeehad disregarded DoD travel restrictions for contractor employees;

• the contractor provided insufficient documentation to support its claimsfor reimbursement; or

• there was insufficient funding available.8

Section 3610 Contracts and SampleWhen we finalized our audit sample on July 6, 2020, there were 79 contracts with $33.3 million in funds allocated to section 3610. Of the 79 contracts, we selected a nonstatistical sample of 37 contracts. See Table 2 for a summary of the contracts in our sample.

Table 2. Number and Dollar Value of Section 3610 Contracts in Our Sample

DoD Component1 Number of Contracts

Section 3610 Contract Dollar Value

(thousands)

Dollar Amount

Reviewed

Army 3 $17,425 9,390

Air Force 3 5,325 5,311

U.S. Cyber Command 1 223 117

Navy and Marine Corps 1 170 170

National Geospatial-Intelligence Agency 92 142 142

U.S. Special Operations Command 203 5,028 5,028

Total 37 $28,3144 20,1574

1 To see a breakdown of the contracts by command, see Appendix C. 2 The nine National Geospatial-Intelligence Agency contracts we selected for our sample were nine task orders

under the same indefinite-delivery indefinite-quantity contract. No classified contracts were included in our universe or sample.

3 Of the 20 contracts, 18 were task orders under the same indefinite-delivery indefinite-quantity contract. 4 Total differs due to rounding.

Source: The DoD OIG.

8 DoD Instruction 6200.03, “Public Health Emergency Management Within the DoD,” March 28, 2019; and OUSD for Personnel and Readiness Memorandum, “Force Health Protection Guidance (Supplement 4) – Department of Defense Guidance for Personnel Traveling During the Novel Coronavirus Outbreak,” March 11, 2020, authorized the DoD to restrict contractor personnel during declared emergencies.

Audit of DoD Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act

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We chose a nonstatistical sample of 37 contracts, with $28.3 million in funds associated with section 3610 costs. Of the $28.3 million in funds associated with section 3610 costs, we reviewed a total of $20.2 million during our audit. We assessed whether contracting officers complied with OMB and DoD guidance to support rational decisions that were in the best interest of the Government when approving and reimbursing contractors for section 3610 costs. To assess whether contracting officers complied with guidance, we verified that:

• contractors claimed on average only 40 hours per week for each employeeacross all contracts they worked on;

• billing rates were in line with minimum applicable contract billing ratesfor the contract and excluded profit;

• contractors provided necessary documentation to support reimbursement;

• employees were not double-billed on multiple contracts with thesame contractor;

• contracting officers deemed the contractors essential to keep in aready state; and

• contracting officers obtained information from the contractor on otherrelief claimed or received.

The DoD’s Implementation of Section 3610In general, DoD contracting officers complied with OMB and DoD guidance to support rational decisions that were in the best interest of the Government when implementing section 3610 of the CARES Act. However, we identified some challenges that the DoD faced while implementing section 3610 that extended beyond our sample. Specifically:

• contracting officers had to rely on the contractor’s self-certification oftheir use of other COVID-19 relief options;9

• the DoD’s use of section 3610 authority was limited; and

• tracking and identifying DoD contracts using section 3610 was not easy.

Results of Our Review of a Sample of Section 3610 ContractsIn general, DoD contracting officers complied with OMB and DoD guidance to support rational decisions that were in the best interest of the Government when implementing section 3610 of the CARES Act. For the 37 contracts reviewed, we found that the majority of contracting officers ensured that contractors provided necessary supporting documentation, claimed only 40 hours per week for each employee, charged billing rates in line with contract billing rates, and

9 We consider the self-certification the “affirmation that the contractor has not or will not pursue reimbursement for the same costs accounted for under their request” from other COVID-19 relief sources that is required by OUSD Memorandum, “Class Deviation--CARES Act Section 3610 Implementation,” April 8, 2020.

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Audit of DoD Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act

excluded profit from their request for reimbursement. In addition, the majority of contracting officers justified that contractors needed to be kept in a ready state and obtained information from the contractors on other relief claimed or received. See Table 3 for the results of the 37 contracts reviewed.

Table 3. Number of Contracts That Met or Did Not Meet Criteria for Implementing Section 3610

Criteria for Implementing Section 3610Number of Contracts

Yes No

Contractors provided necessary documentation to support request for reimbursement? 37 0

Contractors only claimed an average of 40 hours per week per employee? 34 3

Contractors charged billing rates that were in line with applicable contract billing rates for the contract? 37 0

Billing rates did not include profit? 35 2

Contracting officers justified that contractors needed to be kept in a ready state? 36 1

Contracting officer obtained information or self-certification on other COVID relief claimed by the contractor? 36 1

Source: The DoD OIG.

We found only one instance with a U.S. Special Operations Command contract where the contracting officer did not fully meet the criteria for the implementation of section 3610 and we determined that section 3610 authority should not have been used. The contractor employee was required to quarantine for 2 weeks after returning from travel for the contract. However, the period of performance for the contract ended before the employee completed the 2-week quarantine period. Therefore, keeping the contractor employee in a ready state was not in the best interest of the Government. In addition, the contracting officer paid the employee more than 40 hours per week and did not exclude profit. The contracting officer should have used the traditional request for equitable adjustment process rather than implementing section 3610.

We found a few instances where the contractor claimed slightly more than an average of 40 hours per week per contractor employee. For example, we found that, under an Army contract, a contractor had invoiced more hours than the allowed average 40 hours per week for 2 employees, 44 hours for 1 employee and 48 hours for the other employee. The contractor has since corrected the overcharge of $626 for the 12 unallowable hours charged between the 2 employees.

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Also, a request under a U.S. Special Operations Command contract included a request for reimbursement for 56 hours for one employee that should have been no more than 40 hours. The contractor has since corrected the request.

We also found that an Air Force contracting officer did not realize that profit needed to be removed from the billing rates under the section 3610 request. The contractor has yet to invoice for section 3610 expenses, and the contracting officer is determining how much profit needs to be removed from the request.

The majority of contracting officers in our sample obtained self-certifications from the contractors asserting that they had not and would not request funds from other COVID-19 relief measures for the same expenses reimbursed under section 3610. However, many contracting officers missed the opportunity to engage the contractor about other COVID-19 relief they might have received and instead relied only on the self-certifications from the contractors. We found that identifying and validating the use of other relief options used by contractors that also obtained section 3610 funds was a challenge that the DoD faced while implementing section 3610.

Contracting Officers Could Not Validate Contractor Use of Other Relief OptionsDoD contracting officers relied on contractors to self-certify that the section 3610 costs being claimed were the only reimbursement that they were receiving for the paid leave and that they were not being reimbursed from any other source of funding for the same leave expenses. DoD contracting personnel do not have access to other agencies’ databases. Therefore, if contractors did receive other COVID-19 funds from another Federal agency for the same expenses, the contracting officer had to rely on the contractor to reduce the requested reimbursement amount accordingly. Contractors can apply for assistance from various COVID-19 financial relief options administered by multiple agencies, including the:

• Paycheck Protection Program (PPP), established by section 1102 of theCARES Act and overseen by the U.S. Small Business Administration (SBA);

• tax credits, established in section 7001 of Public Law 116–127 ‘‘FamiliesFirst Coronavirus Response Act” and overseen by the Department ofthe Treasury; and

• unemployment compensation programs, established in sections 2101,2104, and 2107 of the CARES Act and overseen by the Department ofLabor, and implemented by each state.10

10 As of August 27, 2020, the PPP stopped accepting applications for loans and the unemployment compensation program benefits have been extended to December 6, 2020. Additionally, the tax credits expire on December 31, 2020.

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Audit of DoD Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act

According to OMB and OUSD(A&S) guidance, contractors cannot receive additional financial relief from other COVID-19 programs without reducing the amount of the requested reimbursement under section 3610.11 Contracting officers are encouraged to work with the contractor to secure necessary documentation to prevent duplication of payment and secure representations from contractors regarding any other relief claimed or received stemming from COVID-19, including an affirmation that the contractor has not or will not pursue reimbursement for the same costs accounted for under their section 3610 request. A contractor cannot receive duplicate relief for the same employee’s leave expenses for the same timeframe from more than one COVID-19 relief program, such as the PPP.

While most DoD contracting officers in our sample did work with the contractor to obtain some type of agreement that the contractor would not use funds from other COVID-19 relief measures for the same expenses reimbursed under section 3610, DoD contracting personnel stated that they were not sure how they could verify that contractors were not actually receiving assistance from other COVID-19 programs. For example, one contracting officer stated that she knows she has to review whether the contractor is receiving any additional funds, but other than a statement the contractor signs to certify it is not receiving other assistance, she does not know what else she could require. Another contracting officer stated that he also relied on the certification statement and that he could not determine what other assistance the contractor was receiving because he did not have access to that information. Ultimately, DoD contracting officers had to trust the contractors to self-report because DoD contracting personnel do not have access to the SBA, the Department of the Treasury, the Department of Labor, or state unemployment databases.

To assess whether any contractors that received funds under section 3610 also received funds under the PPP, we coordinated with the SBA. The SBA identified that 14 out of the 67 contractors and subcontractors that received or were approved for reimbursements under section 3610 also received PPP loans.12 Only 7 of the 14 contractors were in our sample of contracts, therefore we reached out to the remaining contracting officers to determine whether the contractors had disclosed that they also received PPP loans. We found that 3 of the 14 contractors disclosed that they received a PPP loan to the DoD contracting officers and reduced their section 3610 reimbursement requests accordingly. We also

11 OMB Memorandum M-20-22, “Preserving the Resilience of the Federal Contracting Base in the Fight Against the Coronavirus Disease 2019,” April 17, 2020, and OUSD (A&S) Memorandum, “Class Deviation – CARES Act Section 3610 Implementation,” April 8, 2020.

12 On August 5-19, 2020, we sent a list of the 67 contractors that had received or were approved for reimbursements under section 3610 at the time. As of September 30, 2020, we identified that there is now a total of 96 contractors that had received or were approved for reimbursements under section 3610.

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found that 3 contractors did not disclose the loan to the contracting officer nor did they provide a certification. At least eight contractors did not disclose that they received PPP loans to the contracting officer; however, these same contractors certified that they had not and would not use funds from other COVID-19 relief measures for the same expenses reimbursed under section 3610. Contracting officers for eight of the contracts relied on the contractor to self-certify and did not further engage the contractor on the contractor’s use of other programs. We notified the contracting officers that the contractors had received PPP loans. However, contracting officers should take the opportunity, when approving the contractor’s request for reimbursement, to have a detailed conversation with the contractor on other COVID-19 assistance that the contractor plans to use.

Contractors can receive loan forgiveness for PPP loans if they used the funds to pay payroll, mortgage interest, rent, or utilities, with at least 60 percent of the loan used for payroll costs. Receiving a PPP loan and section 3610 funds is not prohibited; however, it is prohibited if the contractor receives loan forgiveness and intended to use the PPP funds for the same expenses as those covered by the contractor’s section 3610 request for reimbursement. We were not able to determine which contractors will receive loan forgiveness because the SBA recently started accepting loan forgiveness applications on August 10, 2020, and borrowers have 10 months from the end of their covered loan period to apply for loan forgiveness. Therefore, the SBA did not have information on which contractors would receive forgiveness because the application period was still open. We shared the list of contractors that we identified as receiving PPP loans with the contracting officers, Defense Contract Management Agency, and Defense Contract Audit Agency officials. This information should assist the Defense Contract Management Agency with its future contract administration and oversight responsibilities, and the Defense Contract Audit Agency with its future incurred cost audits.

In addition to the PPP loan forgiveness, DoD contractors could also apply for tax credits, and contractor employees could be collecting unemployment benefits while contractors are requesting Federal assistance for those employees. However, at this time, we were unable to conduct analysis for these programs. The tax credits are available until December 31, 2020, and unemployment compensation benefits are handled by each state and would require obtaining information from each state to verify that contractor employees are not also receiving unemployment benefits. As a result, identifying contractors that might be receiving assistance through multiple programs for the same expenses will require extensive interagency coordination, but should be considered to detect potential fraud, waste, and abuse.

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Audit of DoD Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act

Use of Section 3610 Authority Was Limited in the DoDThe CARES Act was intended to provide fast and direct economic assistance to American workers, with section 3610 created to keep contractor employees the agency has deemed critical to national security or other high priorities in a ready state. During a congressional hearing, the Under Secretary of Defense for Acquisition and Sustainment stated that reimbursing contractors for section 3610 costs “is likely well beyond the department’s resourced ability to do so without significantly jeopardizing modernization or readiness” and stated that one prime contractor estimated up to $1.5 billion in reimbursement requests under section 3610. However, only a few DoD contractors received assistance through section 3610. We identified that only 96 contractors and subcontractors, out of the total 781 DoD affected contractors and subcontractors, received assistance through section 3610 as of September 30, 2020.13 During our audit, we identified that section 3610 authority was not more widely used within the DoD because contracting officers were flexible and creative, the defense industrial base was declared a critical infrastructure, there was no appropriation of funds specifically for section 3610, and contractors used other forms of COVID-19 assistance.

Contracting Officers Were Flexible and CreativeContracting officers remained flexible and creative to keep contractor employees working instead of causing them to be laid off or using section 3610 authority. Three contracting officers responsible for 11 of the contracts maximized telework and other alternatives; this resulted in less paid leave under section 3610. For example, a U.S. Special Operations Command contracting officer in charge of a contract, with more than 1,000 full-time equivalent employees, authorized all the contractor employees to telework or gave them alternate work assignments rather than causing them to be laid off. Therefore, the contracting officer had only $45,154 in requests for reimbursements for two employees under section 3610. In another case, the contracting officer for a mobile recruiting tour contract authorized the contractor to shift its maintenance cycle to an earlier date.14 Only after the maintenance cycle was complete did the contracting officer authorize the use of section 3610 assistance. These flexible and creative approaches allowed the DoD to retain the services of its highly skilled, vetted, and cleared contractor employees during a period of uncertainty.

13 An affected contractor is one who cannot perform work on a Government-owned, Government-leased, contractor-owned, or contractor-leased facility or site approved by the U.S. Government for contract performance due to closures or other restrictions and is unable to telework because the job duties cannot be performed remotely. The number of affected contractors comprises those identified by the Defense Contract Management Agency, the Defense Logistics Agency, and through our analysis for the audit.

14 The maintenance cycle is the 4-week period during which the contractor employees perform annual maintenance on the mobile tour equipment.

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The Defense Industrial Base Was Declared a Critical InfrastructureThe defense industrial base was identified as one of the critical infrastructure industries by the Department of Homeland Security in its March 19, 2020, memorandum on identifying essential critical infrastructure workers during the COVID-19 response.15 Within the defense industrial base, this included:

• workers who support essential services required to meet national securitycommitments to the U.S. military, including aerospace, mechanical, andsoftware engineers; manufacturing and production workers; informationtechnology support; security personnel; intelligence support staff andaircraft and weapon system mechanics and maintainers; and

• personnel working for companies and subcontractors that providematerials and services to DoD and Government-owned facilities.

The former Acting Principal Director of Defense Pricing and Contracting stated that as a result of the Department of Homeland Security memorandum, some companies were able to reopen after states forced them to shut down. The former Acting Principal Director also stated that some companies were able to rearrange their assembly lines and institute social distancing practices. This lessened their requests for section 3610 reimbursements. As a result, more DoD contractor employees were able to return to work, reducing the need for paid leave under section 3610.

There Was No Appropriation of Funds for Section 3610The CARES Act did not provide specific appropriations for section 3610, but instead authorized agencies to use any available funds. According to the former Acting Principal Director of Defense Pricing and Contracting, defense contractors are waiting to see whether Congress will appropriate money for section 3610 before filing their claims because contractors do not want to go through the effort and additional cost of submitting a request if there are no funds.

A total of 12 contracting officers implemented section 3610 for the 37 contracts we reviewed during the audit.16 Five of those contracting officers had no concern about the availability of funds to cover the costs associated with section 3610-related requests. According to two of the five contracting officers, they used funding that would have otherwise been spent on payroll expenses regardless of COVID-19, and did not foresee a negative impact on funding. For example, an Air Force

15 Department of Homeland Security, “Memorandum on Identification of Essential Critical Infrastructure Workers during COVID-19 Response,” March 19, 2020, stated that if you work in a critical infrastructure industry, you have a special responsibility to maintain your normal work schedule.

16 One National Geospatial-Intelligence Agency contracting officer was responsible for nine task orders under one indefinite-delivery indefinite-quantity contract. Additionally, there was one U.S. Special Operations Command contracting officer responsible for 18 task orders under one definite-delivery indefinite-quantity contract.

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Audit of DoD Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act

contracting officer stated that she would have used the funding to pay for the employees’ salaries regardless and that a lack of specific funding for section 3610 had no impact on her contract.

However, the remaining seven contracting officers expressed concerns about identifying funds to cover section 3610 expenses or the future impact on funding for the contract because they paid section 3610 expenses. We found that a lack of funding was more of a concern on contracts for work such as repairing aircraft and vehicles. This work still had to be completed, and the funding could not be used for section 3610 expenses without future negative consequences to accomplishing the work under the contract or meeting mission needs. For example, a U.S. Special Operations Command contracting officer had to find up to $15 million in funding to cover section 3610 expenses for his contractor and subcontractor employees. The contracting officer stated that he transferred funding from other contract line items under the contract and is also exploring transferring funds from other aircraft programs to cover the section 3610 costs. In addition, through our data call we identified two section 3610 requests that contracting officers disapproved because funds were not available and the contractor did not have the need to maintain a ready state.

Contractors Used Other Forms of COVID-19 AssistanceThe CARES Act contained multiple relief scenarios for contractors to receive compensation, including loan relief, tax credits, and other assistance. Contracting officers stated that contractors used another Federal program, the PPP, which provided COVID-19 assistance instead of section 3610. For example, one contractor applied for and received a PPP loan to cover its employees’ payroll and requested section 3610 relief only for its subcontractor who was not covered by the loan.

Tracking the Use of Section 3610Not all contracts that used section 3610 authority were clearly identified in DoD information systems, resulting in a lack of transparency. In addition, some contracts were incorrectly labeled as using section 3610 authority when they did not use it. DoD contracting officers are required to track and identify their use of section 3610. The OMB memorandum stated that, as an initial step to support accountability and transparency in connection with section 3610, agencies should report section 3610 modifications to FPDS-NG, entering “COVID-19 3610” at the beginning of the description of requirements data field on the CAR.17 The memorandum also stated that the CARs must also include the National

17 OMB Memorandum M-20-22, “Preserving the Resilience of the Federal Contracting Base in the Fight Against the Coronavirus Disease 2019,” April 17, 2020.

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Interest Action Code established for identifying all COVID-19–related procurement actions. Additionally, DoD-specific guidance states that contracting officers should create a separate line item for section 3610 reimbursements to enable segregation of section 3610 costs.18

Alternative Forms of Tracking CostsAs a result of our data call, we identified 30 contracts where the contracting officers did not modify the contracts to implement section 3610 authority; rather, the contracting officers authorized the contractors to invoice section 3610 leave costs on already established contract line item numbers. Contracting officers did not modify contracts for various reasons. Some contracting officials decided it was more efficient and effective to not modify the contract, and instead separated section 3610 expenses on specific invoices. One contracting officer was concerned about losing the funds on the contract if she moved them to another contract line item number. Another contracting officer knew that the expenses were section 3610-related for a specific month only and did not see the need to modify the contract. In some instances, the contractors were required to submit a separate invoice for section 3610 to clearly identify section 3610 expenses.

While some contracting officers identified the costs for section 3610 via invoices rather than a separate contract line item number, these contracts are not easily tracked or identified within FPDS-NG. Of the 30 contracts that contracting officers did not modify, 13 contracts were exempt from reporting in FPDS-NG, and the remaining 17 contracts were not identifiable within FPDS-NG. Based on our request, the contracting officers issued administrative contract modifications identifying that section 3610 authority was used for the 17 contracts. These modifications will increase the DoD’s transparency and help identify and track section 3610 costs. Because these contracts did not initially show up in FPDS-NG as implementing section 3610 authority, we shared the information we collected during this audit with officials from the Defense Contract Management Agency and Defense Contract Audit Agency.19

Mislabeled ContractsWe found that contracting officers mislabeled contracts in FPDS-NG as using section 3610 authority. We found that some contracting officers were unclear as to which contracts section 3610 authority applied. Correctly labeling contracts in FPDS-NG is an important step for contracting officers to support accountability

18 OUSD(A&S) Memorandum, “Implementation Guidance for Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act,” April 9, 2020.

19 The Defense Contract Audit Agency’s primary function is to conduct contract audits and related financial advisory services.

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Audit of DoD Implementation of Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act

and transparency when using section 3610 authority. FPDS-NG supports Federal-wide analysis of contractor payments, assists in oversight of section 3610 implementation, and helps safeguard taxpayer dollars against duplicative and wasteful spending. We identified 72 contracts that were labeled as implementing section 3610, but were not implementing section 3610 authority on the contract and therefore should not have been labeled as section 3610.

The contracts were issued by contracting officers from the Army, Navy, Air Force, National Guard Bureau, Defense Advanced Research Projects Agency, Washington Headquarters Services, Defense Microelectronics Activity, and Defense Logistics Agency, with the majority, 39 out of 72, being issued by contracting officers from the National Guard Bureau.20 As of December 4, 2020, contracting officers have corrected all of the CARs in FPDS-NG. Contracting officers should label contracts as section 3610 in FPDS-NG only when they are specifically using section 3610 authority and approving reimbursement of leave expenses for keeping contractor employees in a ready state. This will help improve the DoD’s accountability of contracts for which contracting officers implemented section 3610.

SummaryWe reviewed multiple aspects of the DoD’s implementation of section 3610 of the CARES Act. While we found that in general DoD contracting officers complied with OMB and DoD guidance to support rational decisions that were in the best interest of the Government when approving section 3610 requests, we did find some challenges that the DoD faced while implementing section 3610 that extended beyond our sample. These challenges included contracting officers having to rely on the contractor’s self-certification of the use of other COVID-19 relief measures, tracking and identifying section 3610 in DoD contracts, and the lack of a specific appropriation for section 3610.

In addition, contracting officers should have a detailed conversation with the contractor about the use of other COVID-19 relief when reviewing and approving section 3610 reimbursement requests. Contracting officers should also label contracts as section 3610 only when they are specifically using section 3610 authority to reimburse for leave expenses to keep the contractor in a ready state. Ultimately, the overall use of section 3610 was less than expected when compared to the number of affected contractors due to the flexibility and creativity of contracting officers, the declaration of the defense industrial base as critical, and the lack of appropriations for section 3610.

20 Only unclassified contracts are reported to FPDS-NG, and some agencies are exempt from entering all contract information into FPDS-NG.

Appendixes

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Appendix A

Scope and MethodologyWe conducted this performance audit from May 2020 through November 2020 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Criteria and Guidance ReviewedWe reviewed the following criteria and guidance.

• Section 3610 of the CARES Act, “Federal Contractor Authority,” March 27, 2020

• OUSD for Personnel and Readiness Memorandum, “Force Health ProtectionGuidance (Supplement 4) – Department of Defense Guidance for PersonnelTraveling During the Novel Coronavirus Outbreak,” March 11, 2020

• Department of Homeland Security, “Memorandum on Identificationof Essential Critical Infrastructure Workers During COVID-19Response,” March 19, 2020

• OMB Memorandum M-20-18, “Managing Federal Contract PerformanceIssues Associated with the Novel Coronavirus,” March 20, 2020

• DoD Instruction 6200.03, “Public Health Emergency Management Withinthe DoD,” March 28, 2019

• OUSD(A&S) Memorandum, “Class Deviation – CARES Act Section 3610Implementation,” April 8, 2020

• DFARS 231.205-79, “CARES Act Section 3610 – Implementation”

• OUSD(A&S) Memorandum, “Implementation Guidance for Section 3610 ofthe Coronavirus Aid, Relief, and Economic Security Act,” April 9, 2020

• OMB Memorandum M-20-22, “Preserving the Resilience of the FederalContracting Base in the Fight Against the Coronavirus Disease2019,” April 17, 2020

• OUSD(A&S) Frequently Asked Question, “Implementation Guidance forSection 3610 of the Coronavirus Aid, Relief, and Economic SecurityAct,” April 24, 2020

• OMB Memorandum M-20-27, “Additional Guidance on Federal ContractingResiliency in the fight Against the Coronavirus Disease,” July 14, 2020

Appendixes

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• OUSD(A&S) Memorandum, “Memorandum for Record Template for Contracting Officers for Coronavirus Aid, Relief, and Economic Security Act Section 3610 Reimbursement,” August 17, 2020

• OUSD(A&S) Memorandum, “Class Deviation – Section 3610 Reimbursement Requests,” Revision 1, October 14, 2020

• DFARS 252.243-7999, “Section 3610 Reimbursement”

• OUSD(A&S) Memorandum, “Class Deviation – CARES Act Section 3610 Implementation,” Revision 2, October 14, 2020

• OUSD(A&S) Frequently Asked Questions, “Implementation Guidance for Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act,” October 14, 2020

• Section 106 of the Continuing Appropriations Act, 2021 and Other Extensions Act, “Division A – Continuing Appropriation, 2021,” October 1, 2020

Universe and SampleWe used FPDS-NG to identify a universe of section 3610 contracting actions. We searched for actions with “COVID-19 3610” in the Description of Requirements data field and “COVID-19 2020” as the National Interest Action. We also identified contracts that were missing “COVID-19 3610” in the Description of Requirements data field, but were implementing section 3610. We used beta.SAM.gov reports to identify additional contracts that had “3610” in the Description of Requirements data field, but did not have “COVID-19 2020” as the National Interest Action data field. We also conducted a manual data call to the Military Departments, combatant commands, and Defense agencies to identify contracts that used, planned to use, or had denied requests for the use of section 3610 authority. The data call identified an additional 30 contracts that had used section 3610 authority.

We picked a nonstatistical sample in two phases. The first sample set was selected from our initial results from contracts we identified in FPDS-NG and beta.SAM.gov. The second sample set was selected from the results of FPDS-NG, beta.SAM.gov, and the data call received later in the audit. We selected a total of 37 contracts with the highest dollar values where the contractor had already invoiced for section 3610 costs on the contract. We selected contracts from various Defense agencies, Military Departments, or combatant commands to obtain a broader picture of the DoD’s implementation of section 3610.

Appendixes

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After verifying contract information in Electronic Document Access (EDA) and with the contracting officers, we identified 79 contracts that implemented section 3610 authority as of July 6, 2020:

• 12 contracts issued by the Army (we selected 3 contracts for our sample),

• 23 contracts issued by the Air Force (we selected 3 for our sample),

• 5 contracts issued by the U.S. Cyber Command (we selected 1 for our sample),

• 1 contract issued by the Navy and Marine Corps (we selected 1 for our sample),

• 13 contracts issued by the National Geospatial-Intelligence Agency (we selected 9 for our sample), and21

• 25 contracts issued by the U.S. Special Operations Command (we selected 20 for our sample).22

The team excluded any classified contracts from the universe, sample, and contracts that planned to use section 3610.

Review of Internal ControlsDoD Instruction 5010.40 requires DoD organizations to implement a comprehensive system of internal controls that provides reasonable assurance that programs are operating as intended and to evaluate the effectiveness of the controls.23 We did not identify any significant internal control weaknesses, but did identify some areas to consider when managing section 3610 CARES Act contracting actions. Specifically, contracting personnel had to rely on the contractors to self-certify that contractors were in line with section 3610 guidance, including that they were not obtaining funds for the same expenses from other relief measures. The DoD should consider an interagency review to identify any contractors that received relief for the same expenses. We will provide a copy of the report to the senior officials responsible for internal controls and policy for management of section 3610 CARES Act contracting actions.

Review of Documentation and InterviewsWe reviewed selected section 3610 CARES Act contracts and modifications from EDA and reviewed contract documentation from contract files and the Army’s Paperless Contracting Files system. We combined the data to determine whether the contracting offices complied with OMB, OUSD(A&S), and DFARS requirements. We primarily looked at the request for reimbursement and any invoices or additional funding modifications issued during the scope of our review.

21 The nine contracts were task orders under the same indefinite-delivery indefinite-quantity contract. 22 Of the 20 contracts,18 were task orders under the same indefinite-delivery indefinite-quantity contract. 23 DoD Instruction 5010.40, “Managers’ Internal Control Program Procedures,” May 30, 2013.

Appendixes

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We interviewed contracting, procurement, and policy personnel covering DoD implementation of section 3610 of the CARES Act and related management control programs at the:

• Defense Pricing and Contracting,

• Army,

• Air Force,

• Navy,

• U.S. Special Operations Command,

• U.S. Cyber Command, and

• National Geospatial-Intelligence Agency.

We reviewed documentation related to our review of section 3610 CARES Act reimbursements, including:

• requests for reimbursements and approval documents,

• determination of applicability,

• contractor’s signed statement of certification,

• contract modifications,

• universal block modification on implementation of section 3610 of the CARES Act,

• proposed labor rates,

• COVID-19 invoices,

• historical invoices,

• internally issued guidance for section 3610 implementation, and

• e-mail correspondence between contracting officers and contractors.

Coordination With the Small Business AdministrationWe provided a list of affected contractors that we created based on information obtained from the Defense Contract Management Agency, the Defense Logistics Agency, and through our analysis for the audit. The list included the contractor’s name, data universal numbering system number, and tax identification number. The SBA compared the tax identification numbers against their database of loan recipients. The information that the SBA provided identified which of the affected contractors had received an SBA loan.

Appendixes

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Use of Computer-Processed DataWe relied on computer-processed data from FPDS-NG and beta.SAM.gov to identify a universe of contracting actions for section 3610 of the CARES Act. We checked contract documentation in EDA to validate the information reported in FPDS-NG; otherwise, we did not assess the reliability of the computer-processed data we obtained from FPDS-NG or beta.SAM.gov because we did not rely on their data records within the system in reporting our audit results. Our audit work for our review of individual contracts and modifications did not use FPDS-NG and beta.SAM.gov; therefore, their use in the report does not materially affect our audit results.

We also used EDA to obtain contract documentation that we identified in FPDS-NG and beta.SAM.gov. We did perform some validation testing by comparing FPDS-NG and beta.SAM.gov to the EDA documentation and the documentation we obtained from the Army’s Paperless Contracting Files system and from the contracting officers.

We relied on information from the Army’s Paperless Contracting Files system. To assess the accuracy of computer-processed data, we verified FPDS-NG and EDA data against the official records obtained from contracting officers and the Army’s Paperless Contracting Files system. Based on the FPDS-NG data obtained for Army contract modifications, we used the Army’s Paperless Contracting Files system to obtain signed copies of contracting actions to verify. We cross-checked the Paperless Contracting Files documents against the EDA contracts to verify that the information was consistent and accurate. Therefore, we determined that the data obtained from the Army’s Paperless Contracting Files system were sufficiently reliable to accomplish our audit objective.

Use of Technical AssistanceWe met with an analyst from the DoD OIG Quantitative Methods Division to discuss our nonstatistical sample selection of contracts based on the universe we identified. Based on our discussion, the analyst determined that a nonstatistical sample was most appropriate for our audit objectives. Our sample was limited to specific contracts, and our results should not be projected across other contracts.

Appendixes

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Prior CoverageThe Government Accountability Office (GAO) issued one report in the last 5 years related to section 3610. Unrestricted GAO reports can be accessed at https://www.gao.gov/.

Report No. GAO-20-662, “Observations on Contractor Paid Leave Reimbursement Guidance and Use,” September 2020

The GAO identified some differences across guidance documents issued by OMB and seven other agencies, including the date from which contractors could request reimbursement and the extent to which rates could include profit or fees. The GAO also found that contract obligations data in FPDS-NG may not capture the full amount of section 3610 reimbursements. Specifically, the Department of Energy reimbursed contractors for almost $550 million under section 3610 without modifying the contract, so these obligations were not reported to FPDS-NG.

Appendixes

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Appendix B

Summary of 3610 Criteria and GuidanceOffice of Management and Budget Memorandums

OMB Memorandum M-20-18, “Managing Federal Contract Performance Issues Associated with the Novel Coronavirus,” March 20, 2020This memorandum states that maintaining the Federal contract base through COVID-19–related disruptions includes agencies being flexible with performance timeframes when telework or other virtual work environments are not available as well as when contractors cannot perform their work due to restrictions such as social distancing and quarantining.

OMB Memorandum M-20-22, “Preserving the Resilience of the Federal Contracting Base in the Fight Against the Coronavirus Disease 2019 (COVID-19),” April 17, 2020This memorandum provides guiding principles to support the use of section 3610 by agencies and the acquisition workforce. Specifically, this memorandum states that agencies should consider whether providing paid leave to keep the contractor in a ready state is in the best interest of the Government, to be mindful of challenges faced by small businesses, look at the impact of funding or not funding the paid leave, follow the restrictions in section 3610, secure the necessary documentation to support the reimbursement and prevent duplication of payment, and track the use of section 3610.

OMB Memorandum M-20-27, “Additional Guidance on Federal Contracting Resiliency in the Fights Against the Coronavirus Disease (COVID-19),” July 14, 2020This memorandum provides supplemental guidance to memorandums M-20-18 and M-20-22 that further addresses the resiliency of the Federal acquisition workforce and the Federal contractors that support our agency missions, including in the fight against COVID-19. This memorandum clarifies that the effective date of section 3610 begins on the date of enactment of the CARES Act, and any reimbursement made before March 27, 2020, should not be identified as a payment made under section 3610.

Appendixes

DODIG-2021-030 │ 23

Office of the Under Secretary of Defense for Acquisition and Sustainment Memorandums

“Class Deviation – CARES Act Section 3610 Implementation Memorandum,” April 8, 202024

This memorandum states that contractors can obtain relief from other sources than section 3610 of the CARES Act, including tax credits and the PPP. It further discusses the contracting officer’s duties in collecting information from the contractor on other relief secured and to avoid the duplication of payments.

“Implementation Guidance for Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act,” April 9, 2020This memorandum, issued for implementing the CARES Act, states that the implementation of section 3610 depends on the contract type and details what contracting officers should do for each contract type to account for COVID-19–related costs. This memorandum also details what contracting officers must do to have proper documentation for future audit purposes.

“Implementation Guidance for Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act, Frequently Asked Questions,” April 24, 202025

The Frequently Asked Questions covers many topics concerning implementation of Section 3610. Specifically, this document defines “ready state” as referring to a contractor’s ability to mobilize and resume performance in a timely manner. This Frequently Asked Questions also identifies that any legally available funds under the contract can be used for section 3610 reimbursements.

“Memorandum for Record Template for Contracting Officers for Coronavirus Aid, Relief, and Economic Security Act Section 3610 Reimbursement,” August 17, 2020This template is for contracting officers to use to document their rationale for reimbursing costs under section 3610. The template provides a section for the contracting officer to document why the contractor is “affected” and the estimated reimbursement costs, including direct labor, fringe, overhead, and general and administrative costs. This documented review of the reimbursement request will help support the contracting officer’s determination that the total amount of paid leave costs are eligible for reimbursement.

24 OUSD(A&S) updated its memorandum on October 14, 2020, to reflect the extension on section 3610 to December 11, 2020.25 OUSD(A&S) updated its Frequently Asked Questions on October 14, 2020, to reflect the extension on section 3610 to

December 11, 2020.

Appendixes

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“Class Deviation – Section 3610 Reimbursement Requests,” Revision 1, October 14, 2020This class deviation provides guidance for contracting officers when reviewing and processing contractor requests for section 3610 reimbursements. This deviation provides three checklists to identify the information a contracting officer may need to assess a contractor’s section 3610 reimbursement request. The checklists provide guidance for processing reimbursement requests and may be tailored to fit specific circumstances.

“Class Deviation – CARES Act Section 3610 Implementation,” Revision 2, October 14, 2020This class deviation provides guidance for extending the date through which paid leave may be taken to be eligible for reimbursement under section 3610. This deviation extended the time period for which paid leave must be taken from March 27, 2020, through September 30, 2020, to March 27, 2020, through December 11, 2020.

“Implementation Guidance for Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act, Frequently Asked Questions,” October 14, 2020The Frequently Asked Questions covers many topics concerning implementation of Section 3610. Specifically, this document includes updates to the questions to reflect the extension of eligibility for reimbursement under section 3610 until December 11, 2020.

Appendixes

DODIG-2021-030 │ 25

Appendix C

The Number and Dollar Value of Section 3610 Contracts by DoD Component

DoD ComponentAs of September 30, 2020 Sample Selected

July 6, 2020

Number of Contracts

Dollar Value (thousands)

Number of Contracts

Dollar Value (thousands)

Army Contracting Command – Aberdeen Proving Ground 17 $32,949 3 $17,425

Army Health Contracting Activity 7 211 0 0

Army Medical Research and Development Command 1 0 0 0

Army Mission and Installation Contracting Command 2 8 0 0

Army 409th Contracting Support Brigade 2 0 0 0

Air Force Combat Command 1 211 0 0

Air Force Education and Training Command 8 196 1 184

Air Force Materiel Command 21 25,302 2 5,141

US Air Forces in Europe 1 2 0 0

Cyber Command 5 685 1 223

DoD Education Activity 27 3,089 0 0

National Geospatial-Intelligence Agency 13 197 9 142

Naval Facilities Engineering Command 1 0 0 0

Naval Supply Systems Command 2 56 0 0

Marine Corps Logistics Command 1 170 1 170

Special Operations Command 25 5,175 20 5,028

Washington Headquarters Services 1 53 0 0

Total 135 $68,304 37 $28,314*

* Total differs due to rounding

Source: The DoD OIG.

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Acronyms and Abbreviations

Acronyms and AbbreviationsAcronym Definition

CAR Contract Action Report

CARES Act Coronavirus Aid, Relief, and Economic Security Act

COVID-19 Coronavirus Disease–2019

DFARS Defense Federal Acquisition Regulation Supplement

EDA Electronic Document Access

FAR Federal Acquisition Regulation

FPDS-NG Federal Procurement Data System-Next Generation

GAO The Government Accountability Office

OMB Office of Management and Budget

OUSD(A&S) Office of the Under Secretary of Defense Acquisition and Sustainment

PPP Paycheck Protection Program

SBA U.S. Small Business Administration

Whistleblower ProtectionU.S. Department of Defense

Whistleblower Protection safeguards DoD employees against retaliation for protected disclosures that expose possible waste, fraud,

and abuse in government programs. For more information, please visit the Whistleblower webpage at http://www.dodig.mil/Components/

Administrative-Investigations/Whistleblower-Reprisal-Investigations/Whisteblower-Reprisal/ or contact the Whistleblower Protection Coordinator at Whistleblowerprotectioncoordinator@dodig.mil

For more information about DoD OIG reports or activities, please contact us:

Congressional Liaison 703.604.8324

Media Contactpublic.affairs@dodig.mil; 703.604.8324

DoD OIG Mailing Lists www.dodig.mil/Mailing-Lists/

Twitter www.twitter.com/DoD_IG

DoD Hotline www.dodig.mil/hotline

DEPARTMENT OF DEFENSE │ OFFICE OF INSPECTOR GENERAL4800 Mark Center Drive

Alexandria, Virginia 22350-1500www.dodig.mil

DoD Hotline 1.800.424.9098

TAB 26

I N T E G R I T Y I N D E P E N D E N C E E XC E L L E N C E

Inspector GeneralU.S. Department of Defense

Report No. DODIG-2021-047

J A N U A R Y 2 1 , 2 0 2 1

Evaluation of Department of Defense Contracting Officer Actions on Questioned Direct Costs

DODIG-2021-047 (Project No. D2019-DAPOCF-0130.000) │ i

Results in BriefEvaluation of Department of Defense Contracting Officer Actions on Questioned Direct Costs

ObjectiveThe objective of this evaluation was to determine whether the actions taken by DoD contracting officers on questioned direct costs reported by the Defense Contract Audit Agency (DCAA) complied with the Federal Acquisition Regulation (FAR), DoD Instructions, and agency policy.

Additionally, we followed up on the actions taken by DoD contracting officers in response to prior recommendations in DoD OIG Report No. DODIG-2017-055. The prior DoD OIG report identified eight DCAA audit reports where the contracting officers took no action on $304.8 million in questioned direct costs.

BackgroundThe DCAA performs incurred cost audits to examine a DoD contractor’s claimed indirect and direct costs incurred on Government contracts to determine whether the claimed costs are allowable in accordance with contract terms and the FAR. When a DCAA auditor finds any indirect and direct claimed costs that do not comply with the contract terms and the FAR, the DCAA reports the costs as questioned because the costs are considered unallowable on Government contracts. The DCAA issues the report to a DoD contracting officer who is responsible for making a final determination on whether the DoD contractor’s claimed indirect and direct costs are allowable in accordance with contract terms and the FAR.

January 21, 2021DoD Instruction 7640.02 and DCMA policy require DCMA divisional administrative contracting officers (DACOs), who are usually the primary recipients of DCAA incurred cost audit reports, to settle (make a final determination on the allowability of the claimed costs) any questioned indirect costs identified in DCAA audit reports and prepare a final indirect cost rate agreement.1

However, according to DCMA Manual 2201-03, DCMA administrative contracting officers (ACOs) must settle DCAA questioned direct costs.2 The DCMA DACO must coordinate with DCMA ACOs, other DoD Component contracting officers, or other Government agency contracting officers who have the responsibility for settling any questioned direct costs identified in DCAA incurred cost audit reports.

DoD Instruction 7640.02 and DCMA policy also require the DCMA contracting officer to keep the DCAA audit report open in the Contract Audit Follow-Up (CAFU) system until all questioned costs (including questioned direct costs) are settled. The DoD Components use the CAFU system to track and record actions taken to settle DCAA audit reports. For 25 of the 26 DCAA reports we selected, DCMA DACOs were responsible for coordinating with the DCMA ACOs or other contracting officers to obtain a settlement on the questioned direct costs. The DCMA DACOs were then responsible for closing the associated CAFU system record after they completed all required actions, including the completion of a negotiation memorandum, which in part explains the basis for settling DCAA questioned costs.

FindingsFor 12 of 26 DCAA audit reports, DCMA contracting officers did not comply with DoD Instruction 7640.02 and DCMA policy because they did not settle, or coordinate the

1 DoD Instruction 7640.02, “Policy for Follow-up on Contract Audit Reports,” April 15, 2015.

2 DCMA Manual 2201-03, “Final Indirect Cost Rates,” February, 14, 2019.

Background (cont’d)

ii │ DODIG-2021-047 (Project No. D2019-DAPOCF-0130.000)

Results in BriefEvaluation of Department of Defense Contracting Officer Actions on Questioned Direct Costs

settlement of, $231.5 million in questioned direct costs. DCMA contracting officers did not comply with DoD Instruction 7640.02 and DCMA policy because:

• The DCMA lacks adequate guidance for identifying and coordinating with other contracting officers who are responsible for settling questioned direct costs;

• DCMA supervisors and the DCMA OIG did not provide effective oversight of the DCMA DACOs’ actions for settling questioned direct costs; and

• DCMA Manual 2201-03 states that DCMA ACOs must settle questioned direct costs.

As a result of not settling the DCAA questioned direct costs, DCMA contracting officers may have reimbursed DoD contractors up to $231.5 million in costs that may be unallowable on Government contracts in accordance with the FAR.

Additionally, three recommendations from DoD OIG Report No. DODIG-2017-055 remain open because the DCMA contracting officers assigned to three of the eight audit reports have not yet settled $98.1 million of the $304.8 million in questioned direct costs reported by the DCAA. The DCMA contracting officers stated that they did not settle, or coordinate the settlement of, the questioned direct costs because they experienced difficulties in determining the other contracting officers responsible for settling the questioned direct costs. As a result, DCMA contracting officers may have reimbursed DoD contractors up to $98.1 million in unallowable costs.

RecommendationsAmong the six recommendations for DCMA, we recommend that the Defense Contract Management Agency Director:

• Require the DCMA DACOs to coordinate the settlement of the $231.5 million in questioned costs that have not been settled.

• Determine whether to revise DCMA policy to allow DCMA DACOs to settle questioned direct costs.

In addition, we recommend that the Defense Pricing and Contracting (DPC) Principal Director issue guidance to the DoD Components to clarify who has the authority and responsibility for settling questioned direct costs.

Management Comments and Our ResponseThe DCMA Director disagreed with one element of our findings, but agreed with the six recommendations for the DCMA. In addition, the DPC Principal Director partially agreed with the one recommendation for the DPC.

The DCMA Director did not agree with our finding that the FAR grants DCMA contracting officers the authority to settle or negotiate DCAA questioned direct costs. The DCMA Director stated that DCMA ACOs and DACOs are limited to establishing final indirect cost and billing rates.3 We disagree with the DCMA Director that the

3 FAR Subpart 42.3, “Contract Administration Office Functions.”

Findings (cont’d)

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Results in BriefEvaluation of Department of Defense Contracting Officer Actions on Questioned Direct Costs

FAR limits DCMA ACOs and DACOs to establishing final indirect cost and billing rates. As stated by the DPC, which establishes DoD acquisition policy, DCMA contracting officers (including DACOs) have the authority to settle questioned direct costs as part of their administrative responsibilities in establishing indirect rates in accordance with the FAR.

The DCMA Director agreed with the six recommendations for the DCMA. Specifically, the Director agreed to have the DCMA DACOs reopen the CAFU records and coordinate the settlement of the $231.5 million in questioned costs that have not been settled. The DCMA Director also agreed to provide the DCMA contracting officers and supervisors who were responsible for settling the questioned costs with additional training. The DCMA Director further agreed to update DCMA policy to clarify the roles of the various types of DoD contracting officers in settling questioned direct costs, consistent with guidance provided by the DPC.

The DPC Principal Director stated that he partially agreed with the one recommendation to issue guidance to the DoD Components, which clarifies who has the authority to settle direct questioned costs. The DPC Principal Director agreed to consider issuing clarifying guidance if he determines that it will be useful to do so. In addition, the DPC Principal Director will consider a revision to the Defense Federal Acquisition Regulation Supplement to clarify DoD contracting officer roles and their authority in settling questioned direct costs.

We determined that the comments from the DCMA Director and the DPC Principal Director addressed the specifics of all seven recommendations. Therefore, the seven recommendations are resolved but will remain open until we verify that the agreed-upon actions to implement the recommendations are completed.

Please see the Recommendations Table on the next page for the status of recommendations.

Comments (cont’d)

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Recommendations TableManagement Recommendations

UnresolvedRecommendations

ResolvedRecommendations

Closed

Defense Contract Management Agency Director None A.1, A.2, A.3, A.4,

A.5, A.6 None

Defense Pricing and Contracting Principal Director None A.7 None

Note: The following categories are used to describe agency management’s comments to individual recommendations.

• Unresolved – Management has not agreed to implement the recommendation or has not proposed actions thatwill address the recommendation.

• Resolved – Management agreed to implement the recommendation or has proposed actions that will address theunderlying finding that generated the recommendation.

• Closed – OIG verified that the agreed upon corrective actions were implemented.

DODIG-2021-047 │ v

January 21, 2021

MEMORANDUM FOR DIRECTOR, DEFENSE CONTRACT MANAGEMENT AGENCY DIRECTOR, DEFENSE CONTRACT AUDIT AGENCY PRINCIPAL DIRECTOR, DEFENSE PRICING AND CONTRACTING NAVAL INSPECTOR GENERAL

SUBJECT: Evaluation of DoD Contracting Officer Actions on Questioned Direct Costs (Report No. DODIG-2021-047)

This final report provides the results of the DoD Office of Inspector General’s evaluation. We previously provided copies of the draft report and requested written management comments on the recommendations. We considered management’s comments in finalizing the report and included them in the report.

The Defense Contract Management Agency Director and the Defense Pricing and Contracting Principal Director plan to take action in response to all the recommendations presented in the report; therefore, we consider the recommendations resolved and open. As described in the Recommendations, Management Comments, and Our Response section of this report, we will close the recommendations when you provide us documentation showing that all agreed-upon actions to implement the recommendations are completed. Therefore, please provide us within 90 days your response concerning specific actions in process or completed on the recommendations. Send your response to

If you have any questions, please contact

Randolph R. StoneAssistant Inspector General for Evaluations Space, Intelligence, Engineering, and Oversight

INSPECTOR GENERALDEPARTMENT OF DEFENSE

4800 MARK CENTER DRIVE

ALEXANDRIA, VIRGINIA 22350-1500

vi │ DODIG-2021-047

IntroductionObjective ...........................................................................................................................................................................................................................1

Background ...................................................................................................................................................................................................................1

Finding A. DCMA Contracting Officers’ Actions on Questioned Direct Costs Did Not Comply With DoD Instruction 7640.02 and DCMA Policy for 12 of 26 Audit Reports .................................................................................................................................................5DCMA Contracting Officers Did Not Comply With DoD Instruction 7640.02

and DCMA Manual 2201-03 on 12 of the 26 DCAA Audit Reports ....................................................6

Three Factors Contributed to DCMA Contracting Officers Not Complying With DoD Instruction 7640.02 and DCMA Manual 2201-03 ..................................................................................9

DCMA Contracting Officers May Have Reimbursed DoD Contractors Up To $231.5 Million in Unallowable Direct Costs ............................................................................................................. 13

Defense Contract Management Agency Comments on the Finding .........................................................14

Our Response ...........................................................................................................................................................................................................14

Recommendations, Management Comments, and Our Response ............................................................. 15

Finding B. DCMA DACOs Have Not Taken All Actions Required to Settle the Questioned Direct Costs From Three of Eight Audit Reports, as a Previous DoD Office of Inspector General Report Recommended............................................................................................................................................. 20The DCMA Has Not Taken All Actions Required to Settle $98.1 Million in

Questioned Direct Costs From Three of the Eight Audit Reports, as a DoD Office of Inspector General Report Recommended ........................................................................... 21

DCMA DACOs Have Not Completed Actions Required to Settle $98.1 Million Because of Difficulties With Identifying Who Had Responsibility to Settle the Questioned Direct Costs ....................................................................................................................................................... 24

DCMA Contracting Officers May Have Reimbursed up to $98.1 Million in Unallowable Costs on Government Contracts ....................................................................................................... 24

The Recommendations in Report No. DODIG-2017-055 Remain Open .............................................. 25

Contents

DODIG-2021-047 │ vii

Contents (cont’d)

AppendixesAppendix A. Scope and Methodology ........................................................................................................................................ 26

Use of Computer-Processed Data.......................................................................................................................................... 28

Use of Technical Assistance......................................................................................................................................................... 28

Prior Coverage ............................................................................................................................................................................................ 28

Appendix B. ................................................................................................................................................................................................................ 30

Appendix C. ................................................................................................................................................................................................................ 32

Appendix D. ................................................................................................................................................................................................................ 34

Management CommentsDefense Contract Management Agency Director .......................................................................................................... 36

Defense Pricing and Contracting Principal Director ............................................................................................... 42

Acronyms and Abbreviations ................................................................................................................ 43

DODIG-2021-047 │ 1

Introduction

Introduction

ObjectiveThe objective of this evaluation was to determine whether the actions taken by DoD contracting officers on questioned direct costs reported by the Defense Contract Audit Agency (DCAA) complied with the Federal Acquisition Regulation (FAR), DoD Instructions, and agency policy.

Additionally, we followed up on the actions taken by DoD contracting officers in response to DoD OIG Report No. DODIG-2017-055.4 In this report, we recommended that the DoD contracting officers assigned to eight DCAA audit reports take action to settle $304 million in questioned direct costs. Appendix A contains details of our scope and methodology.

BackgroundThe FAR is the primary regulation that all Federal Executive agencies follow to acquire supplies and services. The Government pays contractors in amounts determined to be allowable by the contracting officer in accordance with FAR subpart 31.2.5 DoD contractors incur both direct and indirect costs in the performance of a Government contract. Direct costs benefit one contract, while indirect costs benefit two or more contracts. Examples of direct costs include labor, travel, material, and services that benefit a single contract. Examples of indirect costs include office rent, utilities, and employee benefits that benefit more than one contract.

Defense Contract Audit Agency Performs Audits of Contractor Claimed Direct and Indirect CostsThe DCAA operates in accordance with DoD Directive 5105.36 and reports to the Under Secretary of Defense (Comptroller)/Chief Financial Officer, DoD.6 On behalf of the DoD, the DCAA performs several types of contract audits, including incurred cost audits. The objective of an incurred cost audit is to determine if a DoD contractor’s incurred direct and indirect costs claimed on Government contracts are allowable in accordance with contract terms and the FAR. When a DCAA auditor finds any direct and indirect costs that do not comply with the contract terms and FAR 31.2, the DCAA auditor questions the costs as unallowable. For all DCAA incurred cost audit reports issued in FY 2019, the DCAA questioned a total of $2.8 billion in DoD contractor claimed direct and indirect costs.

4 Report No. DODIG-2017-055, “Evaluation of Defense Contract Management Agency Contracting Officer Actions on Defense Contract Audit Agency Incurred Cost Audit Reports,” February 9, 2017.

5 FAR Subpart 31.2, “Contract with Commercial Organizations.” 6 DoD Directive 5105.36, “Defense Contract Audit Agency,” January 4, 2010.

Introduction

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DoD Instruction 7640.02 Establishes Recordkeeping Requirements for DoD Contracting Officer Actions on Contract Audit ReportsDoD Instruction 7640.02 establishes recordkeeping requirements for DoD contracting officer actions on contract audit reports, including DCAA incurred cost audit reports.7 In support of the recordkeeping requirements, the Defense Contract Management Agency (DCMA) maintains an automated database referred to as the Contract Audit Follow-Up (CAFU) system that DoD Components use to track and record actions taken to settle DCAA audit reports. The CAFU system creates a record for each unique DCAA report number.8 DoD contracting officers must address all DCAA audit report findings and recommendations and prepare a negotiation memorandum before they close the associated record in the CAFU system. The negotiation memorandum provides a written record of the DoD contracting officer’s decision on the DCAA audit report and includes the rationale for not upholding any of the DCAA reported questioned costs.

DoD Instruction 7640.02 requires DoD contracting officers to determine whether they agree with each DCAA audit finding or recommendation and, if they do not, document their rationale for any disagreement with the DCAA in the negotiation memorandum. DoD Instruction 7640.02 also requires DoD contracting officers to complete their actions on a DCAA audit report (“settle” a DCAA audit report) within 12 months. A DCAA incurred cost audit report is considered settled when the DoD contracting officer has prepared a negotiation memorandum addressing all reported findings and no further actions can be reasonably anticipated. If the DoD contracting officer does not settle the DCAA audit report within 12 months, DoD Instruction 7640.02 requires the DoD contracting officer to document the actions taken to achieve settlement at least monthly.

Defense Contract Management Agency Is Normally Responsible for Taking Action on DCAA Audit ReportsThe DCMA operates in accordance with DoD Directive 5105.64 and functions under the authority, direction, and control of the Under Secretary of Defense for Acquisition and Sustainment.9 As the designated contract administration office in accordance with FAR subpart 42.3, the DCMA is responsible for taking action on most DCAA audit reports.10 For DCAA incurred cost audit reports, the DCMA is generally responsible for determining whether the DoD contractor’s claimed

7 DoD Instruction 7640.02, “Policy for Follow-up on Contract Audit Reports,” April 15, 2015. 8 The DCAA may issue an incurred cost audit report that covers multiple contractor fiscal years. In those cases, the report

includes more than one unique DCAA audit number. We counted each DCAA audit number as a separate report. 9 DoD Directive 5105.64, “Defense Contract Management Agency,” January 10, 2013. 10 FAR Subpart 42.3, “Contract Administration Office Functions.” Contract administration office means an office

that performs (1) assigned post-award functions related to the administration of contracts, and (2) assigned pre-award functions.

DODIG-2021-047 │ 3

Introduction

indirect and direct costs are allowable in accordance with contract terms and FAR subpart 31.2 and for negotiating a final indirect cost rate agreement that will be used to close the contractor’s contracts.11

DCMA Manual 2201-03 reiterates the requirements of FAR subpart 42.3 and establishes policies and assigns responsibility for settling final indirect cost rates and questioned direct costs.12 DCMA Manual 2201-03 requires DCMA divisional administrative contracting officers (DACOs), who are usually the primary recipients of a DCAA incurred cost audit report, to settle any questioned indirect costs and prepare the final indirect cost rate agreement. According to DCMA Manual 2201-03, DCMA administrative contracting officers (ACOs) must settle any questioned direct costs. DCMA Manual 2201-03 does not indicate whether DCMA DACOs have the authority to settle direct costs. However, the Manual does state that the DCMA DACO must coordinate and obtain settlement results from DCMA ACOs, DoD Component contracting officers, and Government agency contracting officers, who have the responsibility for settling DCAA questioned direct costs relating to one or more of their contracts. The DCMA DACO and DCMA ACO are collectively referred to in this report as DCMA contracting officers.

DCMA Manual 2201-04 reiterates the requirements of DoD Instruction 7640.02 for settling DCAA audit reports and emphasizes that DCMA contracting officers must include sound rationale in the negotiation memorandum when they disagree with audit findings and recommendations.13 DCMA Manual 2201-04 also requires the DCMA contracting officer to keep the DCAA audit report open in the CAFU system until all questioned costs (including questioned direct costs) are settled.

Defense Pricing and Contracting Develops and Implements Department of Defense Procurement and Acquisition PolicyThe Defense Pricing and Contracting (DPC), within the Office of the Under Secretary of Defense for Acquisition and Sustainment, is responsible for developing and implementing contracting, procurement, and acquisition policy within the DoD in accordance with DoD Instruction 5000.35.14 The DPC executes amendments to the Defense Federal Acquisition Regulation Supplement (DFARS) and the companion

11 FAR Subpart 31.2, “Contracts with Commercial Organizations.” An indirect cost rate agreement refers to a written understanding between the contractor and the Government on indirect cost rates that the Government uses to close out cost-reimbursement contracts.

12 DCMA Manual 2201-03, “Final Indirect Cost Rates,” February, 14, 2019. This DCMA Manual replaces DCMA Instruction 125, “Final Overhead Rates,” November 8, 2016. The requirements discussed in this report remain the same between the two documents.

13 DCMA Manual 2201-04, “Contract Audit Follow Up,” March 3, 2019. This DCMA Manual replaces DCMA Instruction 126, “Contract Audit Follow Up,” August 22, 2013, as amended. The requirements discussed in this report remain the same between the two documents.

14 DoD Instruction 5000.35, “Defense Acquisition Regulations (DAR) System,” August 31, 2018.

Introduction

4 │ DODIG-2021-047

resource, DFARS Procedures, Guidance, and Information. Additionally, the DPC Principal Director is a member of the FAR Council and collaborates with the FAR Council staff members on the direction and promulgation of Government-wide procurement policy and regulatory activities.

We Selected 26 Defense Contract Audit Agency Audit Reports That Identified Questioned Direct Costs and We Followed Up on Previous RecommendationsWe selected 26 DCAA audit reports from a universe of 68 DCAA audit reports that each questioned over $1 million in direct costs and were reported as settled in the CAFU system by DoD contracting officers between October 2017 and September 2018. The DCAA issued the 26 DCAA audit reports for settlement between February 2006 and September 2017. In total, the 26 DCAA audit reports identified $597.4 million in questioned direct costs because the auditors determined that the costs were unallowable in accordance with FAR subpart 31.2. Common reasons for the DCAA questioning the direct costs included instances where contractors did not provide sufficient supporting documentation of the costs or where DCAA auditors determined that the costs were unreasonable in accordance with FAR 31.201-3.15

For 25 of the 26 DCAA reports we evaluated, DCMA DACOs were responsible for coordinating the settlement of the questioned direct costs and closing the CAFU system record. For the remaining DCAA audit report we evaluated, a Navy contracting officer was responsible for settling the questioned direct costs and closing the CAFU system record.

In addition, we performed a follow-up evaluation of Recommendations A.1, A.2, D.1, and E.1 from DoD OIG Report No. DODIG-2017-055. In Finding A ofReport No. DODIG-2017-055, we determined that DoD contracting officers didnot take any action on eight DCAA audit reports that questioned $304.8 millionin direct costs, and we recommended that the DoD contracting officers take theactions necessary to settle the costs.

15 FAR 31.201-3, “Determining Reasonableness.”

Findings

DODIG-2021-047 │ 5

Finding A

DCMA Contracting Officers’ Actions on Questioned Direct Costs Did Not Comply With DoD Instruction 7640.02 and DCMA Policy for 12 of 26 Audit Reports

For 12 of 26 DCAA audit reports, DCMA contracting officers did not comply with DoD Instruction 7640.02 and DCMA policy because they did not settle, or coordinate the settlement of, $231.5 million in questioned direct costs. In addition, the DCMA DACOs closed the associated records in the CAFU system for the 12 audit reports even though the $231.5 million of the $258 million in reported questioned direct costs were not settled. Specifically, of the 12 DCAA audit reports, the DCMA contracting officers did not settle, or coordinate the settlement of:

• any of the $193.1 million in questioned direct costs identified in 2 of the 12 audit reports; and

• $38.4 million of $64.9 million in questioned direct costs identified in 10 of the 12 audit reports.

The DCMA DACOs received the 12 audit reports for settlement from the DCAA between February 2006 and September 2017 (56 months ago on average, as of August 1, 2020). Although DoD Instruction 7640.02 requires contracting officers to settle a DCAA audit report within 12 months, the DCMA contracting officers still have not settled, or coordinated the settlement of, the $231.5 million of the $258 million in questioned direct costs identified within the 12 audit reports.

For the remaining 14 of 26 DCAA audit reports, the DoD contracting officers settled the $339.4 million in questioned direct costs and closed the CAFU system record in compliance with FAR subpart 31.2, DoD Instruction 7640.02, and agency policy, including the one audit report issued to the Navy that we selected for review.

We identified the following three factors that contributed to DCMA contracting officers not complying with DoD Instruction 7640.02 and DCMA policy for 12 of 26 DCAA audit reports:

• the DCMA lacks adequate guidance for identifying and coordinating with other contracting officers who are responsible for settling questioned direct costs;

• DCMA supervisors and the DCMA OIG did not provide effective oversight of the DCMA DACOs’ actions for settling questioned direct costs; and

• DCMA Manual 2201-03 states that DCMA ACOs must settle questioned direct costs.

Findings

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As a result, DCMA contracting officers may have reimbursed DoD contractors up to $231.5 million in costs that may be unallowable on Government contracts according to FAR subpart 31.2. Appropriately addressing questioned direct costs in a timely manner by DCMA contracting officers is important for ensuring that the Government does not reimburse DoD contractors for costs that are unallowable.

DCMA Contracting Officers Did Not Comply With DoD Instruction 7640.02 and DCMA Manual 2201-03 on 12 of the 26 DCAA Audit ReportsFor 12 of 26 DCAA audit reports we reviewed, DCMA contracting officers did not comply with the requirements of DoD Instruction 7640.02, Enclosure 3, paragraph 3, and DCMA Manual 2201-03, Section 3.11, because they did not settle, or coordinate the settlement of, $231.5 million of the $597.4 million in questioned direct costs. The DCMA DACOs closed the CAFU system records indicating that all required actions had been completed on the audit reports, including the settlement of the questioned direct costs. However, the DCMA contracting officers did not settle, or coordinate the settlement of:

• $193.1 million in questioned direct costs identified in 2 audit reports; and

• $38.4 million of $64.9 million of the questioned direct costs identified in 10 audit reports.

In addition, as of August 1, 2020, 56 months on average had passed since the DCMA DACOs received the 12 DCAA audit reports, which significantly exceeded the DoD Instruction 7640.02 requirement to settle DCAA audit reports within 12 months. Appendix C contains details on the number of months elapsed between DCAA audit report issuance date and the contracting officer’s settlement of the questioned direct costs.

For the remaining 14 of 26 DCAA audit reports, the DCMA and Navy contracting officers settled all questioned direct costs, worth $339.4 million, identified in the audit reports and closed the associated CAFU system records in compliance with the FAR subpart 31.2, DoD Instruction 7640.02, DCMA Manual 2201-03, and Department of the Navy, Supervisor of Shipbuilding, Conversion and Repair, Instruction 4330.27F.16

16 Supervisor of Shipbuilding, Conversion and Repair, Instruction 4330.27F, “Follow-up on DCAA Contract Audit Reports,” October 21, 1994.

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The DCMA DACO Did Not Take Any Action on $193.1 Million in Questioned Direct Costs for Two Audit ReportsFor two DCAA audit reports, the DCMA DACO did not take action on any of the $193.1 million in questioned direct costs. Even though the DCMA DACO did not take any action on the questioned direct costs, she closed the CAFU system record for the two audit reports. DoD Instruction 7640.02, Enclosure 3, paragraph 3, requires DoD contracting officers to address all audit findings and recommendations before the DoD contracting officer closes the CAFU system record. Table 1 shows the amount of unsettled questioned direct costs by DCAA audit report number.

Table 1. Unsettled Questioned Direct Costs by DCAA Audit Report

DCAA Audit Report Number

DCAA Questioned Direct Costs

Settled Questioned Direct Costs

Unsettled Questioned Direct Costs

1 9841-2009C10100001 $88,502,086 $0 $88,502,086

2 9841-2010C10100001 104,629,898 0 104,629,898

Total $193,131,984 $0 $193,131,984

Source: DoD OIG, based on DCAA and DCMA data.

Although the DCMA DACO received the two DCAA audit reports on March 10, 2016, the $193.1 million of questioned direct costs remained unsettled as of August 1, 2020. According to DCMA Manual 2201-03, Section 3.11, the DCMA DACO is responsible for:

• coordinating with any DoD contracting officer, or other Government agency, that has settlement responsibility over a portion of the questioned direct costs; and

• keeping the audit report open in the CAFU system until the DCMA DACO receives the settlement results for all questioned direct costs.

However, for these two audit reports, the DCMA DACO did not coordinate with the other contracting officers who were responsible for settling the questioned direct costs. Instead, the DCMA DACO settled only the indirect costs for both reports and closed the records in the CAFU system without taking any action on the questioned direct costs. The DCMA DACO stated that she provided the two DCAA audit reports to the DCMA ACO for direct cost settlement. However, we found no evidence that DCMA DACO had actually sent the audit reports to the DCMA ACO. The DCMA ACO stated that he did not receive the two DCAA audit reports for direct cost settlement.

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DCMA Contracting Officers Did Not Settle $38.4 Million of the $64.9 Million in Questioned Direct Costs for 10 Audit ReportsFor 10 of 26 DCAA audit reports we reviewed, DCMA contracting officers did not settle $38.4 million of $64.9 million in questioned direct costs, even though the DCMA DACOs closed the CAFU system record indicating that they had completed all required actions. Table 2 shows the amount of settled and unsettled questioned direct costs by DCAA audit report number.

Table 2. Settled and Unsettled Questioned Direct Costs by DCAA Audit Report Number

DCAA Audit Report Number

DCAA Questioned Direct Costs

Settled Questioned Direct Costs

Unsettled Questioned Direct Costs

1 4371-2009M10100018 $13,656,359 $2,845,945 $10,810,414

2 4371-2010C10100001 4,642,909 2,475,007 2,167,902

3 2631-2010D10100001 13,586,159 2,577,871 11,008,288

4 2631-2011D10100001 10,777,531 1,140,295 9,637,236

5 3211-2010D10100001S1 1,080,679 1,033,934 46,745

6 4371-2007M10100010 1,731,929 1,608,165 123,764

7 4371-2008M10100010 3,247,171 3,091,837 155,334

8 6161-2008G10100001 5,291,950 5,227,647 64,303

9 6161-2009G10100002 4,619,491 1,895,129 2,724,362

10 6741-2009Q10100001 6,303,155 4,680,463 1,622,692

Total $64,937,333 $26,576,293 $38,361,040

Source: DoD OIG, based on DCAA and DCMA data.

Although the DCMA DACOs received the 10 DCAA audit reports between September 2014 and April 2017, the $38.4 million remained unsettled as of August 1, 2020. The DCMA DACOs either did not coordinate the settlement or did not wait for the settlement results for a portion of the questioned direct costs before closing the CAFU system records. For example, the DCAA issued Audit Report Numbers 4371-2009M10100018 and 4371-2010C10100001 to a DCMA DACO who was required to coordinate with other contracting officers responsible for the settlement of $18.3 million in questioned direct costs. However, the DCMA DACO did not coordinate with other contracting officers responsible for settling $13 million of the $18.3 million in questioned direct costs and closed the associated records in the CAFU system. A DCMA ACO took action to settle the remaining $5.3 million of $18.3 million questioned direct costs for which he had settlement responsibility. The DCMA DACO’s actions did not comply with DCMA Manual 2201-03, which requires a DACO to coordinate with other

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contracting officers responsible for the settlement of the questioned direct costs. In addition, the DCMA DACO did not keep the CAFU records open until all costs were settled, as DoD Instruction 7640.02 requires. The DCMA DACO responsible for taking action on Audit Report Numbers 4371-2009M10100018 and 4371-2010C10100001 left the agency and the newly assigned DCMA DACO has not coordinated the settlement of the questioned direct costs because the CAFU system records were closed.

For the remaining eight audit reports, the DCMA DACOs similarly closed the records in the CAFU system and did not take action to settle $25.4 million in questioned direct costs. Therefore, we concluded that the DCMA DACOs did not comply with DoD Instruction 7640.02 and DCMA Manual 2201-03 for the 10 audit reports.

Three Factors Contributed to DCMA Contracting Officers Not Complying With DoD Instruction 7640.02 and DCMA Manual 2201-03 We identified the following three factors that contributed to DCMA contracting officers not ensuring the settlement of millions of dollars in DCAA questioned direct costs.

• The DCMA lacks adequate guidance for identifying and coordinating with other contracting officers who are responsible for settling questioned direct costs.

• DCMA supervisors and the DCMA OIG did not provide effective oversight of DCMA DACO actions on the settlement of questioned direct costs.

• DCMA Manual 2201-03 states that DCMA ACOs must settle questioned direct costs.

DCMA Lacks Adequate Guidance for Identifying and Coordinating With DoD Contracting Officers Who Are Responsible for Settling Questioned Direct CostsThe DCMA lacks adequate guidance for helping DCMA DACOs identify and coordinate with DoD contracting officers who are responsible for settling questioned direct costs. For 9 of the 26 audit reports we selected, the DCMA DACOs who received the DCAA audit reports experienced difficulties in:

• identifying the DoD contracting officers authorized to settle the costs; or

• obtaining the settlement results from the other contracting officers after initially coordinating with them.

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For example, in DCAA Audit Report Numbers 6161-2008G10100001 and 6161-2009G10100002, the DCAA questioned $9.9 million in direct costs. The DCMA DACO who received the audit reports coordinated with the other contracting officers settling $7.1 million in questioned direct costs. However, for the remaining $2.8 million, the DCMA DACO stated that she was unable to identify some of the contracting officers responsible for settling the questioned direct costs. The DACO closed the CAFU system record instead of elevating her issue with identifying the responsible contracting officers to DCMA management, which resulted in a noncompliance with DoD Instruction 7640.02 and DCMA Manual 2201-03.

In another example, in DCAA Audit Report Numbers 2631-2010D10100001 and 2631-2011D10100001, the DCAA questioned $24.3 million in direct costs. The DCMA DACO who received the audit reports coordinated with the other contracting officers who were responsible for settling $24.3 million in questioned direct costs. Although the DCMA DACO received the settlement results for $3.7 million of the $24.3 million, she did not obtain the settlement results for the remaining $20.6 million. The DCMA DACO stated that she made repeated requests to obtain the settlement results for the remaining $20.6 million in questioned direct costs. However, the DCMA DACO ultimately closed the CAFU record without receiving the settlement results. The DCMA DACO stated that she closed the CAFU system records due to her concern that the 6-year statute of limitations was going to expire soon.17 However, the DCMA DACO did not consult with DCMA legal counsel over her concern with the 6-year statute of limitations prior to closing the two audit reports in CAFU system. Closing the CAFU system records without obtaining the responses from the other contracting officers did not comply with DoD Instruction 7640.02 and DCMA Manual 2201-03.

Although DCMA Manual 2201-03 requires the DCMA DACO who receives a DCAA audit report to coordinate with other contracting officers who are responsible for settling the questioned direct costs, it does not provide any guidance on how to identify all responsible DoD contracting officers. Furthermore, DCMA Manual 2201-03 does not provide any guidance for addressing situations when the other DoD contracting officers do not respond to the DCMA contracting officer’s repeated requests to provide settlement results of the questioned direct costs.

In April 2020, the DCMA developed a contracting officer locator form that describes specific actions to take when DCMA contracting officers are unable to identify the DoD contracting officers responsible for settling questioned direct

17 The Contract Disputes Act (41 U.S.C. 7101-7109) imposes a 6-year statute of limitations on all claims, whether they are asserted by the contractor or by the Government. The statute period begins upon the accrual of a claim, which is the date when all events that fix the alleged liability of either the Government or the contractor and permit assertion of the claim were known or should have been known.

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costs or they experience delays in receiving the settlement results. Use of the locator form should help DCMA DACOs identify the DoD contracting officers responsible for settling the questioned direct costs. The DCMA posted the locator form to its internal website, but the form has not been incorporated into DCMA Manual 2201-03.

DCMA Supervisors and the DCMA OIG Did Not Provide Effective Oversight of DCMA DACO Actions to Settle Questioned Direct CostsWe determined that both the DCMA supervisors and the DCMA OIG did not provide effective oversight of DCMA DACO actions to settle questioned direct costs. Paragraph 3.9 of DCMA Manual 2201-03 requires supervisors to indicate their review and concurrence of the DCMA contracting officer actions with a signature in the negotiation memorandum. In all 12 instances, the supervisors signed the negotiation memorandum even though the DACOs’ negotiation memorandums did not document that all questioned direct costs were settled. Supervision is a key control for monitoring contracting officer actions. However, the supervisor signatures in this case did not serve as an effective control for ensuring that DCMA DACOs completed all actions to settle the questioned direct costs on the 12 DCAA audit reports. An effective supervisory review of the DCMA DACOs’ negotiation memorandums should have identified that the DCMA DACOs did not obtain a settlement determination on all questioned direct costs and prompted the supervisors to request that the DACOs take the necessary corrective actions.

In April 2020, the DCMA developed a CAFU checklist, an additional internal control to help ensure that DCMA contracting officers appropriately settle DCAA audit reports. The supervisors’ use of the CAFU checklist should help them ensure the DCMA contracting officers have completed all actions necessary to settle the questioned direct costs before closing the record in the CAFU system. The DCMA posted the CAFU checklist to its internal website, but the form has not been incorporated into DCMA Manual 2201-03.

In addition, DoD Instruction 7640.02 requires the DCMA to perform periodic internal reviews of DCMA contracting officer actions on DCAA audit reports to determine whether they took timely and effective action on audit findings and recommendations.18 DCMA OIG officials stated that the DCMA OIG periodically evaluates compliance with DoD Instruction 7640.02 and DCMA policy, but only of a DCMA ACO, and only when the DCMA ACO is the primary recipient of a DCAA audit report. The DCMA OIG does not evaluate the actions that a DCMA DACO

18 DoD Instruction 7640.02, Enclosure 2, Section 3.g, “Policy for Follow-Up on Contract Audit Reports,” April 15, 2015.

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took on any DCAA audit reports, including those that questioned direct costs. The DCAA issued 25 of the 26 reports selected for this review to a DCMA DACO for action and the DCMA DACO had the responsibility to coordinate the settlement of the questioned direct costs and correctly update the status of the CAFU system records. Therefore, none of the 25 reports were subject to a DCMA OIG review because a DCMA ACO was not the primary recipient of the 25 reports.

Effective DCMA OIG monitoring of DCMA DACO actions could have identified the lack of actions on the questioned direct costs and prompted the DCMA OIG to request that the DACOs take corrective actions. Timely settlement of all audit findings and recommendations, including questioned direct costs, is critical for ensuring that contractors are not inadvertently reimbursed for unallowable costs.

DCMA Manual 2201-03 States That DCMA ACOs Must Settle Questioned Direct CostsDCMA Manual 2201-03 states that DCMA ACOs (which does not include DCMA DACOs) must settle questioned direct costs. DCMA Manual 2201-03 does not indicate whether or not DCMA DACOs have the authority to settle questioned direct costs. We spoke to several DCMA DACOs who stated that, based on their interpretation of DCMA Manual 2201-03, the DCMA has not granted them the authority to settle questioned direct costs. DCMA DACOs not settling questioned direct costs causes delays because the DCMA DACOs often must coordinate with, and receive settlements from, several different DCMA ACOs and other contracting officers who are specifically authorized by the DCMA Manual 2201-01 to settle questioned direct costs.

DCMA Manual 2201-03 does not authorize DCMA DACOs to settle questioned direct costs based on the DCMA’s interpretation of FAR 42.302(a)(9). FAR 42.302(a)(9) states that the contracts administration office (typically the DCMA) is responsible for establishing final indirect cost rates; however, the FAR does not specifically identify who is responsible for settling direct costs. The DCMA typically tasks DCMA DACOs with the responsibility for establishing indirect cost rates in accordance with FAR 42.302(a)(9). However, because the FAR lacks specificity for establishing responsibility over direct costs, DCMA Manual 2201-03, section 3.11, implements policy that only allows the DCMA ACOs assigned to each contract to settle questioned direct costs. When the DCAA questions a contractor’s direct costs, the questioned costs can involve dozens of contracts and several different DCMA ACOs. Additionally, questioned direct costs can involve contracting officers from the DoD and other Government agencies.

We spoke to representatives from the DPC, which is responsible for acquisition policy for the DoD. The representatives stated that FAR 42.302(a)(9) does not prohibit DCMA DACOs from having the authority to settle direct costs.

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The representatives explained that direct costs are an integral part of an indirect cost rate because the direct costs are used as the base (denominator) to calculate the indirect cost rate.19 Therefore, the representatives stated that when a DCMA DACO settles indirect cost rates, the DACO should give due consideration to the DCAA questioned direct costs.

DCMA Contracting Officers May Have Reimbursed DoD Contractors Up To $231.5 Million in Unallowable Direct CostsIn 12 of 26 DCAA audit reports we reviewed, the DCMA contracting officers did not settle $231.5 million of the $258 million in reported DCAA questioned direct costs. As described in Table 2, the DCMA contracting officers settled the remaining $26.5 million in reported DCAA questioned direct costs. The DCMA DACOs received the 12 audit reports for settlement between February 2006 and September 2017. Although DoD Instruction 7640.02 and DCMA Manual 2201-03 require DCMA contracting officers to settle a DCAA audit report within 12 months, the DCMA contracting officers still have not settled, or fully coordinated the settlement of, the questioned direct costs within the 12 audit reports as of August 1, 2020 (56 months ago, on average, as of August 1, 2020). As a result, DCMA contracting officers’ actions may have resulted in DoD contractors being reimbursed up to $231.5 million in questioned direct costs that may not be allowable on Government contracts.

Timely settlement of questioned direct costs is critical for recouping any unallowable costs and protecting the Government’s interests. As time passes without any action, the Government risks the expiration of the 6-year statute of limitation for recovering unallowable costs that the contractor has charged on Government contracts. In addition, the negotiation of unsettled questioned direct costs becomes more difficult over time due to the potential loss of records and the departure of Government personnel with firsthand knowledge of the issues. Finally, when the DCMA contracting officers close the record in the CAFU system without the settlement of all questioned direct costs, the accuracy and reliability of the CAFU system for tracking the status of contracting officer actions on DCAA audit reports is diminished.

19 The indirect cost rate is the mathematical percentage resulting from dividing the indirect cost by the direct cost (also referred to as the “base”).

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Defense Contract Management Agency Comments on the FindingThe DCMA Director agreed that the current version of DCMA Manual 2201-03 does not adequately clarify the different contracting officer roles and authority in settling DCAA questioned direct costs. However, the DCMA Director maintained that DCMA contacting officers only have the authority to settle DCAA questioned direct costs when delegated the authority by a DoD Component contracting officer.

In addition, the DCMA Director does not interpret FAR 42.302(a)(9) as conferring DCMA contracting officers the authority to settle or negotiate DCAA direct costs. The DCMA Director stated that the FAR grants DCMA ACOs and DACOs only the authority to establish final indirect cost rates and billing rates. The DCMA Director further stated that the FAR does not extend questioned direct costs settlement authority to DCMA contacting officers because DoD Component contracting officers are better suited to settle DCAA questioned direct costs because they negotiate the contract terms with the contractor, award the contract, and understand the expectations of the parties. Finally, the DCMA Director stated that this report unfairly implies that DCMA ACOs are responsible for the failure to settle direct costs questioned by the DCAA.

Our ResponseWe disagree with the DCMA’s position that the FAR prohibits DCMA ACOs and DACOs from settling DCAA questioned direct costs. FAR 1.102-4(e) states:

…If a policy or procedure, or a particular strategy or practice, is in the best interest of the Government and is not specifically addressed in the FAR, nor prohibited by law (statute or case law), Executive order or other regulation, Government members of the Team should not assume it is prohibited. Rather, absence of direction should be interpreted as permitting the Team to innovate and use sound business judgment that is otherwise consistent with law and within the limits of their authority. Contracting officers should take the lead in encouraging business process innovations and ensuring that business decisions are sound.20

The FAR does not prohibit DCMA ACOs and DACOs from settling DCAA questioned direct costs. The DPC, which establishes DoD acquisition policy, stated that DCMA DACOs do have the authority to settle questioned direct costs as part of their administrative responsibilities in establishing indirect rates in accordance with FAR 42.302(a)(9). Furthermore, according to representatives from the

20 FAR 1.102-4, “Role of the Acquisition Team.”

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DoD Components, DCMA contracting officer have the authority to settle DCAA questioned direct costs because the DCMA is identified as the contracts administration office on most contracts.

As previously stated, FAR 42.302(a)(9) grants both DCMA ACOs and DACOs the authority to settle questioned direct costs.21 Even if the FAR does not grant such authority, the DCMA ACOs or DACOs were still responsible for determining who had authority and coordinating with them to ensure the questioned costs were settled before closing the CAFU record. However, the DCMA ACOs and DACOs did not comply with the FAR, DoD Instruction 7640.02, and DCMA Manual 2201-03, when they closed CAFU system records for 12 of the 26 audit reports before they settled the questioned direct costs.

Recommendations, Management Comments, and Our ResponseRecommendation A.1We recommend that the Defense Contract Management Agency Director require the Defense Contract Management Agency divisional contracting officers to:

a. Reopen the 12 Defense Contract Audit Agency audit reports shown in Tables 1 and 2 in the Contract Audit Follow-Up System because the questioned direct costs have not been settled.

b. Coordinate the settlement of the questioned direct costs with the contracting officers with settlement responsibility.

c. Consult with legal counsel for any concerns that the 6-year statute of limitations has expired or may expire soon.

d. Explore available remedies for recovering any unallowable direct costs that were reimbursed to the contractor on DoD contracts.

e. Close the 12 records shown in Tables 1 and 2 in the Contract Audit Follow-up System after all questioned direct costs are settled.

Defense Contract Management Agency CommentsThe DCMA Director agreed with the recommendation, stating that the DCMA would complete the required actions by October 1, 2022, with the exception of those CAFU records that are under litigation or criminal investigation.

21 There maybe an exception where a DoD Component contracting officer delegates contract administration to the DCMA on a majority of contracts, but withholds delegation of contract administration to the DCMA on a specific contract.

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Our ResponseComments from the Director addressed the specifics of the recommendation. Therefore, the recommendation is resolved but will remain open. We will close this recommendation once we verify that the DCMA DACOs completed all actions required to settle questioned direct costs.

Recommendation A.2We recommend that the Defense Contract Management Agency Director:

a. Review the contracting officers’ actions for closing the 12 reports from Tables 1 and 2 in the Contract Audit Follow-up system without settling all questioned direct costs in noncompliance with DoD Instruction 7640.02; and

b. Based on the results of the review, take action as appropriate for the noncompliances, such as providing remedial training or initiating management action to hold personnel accountable.

Defense Contract Management Agency CommentsThe DCMA Director agreed with the recommendation, stating that the DCMA would complete the required actions by May 1, 2022. The DCMA Director stated that the DCMA reviewed the DCMA DACOs’ actions and determined that the records will be reopened in an attempt to settle questioned direct costs. Additionally, the DCMA created ad hoc training on coordinating the settlement of questioned direct costs and will update existing training to incorporate instructions for settling questioned direct costs. The DCMA DACOs identified in this report will receive the ad hoc or updated training.

Our ResponseComments from the Director addressed the specifics of the recommendation. Therefore, the recommendation is resolved but will remain open. We will close this recommendation once we verify that the DCMA DACOs assigned to the 12 audit reports have received the ad hoc training and the DCMA has updated its existing training.

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Recommendation A.3We recommend that the Defense Contract Management Agency Director require the supervisors of the Defense Contract Management Agency divisional administrative contracting officers responsible for the 12 Defense Contract Audit Agency audit reports shown in Tables 1 and 2 to take the training on the requirements for settling questioned direct costs outlined in DoD Instruction 7640.02, “Policy for Follow-up of Contract Audit Reports;” Defense Contract Management Agency Manual 2201-03, “Final Indirect Cost Rates;” and Manual 2201-04, “Contract Audit Follow-Up.”

Defense Contract Management Agency CommentsThe DCMA Director agreed with the recommendation and stated that ad hoc training for supervisors on the settlement of questioned direct costs has been created for supervisors and will be provided by May 1, 2021.

Our ResponseComments from the Director addressed the specifics of the recommendation. Therefore, the recommendation is resolved but will remain open. We will close this recommendation once we verify that the DCMA supervisors of the DCMA DACOs assigned to the 12 audit reports have received the ad hoc training on settlement of questioned direct costs.

Recommendation A.4We recommend that the Defense Contract Management Agency Director update Defense Contract Management Agency Manual 2201-03, “Final Indirect Cost Rates,” and Manual 2201-04, “Contract Audit Follow-Up,” to require that:

a. Contracting officers use the contracting officer locator form to identify contracting officers responsible for settling questioned direct costs.

b. Contracting officers and supervisors use the Contract Audit Follow-Up checklist to help ensure that the findings and recommendations related to questioned direct costs have been settled before the record is closed in the Contract Audit Follow-Up system.

Defense Contract Management Agency CommentsThe DCMA Director agreed with the recommendation, stating that the DCMA would complete the actions by May 1, 2021. The DCMA Director stated that all DCMA contracting officers will be required to use the CAFU checklist and the contracting officer locator form. The DCMA Manuals 2201-03 and 2201-04 are being revised, in part to require that DCMA contracting officers use the CAFU checklist and the contracting officer locator form.

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Our ResponseComments from the Director addressed the specifics of the recommendation. Therefore, the recommendation is resolved but will remain open. We will close the recommendation once we verify DCMA Manuals 2201-03 and 2201-04 have been revised to require that DCMA contracting officers use the CAFU checklist and the contracting officer locator form.

Recommendation A.5We recommend that the Defense Contract Management Agency Director require that the Defense Contract Management Agency Office of Inspector General perform internal reviews of divisional administrative contracting officer actions on questioned direct costs for compliance with DoD Instruction 7640.02, “Policy for Follow-up of Contract Audit Reports,” and Defense Contract Management Agency Manual 2201-03, “Final Indirect Cost Rates,” and Manual 2201-04, “Contract Audit Follow-Up.”

Defense Contract Management Agency CommentsThe DCMA Director agreed with the recommendation and stated that the DCMA OIG added the DCMA Cost and Pricing Regional Command (including audit reports issued to DCMA DACOs) to the FY 2021 schedule for a targeted review to validate compliance with DCMA Manuals 2201-03 and 2201-04.

Our ResponseComments from the Director addressed the specifics of the recommendation. Therefore, the recommendation is resolved but will remain open. We will close the recommendation once we verify that the DCMA OIG performed reviews to validate DCMA DACO compliance with DCMA Manuals 2201-03 and 2201-04.

Recommendation A.6We recommend that the Defense Contract Management Agency Director conduct a review of the Agency’s policy on settling questioned direct costs to clarify the authority of divisional administrative contracting officers to settle questioned direct costs in Defense Contract Audit Agency audit reports.

Defense Contract Management Agency CommentsThe DCMA Director agreed with the recommendation and stated that the DCMA will issue a memorandum to DCMA contracting officers, which clarifies the process for settling questioned direct costs. The DCMA will also work with the DPC to help clarify who has the authority to settle questioned direct costs. In addition, in response to Recommendation A.4, the DCMA will revise DCMA Manuals 2201-03

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and 2201-04 to clarify the roles of the DoD contracting officers in settling questioned direct costs, consistent with guidance provided by the DPC. The estimated date for completing these actions is May 1, 2021.

Our ResponseComments from the Director addressed the specifics of the recommendation. Therefore, the recommendation is resolved but will remain open. We will close the recommendation once we verify that the DCMA has revised DCMA Manuals 2201-03 and 2201-04 to clarify on the roles of DoD contracting officers in settling DCAA questioned direct costs that is consistent with guidance issued by the DPC.

Recommendation A.7We recommend that the Defense Pricing and Contracting Principal Director issue guidance to the DoD Components to clarify who has the authority to settle Defense Contract Audit Agency questioned direct costs in accordance with Federal Acquisition Regulation Subpart 42.3, “Contract Administration Office Functions.”

Defense Pricing and Contracting CommentsThe DPC Principal Director stated that he partially agreed with the recommendation to issue guidance to the DoD Components that clarifies who has the authority to settle direct questioned costs. Specifically, the DPC Principal Director will, in coordination with the DCMA, consider the issuance of clarifying guidance if he determines that it will be useful to do so. In addition, the DPC Principal Director will consider a revision to the DFARS to clarify DoD contracting officer roles and their authority in settling questioned direct costs.

Defense Contract Management Agency CommentsWhile not required to comment on this recommendation, the DCMA Director agreed that clarifying guidance would be useful. The DCMA will work with the DPC in considering whether a DFARS revision is needed to provide clarification on the DoD contracting officer roles and authority regarding settlement of DCAA questioned direct costs.

Our ResponseComments from the DPC Principal Director addressed the specifics of the recommendation. Therefore, the recommendation is resolved but will remain open. We will close the recommendation once the DPC distributes guidance regarding the authority of DoD contracting officers for settling direct costs or issues a DFARS revision.

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Finding B

DCMA DACOs Have Not Taken All Actions Required to Settle the Questioned Direct Costs From Three of Eight Audit Reports, as a Previous DoD Office of Inspector General Report Recommended

The DCMA DACOs have not taken all actions required to settle the questioned direct costs from three of the eight DCAA audit reports, as DoD OIG Report No. DODIG-2017-055 recommended more than 3 years ago, in February 2017.22 The DCMA DACOs continue to be in noncompliance with DoD Instruction 7640.02 and DCMA Manuals 2201-03 and 2201-04 because $98.1 million of the $304.8 million questioned direct costs still needs to be settled. In DoD OIG Report No. DODIG-2017-055, we recommended that the DCMA Director require the DCMA contracting officers to:

• settle, or coordinate the settlement of, $304.8 million in questioned direct costs that the DCAA reported on in the eight audit reports; and

• correct the inaccurate CAFU system data for four of the eight DCAA audit reports.

In addition, two of the three DCMA DACOs assigned to the three reports closed the associated records in the CAFU system even though they have not completed all of the actions required to settle the questioned direct costs. For the remaining five reports, DCMA contracting officers settled, or coordinated the settlement of, the questioned direct costs and closed the CAFU system records when they completed all required actions.

The DCMA DACOs stated that they have not taken all of the actions required to settle the questioned direct costs for the three audit reports in part because they experienced difficulties determining the other DoD contracting officers who were responsible for settling portions of the questioned direct costs. Nevertheless, the DCMA DACOs were still responsible for identifying who has responsibility to settle the questioned direct costs and to keep the record open in the CAFU system until all questioned direct costs are settled.

22 In Report DODIG-2017-055, “Evaluation of Defense Contract Management Agency Contracting Officer Actions on Defense Contract Audit Agency Incurred Cost Audit Report,” February 9, 2017, we identified that contracting officers did not settle questioned direct costs in eight DCAA incurred cost audit reports although the contracting officers closed the audit reports in the CAFU system.

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As a result, DCMA DACOs may have reimbursed DoD contractors up to $98.1 million in costs that may not be allowable on Government contracts in accordance with FAR subpart 31.2. Appropriately addressing questioned direct costs in a timely manner by DCMA contracting officers is important for ensuring that the Government does not reimburse DoD contractors for costs that are unallowable.

The DCMA Has Not Taken All Actions Required to Settle $98.1 Million in Questioned Direct Costs From Three of the Eight Audit Reports, as a DoD Office of Inspector General Report RecommendedThe DCMA has not taken all actions required to settle $98.1 million in DCAA questioned direct costs from three of the eight DCAA audit reports identified in DoD OIG Report No. DODIG-2017-055. In DoD OIG Report No. DODIG-2017-055, we recommended that the DCMA Director require the DCMA contracting officers to:

• settle, or coordinate the settlement of, DCAA questioned direct costs totaling $304.8 million in eight audit reports (Recommendations A.1, A.2, and D.1); and

• correct the inaccurate CAFU system data on four DCAA audit reports (Recommendation E.1).

In response to the DoD OIG report, the DCMA agreed to settle or coordinate the settlement of the questioned direct cost for all eight reports and to correct the inaccurate CAFU system data.

However, the DCMA DACOs assigned to three of the eight reports have not settled $98.1 million of $131.6 million in questioned direct costs even though the DCAA audit reports were issued to the DCMA for action more than 6 years ago. For the remaining five DCAA audit reports, the DCMA contracting officers completed the actions required for settling $173.2 million in questioned direct costs reported by the DCAA, as Report No. DODIG-2017-055 recommended. Table 3 shows the status of the actions on the questioned direct costs in all eight DCAA audit reports.

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Table 3. Questioned Direct Costs Unsettled and Settled From Report No. DODIG-2017-055

DCAA Audit Report Number

DCAA Questioned Direct Costs

Settled Questioned Direct Costs

Unsettled Questioned Direct Costs

1 6271-2003A10100103 $98,167,148 $24,507,628 $73,659,520

2 6281-2005G10100001 30,440,065 9,057,045 21,383,020

3 2161-2007T10100001 3,052,934 0 3,052,934

Subtotal - Unsettled Questioned Direct Cost $131,660,147 $33,564,673 $98,095,474

4 4531-2007K10100001 $2,385,825 $2,385,825 $0

5 1311-2006C10100006 2,900,992 2,900,992 0

6 3181-2009D10100001 4,163,301 4,163,301 0

7 3321-2009K10100002 158,812,697 158,812,697 0

8 3161-2007F10100001 4,922,064 4,922,064 0

Subtotal - Settled Questioned Direct Cost $173,184,879 $173,184,879 $0

Total $304,845,026 $206,749,552 $98,095,474

Source: DoD OIG based on DCAA and DCMA data.

DCMA DACOs Have Not Taken Action on the $98.1 Million of $131.6 Million in Questioned Direct CostsFor three DCAA audit reports, we determined that DCMA DACOs have not taken all actions required to settle $98.1 million of $131.6 million in questioned direct costs even though the DCAA audit reports were issued to the DCMA for action more than 6 years ago. Report No. DODIG-2017-055, recommended more than 3 years ago that the DCMA contracting officers complete the actions required to settle, or coordinate the settlement of, the questioned direct costs. DCMA DACOs were responsible for taking action on the questioned direct costs within 12 months of receiving the DCAA audit report and accurately recording the status of their actions in the CAFU system, in accordance with DoD Instruction 7640.02 and DCMA Manual 2201-04.

For example, the DCMA DACO who received DCAA Audit Report No. 6271-2003A10100103 was responsible for coordinating with DCMA ACOs for the settlement of $24.5 million of the $98.2 million in questioned direct costs. The DCMA ACOs settled the $24.5 million, but the DCMA DACO did not coordinate with the other DoD contracting officers who were responsible for settling the remaining $73.7 million. The DCMA DACO closed the record in the CAFU system without documenting any comments on the status of the $73.7 million questioned direct costs.

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The DCMA DACO did not comply with DoD Instruction 7640.02 and DCMA Manuals 2201-03 and 2201-04 when she closed the record in the CAFU before the $73.7 million in questioned direct costs were settled. The DCMA DACO left the agency and the newly assigned DCMA DACO stated that the former DCMA DACO experienced difficulties and delays in identifying and receiving settlement determinations from the DoD contracting officers who were responsible for settling the $73.7 million in questioned direct costs. Regardless, in accordance with DCMA Manual 2201-03, the DCMA DACO was required to identify the contracting officers responsible for settling the $73.7 million and keep the CAFU record open until the costs were settled. The DCMA DACO should have immediately elevated to DCMA management any difficulties experienced or delays with identifying the appropriate contracting officers with questioned direct costs settlement responsibility. DCMA management could have assisted the DCMA DACO in identifying DoD contracting officers with settlement responsibility and requesting action from those that had been identified.

For the remaining two audit reports, the DCMA DACOs similarly did not take action to settle $24.4 million in questioned direct costs. Therefore, we concluded that the DCMA DACOs did not fully address the recommendations in DoD OIG Report No. DODIG-2017-055 and the recommendations remain open.

DCMA Contracting Officers Completed Actions Required to Settle the Questioned Direct Costs in the Five Remaining Audit ReportsFor the remaining five DCAA audit reports listed in Table 3, DCMA contracting officers completed the actions required to settle $173.2 million in questioned direct costs. For example, the DCMA contracting officer for DCAA Audit Report No. 3321-2009K10100002 settled part of the questioned direct costs related to subcontracts, legal services, and legal settlements based on coordination with the DCAA and additional support provided by the contractor during negotiations to demonstrate that the costs were allowable. In addition, the DCMA contracting officer coordinated with several DoD contracting officers to settle the remaining questioned direct costs. See Appendix D for a list of the eight DCAA audit reports and whether DCMA contracting officer actions satisfied the recommendations in DoD OIG Report No. DODIG-2017-055.

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DCMA DACOs Have Not Completed Actions Required to Settle $98.1 Million Because of Difficulties With Identifying Who Had Responsibility to Settle the Questioned Direct CostsFor three of the eight DCAA audit reports, DCMA DACOs stated that they experienced difficulties identifying who had the responsibility to settle the questioned direct costs. As a result, the DCMA DACOs did not complete all actions required to settle the questioned direct costs. For example, one DCMA DACO stated that she attempted to locate the responsible contracting officers at other Government agencies, but those attempts were unsuccessful. In accordance with DCMA Manual 2201-03, the DCMA DACO had an obligation to identify the contracting officers responsible for settling the $98.1 million and keeping the CAFU record open until the costs were settled. The DCMA DACOs should have elevated the difficulties to DCMA management to resolve the difficulties and successfully settle all of the questioned costs. Use of the newly created contracting officer locator form identified in Finding A and Recommendation A.4 should help the DCMA DACOs identify contracting officers responsible for settling the questioned direct costs.

DCMA Contracting Officers May Have Reimbursed up to $98.1 Million in Unallowable Costs on Government ContractsAs a result of the DCMA contracting officers not coordinating the settlement of the questioned direct costs, the Government may have reimbursed DoD contractors up to $98.1 million in costs that may not be allowable on Government contracts. The DCMA DACOs received the three audit reports for settlement between December 2013 and June 2014. Although DoD Instruction 7640.02 and DCMA Manual 2201-03 requires contracting officers to settle a DCAA audit report within 12 months, the DCMA contracting officers still have not settled, or coordinated the settlement of, the questioned direct costs within the three audit reports. The DCMA contracting officers received the reports from DCAA for action 6 years ago on average, as of August 1, 2020. The excessive delays may have jeopardized the ability of the Government to recoup questioned direct costs that may be unallowable because the 6-year statute of limitation for recouping unallowable costs from the contractor may have passed.23

23 The Contract Disputes Act (41 U.S.C. 7101-7109) imposes a 6-year statute of limitations on all claims, whether they are asserted by the contractor or by the Government. The statute period begins upon the accrual of a claim, which is the date when all events that fix the alleged liability of either the Government or the contractor and permit assertion of the claim were known or should have been known.

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In addition, when the DCMA DACOs prematurely closed the records for the reports in the CAFU system, they impacted the accuracy and reliability of the CAFU system, which DoD Component management and the DoD OIG use to track and monitor contracting officer actions on DCAA audit reports.

The Recommendations in Report No. DODIG-2017-055 Remain OpenThe Contract Disputes Act’s 6-year statute of limitations does not preclude the contracting officer from attempting to settle the questioned direct costs. Recommendations A.1, A.2, and D.1 in DoD OIG Report No. DODIG-2017-055 remain open because the DCMA contracting officers assigned to three of the eight audit reports have not yet settled, or coordinated the settlement of, $98.1 million of the $304.8 million in questioned direct costs reported by DCAA in the eight audit reports. We will close the recommendations once we have verified that all questioned direct costs have been settled and the records are closed in the CAFU system. We have not identified any additional recommendations for this finding.

Appendixes

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Appendix A

Scope and MethodologyWe conducted this evaluation from April 2019 through August 2020 in accordance with the “Quality Standards for Inspection and Evaluations,” published in January 2012 by the Council of Inspector General on Integrity and Efficiency. Those standards require that we plan and perform the evaluation to ensure that objectives are met and that we perform the evaluation to obtain sufficient, competent, and relevant evidence to support the findings, conclusions, and recommendations. We believe that the evidence obtained was sufficient, competent, and relevant to lead a reasonable person to sustain the findings, conclusions, and recommendations.

DCAA Audit Reports Sample To accomplish our evaluation objective, we evaluated DoD contracting officer actions on 26 DCAA incurred cost audit reports from a universe of 68 DCAA audit reports. The DCAA issued the 26 DCAA audit reports for settlement between February 2006 and September 2017, reporting a total of $597.4 million in questioned direct costs. Our selection of a sample of 26 DCAA incurred cost audit reports was based on a non-statistical selection of all DCAA audit reports that included at least $1 million in questioned direct costs and were closed by DoD contracting officers in the CAFU system between October 2017 and September 2018.

For 25 of the 26 DCAA audit reports we selected, DCMA DACOs were responsible for coordinating the settlement of the questioned direct costs and closing the CAFU system record. For the remaining DCAA audit report we selected, a Navy contracting officer was responsible for settling the questioned direct costs and closing the CAFU system record after he completed all required contractual actions.

In addition, we evaluated DCMA contracting officer actions taken in response to Recommendations A.1, A.2, D.1, and E.1 from DoD OIG Report No. DODIG-2017-055. The recommendations stated that the DCMA should take immediate action to settle $304.8 million in questioned direct costs reported by the DCAA in eight audit reports.

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DODIG-2021-047 │ 27

Review of Documentation and Interviews For the 26 DCAA audit reports we selected for review, we:

• gained an understanding of the 26 DCAA audit reports and associated supporting DCAA audit working papers;

• obtained and evaluated the adequacy of established agency policies available to the contracting officers for addressing the questioned direct costs;

• interviewed DCAA auditors who conducted the audits, as needed;

• interviewed contracting officers and other appropriate personnel involved in taking action on the questioned direct costs;

• obtained and evaluated contracting officer negotiation memorandums and any other records that documented the actions taken by the contracting officers on the DCAA questioned direct costs; and

• evaluated contracting officer actions taken on the questioned direct costs for compliance with the FAR, DoD Instruction 7640.02, and agency policies and procedures.

We conducted site visits at the following DCMA field offices.

• DCMA Sacramento, Roseville, California

• DCMA Hartford, East Hartford, Connecticut

• DCMA Lockheed Martin, Orlando, Florida

• DCMA Manassas, Chantilly, Virginia

• DCMA British Aerospace and Electronics, Sterling, Virginia

CriteriaWe reviewed criteria from Federal laws and regulations, DoD directives, instructions, manuals, and policy memorandums. We also reviewed criteria from DCMA and DCAA manuals and other policies. The following criteria were most pertinent to our evaluation and conclusions in this report.

Laws and Regulations • FAR Part 31, “Contract Cost Principles and Procedures,” January 13, 2017

• FAR Part 42, “Contract Administration and Audit Services,” November 6, 2017

DoD Directives, Instructions, Manuals, and Policy Memorandums• DoD Instruction 7640.02, “Policy for Follow-Up on Contract Audit

Reports,” April 15, 2015

Appendixes

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DCMA and DCAA Instructions, Guidance, and Manuals• DCMA Manual 2201-03, “Final Indirect Cost Rates,” February 14, 2019

• DCMA Manual 2201-04, “Contract Audit Follow-up,” March 3, 2019

• DCMA Instruction 125, “Final Overhead Rates,” April 21, 2014 (replaced by DCMA Manual 2201-03, as of February 14, 2019)

• DCMA Instruction 126, “Contract Audit Follow Up,” February 11, 2016 (replaced by DCMA Manual 2201-04, as of March 3, 2019)

• DCMA Guidance 13-192, “Administrative Contracting Officer Settlement of Questioned Direct Costs Reported by DCAA,” June 21, 2013

• DCAA Contract Audit Manual, January 2014

Use of Computer-Processed DataIn selecting our sample of 26 DCAA audit reports, we obtained a computerized list of audit reports that contracting officers closed in the CAFU system between October 2017 and September 2018. The list of audit reports was generated from the CAFU system. We tested the reliability of the list by tracing the 26 selected reports to source documents and we determined that the data in the list were reliable.

Use of Technical AssistanceWe did not rely on technical assistance for this evaluation.

Prior CoverageDoD OIG During the last 5 years, the DoD OIG issued three reports that addressed DoD contracting officer actions on DCAA questioned direct costs. Unrestricted DoD OIG reports can be accessed at http://www.dodig.mil/reports.html/.

Report No. DODIG-2020-036, “Report on Evaluation of Contracting Officer Actions on Defense Contract Audit Agency Reports that Disclaim an Opinion,” November 26, 2019

The DoD OIG evaluated whether the actions taken by DoD contracting officers on DCAA audit reports that disclaimed an audit opinion complied with the FAR, DoD Instructions, and agency policy. For 2 of 21 audit reports selected for evaluation, the contracting officers did not justify their actions to disagree with the DCAA questioned costs totaling $219 million.

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DODIG-2021-047 │ 29

Report No. DODIG-2018-134, “Evaluation of DoD Hotline Complaint Regarding Defense Contract Management Agency Baltimore’s Actions on Audit Findings Reported by Defense Contract Audit Agency,” July 9, 2018

The DoD OIG evaluated and substantiated a Defense Hotline complaint alleging that a DCMA contracting officer at the Baltimore field office did not take appropriate action on a DCAA audit report which identified $1.1 million in questioned indirect costs. The same contracting officer did not take appropriate action on an additional $9 million in questioned direct costs.

Report No. DODIG-2017-055, “Evaluation of Defense Contract Management Agency Contracting Officer Actions on Defense Contract Audit Agency Incurred Cost Audit Reports,” February 9, 2017

The DoD OIG evaluated the appropriateness of DCMA actions on DCAA findings reported in 22 incurred cost audit reports. For eight audit reports, the contracting officers did not taken any action on $304.8 million in DCAA questioned direct costs. In noncompliance with DoD Instruction 7640.02, the contracting officers also closed the CAFU system records before they took any action on the questioned direct costs.

 

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Appendix BFor the 26 audit reports, this appendix identifies the DoD Component responsible for coordinating the settlement of the questioned direct costs and for reporting the correct status of its actions in the CAFU system. The appendix also identifies the DoD Components primarily responsible for settling the questioned direct costs.

Table 4. DoD Components Responsible for Coordinating the Settlement of the Questioned Direct Costs and for Settling the Questioned Direct Costs

DCAA Report NumberTotal

Questioned Direct Costs

Contracting Officer Responsible for

Coordinating Settlement of Questioned Direct Costs

DoD Component Primarily Responsible

for Settling the Questioned Direct

Costs (See Table Note)

1 9841-2009C10100001 $88,502,086 DCMA DACO DCMA ACOs

2 9841-2010C10100001 104,629,898 DCMA DACO DCMA ACOs

3 2631-2010D10100001 13,586,159 DCMA DACO DCMA ACOs, Air Force

4 2631-2011D10100001 10,777,531 DCMA DACO DCMA ACOs, Air Force

5 3211-2010D10100001S1 1,080,679 DCMA DACO DCMA ACOs, Air Force

6 4371-2007M10100010 1,731,929 DCMA DACO DCMA ACOs

7 4371-2008M10100010 3,247,171 DCMA DACO DCMA ACOs

8 4371-2009M10100018 13,656,359 DCMA DACO DCMA ACOs

9 4371-2010C10100001 4,642,909 DCMA DACO DCMA ACOs

10 6161-2008G10100001 5,291,950 DCMA DACO DCMA ACOs, Army

11 6161-2009G10100002 4,619,491 DCMA DACO DCMA ACOs, Army

12 6741-2009Q10100001 6,303,155 DCMA DACO DCMA ACOs, Army

Subtotal $258,069,317

13 1551-2011A10100003 6,850,732 DCMA DACO DCMA ACOs, Navy, Army, Air Force

14 1721-2003B10100001 14,114,346 Navy Navy

15 3321-2010S10180003 12,202,051 DCMA DACO DCMA ACOs

16 3631-2012A10100001 6,764,211 DCMA DACO DCMA ACOs, NASA

17 6281-2010G10100001 3,118,078 DCMA DACO DCMA ACOs

18 6281-2011G10100001 5,001,535 DCMA DACO DCMA ACOs

19 6421-2006B10100403S1 8,977,735 DCMA DACO DCMA ACOs

20 6831-2006M10100001 62,411,516 DCMA DACO DCMA ACOs

21 6831-2008M10100001 96,904,475 DCMA DACO DCMA ACOs

22 6831-2009M10100001 71,963,683 DCMA DACO DCMA ACOs

Appendixes

DODIG-2021-047 │ 31

DCAA Report NumberTotal

Questioned Direct Costs

Contracting Officer Responsible for

Coordinating Settlement of Questioned Direct Costs

DoD Component Primarily Responsible

for Settling the Questioned Direct

Costs (See Table Note)

23 6851-2007A10100001 8,929,647 DCMA DACO DCMA ACOs

24 6861-2007C10100375 25,922,913 DCMA DACO DCMA ACOs

25 9811-2010F10100015 8,840,366 DCMA DACO DCMA ACOs

26 9811-2011F10100015 7,398,466 DCMA DACO DCMA ACOs

Subtotal $339,399,754

Total $597,469,071

Source: DoD OIG prepared, based on DCMA and DCAA data and from the findings in this report.

Table Note: This column identifies the DoD Components who had settlement responsibility over a majority of the questioned direct costs that we evaluated. It is not an all-inclusive list of all DoD Components that were responsible for settling the questioned direct costs.

Table 4. DoD Components Responsible for Coordinating the Settlement of the Questioned Direct Costs and for Settling the Questioned Direct Costs (cont’d)

Appendixes

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Appendix CThis appendix identifies the number of months elapsed between DCAA audit report issuance date and the contracting officer’s settlement of the questioned direct costs. For all 26 reports, the contracting officers settled the questioned direct costs in 47 months, on average, after the receipt of the DCAA audit report, which exceeded the 12 month settlement requirement in DoD Instruction 7640.02.

Table 5. Number of Months Elapsed Between DCAA Audit Report Date and Settlement of the Questioned Indirect and Direct Costs Date

DCAA Audit Report Number

DCAA Audit Report Date

Questioned Direct Costs

Settlement Date

Months Elapsed From Report

Issuance to Direct Cost Settlement (See Table Note)

1 9841-2009C10100001 03/10/16 Not Settled 52

2 9841-2010C10100001 03/10/16 Not Settled 52

3 2631-2010D10100001 09/30/16 Not Settled 46

4 2631-2011D10100001 09/30/16 Not Settled 46

5 3211-2010D10100001S1 04/21/17 Not Settled 39

6 4371-2007M10100010 09/03/14 Not Settled 70

7 4371-2008M10100010 09/03/14 Not Settled 70

8 4371-2009M10100018 09/30/15 Not Settled 58

9 4371-2010C10100001 09/30/15 Not Settled 58

10 6161-2008G10100001 05/07/15 Not Settled 62

11 6161-2009G10100002 05/07/15 Not Settled 62

12 6741-2009Q10100001 08/04/15 Not Settled 59

Subtotal Average Months Elapsed 56

13 1551-2011A10100003 04/07/17 02/07/20 34

14 1721-2003B10100001 02/06/06 03/14/14 97

15 3321-2010S10180003 04/28/11 09/05/18 88

16 3631-2012A10100001 09/29/17 09/18/18 11

17 6281-2010G10100001 09/30/16 05/24/17 7

18 6281-2011G10100001 09/30/16 07/09/18 21

19 6421-2006B10100403S1 09/03/13 05/18/18 56

20 6831-2006M10100001 09/30/13 05/11/18 55

21 6831-2008M10100001 12/30/15 07/03/18 30

22 6831-2009M10100001 12/30/15 07/03/18 30

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DODIG-2021-047 │ 33

DCAA Audit Report Number

DCAA Audit Report Date

Questioned Direct Costs

Settlement Date

Months Elapsed From Report

Issuance to Direct Cost Settlement (See Table Note)

23 6851-2007A10100001 04/11/14 03/22/18 47

24 6861-2007C10100375 10/16/14 05/07/18 42

25 9811-2010F10100015 06/30/17 12/26/17 5

26 9811-2011F10100015 06/30/17 06/22/18 11

Subtotal Average Months Elapsed 38

Total Average Months Elapsed 47

Source: DoD OIG prepared, based on DCMA and DCAA data and the findings in this report.Table Note: As of August 1, 2020, the questioned costs for the first 12 listed audit reports were not settled. For these 12 reports, we used August 1, 2020, as the settlement date for calculating the number of months elapsed between the audit report date and the settlement date.

Table 5. Number of Months Elapsed Between DCAA Audit Report Date and Settlement of the Questioned Indirect and Direct Costs Date (cont’d)

Appendixes

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Appendix DThis appendix identifies Recommendations A.1, A.2, D.1, and E.1 from DoD OIG Report No. DODIG-2017-055, the status of the recommendations, and whether the DCMA contracting officers’ actions satisfied the intent of the related recommendations.

Table 6. Status of Recommendations and Actions Taken in Response to DoD OIG Report No. DODIG-2017-055

Recommendation from DODIG-2017-055Recommendation

Status (Unresolved, Resolved-Open, or Resolved-Closed)

Actions Performed Documentation Needed to Close Recommendation

Rec. A.1.a-b: The DoD OIG recommended that the Defense Contract Management Agency Director request the six Defense Contract Management Agency contracting officers with negotiation authority to:

a. take appropriate action on the Defense Contract Audit Agency reported questioned direct costs of $297.6 million; and

b. document the action in a post-negotiation memorandum, as DoD Instruction 7640.02 requires.

DCAA Audit Reports: 3321-2009K10100002, 6281-2005G10100001, 4531-2007K10100001, 3161-2007F10100001, 6271-2003A10100103, and 1311-2006C10100006.

Resolved-Open The DACOs completed actions to settle the $203 million in questioned direct costs from DCAA audit reports: 3321-2009K10100002, 4531-2007K10100001, 3161-2007F10100001, and 1311-2006C10100006. No further actions required for these audit reports.

The DACOs need to take action to settle the $95 million in questioned direct costs from DCAA audit reports 6281-2005G10100001 and 6271-2003A10100103.

Rec. A.2.a-b: The DoD OIG recommended that the Defense Contract Management Agency Director direct the two remaining Defense Contract Management Agency contracting officers to:

a. coordinate with the other DoD Component contracting officers having authority to negotiate the reported questioned direct costs of $7.2 million; and

b. incorporate the negotiation results from the other DoD Components in a post-negotiation memorandum, as DoD Instruction 7640.02 requires.

DCAA Audit Reports: 2161-2007T10100001 and 3181-2009D10100001.

Resolved-Open The DACO completed actions to settle the $4.2 million in questioned direct costs from DCAA audit report 3181-2009D10100001. No further action required for this audit report.

The DACO needs to take action to settle the $3 million in questioned direct costs from DCAA audit report 2161-2007T10100001.

Appendixes

DODIG-2021-047 │ 35

Recommendation from DODIG-2017-055Recommendation

Status (Unresolved, Resolved-Open, or Resolved-Closed)

Actions Performed Documentation Needed to Close Recommendation

Rec. D.1.a-c: The DoD OIG recommended that the Defense Contract Management Agency Director request that the contracting officers assigned to Audit Report Numbers 6281-2005G10100001, 3321-2009K10100002, and 4531-2007K10100001:

a. determine the actions they should take to appropriately disposition the audit findings;

b. document the actions taken to achieve disposition at least monthly; and

c. document the disposition of the audit findings in a negotiation memorandum.

Resolved-Open For 3321-2009K10100002 and 4531-2007K10100001, the contracting officers completed the actions; therefore, no further action is required. The recommendation remains open until all reports are addressed.

The DACO needs to take action to settle the $21.4 million in questioned direct costs from DCAA audit report 6281-2005G10100001.

Rec. E.1.a- d: The DoD OIG recommended that the Defense Contract Management Agency Director remove the disposition date entered in the Contract Audit Follow-up System for the following audit reports and reinstate the reports as unresolved until the contracting officer resolves and dispositions the questioned direct costs:

a. Audit Report No. 2161-2007T10100001,b. Audit Report No. 3161-2007F10100001,c. Audit Report No. 3181-2009D10100001, andd. Audit Report No. 6271-2003A10100103.

Resolved-Closed The DCMA DACOs completed the required action.

N/A

Source: DoD OIG prepared, based on DCMA and DCAA data and the findings in this report.

Table 6. Status of Recommendations and Actions Taken in Response to DoD OIG Report No. DODIG-2017-055 (cont’d)

Management Comments

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Management Comments

Defense Contract Management Agency Director

Management Comments

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Defense Contract Management Agency Director (cont’d)

Management Comments

38 │ DODIG-2021-047

Defense Contract Management Agency Director (cont’d)

Management Comments

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Defense Contract Management Agency Director (cont’d)

Management Comments

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Defense Contract Management Agency Director (cont’d)

Management Comments

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Defense Contract Management Agency Director (cont’d)

Management Comments

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Defense Pricing and Contracting Principal Director

DODIG-2021-047 │ 43

Acronyms and Abbreviations

Acronyms and AbbreviationsAcronym Definition

ACO Administrative Contracting Officer

CAFU Contract Audit Follow-up

DACO Divisional Administrative Contracting Officer

DCAA Defense Contract Audit Agency

DCMA Defense Contract Management Agency

DFARS Defense Federal Acquisition Regulation Supplement

DPC Defense Pricing and Contracting

FAR Federal Acquisition Regulation

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Whistleblower Protection safeguards DoD employees against retaliation for protected disclosures that expose possible waste, fraud,

and abuse in government programs. For more information, please visit the Whistleblower webpage at http://www.dodig.mil/Components/

Administrative-Investigations/Whistleblower-Reprisal-Investigations/Whisteblower-Reprisal/ or contact the Whistleblower Protection Coordinator at Whistleblowerprotectioncoordinator@dodig.mil

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