On March 21, 2008, the Executive Director of Contracts for the Defense Contract Management Agency, David E. Ricci, indicated that DCMA is considering a single process initiative (SPI) approach to streamline the morass of specialty metals rules that have come about in the last 18 months due to various legislative and regulatory changes. This announcement follows a new Class Deviation issued by DCMA on January 29, 2008 to implement the latest legislative directives, superseding prior announcements.
For the last 35 years, the specialty metals restrictions of the Berry Amendment (10 U.S.C. § 2533b; DFARS 225.7002; DFARS 252.225-7014) have been a thorn in the side of DOD suppliers – the restriction has been a recurring feature in each annual DOD authorization act since 1973. Subject to limited exceptions, the specialty metals restrictions have barred the DOD from acquiring specialty metals that are not melted, reprocessed, or produced in the United States or certain "qualifying countries" (a list maintained by the DOD consisting of several members of the European Union, plus other allies such as Australia, Canada, Egypt and Israel). This prohibition places an enormous administrative burden on DOD suppliers and DOD contracting personnel and, within the last several years, Congress and DOD have called for much more exacting implementation of the restrictions, heightening the risks imposed on DOD’s suppliers in trying to comply with a virtually unworkable statutory mandate.
The following timeline of some key events is helpful:
- Effective November 16, 2006, Sections 842 and 843 of the FY 2007 DOD Authorization Act (P.L. 109-364) codified the specialty metals restrictions as 10 U.S.C. § 2533b, creating limited exceptions and tightening additional requirements. Click here for more information.
- On December 6, 2006, the DOD issued Class Deviation 2006-O0004, attempting to implement sections 842 and 843 of P.L. 109-364, effective November 16, 2006.
- On October 26, 2007, the DOD issued Class Deviation 2007-O0011, creating a new exemption for COTS products.
- On November 8, 2007, the DOD issued final regulations (72 FR 63113), adding the new COTS exception to DFARS 225.7002-2(q).
- On January 28, 2008, Section 804 of the FY 2008 DOD Authorization Act (P.L. 110-181) further modified 10 U.S.C. § 2533b by adding a number of new exceptions. Click here for more information.
- On January 29, 2008, the DOD issued Class Deviation 2008-O0002, superseding all prior Class Deviations and implementing the FY 2008 Act.
Regulatory Confusion and the Potential SPI
Given the maelstrom of regulatory changes in this area, it is possible for a delivered product to comply with one set of rules, but not another. Such risk and unpredictability is unwelcome to say the least. Many contractors and government personnel find themselves confronted with a number of austere questions, including the basic inquiry of "Which of these restrictions applies to my contract?" and the natural analogue – "How do I apply this restriction?"
Recognizing the difficulty in answering these questions, DCMA recently issued guidance in Information Memorandum 08-143. Additionally, DCMA is now considering an SPI to harmonize all of the changes over the last 18 months. An SPI was previously used in the mid-1990s when federal procurement policy shifted toward favoring commercial products. At that time, suppliers were able to negotiate "block changes" to contracts, to facilitate uniform administration.
DCMA identified the following five "categories" of contracts to which the various specialty metals rules may apply (based on the contract award date):
1. Contracts awarded prior to November 16, 2006 (the effective date of the FY 2007 Act): These contracts are subject to the "original" specialty metals restrictions of 10 U.S.C. § 2533a (where the specialty metals restriction was codified prior the FY 2007 and FY 2008 Acts) and the "original" contract clauses at DFARS 252.225-7014.
2. Contracts awarded between November 16, 2006 and October 25, 2007: The changes in the FY 2007 Act apply, as implemented by the December 6, 2006 Class Deviation 2006-O0004. Click here for more information.
3. Contracts awarded between October 26, 2007 and November 7, 2007: The changes in the FY 2007 Act apply, as implemented by the December 6, 2006 Class Deviation, as well as the COTS exemptions implemented on October 26, 2007 by Class Deviation 2007-O0011.
4. Contracts awarded between November 8, 2007 and January 28, 2008: The changes in the FY 2007 Act apply, as implemented by the December 6, 2006 Class Deviation, as well as the COTS exemptions implemented by Class Deviation 2007-O0011 on October 26, 2007 and the Final Rule amending DFARS 225.7002-2(q) on November 8, 2007.
5. Contracts awarded on or after January 29, 2008: The changes in the FY 2008 Act apply, as implemented by Class Deviation 2008-O0002 (dated January 30, 2008), which expressly supersedes the prior Class Deviations, and functionally overrules the November 8, 2007 Final Rule.
DCMA hopes that an SPI will eliminate confusion in the identification of requirements and the administration of contracts.
January 2008 Class Deviation Following the FY 2008 Changes
The contemplated SPI comes on the heals of the latest attempt by the DOD to implement Section 804 of the FY 2008 Act (P.L. 110-181) – Class Deviation 2008-O0002, which issued on January 29, 2008, the day after P.L. 110-181 was signed into law. The new Class Deviation (applicable to all contracts awarded on or after January 29, 2008) includes "several new, expanded flexibilities," including:
- An expanded exception for all electronic components, not merely commercially available electronic components. "Component" is defined as "any item supplied to the Government as part of an end item or of another component."
- The statutory exception for some COTS items, excluding high performance magnets and certain fasteners.
- The statutory exception for "commercial derivative military articles" – commercial products manufactured on a line using a high percentage of domestically melted specialty metals.
- The statutory exception for de minimis amounts of noncompliant specialty metals – less than 2% of the total weight of specialty metals in the item.
- The statutory authority for waiver of the specialty metals restrictions, which can be exercised in writing by the Undersecretary of Defense for Acquisition, Technology, and Logistics (currently John J. Young), when the item subject to the waiver is vital to national security interests.
In issuing the Class Deviation, Shay Assad, Director of the Defense Procurement, Acquisition Policy & Strategic Sourcing Office, made several additional observations regarding the FY 2008 Act:
- Congress has removed language prohibiting the use of "appropriated funds," indicating merely that acquisition of noncompliant metals is "prohibited." Such as change "removes the implication that accepting noncompliant material may create an Anti-Deficiency Act violation. However, contractors continue to be obligated to comply with the restriction."
- Despite the fact that DOD has several additional tools under the FY 2007 and FY 2008 Acts to smooth contractor compliance, contracting officers should still be vigilant in requiring enforcement. "If the noncompliance is determined to be knowing or willful, the Secretary will consider suspending or debarring the contractor or subcontractor until the contractor or subcontractor has effectively addressed the issues leading to the noncompliance."
- The FY 2008 Act requires DOD to review all previously issued Domestic Non-Availability Determinations (DNADs) to ensure they are in compliance with the new law, and DOD intends to complete this review by the end of July 2008. The issuance of a DNAD remains an alternative for nonconforming products if the statutory exceptions are not met, although the FY 2008 Act does impose additional restrictions on the issuance of DNADs.
- "Contracting officers may, at their discretion, include the changes implemented by this Class Deviation in any existing contract with appropriate consideration." Such recognition seems to support the DCMA plan of launching an SPI to harmonize individual contracts.
Difficulties in Implementing the Class Deviation
Still, as the contracting community has come to learn all too well over the last few years, nothing related to specialty metals is ever easy. While the Class Deviation attempts to implement the FY 2008 Act, portions of the new policy are simply mind numbing.
- "COTS Products"
While the statutory exception for COTS products appears on its face to apply to all COTS products procured by DOD, the proposed implementation remains opaque. Consider the following:
According to the DOD, "a COTS item is considered to be ‘offered without modification’ as long as it is not modified prior to contractual acceptance by the next higher tier in the supply chain.… Specialty metals contained in a COTS item that was accepted without modification by the next higher tier are excepted and remain excepted even if a piece of the COTS item subsequently is removed (e.g. the end is removed from a COTS screw or an extra hole is drilled in a COTS bracket)."
"For specialty metals that were not contained in a COTS item upon acceptance but are added to the COTS item after acceptance, the added specialty metals are subject to the restrictions (e.g. a special reinforced handle made of specialty metal that is added to a COTS item)."
"If two or more COTS items are combined in such a way that the resultant item is not a COTS item, only the specialty metals involved in joining the COTS items together are subject to the restrictions (e.g. a COTS aircraft is outfitted with a COTS engine, but not the COTS engine normally provided with that aircraft)."
"For COTS items that are normally sold in the commercial marketplace with various options, items that include such options are also COTS items. However, if a COTS item is offered to the Government with an option that is not normally offered in the commercial marketplace, that option is subject to the specialty metals restrictions (e.g., an aircraft is normally sold to the public with an option for several radios. DOD requests a military-unique radio. The aircraft is still a COTS item, but the military-unique radio is not a COTS item, and must comply with the specialty metals restriction unless another exception applies)."
It seems that this COTS exception, while ostensibly designed to minimize the administrative burden, will continue to require vast amounts of time by both government and contractor personnel to justify and defend the classification of COTS products at various steps in the manufacturing process. Considering that Congress has also demanded DOD to provide updates on what types of COTS products are being procured, one is hard-pressed to understand how exactly this "minimizes" an administrative burden. Somehow, we doubt that this is what industry hoped for in begging for a COTS exception.
- "Commercial Derivative Military Article"
The FY 2008 Act provides a new exception for commercial derivative military articles, provided the contractor has certified that it or its subcontractors have entered into agreements to purchase a certain amount of domestically melted or produced specialty metals for use during the period of contract performance. "The amount of specialty metal that is required to carry out production of the commercial derivative military article includes specialty metal contained in any item, including COTS items." But the Class Deviation fails to elaborate on how these amounts are calculated. Undoubtedly, further clarification from DOD will be required before this exception can be applied in practice.
Thankfully, DOD acknowledges that the representations as to amounts "will be based on good faith estimates." However, a contractor is still required to "certify" its compliance with these provisions, potentially exposing the supplier to False Claims Act liability if its good faith is not "good enough."
Based on the number of inquiries we regularly receive from companies trying to comply with the specialty metals restrictions, it seems clear that, rather than streamlining and simplifying the specialty metals process, improving DOD’s access to cutting-edge commercial technologies, and providing contractors with the type of ready predictability to which they are entitled when confronted with an aggressive enforcement infrastructure, the changes to the specialty metals provisions have simply succeeded in making more complex an already poisonous mix. If Congress’ goal in 2006 was to make this process worse and to complicate DOD contract administration, then Congress has succeeded admirably. However, if the goal was to improve efficiency in the procurement markets, then Congress has failed abysmally. When it comes to specialty metals and the U.S. Congress, nothing is so bad that it cannot get worse. Truly.