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

SUPPLEMENTARY INFORMATION:

I. Background

DoD published a proposed rule in the Federal Register 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.

II. Discussion and Analysis

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:

A. Summary of Significant Changes From the Proposed Rule

There are no significant changes from the proposed rule.

B. Analysis of Public Comments

1. Support for the Rule

Comment: The respondents expressed support for the rule.

Response: DoD acknowledges the respondents' support for the rule.

2. Clarifications

Comment: 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.

Response: 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).

3. Exceptions to Implementation

Comment: 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.

Response: 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.

Comment: 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.

Response: 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.

Comment: 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.

Response: 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.

4. Outside the Scope of the Rule

Comment: 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.

Response: 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.

C. Other Changes

DFARS 270.102(b) is revised in the final rule to simplify the direction to contracting officers. The final rule revises the prescriptions for the solicitation provisions at DFARS 252.270-7000 and 252.270-7001 and the clause at DFARS 252.270-7002 to specify that they are not to be included in solicitations and contracts solely for the acquisition of commercially available off-the-shelf items. These provisions and this clause are added to the list of provisions and clauses that are not applicable to COTS items, located at DFARS 212.371. The reporting requirements are clarified in the clause at DFARS 252.270-7002.

III. Applicability to Contracts at or Below the Simplified Acquisition Threshold (SAT), for Commercial Products (Including Commercially Available Off-the-Shelf (COTS) Items), and for Commercial Services

The two provisions and the clause at DFARS 252.270-7000, Pilot Program to Incentivize Contracting with Employee-Owned Businesses-Representation; DFARS 252.270-7001, Pilot Program to Incentivize Contracting with Employee-Owned Businesses—Certification; and DFARS 252.270-7002, Pilot Program to Incentivize Contracting with Employee-Owned Businesses, are prescribed at DFARS 270.105 for use in solicitations and contracts for approved acquisitions under the Pilot Program to Incentivize Contracting with Employee-Owned Businesses. Consistent with the analysis that DoD provided in the proposed rule with regard to the application of the requirements of section 874 of the NDAA for FY 2022, as amended by section 872 of the NDAA for FY 2024, DoD has decided to not apply the statutes to contracts at or below the SAT, and DoD has made the determination to apply the statutes, as implemented in the provisions and clause at 252.270-7000, 252.270-7001, and 252.270-7002, to contracts for the acquisition of commercial products excluding COTS items and for the acquisition of commercial services, as defined at Federal Acquisition Regulation 2.101.

IV. Expected Impact of the Rule

This final rule is expected to impact the Government and contractors that participate in the Pilot Program to Incentivize Contracting with Employee-Owned Businesses. This final rule is expected to incentivize and expedite the award of follow-on contracts to qualified businesses for the continued development, production, or provision of products or services previously procured by or for DoD. As a result, employee-owned businesses may benefit from additional opportunities to contract with DoD, which may benefit DoD by expanding the defense industrial base.

V. Executive Orders 12866 and 13563

Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This is not a significant regulatory action and, therefore, was not subject to review under section 6(b) of E.O. 12866, Regulatory Planning and Review, as amended.

VI. Congressional Review Act

As required by the Congressional Review Act (5 U.S.C. 801-808) before an interim or final rule takes effect, DoD will submit a copy of the interim or final rule with the form, Submission of Federal Rules Under the Congressional Review Act, to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States. A major rule under the Congressional Review Act cannot take effect until 60 days after it is published in the Federal Register . The Office of Information and Regulatory Affairs has determined that this rule is not a major rule as defined by 5 U.S.C. 804.

VII. Regulatory Flexibility Act

A final regulatory flexibility analysis has been prepared consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. and is summarized as follows:

This final rule is necessary 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) and section 872 of the NDAA for FY 2024 (Pub. L. 118-31; 10 U.S.C. 3204 note). The objective of the rule is to implement sections 874 and 872, which authorize DoD to establish a pilot program to incentivize contracting with employee-owned businesses. The pilot program provides for the use of noncompetitive procedures for certain follow-on contracts to qualified businesses. A “qualified business” is defined as an S corporation (as defined in 26 U.S.C. 1361(a)(1)) for which 100 percent of the outstanding stock is held through an employee stock ownership plan as defined in 26 U.S.C. 4975(e)(7).

There were no significant issues raised by the public comments in response to the initial regulatory flexibility analysis. One respondent took exception to the number of hours DoD estimated it would take a contractor to comply with the reporting requirement. DoD reviewed the data to be collected and modified the reporting requirement to clarify that the contractor is required to only report challenges it faced, if any. Although not specified in the DFARS text, because this is a contract clause, contractors are only required to report data collected during the period of performance of the contract.

Data from the System for Award Management (SAM) revealed there were 384,145 small entities registered in SAM as of August 2024. Data on the number of small entities that are a qualified business, as defined in the final rule, is not available.

The pilot program was implemented on November 8, 2022. To date, eight businesses are participating in the pilot, six of which are small entities. DoD cannot estimate the number of contracting officers that will submit applications for participation in the pilot program, how many applications will be approved for participation, or how many of the subsequent awards will be made to small entities. However, based on current participation, DoD expects that the pilot program will grow to approximately 16 contractors per year, of which approximately 12 may be small entities.

This final rule imposes a new reporting requirement. Not later than 30 days after the end of the period of performance of the contract, contractors participating in the pilot program will be required to submit to the contracting officer the following information: (1) the number of years the contractor has been wholly-owned by its employee stock ownership plan; (2) the contractor's challenges, if any, in attracting and retaining a talented workforce due to its corporate ownership structure; (3) challenges, if any, the contractor experienced that hinder its ability to contract with DoD in order to scale its technologies and capabilities due to its corporate ownership structure; and (4) challenges, if any, the contractor experienced, due to its corporate ownership structure, in obtaining capital necessary to bridge funding gaps, for example, between prototype demonstration and full-scale development. The annual reporting burden is estimated as follows: 16 respondents, with 16 total annual responses (1 response per respondent), and a total annual burden of 16 hours.

There are no known significant alternative approaches that would accomplish the stated objectives.

VIII. Paperwork Reduction Act

This final rule contains information collection requirements that have been approved by the Office of Management and Budget under the Paperwork Reduction Act (44 U.S.C. chapter 35). This information collection requirement has been assigned OMB Control Number 0750-0012, Defense Federal Acquisition Regulation Supplement Part 270, Defense Contracting Programs—Pilot Program to Incentivize Contracting with Employee-Owned Businesses, and Related Clause.

Therefore, the Defense Acquisition Regulations System amends 48 CFR chapter 2 as follows as follows:

1. The authority citation for part 206 continues to read as follows:

Authority: 41 U.S.C. 1303 and 48 CFR chapter 1.

2. Revise and republish section 206.302-5 to read as follows:

3. The authority citation for part 212 continues to read as follows:

Authority: 41 U.S.C. 1303 and 48 CFR chapter 1.

4. Amend section 212.301 by adding paragraph (f)(xxii) to read as follows:

5. Amend section 212.371 by adding paragraphs (b), (c), and (d) to read as follows:

6. The authority citation for part 252 continues to read as follows:

Authority: 41 U.S.C. 1303 and 48 CFR chapter 1.

7. Add sections 252.270-7000, 252.270-7001, and 252.270-7002 to read as follows:

8. Add part 270 to read as follows:

[FR Doc. 2024-23226 Filed 10-9-24; 8:45 am]

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