Changes to Supply Chain Management and Commercial Item Contracting in FY 2018 NDAA

Supply Chain Scrutiny

The Conference Report recommends enhanced scrutiny of government contract supply chains in order to identify and ferret out threats to national security. According to Section 807 of the Report, within 90 days after enactment of the provision, the Department of Defense must “establish a process for enhancing scrutiny of acquisition decisions in order to improve the integration of supply chain management into the overall acquisition decision cycle.” (Conference Report, Section 807, pp. 418-19.) This process has to include tools to support commercial due diligence and intelligence; risk profiles of products or services; education and training of the acquisition work force; and periodic “assessment of software products and services on computer networks of the Department of Defense.” (Id. at p. 419.) Further, the Report recommends that the Department of Defense “develop Government-wide strategies for dealing with significant entities determined to be significant threats to the United States, and effectively use authorities in other departments and agencies to provide consistent, Government-wide approaches to supply chain threats.” (Id. at p. 420.)

These provisions demonstrate that the Department of Defense is becoming increasingly concerned about contractors and subcontractors that may pose security, cybersecurity or other threats to the United States. Accordingly, contractors should expect regulations in the near future that place a burden upon them to better vet their supply chain for such risks.

Changed Definition of a “Subcontract”

In Section 820, the Report proposes a change to 41 U.S.C. § 1906 (which lists the laws inapplicable to procurements of commercial items). (See Conference Report, Section 820, pp. 439-440.) The Report recommends adding that the definition of a subcontract in that provision “does not include agreements entered into by a contractor for the supply of commodities that are intended for use in the performance of multiple contracts with the Federal Government and other parties and are not identifiable to any particular contract.” (Id.) This statute applies to the Federal Acquisition Regulation, so this change would impact both DoD and civilian contracts.

We read this to mean that a contractor’s agreement with a vendor to buy, for example, “commodities” such as ball bearings or gaskets to fulfill requirements on more than one government contract and on one or more commercial contracts would not be a “subcontract” after this change and, therefore, would not be subject to flow-down requirements.

Proposed Commercial Item Contracting Changes

Section 846 of the Report recommends the establishment of a program to procure commercial products through commercial e-commerce portals to enhance competition, expedite procurement, enable market research and ensure reasonable pricing. (See Conference Report, Section 846, p. 489.) The Report recommends the establishment of this program over three phases; that executive agencies make purchases via the e-commerce portal beneath the simplified acquisition threshold; and that such purchases utilize standard terms and conditions to be developed. (Id. at pp. 490-496.)

The Report proposes to add language to 41 U.S.C. § 103 to clarify that non-developmental products or services developed at a private expense and sold competitively in “substantial quantities” to “multiple foreign governments” also qualify as “commercial items.” If enacted, this language would broaden the definition of what constitutes a commercial item, perhaps opening up the United States commercial item market to foreign vendors that regularly sell non-developmental items to foreign governments. (Id. at § 847, p. 499.)