It’s that time of year again: the House and Senate have each passed their respective version of the National Defense Authorization Act for FY 2024 (“NDAA”) (H.R. 2670, S. 2226). The NDAA is a “must pass” set of policy programs and discretionary authorizations to fund Department of Defense (“DoD”) operations. Lawmakers are currently undertaking the arduous process of reconciling these bills, while jockeying to include topics of importance in the final legislation. The engrossed bills contain a number of significant provisions for defense contractors, technology providers, life science companies and commercial-item contractors – many of which we discuss briefly below and others that we will analyze in more depth in our NDAA series in the coming weeks. Subscribe to our blog here so that you do not miss these updates.
Identifying and Mitigating Supply Chain Risks
Both houses of Congress remain focused on assessing and mitigating supply chain risks, especially for materials used for DoD and other national security applications. Although many provisions in the bills operate on a granular level, i.e., focusing on procurement of particular items, a notable provision in the House bill directs DoD to report on the feasibility of leveraging artificial intelligence (“AI”) to develop a DoD-wide, continuously monitored supply chain visibility system that would be capable of quickly identifying and mitigating supply chain risks related to strategic goods, components, and materials. This measure underscores Congress’ commitment to overhauling DoD’s approach to tracking supply chain issues and its willingness to pressure DoD to use novel approaches to achieve this goal.
The House and Senate bills further underscore a steadfast focus on supply chain risks tied to critical materials, especially materials that are essential for military systems or strategic infrastructure. For instance, Section 181 of the House NDAA would provide multiyear procurement authority for DoD to acquire domestically produced rare earth elements, including those that are a key component of large-capacity batteries used in electric vehicles. Additionally, Section 1415 requires DoD to recommend measures to achieve supply chain independence for critical minerals, which could include acquisition policy changes involving reviews of contractors’ use of critical minerals sourced in China.
Similarly, Section 1057 of the Senate NDAA directs DoD to develop a strategy for developing supply chains for critical minerals that are not dependent on China and other covered countries, including by changing acquisition laws and exercising authority under the Defense Production Act. It also directs the National Nuclear Security Administration to establish a supply chain reliability assurance program that, in collaboration with DoD, mitigates vulnerabilities with respect to critical materials needed for nuclear security (Section 3121). As the House bill notes, China controls 85% of critical minerals, including rare earth elements, that are necessary to support defense applications and, therefore, we expect Congress’ focus on supply chain integrity and domestic sourcing to continue.
Assessing Ongoing Vulnerabilities in Life Sciences
More than three years after the onset of the COVID-19 pandemic, Congress continues to focus on medical countermeasure readiness in the NDAA, though at a lower priority than at the height of the pandemic. For instance, Section 726 of the House NDAA would require the Secretary of Defense to establish a Military Pharmaceutical and Medical Device Vulnerability Working Group, with membership comprised of individuals from the Armed Forces and civilian employees of DoD. The working group would have 10 prescribed duties, including: (1) discussing issues involving access, threats, and vulnerabilities to pharmaceuticals, therapeutics, and medical devices in operational environments; (2) developing an annual list of pharmaceuticals critical to DoD and related quantities needed to mitigate the risk of supply chain disruptions; and (3) developing plans for allocating scarce pharmaceutical resources, stockpiling essential medications, mitigating vulnerabilities to active pharmaceutical ingredient (“API”) supply chains, and reducing dependence on foreign sources for APIs. The issues that this working group is charged with addressing are multifaceted and complicated by complex supply chains that are intricately tied to the commercial market for many of the same pharmaceuticals and devices that DoD procures. Further, although this working group will be required to submit an initial report and annual reports to Congress, it is not clear how the reports’ findings will be addressed in practice, particularly without involvement of industry participants in the working group.
The House bill also expands Section 215 of the James M. Inhofe National Defense Authorization Act for FY 2023, which established a program aimed at improving the ability of the industrial base to assess, validate, and scale new, innovative bioindustrial manufacturing processes for the production of chemicals, materials, and other products necessary to support national security or secure fragile supply chains. Section 213, which had bipartisan support during the committee markup process of this year’s House bill, would allow bioindustrial manufacturers to receive funding for research and development related to APIs.
Bid Protests: GAO’s Loser Pays Pilot Program
Once again, a “loser pays” bid protest pilot program has appeared in the NDAA, which would require contractors to reimburse DoD for costs incurred in “processing” bid protests that are ultimately denied by the Government Accountability Office. Setting aside that the bid protest system serves a necessary and important oversight function—improving the integrity and quality of government contracting actions—as currently drafted, significant questions remain as to how Section 804 of the House NDAA, which introduces the pilot program, would apply. For instance, Section 804 does not state what costs qualify for reimbursement or whether the reimbursement provisions apply in instances where DoD takes corrective action or the protestor prevails on only a portion of its claims. Congress implemented a nearly identical program in 2018 but repealed it before it went into effect. Section 804 is not in the Senate bill, so it remains unclear whether this provision will make its way into the final legislation and, if so, if the issues with its approach will be clarified. For more in-depth discussion on this topic, see our post “Should Bid Protest Losers Pay?”
Ongoing Oversight and Continued Support for OTAs and MTAs
Congress maintains an ongoing interest in nimble agreement vehicles such as Other Transaction Authority awards (“OTAs”) to quickly and effectively meet the needs of DoD. As DoD continues to rely on OTAs, Congress continues to increase reporting requirements and oversight. For instance, the House bill directs DoD to report to Congress regarding the feasibility of applying the Contractor Performance Assessment Reporting System (“CPARS”) to OTAs, which could result in more formalized oversight of contractors participating under these awards. The House also recognized that OTAs and Middle Tier of Acquisition awards (“MTAs”) pathways have accelerated rapid fielding of resources to meet military needs but more data are needed to study and assess production utility of OTAs and MTAs. DoD is directed to quantify the use of OTAs and MTAs across DoD and the Armed Forces with non-traditional, technology-focused vendors. DoD would also be required to report on a number of other metrics, including what products and services DoD is procuring using these vehicles; business composition of the awardees, including size, type, geography, and industry; and data on certain trends in defense OTAs and MTAs for at least the past five years. The focus on the MTAs pathway comes on the heels of a 2023 GAO Report, Middle-Tier Defense Acquisitions: Rapid Prototyping and Fielding Requires Changes to Oversight and Development Approaches, which made 26 recommendations to improve MTAs oversight and development, including a number of recommendations to improve the reliability of MTAs program data.
On the Senate side, the Senate bill would direct the Space Development Agency to use MTAs for the rapid fielding of satellites and associated systems for warfighter space architecture. Under this directive, selected programs must be ready for prototyping within an acquisition program or rapidly fielded within five years (Section 1605). Additionally, Section 1606 of the Senate bill would allow for OTAs (as well as contracting authority) to support commercial space launch capacity on a military installation by allowing DoD to provide launch services to commercial entities, with such entities reimbursing DoD for direct and indirect costs associated with such services.
Small Business Opportunities and Emerging Technologies
The House and Senate versions of the NDAA include a number of provisions directed at bolstering participation and support for small businesses in DoD’s procurement process. For instance, Section 844 of the Senate bill would clarify that contracting officers may submit or otherwise modify past performance assessments for contractors who engage in an unjustified failure to provide timely payments to small business subcontractors, and impose a duty of cooperation on the contractor to work with the government in “correcting and mitigating” the untimely payment in order to ensure the subcontractor is “made whole.”
The House NDAA looks to establish Entrepreneurial Innovation Project designations that would require the Secretary of each military department to include funding for no less than five promising research programs of the Small Business Innovation Research Program or Small Business Technology Transfer Program in budget program requests for future years. Under Section 881, small businesses would be required to submit applications for a designation as an Entrepreneurial Innovation Project, and a newly established advisory panel in each military department would recommend eligible programs based on the potential of the project to: advance U.S. national security strategies; provide new technologies or processes, or new applications of existing technologies that will enable new alternatives to existing programs; and provide future cost savings. Notably, the five-member advisory panel must include three individuals who are not employed by the federal government and have experience with private sector entrepreneurial innovation—providing a potential opportunity for industry to help shape the program and increase industry participation in DoD’s innovation ecosystem.
The House bill also identifies additional requirements for briefings and reports, including requiring DoD to report on small business access to Sensitive Compartmented Information Facilities (“SCIFs”) and efforts to assist early-stage defense contractor participants in targeted acquisition programs, e.g., Agility Prime, Small Business Innovation and Research, to bridge the gap between graduating from the relevant program and incorporation into larger-scale DoD acquisition frameworks.
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As noted above, these provisions remain subject to further change (or removal) as the House and Senate bills proceed through the conference process. In the meantime, Covington’s Public Policy and Government Contracts teams will continue to track developments and release additional analysis of the topics above and additional areas of interest, including measures related to China, AI, and procurement. Subscribe to our blog here so that you do not miss these updates.