Helping individuals, companies, and organizations understand key legal and practical considerations for promoting compliance and making better business decisions in these types of federal, state, and local government contracting matters MORE

At the end of December, China acknowledged the existence of the coronavirus, and this burgeoning heath crisis is becoming a supply chain problem. China, a major manufacturing hub for materials, products and components being used around the world, has been significantly impacted. 

Facing the fast spread of the virus, China took a number of steps–delaying the return to work of millions following the Lunar New Year celebration, blockading entire cities where the virus is found to be most prevalent, and transporting those with the virus to isolation camps. 

In addition, travel, transportation and shipping services to and from China have been cancelled or restricted. Certain airlines have stopped flying to locations in China. Countries are instituting screening and isolation protocols to prevent those persons with symptoms from entering their countries and further spreading the virus.

Workers have been unable to get to factories to produce materials, products and components. Supplies have been delayed or prevented from transport to their destinations. This has impacted sales, the manufacturing of additional products, and the delivery of services elsewhere. Given the expanding reach of the virus, further impacts to the global supply chain are likely.

What Should Businesses Be Doing Now?

Because of the global nature of the supply chain, these problems are likely to impact businesses in the United States, delaying delivery of both raw and finished materials sourced from China and potentially other origins. This is likely to disrupt manufacturing, construction and other businesses that depend on such materials. For some, the disruption could interfere with the ability to comply with contractual commitments. For others, inventory shortages could lead to a reduction in sales revenues, which in turn, could have a material impact on performance and trigger reporting obligations. Apple reported that the virus would negatively affect iPhone production—and revised its forecasts.
These supply chain problems are not just the province of large multinational businesses. On February 9, Bridgewater, NJ-based Valeritas Holdings, a medical technology company specializing in the manufacture of insulin patches sought bankruptcy protection. The company blamed supply chain problems exacerbated by the coronavirus epidemic as the triggering cause of its bankruptcy filing. 
In these situations, there are several proactive steps that businesses should be taking now to avoid or mitigate problems in the long run.
Identify Alternative Sources: Businesses should identify vulnerabilities in their supply chain and alternative sources to which they can turn. In identifying vulnerabilities, look beyond Chinese-sourced goods. As the virus spreads to other countries, so too could the supply chain disruption.
Review Contracts: Businesses that have contractual commitments that depend on foreign-sourced goods (or goods that include foreign-sourced components) should review those contracts to identify any rights and requirements under those contracts.

  • Are there schedule and performance requirements?
  • Does the contract address under what circumstances delay or non-performance may be excusable?
  • Are there notice requirements if items are delayed or unavailable?
  • Is there a force majeure provision and does it apply to your situation?
  • Are you required to deliver in accordance with an established bill of materials or to use only qualified products, or can you substitute products or components if items are delayed or unavailable?
  • Do you have any rated orders under the Defense Production Act? If so, you have an obligation to deliver what is required under the set schedule. You also may have a duty to notify the government or your higher tier contractor if there are performance and schedule risks.
  • Are the increased costs of performance recoverable?
  • Is your schedule impacted and can you obtain relief?

Communicate: Early and open communication with counterparties can help parties avoid or reduce problems as well as reduce the risk of litigation. This communication extends to businesses with lines of credit determined by a borrowing base formula. Generally, that formula considers a company’s current accounts receivables or finished inventory as the collateral for ongoing loan advances. Advising your lender of the supply chain disruption in advance may avoid an unfortunate conversation later in the quarter. Similarly, lenders should check on borrowers and anticipate potential defaults resulting from these supply chain issues.

Document, Document, Document: If you do have to declare force majeure or otherwise excuse performance, you may need to be able to show not just disruption to the supply chain, but that the disruption prevented or delayed performance under the contract. This may require a showing of the efforts that you took to obtain product from other sources. It is critical not just to engage in such efforts, but to document those efforts contemporaneously.

Reporting Obligations: Prior forecasts and projections may be looking a little overly optimistic at this point. You may consider whether restating forecasts is warranted. Similarly, you should consider additional disclosures in annual reports or in reports to lenders. Disclosure and disclaimers may also be added in connection with representations in new financing or transaction documents entered into during this period.

These issues may also be applicable to your own supply chain members and further impact your performance. Businesses should be urging all of their vendors and subcontractors to take the actions recommended above. Consider developing a plan to identify and address these concerns. Being proactive and strategic now may help you to avoid problems down the road.

The title of this article is based on a line in an old song, “Everybody’s Crying Mercy,” by Mose Allison. As modified, the couplet captures the cognitive dissonance that many are feeling as a result of the federal government’s conflicting approach to trade with Huawei Technologies Co. Ltd. (Huawei) and its non-United States affiliates. In the most recent step in this halting “evolution,” the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) announced it is seeking public comments by March 25, 2020 on the continuing need for, and scope of, possible future extensions of the Temporary General License (TGL) authorizing certain exports to Huawei and 114 of its non-United States affiliates on BIS’s Entity List. In connection with this request for input, BIS extended—for the fourth time—the TGL for Huawei and those affiliates through May 15, 2020.

The TGL was initially published on May 22, 2019, several days after BIS added Huawei and 68 of its non-United States affiliates to the Entity List after determining “that there is reasonable cause to believe that Huawei has been involved in activities contrary to the national security or foreign policy interests of the United States” and “those affiliates pose a significant risk of involvement in activities contrary to the national security or foreign policy interests of the United States.” (BIS subsequently added another 46 affiliates to the list.) As a result, BIS imposed a license requirement for all items subject to the Export Administration Regulations and a license review policy of presumption of denial. Similarly, the action provided that, with limited exceptions for certain shipments already en route, no license exceptions are available for exports, reexports, or transfers (in-country) to the persons added to the Entity List.

Despite the findings that motivated Huawei’s addition to the Entity List, the initial TGL and the three previous extensions of it have allowed: (i) continued operation of existing networks and equipment; (ii) support to existing handsets; (iii) cybersecurity research and vulnerability disclosure; and (iv) engagement as necessary for development of 5G standards by a duly recognized standards body. BIS has explained that the TGL and extensions were intended to allow time for companies and persons to shift to alternative sources of equipment, software, and technology (e.g. those not produced by Huawei or one of its listed affiliates). In addition, under applicable Entity List rules, non-U.S. manufacturers are still allowed to export items to Huawei so long as the items do not have more than de minimis—here, 25%—U.S. origin content.

When BIS floated closing that loophole in late 2019, proposing that the de minimis figure be reduced to 10%, the Department of Defense (DoD) initially pushed back. The Pentagon argued that the additional limits would cost U.S. chip manufacturers so much revenue that their research spending would suffer and they would not be able to keep up with global rivals, which could threaten the American military’s technological edge. Last month, however, after challenges from influential Republican Senators and lobbying from the Department of Commerce, DoD dropped its opposition to the further crack down on Huawei proposed by the Department of Commerce. A cabinet-level meeting to discuss the potential new U.S. restrictions was supposed to follow, but that meeting has since been postponed twice.

Against this background, BIS explains that the recent 45-day extension and request for public comment demonstrates the Department of Commerce is trying to find a permanent solution. BIS hopes the responses will help it better evaluate the need to extend the TGL, determine whether any other changes may be warranted to the TGL, and identify any alternative authorization or other regulatory provisions that may more effectively address what is being authorized under the TGL. Only time will tell how the BIS and the rest of the federal government will resolve the vexing issues raised by Huawei, its connection with the People’s Republic of China, and its position in the technology industry. Until then, it’s arguably “business first.”

Not being included, or being purposely excluded, may remind some of adolescence, and may remind others of the Federal Acquisition Regulation (FAR) simplified acquisition procedures. The recent Government Accountability Office (GAO) decision in Phoenix Environmental Design, Inc. (Phoenix), B-418304 (March 2, 2020) deals with facing the latter form of disappointment.

The underlying purchase order in this matter was issued by the Department of the Interior, United States Fish and Wildlife Service to address the Southeast Idaho National Wildlife Refuge Complex’s (NWRC’s) urgent need for herbicide. The Southeast Idaho NWRC’s need was compounded by an unplanned wildfire, which provided soil conditions that would facilitate the elimination of “cheatgrass,” an invasive species in the area. The Southeast Idaho NWRC expressed its need for fifteen gallons of herbicide to the agency on October 10, 2019, stating that it needed the herbicide by October 25 because of concerns that a freezing event would occur and eliminate the efficacy of the herbicide.

To respond to the pressing request, the agency solicited quotations as a small business set-aside pursuant to FAR §§ 13.003 and 13.104, which provide for simplified acquisition procedures in lieu of full and open competition. The agency solicited quotations from three vendors – one was a local vendor and the other two vendors were businesses that had submitted the lowest prices in response to a prior solicitation for herbicides. Phoenix had also submitted a bid for this prior solicitation, though it had quoted the second highest price. While Phoenix had, throughout the years, repeatedly notified the agency that it was interested in all of the agency’s herbicide requirements, the agency did not solicit a quotation from Phoenix.

The formal purchase order was issued to Wilbur-Ellis Co. on October 17 and on October 18 the Southeast Idaho NWRC picked up the herbicide from the vendor’s facilities. On October 22, Phoenix requested that the contracting officer cancel the award, and after being informed that such would not occur, on October 25, Phoenix filed a protest at the agency level. Following the denial of that protest, Phoenix filed the instant protest with the GAO.

Phoenix protested on two grounds: that it was unreasonably excluded from the solicitation, particularly as it had expressed interest numerous times in competing for the agency’s herbicide requirements, and that the agency improperly awarded the purchase order to a large business.

The GAO was unconvinced on both grounds, noting that simplified acquisition procedures permit an agency to forego full and open competition and generally allow an agency’s soliciting quotations from three sources. However, an agency cannot unreasonably exclude an offeror that has expressed an interest in competing. Here, according to the GAO, the agency was not unreasonable in excluding Phoenix since, despite Phoenix’s request to compete, the agency was on a tight deadline and Phoenix had previously submitted a high-priced offer.

Further, the GAO clarified that its review of an agency’s size determination, which is typically in the purview of the Small Business Administration, is limited to situations where the awardee’s quotation, on its face, demonstrates that the awardee is not eligible for award as a small business. Such was not the case here where, at least facially, the awardee represented and certified that it was a small business.

The important takeaway: simplified acquisition procedures are, indeed, simple and allow the agency a lot of leeway, including the ability to exclude an offeror based on one prior high offer (at least in an urgent situation). Though unsuccessful here, Phoenix’s tactic of putting itself out there and reminding the agency that it wants to compete may be the best way to convince the agency to invite it to participate in future procurements.

Sometimes the most basic rules can be the easiest to forget. One case in point relates to the key role of competitive prejudice in successful protests. No matter how often contractors hear it, this reality bears repeating, early and often: competitive prejudice is an essential element of a viable protest. In protest after protest, disappointed bidders either forget this fundamental rule or misjudge the strength of their argument that the government’s actions prejudiced their ability to compete. The Government Accountability Office’s recent decision in 100 Westminster Partners, LLC, B-418216; B-418216.2; B-418216.3 (January 27, 2020) provides yet another stark example of the importance of competitive prejudice. Simply put, without it you will not win.

The matter involved the award of a lease for office space to Providence Financial Plaza (Providence), LLC by the General Services Administration (GSA) under a request for lease proposals (RLP). The RLP contemplated a 15-year lease of approximately 20,000 square feet of office space in Providence, Rhode Island, for the United States Attorneys’ Office (USAO). As relevant here, the solicitation provided that the agency would determine the lowest price by conducting a present value price evaluation. Significantly, the award was to be made to the lowest-priced technically acceptable offeror.

The GSA received technically acceptable lease proposals from Providence and the protester, Westminster Partners, LLC (Westminster). After conducting the present value price evaluation, the agency calculated that Providence’s evaluated price was $34.13 per square foot (SF), and Westminster’s was $39.19 per SF. Concluding that Providence submitted the lowest-priced, technically acceptable proposal, the GSA awarded it the lease.

Westminster protested, raising a number of grounds, including the claims that the agency (i) failed to include replication costs in its present value price evaluation and (ii) improperly used the same relocation costs for Westminster and Providence even though Westminster would be moving tenants one floor while Providence would have to relocate tenants to a new building. The RLP explained that the agency would perform a present value price evaluation of the proposed rent per SF, which would result in a gross present value price, then add replication costs (a tenant improvement allowance) and the cost of relocation.

As noted above, the agency’s initial present value evaluation resulted in evaluated prices for Providence and Westminster of $34.13 / SF and $39.19 / SF, respectively. However, the agency did not consider relocation costs for either offeror in the initial evaluation, because the tenant would be required to move whether the lease was awarded to Westminster or Providence.

In response to the protest, the agency reviewed the present value analysis and noted that it had used the wrong replication cost figure for Westminster and had failed to include the relocation costs for either offeror. After the GSA corrected those errors and recalculated the present value analysis using the methodology set forth in the RLP, the offerors’ evaluated prices changed to $35.33 / SF for Providence and $43.04 / SF for Westminster. Thus, while Westminster was correct that the agency made mistakes in the initial evaluation, those mistakes did not change the outcome. Providence remained the lowest-priced, technically acceptable offeror. And since Westminster did not demonstrate that the GSA’s errors were prejudicial, the GAO denied the present value price evaluation protest ground.

While the lack of competitive prejudice is not always as objectively demonstrable as in this matter, the basic rule applies to all protests: unless the protestor shows prejudice, it cannot prevail even if all of its factual assertions turn out to be 100% accurate. Put another way, there’s no point in pursuing a protest claim unless you can prove prejudice. If you can’t, you’re wasting your time.

On February 10, 2020, in National Women’s Law Center v. Office of Management and Budget, the U.S. District Court for the District of Columbia ordered the Equal Employment Opportunity Commission’s (EEOC’s) collection of gender and race pay data complete. This marks the end of a long-fought battle that has been raging since 2016 over whether and how the EEOC could require covered employers to submit pay data as part of the EEO-1 Report that these companies are already required to complete each year.

Covered employers include private companies with 100 or more employees and federal contractors with 50 or more employees. Covered employers are required to file the EEO-1 Report each year, identifying the number of employees in various job groups by race and sex (“Component 1”). The long-fought battle concerned whether to add gender and race pay data (“Component 2”) to the EEO-1 Report.

On January 29, 2016, the EEOC announced proposed revisions to the Employer Information Report (EEO-1) that would require collection of pay data beginning in 2017. On September 29, 2016, the White House’s Office of Management and Budget (OMB) under President Obama approved the revised EEO-1 Report. However, after President Trump took office, the OMB brought a lawsuit in the U.S. District Court for the District of Columbia and successfully stayed that requirement on August 29, 2017, prior to the date on which covered employers had any legal obligation to gather and submit pay data.

Various groups challenged the OMB’s stay, and initiated litigation to have the pay data requirement reinstated. On March 5, 2019, the U.S. District Court for the District of Columbia vacated the decision of the OMB to stay and reconsider the EEOC’s 2016 revised EEO-1 Component 2 pay data collection. On May 2, 2019, the EEOC announced that it will collect 2017 pay data along with 2018 pay data by September 30, 2019.

As a result, the EEOC began collecting pay data in a revised EEO-1 form, OMB Control No. 3046-0007, for calendar years 2017 and 2018 in mid-July 2019. The revised EEO-1 form organized pay data into categories of race, sex, ethnicity, and job group. That information was then sorted into one of 12 pay bands, creating a grid. The revised EEO-1 form does not expire until April 5, 2021.

Initially, the District Court set a deadline of September 30, 2019 for collecting pay data. However, the deadline was pushed back when the Court determined that more employers needed to submit their data. As of February 7, 2020, 89% of all eligible employers had submitted pay data to the EEOC.

Despite the collection being complete, the EEOC and the OMB are still appealing the District Court’s orders. The government claims that the Court exceeded its authority by reviving and instituting the Obama-era pay reporting requirement and setting how and when the collection of pay data could occur.

On September 11, 2019, the EEOC announced in the Federal Register that it intends to submit to OMB a request for a three-year approval of Component 1 of the EEO-1 and does not intend to submit to OMB a request to renew Component 2. The Office of Federal Contract Compliance Programs (OFCCP) has said it will not request, accept, or use Component 2 pay data, but it will continue to use Component 1 data.

Even though the EEOC and the OFCCP are purportedly not actively collecting and/or using compensation information in the EEO-1 report, it is critical that all employers—particularly government contractors—regularly conduct pay equity analyses in preparing for OFCCP audits. Compensation information is requested as part of OFCCP audits, separate and apart from the EEO-1 Report. Disparities in compensation remain a focus of OFCCP and allegations of discrimination in compensation have resulted in litigation and significant settlements in recent years.

In fact, in 2019, OFCCP obtained a record $40,569,816 in monetary settlements for affected class members, which is $16 million more than the next highest year. The three-year total of monetary settlements for 2017-2019 is the highest three-year period on record and exceeded the prior seven years (2010-2016) combined. Recently, OFCCP reached a $5 million settlement with Intel Corp. to resolve pay discrimination allegations brought by African American and Hispanic American employees at its facilities in Arizona, California and Oregon.