First Quarter 2023 Government Contracts Policy and Regulatory Review

The first few months of 2023 has brought not only regulatory changes to the government contractor landscape, but also the possibility for new business opportunities in semiconductors, green procurement and infrastructure projects. In this quarterly review, we highlight some of these changes and opportunities and preview what’s to come for government contractors as we head into springtime.

Navigating the COVID-19 Federal Contractor Vaccine Mandate

On January 12, 2023, the Sixth Circuit Court of Appeals followed the Fifth and Eleventh Circuit Courts of Appeals and blocked the mandate from being enforced against Kentucky, Ohio and Tennessee. Because the Office of Management and Budget (OMB) and the Safer Federal Workforce Task Force has yet to issue any implementation-related guidance, federal agencies should continue to refrain from enforcing the mandate.

Additional Sanctions and Restrictions on Contractors Relating to Russia-Ukraine War

In February, the Biden administration marked the one-year anniversary of Russia’s invasion of Ukraine by announcing several new sanctions, export controls and tariffs against Russia and third-country companies. Faegre Drinker described the Office of Foreign Assets Controls’ (OFAC) newly expanded authority to target Russia’s metal and mining sectors, additional sanctions against Russia’s aerospace and defense sectors, additions to the Entity List and other export restrictions, and additional tariffs on Russian aluminum in “One-Year Anniversary of Russian Invasion of Ukraine Brings New Sanctions, Export Controls and Tariffs.”

A Renewed Emphasis on Domestic Sourcing Requirements

In his February 7 State of the Union address, President Biden emphasized domestic sourcing requirements, “announcing new standards to require all construction materials used in federal infrastructure projects to be made in America,” emphasizing “American-made lumber, glass, drywall, fiber optic cables” and proclaiming that “American roads, American bridges, and American highways will be made with American products.” The next day OMB issued a proposed rule to help implement the Infrastructure Investment and Jobs Act’s (IIJA) Build America, Buy America requirements as well as clarify and memorialize prior OMB guidance provided in OMB Memorandum M-22-11. The proposed rule would create new regulations adopting the Federal Acquisition Regulation (FAR) definition of “cost of components” to determine the cost of manufactured products used in federal infrastructure projects. Among other things, the rule also sought feedback on the proposed list of materials to be included within the category of “construction materials,” the proposed standards for manufacturing processes, and whether to define the term “predominantly” in the case of iron or steel products. Faegre Drinker continues to monitor this proposed rule as the rulemaking process moves forward.

Notably, individual agencies are continuing to explore and implement limited Buy America waivers. The Federal Highway Administration (FHWA) is establishing a temporary public interest waiver to waive Buy America requirements for steel, iron, manufactured products and construction materials in electric vehicle (EV) chargers. The temporary waiver became effective March 23, 2023, and will apply to all EV chargers manufactured by July 1, 2024, whose final assembly occurs in the United States and whose installation has begun by October 1, 2024. A second phase of the waiver will only apply to EV chargers that are manufactured on or after July 1, 2024, whose final assembly occurs in the United States, and for which the cost of components manufactured in the United States is at least 55 percent of the cost of all components. Components of EV charger housing that are predominately steel and iron are excluded from this waiver.

Minimum Wage for Government Contractors Goes Into Effect

As of January 1, 2023, all workers performing work on or in connection with covered federal contracts must be paid no less than $12.15 per hour. The U.S. Secretary of Labor set this new minimum wage as instructed in the Department of Labor’s final rule, “Increasing the Minimum Wage for Federal Contractors.” That rule implements President Biden’s April 27, 2021, Executive Order, also titled “Increasing the Minimum Wage for Federal Contractors.”

The Executive Order and its implementing regulations have been targets for litigation since their publication, with several state attorneys general filing suit against the Biden administration and arguing that the Order and its implementing regulations violate the Federal Property and Administrative Services Act and the Procurement Act. On January 6, 2023, the U.S. District Court for the District of Arizona ruled against the state attorneys general, concluding that President Biden had the authority to implement the increase. The state attorneys general have since appealed the decision to the Ninth Circuit Court of Appeals. Similar lawsuits are pending elsewhere, including in the Tenth Circuit Court of Appeals. Government contractors should keep an eye on these lawsuits while continuing to comply with the announced January 1, 2023, wage increase.

Continuing the Push for Sustainable Procurement

It was a busy first quarter for the Biden administration as it continues to prioritize federal sustainability. In January, the Council on Environmental Quality (CEQ) issued interim guidance to assist agencies in analyzing the greenhouse gas (GHG) and climate change effects of their proposed actions under the National Environmental Policy Act (NEPA). The guidance instructs agencies “to quantify proposed actions’ GHG emissions, place GHG emissions in appropriate context and disclose relevant GHG emissions and relevant climate impacts, and identify alternatives and mitigation measures to avoid or reduce GHG emissions” when conducting NEPA reviews. Importantly for government contractors, the guidance also advises agencies to “seek to obtain the information needed to quantify GHG emissions, including by requesting or requiring information held by project applicants.” While the guidance is effective immediately, CEQ may revise the guidance in response to public comments. Government contractors should continue to monitor this guidance and seek counsel on how it may affect their businesses.

Elsewhere, the comment period on the administration’s proposed contractor climate disclosure rule closed in February. The proposed rule drew over 38,000 comments, reflecting wide-ranging viewpoints. Some stakeholders — including a number of groups representing government contractors such as the Aerospace Industries Association — expressed their commitment to lowering GHG emissions and sustainability but voiced concern with the proposed rule’s sweeping approach. Others — including a number of environmental groups — expressed their broad support for the rule. A group of state attorneys general, on the other hand, commented that the proposed rule is an example of the Biden administration overreaching on its authority while also suggesting that the proposed rule’s disclosure requirements violate the First Amendment. In all, the range and number of comments signals the possible impact of this proposed rule. Faegre Drinker will provide additional updates on this proposed rule as the rulemaking process continues.

Changes to the Small Business Administration’s Business Size Standards

A series of rules were adopted during the first quarter of 2023 affecting small business contractors. The SBA issued a final rule increasing its employee-based small-business size standards for several NAICS sectors, including Mining, Quarrying, and Oil and Gas Extraction (Sector 21); Utilities (Sector 22); Manufacturing (Sectors 31-33); Transportation and Warehousing (Sectors 48-49); Information (Section 51); Finance and Insurance (Sector 52); Professional, Scientific and Technical Services (Sector 54); and Administrative and Support, Waste Management and Remediation Services (Sector 56).

The FAR Council also issued a final rule amending the FAR to implement a section of the National Defense Authorization Act (NDAA) FY 2020 and requiring agencies to establish an accelerated payment date for small-business prime contractors and prime contractors that contract with a small-business concern, with a goal of 15 days after receipt of a proper invoice if a specific payment date is not established by contract. Small-business contractors can also review several amendments made to the SBA regulations outlined in this final rule and relating to small-business size standards, set aside orders under multiple award contracts, and 8(a) program eligibility determinations.

Continuing to Roll Out the Infrastructure Investment and Jobs Act

The Biden administration continues to make progress implementing the Infrastructure Investment and Jobs Act (IIJA). In February, the administration provided state-by-state updates detailing the funding that each state has received so far and what funding each state may expect to receive over the next five years.

Following the IIJA’s push toward developing green infrastructure, the Department of Energy (DOE), Department of Transportation (DOT), Environmental Protection Agency (EPA), and Department of Housing and Urban Development (HUD) released “The U.S. National Blueprint for Transportation Decarbonization.” The Blueprint sets forth the agencies’ joint plan to “improve community design and land-use planning,” “increase options to travel more efficiently,” and “transition to zero emission vehicles and fuels” to help meet the administration’s goal of a net-zero GHG emissions economy by 2050. While the Blueprint will likely draw on IIJA and Inflation Reduction Act (IRA) funded projects, government contractors should be on the lookout for additional funding opportunities stemming from the Blueprint.

Trump-Era Rule Rescinded at the Office of Federal Contract Compliance Programs

In February, DOL rescinded a final rule titled “Implementing Legal Requirements Regarding the Equal Opportunity Clause’s Religious Exemption.” The rule had relaxed some anti-discrimination obligations, effectively allowing government contractors to make faith-based employment decisions. The rule’s “recission restores [DOL’s] prior approach of aligning Executive Order 11246’s religious exemption with Title VII caselaw as applied to the facts and circumstances of each contractor when it invokes the exemption,” said Jenny Yang, who was then the Director of DOL’s Office of Federal Contract Compliance Programs. Government contractors seeking a religious exemption should refer to 41 C.F.R. § 60-1.5(a)(5) and DOL’s “Religious Exemption Frequently Asked Questions” for guidance.

False Claims Act to Feature at SCOTUS

In January, the Supreme Court announced it would hear U.S. ex rel. Proctor v. Safeway Inc. The case, which Faegre Drinker previewed in “Looking Back on 2022 in Government Contracts,” asks “whether and when a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether it ‘knowingly’ violated the False Claims Act.” The highly anticipated oral argument is scheduled for April 18, 2023. Several senators, including Iowa’s Chuck Grassley, have already commented on the case, urging the Court to “set the record straight” and “require subjective intent to be taken into account” in False Claims Act (FCA) cases. The National Defense Industrial Association and Coalition for Government Procurement filed an amicus brief urging the Court to do the opposite, arguing that a “subjective scienter test would impede government contracting” and “undermine national-security interests.”

New Cybersecurity Strategy Released

The Biden administration released its highly anticipated National Cybersecurity Strategy on March 2. The Strategy sets out five priorities: (1) defend critical infrastructure; (2) disrupt and dismantle threat actors; (3) shape market forces to drive security and resilience; (4) invest in a resilient future; and (5) forge international partnerships. Government contractors will be at the center of the Strategy’s implementation, with the administration promising to “use federal purchasing power and grant-making to incentivize security.” The Strategy also promises heightened enforcement against contractors, reminding them that a failure to meet cybersecurity requirements could result in Civil Cyber-Fraud Initiative prosecution and FCA charges.

Funding and Protecting Semiconductors and Other Evolving Technologies

In “Looking Back on 2022 in Government Contracts,” we previewed the CHIPS and Science Act, which authorizes $52.7 billion for semiconductor research, development, manufacturing and workforce development. The application process for some of those funds opened in early March. Faegre Drinker cataloged the requirements for receiving funding in “CHIPS Act Funding: An Opportunity With Strings.” The Department of Commerce also recently issued a proposed rule emphasizing that CHIPS Act funding and “related innovations” cannot benefit “countries of concern” like China and Russia.

In further support of the American semiconductor and advanced technology industry, in February the Biden administration announced the launch of the Disruptive Technology Strike Force. The Task Force will “target illicit actors, strengthen supply chains and protect critical technological assets” — including those related to supercomputing and exascale computing, artificial intelligence, advanced manufacturing equipment and materials, quantum computing and biosciences — “from being acquired or used by nation-state adversaries.” For more on the Task Force, check out “Return to Sender: New DOJ/Commerce Strike Force Aims to Broaden Export Control Enforcement and Prosecutions.”

New Disclosure Rules for Doing Business With China

On March 1, the Department of Defense (DOD) adopted a final rule to implement section 855 of the NDAA for fiscal year 2022. Section 855 requires offerors to disclose their use of workforce and facilities in China if they employ one or more individuals who will perform work in China unless a national security waiver has been granted. The rule requires offerors to make an initial disclosure when submitting a bid or proposal for a covered contract and, for contractors that are covered entities and are a party to one or more covered contracts, a recurring post-award disclosure for fiscal years 2023 and 2024. “Covered contracts” include any DOD contract or subcontract with a value in excess of $5 million, excluding contracts for commercial items.

Government contractors should expect to see additional regulations related to China and national security and supply-chain concerns in the coming years. For example, Section 5949 of the NDAA FY 23, enacted in December 2022, expands on Section 889 of NDAA FY 2019 and prohibits the head of an executive agency from (a) procuring or obtaining, or extending or renewing a contract to procure, any electronic parts, products, or services that include covered semiconductor products or services; or (b) entering into a contract (or extending or renewing a contract) with an entity to procure or obtain electronic parts or products that use any electronic parts or products that include covered semiconductor products or services.

The term “covered semiconductor product or services” includes semiconductors and semiconductor products that are designed, produced or provided by the Semiconductor Manufacturing International Corp., ChangXin Memory Technologies, Yangtze Memory Technologies Corp, or any subsidiary or affiliate of those entities or other entities that the federal government determines to be an entity owned, controlled by, or otherwise connected to the government of a foreign country of concern.

While the Section 5949 prohibitions will not take effect until five years after the date of enactment, the FAR Council must issue recommendations to mitigate supply-chain risks relevant to federal government acquisition of semiconductor products and services no later than two years after the date of enactment (the end of 2024) and prescribe regulations implementing the new prohibitions within three years after the date of enactment (the end of 2025). Government contractors should begin assessing the potential impact Section 5949 will have on their supply chains.

Other Topics of Interest

Fighting Pandemic Fraud: The Biden administration recently introduced a three-part Pandemic Anti-Fraud Proposal. The proposal earmarks $600 million to ensure that resources are available to investigate and prosecute those engaged in pandemic fraud, suggesting that the number of COVID-19 Fraud Strike Force teams be tripled and that the statute of limitations for prosecuting pandemic fraud be increased to 10 years.

Authorizing Use of the Defense Production Act: President Biden recently authorized the use of the Defense Production Act to expand domestic production capabilities for hypersonic weapons systems and for printed circuit boards and advanced packaging.

Calling for More Oversight: The Government Accountability Office (GAO) recently called on DOD to improve its financial management system oversight, claiming that DOD “can’t accurately account for or report on its physical assets or spending.”

Modernizing Foreign Military Sales: A defense industry report asking that the Foreign Military Sales (FMS) process be modernized and made more flexible was recently made public. The report, authored in November 2022, sets forth several key themes for FMS modernization including a “resourced and flexible acquisition process,” “defense export financing and expansion of the DOD’s Special Defense Acquisition Fund,” and a “modern technology release process.”