Defense Federal Acquisition Regulation Supplement: Pilot Program To Incentivize Contracting With Employee-Owned Businesses (DFARS Case 2024-D004)

<RULE> DEPARTMENT OF DEFENSE <SUBAGY>Defense Acquisition Regulations System</SUBAGY> <CFR>48 CFR Parts 206, 212, 252, and 270</CFR> <DEPDOC>[Docket DARS-2024-0017]</DEPDOC> <RIN>RIN 0750-AM01</RIN> <SUBJECT>Defense Federal Acquisition Regulation Supplement: Pilot Program To Incentivize Contracting With Employee-Owned Businesses (DFARS Case 2024-D004)</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Defense Acquisition Regulations System, Department of Defense (DoD). <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> DoD is issuing a final rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to implement sections of the National Defense Authorization Acts for Fiscal Year 2022 and Fiscal Year 2024 that authorize DoD to establish a pilot program that allows for the noncompetitive award of certain follow-on contracts to certain employee-owned businesses. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Effective November 25, 2024. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Ms. Jeanette Snyder, telephone 703-508-7524. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Background</HD> DoD published a proposed rule in the <E T="04">Federal Register</E> at 89 FR 46831 on May 30, 2024, to implement section 874 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2022 (Pub. L. 117-81; 10 U.S.C. 3204 note) as amended by section 872 of the NDAA for FY 2024 (Pub. L. 118-31; 10 U.S.C. 3204 note). Sections 874 and 872 authorize DoD to establish a pilot program that allows for the noncompetitive award of certain follow-on contracts to employee-owned businesses that meet the definition of a qualified business. Five respondents submitted public comments in response to the proposed rule. <HD SOURCE="HD1">II. Discussion and Analysis</HD> DoD reviewed the public comments in the development of the final rule. A discussion of the comments and the changes made to the rule as a result of those comments is provided, as follows: <HD SOURCE="HD2">A. Summary of Significant Changes From the Proposed Rule</HD> There are no significant changes from the proposed rule. <HD SOURCE="HD2">B. Analysis of Public Comments</HD> <HD SOURCE="HD3">1. Support for the Rule</HD> <E T="03">Comment:</E> The respondents expressed support for the rule. <E T="03">Response:</E> DoD acknowledges the respondents' support for the rule. <HD SOURCE="HD3">2. Clarifications</HD> <E T="03">Comment:</E> One respondent recommended revising the proposed rule text at DFARS 270.X02 to clarify that a reference to Federal Acquisition Regulation (FAR) 6.302-5 is sufficient to justify a sole-source award under the pilot program. The respondent also recommended adding the following sentence to the text: “A justification that cites FAR 6.302-5, makes reference to 48 CFR 206.302-5(b)(iii), and meets the requirements of subparts 207.X03 and 207.X04 shall be considered complete and sufficient for an exception to full an open competition.” One respondent indicated that a justification and approval (J&A) that only references FAR 6.302-5 is likely to be found insufficient by audit agencies. <E T="03">Response:</E> The proposed rule text at DFARS 270.102(b) requires the contracting officer to justify the use of a sole-source contract in accordance with FAR 6.303 and 6.304 prior to conducting negotiations and to cite FAR 6.302-5, Authorized or required by statute, as the exception to full and open competitive procedures. FAR 6.303 specifies the requirements for and the content of a justification. The statute did not modify the requirements for or content of a justification; therefore, DoD cannot make the recommended change. However, the final rule text at DFARS 270-X02(b) has been amended to remove duplicative text addressed at FAR 6.303-1(a). <HD SOURCE="HD3">3. Exceptions to Implementation</HD> <E T="03">Comment:</E> Two respondents took exception to the fact that the proposed rule does not provide a process for a contractor to apply to participate in the pilot program to ensure a transparent and accessible process. One respondent indicated the inability for a contractor to apply to participate in the pilot program is overly restrictive and inconsistent with the statute. <E T="03">Response:</E> Section 874 required the Secretary of Defense to submit to the congressional defense committees an implementation plan for the pilot program. This implementation plan indicated that applications for participation in the pilot program will be submitted by contracting officers. The proposed rule text at DFARS 270.103 is consistent with the implementation plan. As such, a contractor is not able to submit an application for participation in the pilot program. <E T="03">Comment:</E> One respondent took exception to the requirement for a J&A, indicating that it is inconsistent with the statute. The respondent further indicated that such a requirement may limit the number of businesses that may participate in the pilot program, citing the fact that there are only eight businesses currently participating in the pilot program. <E T="03">Response:</E> While sections 872 and 874 authorize the use of other than competitive procedures for the award of certain contracts under this pilot program, neither waived the requirement for a J&A; therefore, a J&A is required. The Office of the Under Secretary of Defense (Acquisition and Sustainment), Defense Pricing, Contracting, and Acquisition Policy implemented section 874 via a contract policy memorandum dated November 8, 2022, and limited participation in the pilot program to nine contractors. Therefore, the requirement for a J&A has not limited participation in the pilot program. <E T="03">Comment:</E> Three respondents took exception to the proposed rule reporting requirements, while one respondent expressed support for the reporting requirements. One respondent indicated that some of the proposed reporting requirements are open-ended and subjective, which will lead to confusion as to whether the data provided by the contractor is sufficient. One respondent indicated that the proposed reporting requirements focus on challenges of employee ownership rather than performance and value and indicated that the contractor's past performance rating in the Contractor Performance Assessment Reporting System (CPARS) would be more useful in assessing the success of the pilot program. One respondent recommended DoD develop a comprehensive plan to monitor the implementation and impact of the Employee Stock Ownership Plan (ESOP) pilot program, allowing for adjustments and improvements over time to optimize its effectiveness. One respondent stated that its member companies who participated in the original, limited pilot program found the data collection to be straightforward and to require minimal time. Another respondent indicated that DoD's estimate of 16 hours to collect and submit the data required by the clause at DFARS 252.270-70YY should be 80 to 120 hours. <E T="03">Response:</E> Section 874 required the Secretary of Defense to establish mechanisms to collect and analyze data on the pilot program for the purposes of developing and sharing best practices with leadership and the congressional defense committees. Section 874 also required the Secretary of Defense to submit to the congressional defense committees a data collection and reporting strategy for the pilot program. The information to be reported in accordance with the contract clause at DFARS 252.270-7002, Pilot Program to Incentivize Contracting with Employee-Owned Businesses, is consistent with this strategy. This information will be submitted to DoD leadership and the congressional defense committees and may be used to determine if additional measures should be taken to assist ESOP businesses in overcoming challenges associated with their corporate structure. Additionally, the proposed rule text at DFARS Procedures, Guidance, and Information (PGI) 270.104, paragraph(d), specifies the reporting requirements for contracting officers, which include, but are not limited to, a summary of the contractor's performance and the benefits experienced from using the pilot program. This information will be used to assess the success of the pilot program and the need for adjustments and improvements over time. In reporting the contractor's performance pursuant to DFARS PGI 270.104, the contracting officer may use information from CPARS. To minimize the time required to collect and submit the data, the reporting requirements in the clause at DFARS 252.270-7002 are amended to clarify that data regarding challenges faced due to the contractor's corporate ownership structure is only required when applicable. In addition, contractors are only required to report data collected during the period of performance of the contract; therefore, the data should be readily available. <HD SOURCE="HD3">4. Outside the Scope of the Rule</HD> <E T="03">Comment:</E> One respondent recommended DoD establish evaluation criteria to give preference to qualified businesses during the source-selection process in lieu of limiting the pilot program to sole-source, follow-on contracts. The respondent also recommended that DoD prioritize efforts to on-ramp qualified businesses onto multiple-award contracts to create a larger pool of qualified businesses eligible for follow-on contracts under this pilot program. <E T="03">Response:</E> These comments are outside the scope of this rule. Sections 872 and 874 do not authorize DoD to establish source selection evaluation criteria to give preference to qualified businesses or to use on-ramps under the pilot program. <HD SOURCE="HD2">C. Other Changes</HD> DFARS 270.102(b) is revised in the final rule to simplify the direction to contracting officers. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 35k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━