The regulations prohibiting the Department of Defense from purchasing products containing foreign specialty metals may be changing. Again.

In recent years, the DOD has issued a host of Class Deviations, waivers, and policy memoranda — all in an attempt to implement an unworkable statutory mandate that seems to shift every few months. Nowhere is the confusion more clearly displayed than in a January 2008 Information Memorandum issued by the Defense Contract Management Agency, which indicated that there were potentially five different types of specialty metals restrictions that might apply to various contracts (depending on the award date). Click here for previous discussion on this DCMA Information Memorandum, as well as the January 2008 Class Deviation that attempts to implement the most recent statutory changes, welcoming attempts to loosen the restrictions, but also criticizing the compliance nightmare that our Government has unleashed. We hoped that Congress would let the dust settle. But it looks like there may soon be a sixth different type of specialty metals restriction with which DOD and industry must grapple.

Thankfully, the latest version of the 2009 Defense Authorization Act (H.R. 5648), passed by the House of Representatives (but not yet by the Senate) on May 22, 2008, does not revise the specialty metals restrictions. The latest changes were included in sections 804 and 884 of the 2008 Defense Authorization Act, discussed here. However, the House Armed Services Committee did note in its Committee Report for H.R. 5648 (H. Rpt. 110-652, at 392-393) that it was displeased with the January 2008 Class Deviation issued by DOD.

The committee is concerned about the way that the class deviation defines commercial-off-the-shelf (COTS) subassemblies and components. The definition in the class deviation states, `A COTS item is considered to be `offered without modification’ if it is not modified prior to contractual acceptance by the next higher tier in the supply chain.’ The committee believes this definition could be misinterpreted without further clarification by the Department. First, the committee believes that the class deviation should clearly state that the exception for COTS items and components generally applies to items incorporated in non-commercial end items. Second, the committee supports the interpretation in the class deviation that, `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,’ only if the changes made to the COTS item are incidental to installation, joining, or incorporation into the non-commercial end item. The committee believes that if a contractor is using COTS items with more substantial modifications, it must do so either using the new de minimis exception or the streamlined compliance for commercial derivative military articles.

Additionally, the committee believes the definition of the term `produced’ in the class deviation requires clarification. The committee’s intent in adding the term `produced’ was to allow for manufacturing processes other than the traditional melting process, and it is intended to refer to melting or a process that is the equivalent of melting. The committee recommends that the Department strike the definition of the term `produced’ or, at a minimum, clarify that it does not refer to secondary finishing processes such as quenching or tempering.

Further, while the committee agrees that the certifications required by the contractor to receive relief under the de minimis and commercial derivative military article exceptions should be made in `good faith’ as described in the class deviation, the committee also urges the Department to make clear that compliance remains subject to all relevant contractual requirements, including potential audit. The committee further recommends that the class deviation be revised to state that the `de minimis exception does not apply to high performance magnets containing specialty metal,’ placing the focus on the melted magnet, rather than the individual elements combined to produce the magnet.

Moreover, the class deviation lists a number of exceptions to the requirements of section 2533b, title 10, United States Code, including `(a)(2) Acquisitions outside the United States in support of combat operations,’ and `(a)(3) Acquisitions in support of contingency operations.’ The committee notes that it would be inconsistent with existing statute to imply that acquisitions in support of contingency operations are exempt, whether or not those acquisitions take place outside the United States. Therefore, the committee recommends that the Director revise these exceptions to state, `Acquisitions outside the United States in support of combat operations or in support of contingency operations,’ consistent with subsection (c)(1) of the statute.

Finally, the committee notes that the national security waiver provided in subsection (k) of section 2533b of title 10, United States Code, was designed for use when items of critical importance to national security are found to contain non-compliant specialty metals. The committee intends that the authority be used as a last resort and only in the most compelling cases. Use of the authority also obligates the Department to identify and correct the cause of the non-compliance, including potential sanctions against a contractor who knowingly supplies non-compliant materials. The committee expects that the Department will exercise this national security waiver authority on an infrequent, case-by-case basis. (Emphasis added)

We think there is little doubt that DCMA will reformulate the January 2008 Class Deviation. As the House Committee noted, the plain language of the Class Deviation — bizarrely — eliminates any exemption for COTS products unless they are incorporated into a COTS end-item, subassembly, or component. This makes the exception virtually unworkable and meaningless. Hopefully, DCMA will take a cue from Congress and revise the Class Deviation so that the COTS exception makes more common sense. With regard to the other issues raised by the Committee, we think that DOD will more than likely do at it is told.

While we welcome a common sense application of the specialty metals restrictions and a loosening of the restrictions, industry must be growing weary of tracking this incessantly moving target. Those in industry who are legally and contractually obligated to comply with the changes find themselves firmly planted on continually shifting sands — rarely a place that inspires the precitability one wants when facing the enormous enforcement power of the United States Government.

Behold what our Government hath wrought.

Authored by:

John W. Chierichella

(202) 218-6878


David S. Gallacher

(202) 218-0033