On July 27, 2023, the United States Senate passed its version of the National Defense Authorization Act (“NDAA”) for Fiscal Year 2024 (S.2226), setting the stage for negotiation with the House of Representatives over the differences between the Senate’s version of this must-pass bill and the version passed by the House of Representatives (H.R. 2670) on July 14, 2023. The NDAA is an annual congressional bill specifying the annual budget for the Department of Defense. As a “must pass” bill, it is often used by Congress to make policy changes regarding programs related to the Department of Defense and federal procurement.

Both the Senate and House versions of the NDAA have provisions that would impact federal contractors, particularly small business contractors.

Repeal of Bona Fide Place of Business Rule for Department of Defense 8(a) Construction Contracts – S.2226, Section 823

The Small Business Administration (“SBA”) interprets the Small Business Act as requiring federal contractors to have a bona fide place of business in the same geographic area (or in an adjacent geographic area) where they are performing a construction contract issued through the SBA’s 8(a) Program.  While the SBA has modified its regulations governing the bona fide place of business rule to provide more flexibility to contractors, the Senate version of the NDAA eliminates this bona fide place of business requirement for Department of Defense construction contracts.  The bona fide place of business requirement would remain for construction contracts with agencies other than the Department of Defense.

The House bill does not contain any provision eliminating the bona fide place of business rule.  Accordingly, the House and the Senate will have to negotiate over whether to include this language in the final bill.

SEC. 823. REPEAL OF BONA FIDE OFFICE RULE FOR 8(A) CONTRACTS WITH THE DEPARTMENT OF DEFENSE.

Section 8(a)(11) of the Small Business Act (15 U.S.C. 637(a)(11)) is amended‎– ‎

(1) by inserting “(A)” before “To the maximum”; and

(2) by adding at the end the following:

“(B) Subparagraph (A) shall not apply with respect to a contract entered into under this subsection with the Department of Defense.”

If Section 823’s language is retained in the final version of the NDAA that is passed, 15 U.S.C. § 637(a)(11) would read as follows, with the bolded and underlined text showing the additions:

(A) To the maximum extent practicable, construction subcontracts awarded by the Administration pursuant to this subsection shall be awarded within the county or State where the work is to be performed.

(B) Subparagraph (A) shall not apply with respect to a contract entered into under this subsection with the Department of Defense.

Mandatory Consideration of Affiliate Past Performance  – S.2226, Section 843; H.R.2670, Section 884

For negotiated competitive acquisitions expected to exceed the simplified acquisition threshold, federal agencies must consider the past performance of the offerors when making an award.  Federal agencies also have discretion when determining what type of past performance they will permit offerors to rely upon, such as by limiting past performance references to specific time frames and/or size, such as, for example, contracts performed in the last five years with a total value greater than $10,000,000.

Offerors, particularly Alaska Native Corporations and Tribes, often rely on both their own past performance and that of their affiliates to meet the past performance requirements of solicitations.  Some agencies, however, restrict the use of affiliate past performance by including in solicitations provisions stating that offerors cannot rely upon affiliate past performance and must rely solely on their own, direct past performance.  While these restrictions have been challenged in bid protests, procuring agencies can use them if the agency makes a factual determination explaining why the agency’s needs could not be satisfied by a less restrictive method of evaluating offerors’ past performance and experience.

The House and Senate versions of the NDAA each include language that would require the Department of Defense to consider relevant affiliate past performance, although the House version prohibits the Department of Defense from relying on past performance of affiliates that is more than nine years old.

FAR 215.305 currently states:

(a)(2) Past performance evaluation.

(A) When a past performance evaluation is required by FAR 15.304, and the solicitation includes the clause at FAR 52.219-8, Utilization of Small Business Concerns, the evaluation factors shall include the past performance of offerors in complying with requirements of that clause. When a past performance evaluation is required by FAR 15.304, and the solicitation includes the clause at FAR 52.219-9, Small Business Subcontracting Plan, the evaluation factors shall include the past performance of offerors in complying with the requirements of that clause.

(B) Contracting officers shall consider an offeror’s failure to make a good faith effort to comply with its comprehensive subcontracting plan under the Test Program described at 219.702-70 as part of the evaluation of the past performance.

Timely Payment of Defense Small Business Subcontractors – S.2226, Section 844

Section 844 of the Senate bill authorizes contracting officers to provide negative CPARS ratings to a prime contractor “in connection with the unjustified failure to make a full or timely payment to a subcontractor before or after close-out of the covered contract.”  The legislation would also require contractors to “cooperate” with the contracting officer and Department of Defense officials “with regards to correcting and mitigating such unjustified failure to make a full or timely payment to the subcontractor.”  The legislation does not identify what that “cooperation” would look like or what efforts the contractor can be compelled to take (if any) to “correct[ ] and mitigat[e]” an untimely or incomplete payment to the subcontractor.

The House bill does not contain this language.  Accordingly, the House and the Senate will have to negotiate over whether to include this language in the final bill.

SEC. 844. TIMELY PAYMENTS FOR DEPARTMENT OF DEFENSE SMALL BUSINESS SUBCONTRACTORS.

(a) Reduction in Time for Contractor Explanation and Past Performance Consideration of Unjustified Withholding of Payments to Department of Defense Small Business Subcontractors.‎– ‎Section 8(d)(13)(B)(i) of the Small Business Act (15 U.S.C. 637(d)(13)(B)(i)) is amended by inserting “, or, for a covered contract awarded by the Department of Defense, more than 30 days past due,” after “90 days past due”.

 (b) Clarification That Contracting Officers of the Department of Defense Are Authorized to Enter or Modify Past Performance Information Related to Unjustified Non-payment or Reduced Payment Before or After Contract Close-out.‎– ‎Section 8(d)(13)(C) of the Small Business Act (15 U.S.C. 637(d)(13)(C)) is amended—

(1) by striking “A contracting officer” and inserting the following:

“(i) In general.‎– ‎A contracting officer”; and

(2) by adding at the end the following:

“(ii) Past performance information for DoD contracts.‎– ‎The contracting officer for covered contract awarded by the Department of Defense may enter or modify past performance information of the prime contractor in connection with the unjustified failure to make a full or timely payment to a subcontractor before or after close-out of the covered contract.”.

(c) Duty of Cooperation to Correct and Mitigate Unjustified Failure by Department of Defense Prime Contractors to Make Full or Timely Payments to Subcontractors.‎– ‎Section 8(d)(13) of the Small Business Act (15 U.S.C. 637(d)(13)) is amended‎– ‎

(1) by redesignating subparagraph (E) as subparagraph (F);

(2) by inserting after subparagraph (D) the following:

“(E) Cooperation on DoD contracts.—

“(i) In general.‎– ‎If a contracting officer of the Department of Defense determines, with respect to a prime contractor’s past performance, that there was an unjustified failure by the prime contractor on a covered contract awarded by the Department of Defense to make a full or timely payment to a subcontractor covered by subparagraph (B) or (C), such prime contractor is required to cooperate with the contracting officer, who shall consult with the Director of Small Business Programs or Director of Small and Disadvantaged Business Utilization acting pursuant to section 15(k)(6) and other representatives of the Department of Defense, with regards to correcting and mitigating such unjustified failure to make a full or timely payment to the subcontractor.

“(ii) Period.‎– ‎The duty of cooperation under this subparagraph continues until the subcontractor is made whole or the contracting officer’s determination is no longer effective, and regardless of performance or close-out status of the covered contract.”; and

(3) in subparagraph (D), by striking “subparagraph (E)” and inserting “subparagraph (F)”.

(d) Applicability.‎– ‎The amendments made by this section shall apply to any covered contract (as defined in section 8(d)(13)(A) of the Small Business Act (15 U.S.C. 637(d)(13)(A)) that is entered into or modified by the Department of Defense on or after the date of enactment of this Act.

If Section 844 is retained in the final version of the NDAA that is passed, 15 U.S.C. § 637(d)(13) would read as follows, with the bolded and underlined text showing the additions and strikethrough showing deletions:

(13) Payment of subcontractors.

(A) Definition. In this paragraph, the term “covered contract” means a contract relating to which a prime contractor is required to develop a subcontracting plan under paragraph (4) or (5).

(B) Notice.

(i) In general. A prime contractor for a covered contract shall notify in writing the contracting officer for the covered contract if the prime contractor pays a reduced price to a subcontractor for goods and services upon completion of the responsibilities of the subcontractor or the payment to a subcontractor is more than 90 days past due for goods or services provided for the covered contract for which the Federal agency has paid the prime contractor.

(ii) Contents. A prime contractor shall include the reason for the reduction in a payment to or failure to pay a subcontractor in any notice made under clause (i).

(C) Performance. A contracting officer

(i) In general.‎– ‎A contracting officer for a covered contract shall consider the unjustified failure by a prime contractor to make a full or timely payment to a subcontractor in evaluating the performance of the prime contractor.

(ii) Past performance information for DoD contracts.‎– ‎The contracting officer for covered contract awarded by the Department of Defense may enter or modify past performance information of the prime contractor in connection with the unjustified failure to make a full or timely payment to a subcontractor before or after close-out of the covered contract.”.

(D) Control of funds. If the contracting officer for a covered contract determines that a prime contractor has a history of unjustified, untimely payments to contractors, the contracting officer shall record the identity of the contractor in accordance with the regulations promulgated under subparagraph (EF).

(E) Cooperation on DoD contracts.—

(i) In general.‎– ‎If a contracting officer of the Department of Defense determines, with respect to a prime contractor’s past performance, that there was an unjustified failure by the prime contractor on a covered contract awarded by the Department of Defense to make a full or timely payment to a subcontractor covered by subparagraph (B) or (C), such prime contractor is required to cooperate with the contracting officer, who shall consult with the Director of Small Business Programs or Director of Small and Disadvantaged Business Utilization acting pursuant to section 15(k)(6) and other representatives of the Department of Defense, with regards to correcting and mitigating such unjustified failure to make a full or timely payment to the subcontractor.

(ii) Period.‎– ‎The duty of cooperation under this subparagraph continues until the subcontractor is made whole or the contracting officer’s determination is no longer effective, and regardless of performance or close-out status of the covered contract.

(EF) Regulations. Not later than 1 year after the date of enactment of this paragraph [enacted Sept. 27, 2010], the Federal Acquisition Regulatory Council established under section 25(a) of the Office of Federal Procurement Policy Act (41 U.S.C. 421(a)) [41 USCS § 1302(a)] shall amend the Federal Acquisition Regulation issued under section 25 of such Act [41 USCS §§ 1302, 1303] to—

(i) describe the circumstances under which a contractor may be determined to have a history of unjustified, untimely payments to subcontractors;

(ii) establish a process for contracting officers to record the identity of a contractor described in clause (i); and

(iii) require the identity of a contractor described in clause (i) to be incorporated in, and made publicly available through, the Federal Awardee Performance and Integrity Information System, or any successor thereto.

Increase In Small Business Participation Goals – S.2226, Section 851

Section 851 of the Senate version of the NDAA increases the federal government’s goal for participation in federal contracts by service disabled veteran-owned small business concerns from three percent (3%) to five percent (5%).

The House version does not have any provision increasing this participation goal.  Accordingly, the House and the Senate will have to negotiate over whether to include this language in the final bill.

SEC. 851. INCREASE IN GOVERNMENT WIDE GOAL FOR PARTICIPATION IN FEDERAL CONTRACTS BY SMALL BUSINESS CONCERNS OWNED AND CONTROLLED BY SERVICE-DISABLED VETERANS.

Section 15(g)(1)(A)(ii) of the Small Business Act (15 U.S.C. 644(g)(1)(A)(ii)) is amended by striking “3 percent” and inserting “5 percent”.

If Section 851 is retained in the final version of the NDAA that is passed, 15 U.S.C. 644(g)(1)(A) would read as follows, with the bolded and underlined text showing the additions and strikethrough showing deletions:

(g) Goals for participation of small business concerns in procurement contracts.

(1) Governmentwide goals.

(A) Establishment. The President shall annually establish Governmentwide goals for procurement contracts awarded to small business concerns, small business concerns owned and controlled by service-disabled veterans, qualified HUBZone small business concerns, small business concerns owned and controlled by socially and economically disadvantaged individuals, and small business concerns owned and controlled by women in accordance with the following:

(i) The Governmentwide goal for participation by small business concerns shall be established at not less than 23 percent of the total value of all prime contract awards for each fiscal year. In meeting this goal, the Government shall ensure the participation of small business concerns from a wide variety of industries and from a broad spectrum of small business concerns within each industry.

(ii) The Governmentwide goal for participation by small business concerns owned and controlled by service-disabled veterans shall be established at not less than 3 5 percent of the total value of all prime contract and subcontract awards for each fiscal year.

(iii) The Governmentwide goal for participation by qualified HUBZone small business concerns shall be established at not less than 3 percent of the total value of all prime contract and subcontract awards for each fiscal year.

(iv) The Governmentwide goal for participation by small business concerns owned and controlled by socially and economically disadvantaged individuals shall be established at not less than 5 percent of the total value of all prime contract and subcontract awards for each fiscal year.

(v) The Governmentwide goal for participation by small business concerns owned and controlled by women shall be established at not less than 5 percent of the total value of all prime contract and subcontract awards for each fiscal year.

Increase in Sole Source Limits – S.2226, Section 852

Section 852 of the Senate version of the NDAA includes provisions increasing the limits on sole source awards under the SBA’s 8(a) program by Department of Defense agencies to individual-owned entities to $10,000,000 for manufacturing contracts and $8,000,000 for all other contracts.  The current limit is $7,000,000 for manufacturing contracts and $3,000,000 for all other contracts.  The NDAA also provides that the sole source caps would increase with inflation.  The House version does not increase the sole source limits.

SEC. 852. AMENDMENTS TO CONTRACTING AUTHORITY FOR CERTAIN SMALL BUSINESS CONCERNS.

(a) Socially and Economically Disadvantaged Small Business Concerns.‎– ‎Section 8(a)(1)(D)(i)(II) of the Small Business Act (15 U.S.C. 637(a)(1)(D)(i)(II)) is amended—

(1) by inserting “(or $10,000,000, in the case of a Department of Defense contract, as adjusted for inflation by the Federal Acquisition Regulatory Council under section 1.109 of the Federal Acquisition Regulation)” after “$7,000,000”;

and

(2) by inserting “(or $8,000,000, in the case of a Department of Defense contract, as adjusted for inflation by the Federal Acquisition Regulatory Council under section 1.109 of the Federal Acquisition Regulation)” after “$3,000,000”.

(b) Certain Small Business Concerns Owned and Controlled by Women.‎– ‎Section 8(m) of the Small Business Act (15 U.S.C.637(m)) is amended—

(1) in paragraph (7)(B)‎– ‎

(A) in clause (i), by inserting “(or $10,000,000, in the case of a Department of Defense contract, as adjusted for inflation by the Federal Acquisition Regulatory Council under section 1.109 of the Federal Acquisition Regulation)” after “$7,000,000”; and

(B) in clause (ii), by inserting “(or $8,000,000, in the case of a Department of Defense contract, as adjusted for inflation by the Federal Acquisition Regulatory Council under section 1.109 of the Federal Acquisition Regulation)” after “$4,000,000”; and

(2) in paragraph (8)(B)—

(A) in clause (i), by inserting “(or $10,000,000, in the case of a Department of Defense contract, as adjusted for inflation by the Federal Acquisition Regulatory Council under section 1.109 of the Federal Acquisition Regulation)” after “$7,000,000”; and

(B) in clause (ii), by inserting “(or $8,000,000, in the case of a Department of Defense contract, as adjusted for inflation by the Federal Acquisition Regulatory Council under section 1.109 of the Federal Acquisition Regulation)” after “$4,000,000”.

(c) Qualified Hubzone Small Business Concerns.‎– ‎Section 31(c)(2)(A)(ii) of the Small Business Act (15 U.S.C. 657a(c)(2)(A)(ii)) is amended‎– ‎

(1) in subclause (I), by inserting “(or $10,000,000, in the case of a Department of Defense contract, as adjusted for inflation by the Federal Acquisition Regulatory Council under section 1.109 of the Federal Acquisition Regulation)” after “$7,000,000”; and

(2) in subclause (II), by inserting “(or $8,000,000, in the case of a Department of Defense contract, as adjusted for inflation by the Federal Acquisition Regulatory Council under section 1.109 of the Federal Acquisition Regulation)” after “$3,000,000”.

(d) Small Business Concerns Owned and Controlled by Service-disabled Veterans.‎– ‎Section 36(c)(2) of the Small Business Act (15 U.S.C. 657f(c)(2)) is amended—

(1) in subparagraph (A), by inserting “(or $10,000,000, in the case of a Department of Defense contract, as adjusted for inflation by the Federal Acquisition Regulatory Council under section 1.109 of the Federal Acquisition Regulation)” after “$7,000,000”; and

(2) in subparagraph (B), by inserting “(or $8,000,000, in the case of a Department of Defense contract, as adjusted for inflation by the Federal Acquisition Regulatory Council under section 1.109 of the Federal Acquisition Regulation)” after “$3,000,000”.

(e) Certain Veteran-owned Concerns.‎– ‎Section 8127(c) of title 38, United States Code, is amended by striking “$5,000,000” and inserting “the dollar thresholds under section 36(c)(2) of the Small Business Act (15 U.S.C. 657f(c)(2))”.

If Section 852 is retained in the final version of the NDAA that is passed, 15 U.S.C. § 637(a)(1)(D) would read as follows, with the bolded and underlined text showing the additions:

15 U.S.C. § 637(a)(1)(D)(i)(II): A contract opportunity offered for award pursuant to this subsection shall be awarded on the basis of competition restricted to eligible Program Participants if—

(I) there is a reasonable expectation that at least two eligible Program Participants will submit offers and that award can be made at a fair market price, and

(II) the anticipated award price of the contract (including options) will exceed $7,000,000 (or $10,000,000, in the case of a Department of Defense contract, as adjusted for inflation by the Federal Acquisition Regulatory Council under section 1.109 of the Federal Acquisition Regulation) in the case of a contract opportunity assigned a standard industrial classification code for manufacturing and $3,000,000 (or $8,000,000, in the case of a Department of Defense contract, as adjusted for inflation by the Federal Acquisition Regulatory Council under section 1.109 of the Federal Acquisition Regulation) (including options) in the case of all other contract opportunities.

Waiver of Capability Requirements and Interim Security Clearances – S.2226, Section 5841

Finally, Section 5841 of the Senate version of the NDAA attempts to give the Department of Defense more flexibility with respect to small business concerns’ efforts to meet capability requirements for procurements, including security clearances.  Section 5841 authorizes the Department of Defense to waive capability requirements for small business concerns in connection with a specific procurement, provided the small business concern certifies that it will be able to meet the waived capability requirement within 180 days after the contract award date.

Section 5841 also authorizes the Department of Defense to establish a process to grant small business concerns interim access to classified information while the small business concern is seeking a facility clearance permitting them to access classified information.  It can take a significant amount of time for a contractor to receive a facility clearance, and some contractors have not been able to compete for contracts, or receive sole source awards, due to delays in the issuance of the facility clearance.  If enacted, Section 5841 may provide a helpful pathway for small business concerns to obtain and perform contracts that require access to classified information while they are waiting for the facility clearance to be issued.

These waiver provisions would be available to:

• entities considered to be a small business concern under the Small Business Act;
• an entity that is not currently performing and has not performed, for at least the one-year period preceding the solicitation of sources by the Department of Defense for the procurement or transaction, any contract or subcontract for the Department of Defense that is subject to full coverage under the cost accounting standards; and
• any other contractor that has not been awarded a Department of Defense contract in the five-year period preceding the solicitation of sources by the Department of Defense.

The House version of the NDAA does not contain any language analogous with Section 5841 of the Senate bill.

SEC. 5841. COMPETITION OF SMALL BUSINESS CONCERNS FOR DEPARTMENT OF DEFENSE CONTRACTS.

(a) In General.‎– ‎Not later than 180 days after the date of the enactment of this Act, the Secretary of Defense shall issue guidance ensuring that covered small businesses are better able to compete for Department of Defense contracts.

(b) Exemptions From Capability Requirements.—

(1) Waiver authority.— The guidance issued under subsection (a) shall provide that the Department of Defense may waive capability requirements, including the waiver described in paragraph (2), to allow a covered small business that does not otherwise meet such requirements to bid on a contract, provided that it makes the certification described under paragraph (3).

(2) Special consideration to provide interim access to classified information for department of defense contractors without security clearances.—Notwithstanding section 801 of the National Security Act of 1947 (50 U.S.C. 3161) and the procedures established pursuant to such section, the Secretary of Defense may issue a waiver providing a covered small business that has not been determined eligible to access classified information pursuant to such procedures interim access to classified information under such terms and conditions as the Secretary considers appropriate.

(3) Certification requirement.— In order to qualify for a waiver under paragraph (1), a covered small business shall certify that it will be able to meet the exempted capability requirements within 180 days after the contract award date. The certification shall include a detailed project and financial plan outlining the tasks to be completed, milestones to be achieved, and resources required.

(4) Monitoring and compliance.—

(A) In general.‎– ‎The contracting officer for a contract awarded pursuant to a waiver under paragraph (1) shall closely monitor the contract performance of the covered small business to ensure that sufficient progress is being made and that any issues that arise are promptly addressed.

(B) Failure to meet capability requirements. — If a covered small business awarded a contract pursuant to a waiver under paragraph (1) fails to meet the requirements promised in the certification required under paragraph (3) within 180 days, the covered small business shall be subject to disqualification from consideration for future contracts of similar scope pursuant to “Termination for Default” provisions under subpart 49.4 of the Federal Acquisition Regulation.

(c) Covered Small Business Defined.‎– ‎In this section, the term “covered small business” means-

(1) a nontraditional defense contractor, as that term is defined in section 3014 of title 10, United States Code;

(2) a small business concern, as that term is defined in section 3(a) of the Small Business Act (15 U.S.C. 632(a)); and

(3) any other contractor that has not been awarded a Department of Defense contract in the five-year period preceding the solicitation of sources by the Department of Defense.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice, contact an attorney.