Fourth Quarter 2024 Government Contracts Policy and Regulatory Review

At a Glance

• The Federal Acquisition Regulatory Council proposed revisions to the list of domestically nonavailabile articles under the Buy American Act that would reduce the current list by more than half, requiring federal contractors to potentially seek additional waivers for various imported articles moving forward.
• The Small Business Administration finalized updates to its Historically Underutilized Business Zone (HUBZone) Program that will require small businesses to recertify their size and status if they are involved in a merger, sale or acquisition after submitting an offer for a set-aside opportunity and an award has not been made.
• Congress enacted the National Defense Authorization Act (NDAA) for Fiscal Year 2025 on December 23, 2024. The bill includes changes to Department of Defense acquisition policies, bid protest procedures and new disclosure requirements for government contractors regarding their work with China.
• The election of Donald Trump will bring significant changes that will affect federal contractors at all levels, including new executive orders, different spending priorities, revised procurement policies and potential changes to agency staffing.

The fourth quarter of 2024 presented government contractors with significant changes, including annual spending bills, new rulemakings, agency announcements and a new federal administration following the election. We review some of these developments below.

Proposed Changes to 'Buy American' Waivers

On October 23, 2024, the Federal Acquisition Regulatory Council (the FAR Council) proposed a rule to revise the list of domestically non-available articles under the Buy American Act and to implement requirements related to making future changes to the list. The Proposed Rule would remove 70 articles from the list of products presumed to be unavailable from domestic sources, reducing the current list by more than half. The proposed change is intended to serve “as a means to encourage further market research and send a signal to industry” regarding the importance of domestic manufacturing and sourcing.

Although the FAR Council cites “no substantial evidence that there is a major increase in the availability of the articles being deleted,” the change is based on “evidence that there is [domestic] capacity for many of the articles being removed.” The FAR Council also focused on removing articles where “more limited duration waivers with centralized management would provide important insight into government supply chains, including critical supply chains with national or economic security implications,” such as microprocessor chips, critical minerals and rare earth minerals.

The Proposed Rule would also implement the requirements of Section 9 of Executive Order 14005, which requires the FAR Council to consult with the Secretary of Commerce and the Made in America Office (MIAO) Director prior to any changes to the list at FAR 25.104(a). The Proposed Rule retains the current standard for inclusion on the list (i.e., an item is “non-available” where domestic sources can only meet 50% or less of total U.S. government and nongovernmental demand), as well as the current requirement that the procuring agency is responsible for conducting market research appropriate to the circumstances, including seeking domestic sources before acquisition of an article on the list. By substantially reducing the number of presumptively non-available articles on the list at FAR 25.104(a), the Proposed Rule would require agencies to submit a proposed waiver to MIAO explaining the basis for concluding an article is not available domestically, including the market research conducted by the agency to find domestic sources.

Government contractors should identify whether they utilize any items proposed for removal from the presumptive non-available list to determine whether they may need to prepare individual waivers for future procurements after the Proposed Rule becomes final. Although the FAR Council anticipates no cost to federal contractors from the proposed reduction of articles on the regulatory waiver list, contractors should stay apprised of how federal agencies approach the transition to individual waivers for key articles and anticipate potential impacts on their supply chains in the event an individual waiver is not granted. The incoming administration is likely to build on the Biden Administration’s efforts to prioritize domestic sourcing among federal agencies and may continue to expand existing Buy American requirements and other domestic sourcing laws. The comment period for this Proposed Rule closed on December 23, 2024.

Small Business Contracting Updates

During the fourth quarter of 2024, the Small Business Administration (SBA) and the Office of Federal Procurement Policy (OFPP) issued new regulations and guidance, respectively, that will impact how small business concerns engage with federal contracting.

SBA “Rule of Two” Application to Multiple Award Contracts

On October 25, 2024, the SBA proposed a rule that would apply the “Rule of Two” to multiple-award contract task and delivery orders with limited exceptions. The Rule of Two requires agencies to set aside the award for small businesses where there is a reasonable expectation of receiving offers from two or more small-business contract holders that are competitive in terms of price, quality and delivery. The Proposed Rule — which resulted from an interagency negotiation among the SBA, the FAR Council and other agencies — is based on a January 2024 memorandum published by the OFPP encouraging agencies to increase small business participation on multiple-award contracts.

Under the Proposed Rule, where an agency is unable to set aside an order over the micro-purchase threshold and an exception does not apply, the contracting officer must document their rationale and provide the documentation to the agency’s small business specialist or the Office of Small and Disadvantaged Business Utilization (OSDBU) or, for the Department of Defense (DoD), the Office of Small Business Programs (OSBP). Exceptions include orders under the Federal Supply Schedule, orders citing to an exception to competition (i.e., through FAR §16.505(b)(2)) or fair opportunity requirements (e.g., only one responsible source available), or agency-specific procedures that reflect an appropriate exception (e.g., addressing supply chain and national security risks, responding to major disasters, etc.).

SBA anticipates the change will add up to $6 billion per year in small business contract spending across the federal government. Although the rulemaking will impose costs to the federal acquisition workforce to comply with the market research, documentation and coordination requirements when the Rule of Two is not applied, small business contractors and subcontractors seeking multiple award contracts can expect greater opportunities for federal contracting, pending the new administration’s approach to the proposed rulemaking. The comment period for this Proposed Rule closed on December 24, 2024.

OFPP Memo on Small Business Subcontracting

The OFPP published a memo on November 29, 2024 encouraging federal agencies to boost small business participation in government contracting by scrutinizing federal contractors' subcontracting plans and standardizing agency forecasts of upcoming procurement opportunities. The memo specifically highlights: (i) key subcontracting requirements in existing government-wide regulations that are designed to provide maximum practicable opportunities for small business subcontractors and (ii) several agency-developed management practices to improve access for small business subcontractors. The memo also contemplates both pre- and post-award reminders and considerations, including evaluating an offeror’s performance in meeting past small business subcontracting goals to predict the likelihood of achieving new subcontracting targets, implementing subcontracting incentive strategies, and monitoring the submission of subcontracting plan reports to ensure good faith compliance on the part of contractors.

Both small and large business entities stand to benefit from a renewed focus on small business contracting, particularly regarding research and development contracts. The memo highlights the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, which encourage domestic small businesses to explore their research and development potential by establishing paths to commercialization. The memo also encourages agencies to consider an evaluation preference for prime contractors that include protégé firms as subcontractors, citing mentor protégé programs as an important tool to provide developmental assistance to small businesses. Contractors should stay apprised of small business contracting priorities under the new administration, particularly as the OFPP is slated to take an important role in driving OMB policy changes.

SBA Finalizes Updates to HUBZone Program

The SBA published a Final Rule on December 17, 2024 to amend its regulations governing the Historically Underutilized Business Zone (HUBZone) Program, along with technical changes to the Women-Owned Small Business (WOSB) and Veteran Small Business Certification (VetCert) programs. Apart from minor changes that removed proposed rules regarding small business residency requirements and employee definitions, the Final Rule largely incorporates key elements of the proposed rule, covered in our previous set of quarterly updates.

Specifically, the Final Rule requires HUBZone firms to be eligible at the time of offer, rather than retroactively eligible based on the last date of recertification. This is a significant change that will force small businesses to certify their size and status if they are involved in a merger, sale or acquisition after submitting an offer for a set-aside opportunity and an award has not been made. SBA anticipates that — although this rule will increase the burden on HUBZone small business concerns to gather proof of eligibility at the time of offer — HUBZone small businesses may benefit from a greater standard of consistency with other contracting programs.

The Final Rule also implements the proposed amendments to SBA affiliation regulations on size and control by making the negative-control rules consistent across SBA’s various programs (i.e., 8(a) BD, WOSB and VetCert). Under the negative control provision, a concern may be deemed controlled by (and affiliated with) a minority shareholder that can prevent a quorum or otherwise block action by the board of directors or shareholders. The Final Rule is anticipated to make it easier for small businesses to seek equity funding without becoming affiliated with the investors solely because of a broad interpretation of the negative-control rule. The revisions included in the Final Rule will go into effect on January 16, 2025.

Updated SAM Registration Requirements

On November 12, 2024, the FAR Council issued an interim rule — effective immediately — to clarify language at FAR 52.204-7 (System for Award Management) requiring offerors to be registered at the time of offer submission and contract award, but not at every moment in between those periods. Previously, decisions by the GAO had required an offeror to be registered at the point of offer submission and maintain that registration through contract award. In the interim rule, the federal agencies clarified that, while continuous and active registration is the “anticipated normal state expected of offerors,” the minimum compliance for pre-award registration only occurs at the points of offer submission and contract award. Going forward, a lapse in registration that occurs after offer submission and corrected before contract award will not render an offeror ineligible for award under FAR 52.204-7. The interim rule is anticipated to mitigate the risk of procurement-related litigation and delays in contracting.

Department of Defense Updates

Fiscal Year 2025 National Defense Authorization Act: Impact on Government Contractors

On December 23, 2024, President Biden signed the National Defense Authorization Act (NDAA) for Fiscal Year 2025. The bill includes several clauses that federal contractors should be aware of, including various sections related to DoD acquisition policies and bid protests.

The most significant change for contractors in the FY25 NDAA is Section 885, which outlines a “Proposal for Payment of Costs for Certain Government Accountability Office Bid Protests.” Specifically, Section 885 raises the dollar threshold for task order protests from $25 million to $35 million and requires the GAO and DoD to develop a proposal for enhanced pleading standards for bid protests. GAO and DoD also must propose a process for unsuccessful bid protestors to pay litigation costs to the agency and lost profits to the awardee, including specific benchmarks for both amounts.

The NDAA also provides for new potential contracting opportunities through efforts to expand the acquisition of innovative technologies through new programs. Section 804 of the NDAA directs the Office of the Under Secretary of Defense for Acquisition and Sustainment to establish two additional acquisition pathways, including those for: (1) rapid prototyping for innovative technologies and (2) rapid fielding for the use of proven technologies to field production quantities of new or upgraded systems with minimal development required. Meanwhile, Section 861 codifies a pilot program to “accelerate the procurement and fielding of innovative technologies” and establishes a priority for technologies developed by small business concerns. The NDAA further prioritizes small business concerns at Subtitle G, establishing a program for the participation of military research and educational institutions in the STTR Program (Section 871), a pilot program for access to shared classified commercial infrastructure (Section 874), and a “small business bill of rights” for the DoD (Section 876).

Section 839 of the NDAA also imposes additional obligations on DoD contractors to disclose whether its employees are performing work in China or whether they have reported any software vulnerabilities related to a DoD contract to Chinese government agencies. Finally, Section 848 of the NDAA builds on other recent regulatory developments by requiring DoD to develop and maintain a list of all domestic nonavailability determinations within 180 days of the enactment of the statute. Although NDAA amendments generally take some time to be implemented in full, federal contractors should consider how the provisions highlighted above — and others across the NDAA — may impact their business operations and compliance plans.

DFARS Proposed and Final Rules

Throughout the end of 2024, the DoD published or finalized several rules to amend the Department of Defense Federal Acquisition Regulation Supplement (DFARS).

• Cybersecurity Maturity Model Certification Implementation. The department’s Final Rule regarding the Cybersecurity Maturity Model Certification (CMMC) Program, summarized in a previous client alert, went into effect on December 16, 2024. Contractors should closely review DoD solicitations to ensure they have achieved the proper certifications in accordance with the CMMC status level identified as a condition of contract award. Otherwise, contractors may incur various risks, including potential False Claims Act liability for submitting false statements or by providing inaccurate information regarding their cybersecurity infrastructures.
• Disclosure of Information Regarding Foreign Obligations. DoD proposed a rule on November 15, 2024, amending the DFARS to implement a section of the National Defense Authorization Act (NDAA) for Fiscal Year 2019. The Proposed Rule would prohibit DoD from acquiring products, services or systems relating to information or operational technology, cybersecurity, industrial control systems or weapon systems through a contract unless the offeror or contractor provides disclosures related to sharing source code and computer code with foreign governments. After such disclosures are made, the Secretary is required to take measures to mitigate any risks posed. Specifically, disclosures must include: (1) whether the entity has allowed, or is under an obligation to allow, a foreign government to review the code of a noncommercial product, system or service developed for DoD; (2) whether the entity has allowed, or is under an obligation to allow, a foreign government in a list required by Section 1654 of the NDAA for FY 2019 to review the source code of a product, system or service that DoD is using or intends to use; and (3) whether the entity holds or has sought a license pursuant to the Export Administration Regulations, the International Traffic in Arms Regulations or successor regulations for information technology products, components, software or services that contain code custom-developed for the noncommercial product, system, or service DoD is using or intends to use. The comment period for this rule is open until January 14, 2025.
• Small Business Innovation Research Program Data Rights. DoD issued a Final Rule on December 18, 2024 (effective on January 17, 2025) that implements a policy directive issued by the SBA in 2019, allowing participants in the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs a longer data rights retention period for work generated under the program — up from an initial four years to 20 years. Contractors working under these programs should make note of any data rights clauses within their SBIR/STTR contracts to determine whether they may be able to take advantage of the additional intellectual property interests over an extended period following the implementation of the Final Rule. Pilot program to incentivize contracting with employee-owned businesses.
• Pilot Program to Incentivize Contracting with Employee-Owned Businesses. DoD issued a Final Rule on October 10, 2024, to amend the DFARS to implement sections of the FY 2022 and FY 2024 NDAAs, which authorize DoD to establish a pilot program that allows for the noncompetitive award of certain follow-on contracts to certain employee-owned businesses. The Final Rule is expected to incentivize and expedite the award of follow-on contracts to qualified businesses for the continued development, production, or provision of products or services previously procured by or for DoD. As a result, employee-owned businesses may benefit from additional opportunities to contract with DoD.
• Inapplicability of Additional Defense-Unique Laws and Certain Non-statutory DFARS Clauses to Commercial Item Contracts. DoD issued a Final Rule on November 15, 2024 (effective on November 25, 2024), to amend the DFARS to implement sections of the FY 2018 and FY 2019 National Defense Authorization Acts. The Final Rule adds the contract clauses at DFARS 252.204-7012 (Safeguarding Covered Defense Information and Cyber Incident Reporting) and 252.205-7000 (Provision of Information to Cooperative Agreement Holders) to the list of solicitation provisions and contract clauses that are inapplicable to contracts for the acquisition of commercially available off-the-shelf (COTS) items. Although the rule does not add any new solicitation provisions or contract clauses, it may reduce the burden on contractors offering commercial products and COTS items by removing the applicability of various DFARS clauses from their contracts.

Year in Review and Upcoming Developments

Annual Bid Protest and Contract Appeal Reports

On November 14, 2024, the GAO published its annual report covering bid protest statistics and other information about the protest system. The report provides useful insights into the operations of the bid protest system, including a 52% “effectiveness rate,” which measures how often a protester obtained some form of relief from the agency as a result of voluntary agency corrective action or because GAO sustained the protest. This rate demonstrates legitimacy among many protesters’ claims and the relative likelihood of success for government contractors seeking relief through a bid protest.

The Civilian Board of Contract Appeals (CBCA) published a similar annual report with respect to contract claims, indicating a significant decrease in appeals and a 128% increase in alternative dispute resolution. The data indicates that agencies are increasingly open to resolving contract disputes outside of litigation, posing a more cost-efficient option for businesses seeking relief under the Contract Disputes Act.

A New Administration

Following the inauguration of President-elect Donald Trump on January 20, 2025, federal contractors should expect significant changes to spending priorities and procurement policies. Although the new administration’s spending priorities are still taking shape, contractors may see an increased focus on defense spending, as well as new regulations governing supply chains and cybersecurity systems. Even before inauguration day, the FAR Council has begun to withdraw proposed rules related to pay transparency and greenhouse gas emission disclosures, citing the limited time remaining in the Biden Administration.

Contractors should also expect a departure from current spending priorities under the Inflation Reduction Act (IRA), which drove clean energy investments and climate policy initiatives under the Biden Administration. Although it is unlikely that the IRA is repealed in its entirety, contractors should prepare for fewer clean energy contracting opportunities and a potential repurposing of IRA funds across different areas of the energy landscape. The new Department of Government Efficiency (DOGE) — a proposed presidential advisory commission — is also expected to play a key role in influencing agency procurement and reducing federal spending, potentially through cuts to the federal workforce and discretionary programs. As a result, federal contractors should stay apprised of regulatory changes that may impact the procurement process under the new administration, particularly in the event of reduced capacity among federal agencies to efficiently administer contract awards.

Finally, President-elect Trump is expected to rely on executive orders to quickly implement a range of policies within the first several weeks of his presidency. Particularly for any executive orders impacting equal opportunity initiatives and immigration enforcement, federal contractors must consider how these laws will affect their compliance obligations and operations.

Faegre Drinker’s government contracts team will continue to monitor regulatory and legislative developments under the Trump Administration.