By Daniel Wilson

Law360 (July 10, 2020, 7:30 PM EDT) -- The scope of a ban on certain Chinese technology coming in the second half of 2020 may cause government contractors to scrutinize their supply chains, while they face scrutiny of their own from watchdogs looking into COVID-19 funding.

Here are seven federal bills, policy changes and enforcement moves that federal contractors should keep an eye on for the remainder of the year.

Federal Scrutiny Over COVID-19 Funding

As part of the government response to the COVID-19 pandemic, lawmakers passed the largest-ever federal stimulus package, providing more than $2 trillion in funding.

Some of it is specifically targeted at federal contractors, like Section 3610 of the Coronavirus Aid, Relief and Economic Security Act that provides funding to keep workforces in a "ready state" if unable to work due to the virus. Other programs are open to at least some contractors, such as the forgivable payroll loans offered through the Paycheck Protection Program.

In addition to doling out huge amounts of money, which included additional funding for U.S. Government Accountability Office oversight, Congress also created three new oversight bodies and official positions in the CARES Act, including a new special inspector general and the Pandemic Response Accountability Committee.

Scrutiny over coronavirus-related funding will be intense, coming not only from those newly established watchdogs and the GAO, but from Congress, the U.S. Department of Justice and existing agency inspectors general — not to mention False Claims Act relators.

The pattern of intense scrutiny following significant government emergency spending has been well-established by now, attorneys said, from the oversight provided by a special inspector general and lawmakers following the global financial crisis, to probes into Iraq and Afghanistan War spending, as well as the reviews that follow any federal response to major natural disasters like Hurricane Katrina.

That was reinforced in a June 26 speech by Ethan Davis, the principal deputy U.S. attorney general, who said the DOJ "will energetically use every enforcement tool available to prevent wrongdoers from exploiting the COVID-19 crisis."

Although ensuring that watchdogs scrutinize government spending makes sense from the point of view of protecting taxpayer money, sometimes contractors who act in good faith can be caught out unexpectedly, according to Arnold & Porter partner Michael McGill.

"There will be companies that were either not involved in any wrongdoing, or were involved in wrongdoing that's maybe [not] their responsibility," he said. "Maybe it's a subcontractor they had to hire to get the work done because the government wanted it done and needed it done, and then the government two years later questions it, saying, 'OK, you didn't handle this reasonably.' But nobody else could have done it, we were as reasonable as we could have been … or as any contractor in our situation could have been."

Huawei Ban Being Applied to Contractors 

Section 889 of the 2019 National Defense Authorization Act formalized ongoing government efforts to keep technology manufactured by five Chinese suppliers — most notably telecommunications equipment giant Huawei  — out of the federal supply chain, banning the purchase and use of those products, amid concerns about those products being used for espionage.

Part (a)(1)(A) of Section 889 applied to federal government agencies, and went into effect last year, while Part (a)(1)(B) — Part B — applies to federal contractors and is scheduled to go into effect Aug. 13.

The ban as written in the NDAA is expansive. Under that language, contractors could be locked out of federal contracting because of equipment used by a supplier to one of their commercial units located overseas, rather than anything done by their government services division within the U.S., requiring contractors to scrutinize their entire global supply chain, K&L Gates LLP associate Amy Conant Hoang said. 

"This goes well beyond what I think many companies would consider their lower-tier subcontractors performing a portion of a government contract, because as written, this covers your foreign internet service providers, shipping services and other vendors deep in the supply chain," she said.

A pre-publication version of an interim rule to implement Part B, released July 10 by the Federal Acquisition Regulatory Council — the U.S. Department of Defense, U.S. General Services Administration and NASA — isn't quite that broad, requiring only a "reasonable inquiry" by a contractor as to whether they are using the banned equipment, which won't necessarily stretch as far as feared. Agencies will also be able to grant one-time, case-by-case waivers from compliance, running through August 2022, for contractors who need additional time to comply.

Otherwise, the requirement to comply with the rule is coming up quickly, as it will apply to solicitations and contracts issued on or after Aug. 13, as well as to orders issued under existing indefinite-quantity contracts.

Industry groups like the Professional Services Council and the National Defense Industrial Association had asked for implementation to be pushed back by at least six months. The groups say they are not against the intent of the rule, but that contractors should be allowed to focus first on addressing disruptions caused by COVID-19. They will have 60 days to comment on proposed revisions for a final rule once the interim rule is formally published in the Federal Register.

Contractors will also need to brace themselves for a potential expansion of the ban. The Pentagon in a June memo to Congress named 20 companies operating in the U.S. that it believes are owned or controlled by the Chinese military, giving lawmakers a blueprint for an expanded ban. 

2021 National Defense Authorization Act

The annual defense policy and budget bill always includes some policy clauses related to acquisition, which affect a broad swath of federal contractors, given that the DOD accounts for more than half of the federal contracting dollars spent each year.

The Senate version of the $740.5 billion 2021 NDAA is under debate on the Senate floor, while the House version of the bill recently passed the House Armed Services Committee and will be considered by the full chamber soon.

Congressional negotiators will eventually have to reconcile the two versions into one bill, so there is no guarantee that any particular provision will stay, but there are a number of acquisition-related clauses to keep an eye on as the bill moves through the conference process.

The Senate version of the bill, for example, seeks to "reshape" the defense industrial base into a "national security innovation base," encouraging the DOD to engage more with other parts of the government and commercial providers beyond its traditional contractors.

"If you step back and look holistically, the U.S. has a plan where they want to go," Squire Patton Boggs LLP partner Karen Harbaugh said. "It's to secure the defense industrial base, to strengthen manufacturing in the U.S. — less offshoring and more onshoring, if you will. They're looking to update the framework for modernizing the acquisition process to ensure the integrity of the DIB."

The Senate bill would also repeal a pilot program introduced in the 2018 NDAA that would have required large defense contractors to pay the government's costs if they lost a bid protest in the GAO, an unpopular move that had cut against the "American model" of litigation, where each side is typically responsible for its own costs.

And it rolls in the 2021 Intelligence Authorization Act, which includes a clause that would effectively allow the government to share adverse information about a contractor's employee with its employer without requiring its express permission every time, a move intended to try to address "insider threats."

The House bill's proposed changes include a ban on the DOD contracting with companies that use wireless spectrum that could interfere with GPS signals, a slap at the Federal Communications Commission's contentious recent move to allow Ligado Networks to repurpose spectrum close to GPS bands for 5G wireless.

House lawmakers have also moved to consolidate and streamline defense acquisition statutes, making it easier for contractors and prospective contractors to navigate those laws.

4 Important GSA Acquisition Changes

The GSA is at a key juncture for several major acquisition changes, such as the ongoing consolidation of what had been 24 Federal Supply Schedules into one overarching schedule, which is in its third and final phase.

The schedule, a set of overarching contracts that offer federal agencies a streamlined way to buy commonly used products and services, is the most-used contracting vehicle across the entire government, used for about $31 billion in purchases each year, according to the GSA.

The GSA began the consolidation in October 2019, starting with creating the single schedule in Phase 1, followed by a mass modification of thousands of existing contracts to reflect the consolidation in Phase 2, with Phase 3 expected to begin this month.

Phase 3 is the most complicated phase, requiring the agency to work with companies that had held more than one schedule contract to work out which provisions need to be kept and which can be discarded, as well as the pricing that takes precedence if the same item had been offered on more than one schedule.

"[The GSA] will be working with each company individually in determining the best course of action on how to consolidate those multiple schedule contracts into one," said Aron Beezley, co-leader of the government contracts practice at Bradley Arant Boult Cummings LLP. "Because there is not necessarily an easy one-size-fits-all approach, and they're doing it on a company-by-company basis, I think it's inevitably going to be complicated and time-consuming."

There is also the ongoing consolidation of 10 legacy systems into the federal System for Award Management database, creating what the GSA has called a "centralized, authoritative source of federal award data." That will enable contractors to, for example, track solicitations, obtain certifications and check if a prospective subcontractor is excluded from federal contracting through a single portal.

And the GSA recently announced it plans to use Amazon Business, Fisher Scientific and Overstock.com Inc. in an upcoming e-marketplace pilot, long touted as allowing federal agencies to easily purchase commercial off-the-shelf, or COTS, items through "Amazon-like" portals, up to the federal micro-purchase limit — currently $10,000.

The estimated market for relatively low-value open market purchases on government purchase cards alone is about $6 billion each year, according to the GSA, meaning the opportunity is huge for the companies participating in the pilot.

That market will also get bigger if Congress approves a GSA request to raise the purchase threshold to $25,000 for the pilot, which is scheduled to begin at some point this month, as agencies typically use the easiest possible method to purchase what they need.

"[The micro-purchase limit] doesn't have to get very much bigger for people to go buy servers, and laptops — connectable stuff. ... You can buy a lot of IT for $25,000," Mayer Brown LLP government contracts practice chair Marcia Madsen said.

In a July 2 announcement, the agency also flagged a change to how it will handle its large governmentwide, multi-award contracts for small businesses, which are typically information technology contracts, saying they will be aimed at "maximizing opportunities" for specified categories of small businesses, such as companies owned by service-disabled veterans and women.

--Editing by Kelly Duncan and Marygrace Murphy.

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