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The homeland security Act of 2002 (HSA) represents the most significant restructuring of the federal government in the past 50 years. Under the HSA, 22 existing federal agencies with more than 160,000 employees will merge under the umbrella of the Department of Homeland Security (DHS). With an estimated annual budget in excess of $36 billion, DHS will become the third-largest federal agency behind the Department of Defense and the Department of Veteran Affairs. The major changes in contracting policies and procedures in the HSA present significant opportunities for companies that sell to, or would like to sell to, the largest customer in the world-the U.S. government. Under the HSA, DHS is authorized to employ special contracting procedures that represent a dramatic departure from standard government contracting practices. The HSA also provides special contracting rules for other executive agencies acquiring goods or services needed to combat terrorism. These new rules are intended to streamline the acquisition process, enhance the government’s ability to access cutting-edge technologies to aid the war on terrorism and to enable commercial firms to penetrate the government market better. DHS acquisitions The mission of DHS is to prevent domestic terror attacks, reduce domestic vulnerability to terror attacks and minimize the harm caused by, and assist in the recovery following, any terror attack that may occur. 6 U.S.C. 111 (2003). As an executive department of the federal government, DHS generally will be subject to the procurement statutes that govern all executive agencies, including the Competition in Contracting Act of 1984 and the Truth In Negotiations Act, as well as the Federal Acquisition Regulation (FAR), which imposes detailed, mandatory competitive procedures on government procurements. The HSA, however, creates areas of special contracting authority applicable only to DHS. On Dec. 4, DHS issued an interim rule establishing the Department of Homeland Security Acquisition Regulation. 68 Fed. Reg. 67868. The regulation supplements FAR by providing detailed regulations implementing the special contracting procedures discussed below. Under the HSA, DHS is granted special contracting authority when its mission would otherwise be “seriously impaired.” 6 U.S.C. 393 (2003). That determination must be made by the secretary of DHS or his designee and must specifically find that normal competitive procedures would seriously impair DHS’ ability to carry out its functions. To trigger its special contracting authority, DHS must promptly inform Congress of its determination and the basis for that determination. Once those conditions have been met, the HSA authorizes DHS to increase the micropurchase threshold from $2,500 to $7,500; increase the simplified acquisition threshold from $100,000 to $200,000 for domestic contracts and to $300,000 for foreign contracts; and expand the use of commercial-item acquisitions. Under FAR, subpart 13.2, agencies making purchases at or below the micro-purchase threshold may use very simplified purchasing procedures. The primary advantage of micropurchases is that contracting officers may use the governmentwide commercial purchase card. Once DHS’ special contracting authority has been triggered, any company may sell to DHS under those simplified procedures in single amounts up to $7,500. Under FAR subpart 13.1, agencies making purchases in excess of the micro-purchase threshold, but below the simplified acquisition threshold, may employ the streamlined acquisition procedures of part 13 of the regulation. This significantly reduces advertising, competition and evaluation requirements and allows far less burdensome contract clauses. Once DHS’ special contracting authority is triggered, the HSA allows any company to sell goods and services to DHS under simplified acquisition procedures up to $200,000 for contracts to be performed here and up to $300,000 for contracts performed outside the country. Agencies acquiring commercial items may use the streamlined acquisition and administrative procedures in FAR part 12, which permit reduced competition, streamlined contract clauses and commercial data rights provisions. Once DHS’ special authority is triggered, a company may sell up to $7.5 million of any goods or services to DHS as if they were commercial items. The first two of these special procedures will have a relatively limited impact on government sales because they implicate relatively small dollar amounts. The third, wider in scope, may significantly alter standard government contracting practices if employed frequently. It is also potentially controversial in its application because it is unclear how and to what extent commercial-item acquisition rules will apply to goods and services that are deemed, but are not actual, commercial items. A commercial item is defined as any item of a type customarily used by commercial entities that has been offered or sold to the public, or a service offered or sold competitively in the commercial marketplace based on catalog or market prices for specific tasks performed under standard commercial terms and conditions. FAR 2.101. Under part 12 of the regulation, an agency may acquire commercial items under significantly reduced competitive procedures designed to mimic, to the extent practicable, rules used in the commercial market. The policy rests partly on the notion that commercial items have been verifiably “tested” by the marketplace, providing an enhanced basis for the government to verify and evaluate contract terms and condition without a full competition. There are shortcuts available to all executive agencies in the acquisition of commercial items. For example, agencies acquiring commercial items need not obtain cost or pricing data from offerors before awarding a contract. In a commercial-item acquisition, executive agencies may acquire only the technical data rights that the commercial contractor customarily provides under its commercial license, and must accept a warranty consistent with the contractor’s standard commercial warranty. Many of the standard clauses and subcontract flow-down provisions that are mandatory in federal procurements are either streamlined or inapplicable to commercial-item acquisitions. Flexible financing options, including advance and installment payments, also are available in the acquisition of commercial items. The streamlined acquisition procedures available in commercial acquisitions, particularly procedures relating to pricing, data rights and warranties, function well in commercial acquisitions because commercial items have been subject to competition in the commercial marketplace, providing a verifiable basis for a streamlined evaluation of both price and product quality. It is unclear how and to what extent commercial-item acquisition procedures will function when applied to goods and services that are not truly commercial items. For example, it may be difficult for the government properly to evaluate pricing with respect to goods and services for which no commercial or catalog pricing is available. Under its special contracting authority, DHS may still use streamlined price-evaluation procedures, possibly resulting in the government paying too much. This is particularly true in the acquisition of deemed commercial research and development services that lack comparable commercial service. Difficulties may arise in the government’s acquisition of warranty rights and product quality assurance. While true commercial items are subject to stringent market scrutiny, items that are merely deemed commercial will carry none of the quality assurances of a true commercial item. It is unclear how the government will effectively employ streamlined pricing and quality evaluations in deemed commercial-item acquisitions, but such circumstances will present opportunities for companies to make large dollar-value sales to the government under streamlined procedures. In addition, in a true commercial-item acquisition, the government may acquire only technical data rights that are customarily available under the offeror’s standard commercial license. In a deemed commercial-item acquisition in which the item never has been sold to the public, it will be hard to determine what technical data rights are usually available under the offeror’s standard license. Protests for the disappointed As an executive agency, DHS is subject to all statutes and FAR provisions governing dispute resolution procedures. Disappointed bidders or offerors on DHS procurements, therefore, may file agency-level protests directly with the contracting officer as permitted by part 33 of the regulation or bring a protest action to the U.S. General Accounting Office or the U.S. Court of Federal Claims. It is important to note, however, that regardless of the protest forum selected, DHS’ special contracting authority and the accompanying streamlined procedures often will result in a very deferential standard of review. For that reason, it will be very difficult to prevail in a protest of a DHS procurement action. DHS’ authority to enter into “other transactions” also deserves attention. In 1989, Congress authorized the Department of Defense to enter what are known as “other transactions” (OT), a term that encompasses transactions other than traditional contracts, cooperative agreements or grants. See 10 U.S.C. 2371 (2003). OTs may be used in R&D projects when the Department of Defense determines that, to acquire a unique technology or research capability, it is “not feasible or appropriate” to use standard contracting or grant-making procedures. 10 U.S.C. 2371(e). Although OTs are exempt from nearly all the procurement statutes-including the competition requirements of the Competition in Contracting Act of 1984, the cost and pricing requirements of the Truth in Negotiations Act, and the government rights in data provisions of the Bayh-Dole Act, 35 U.S.C. 200-212-the Department of Defense is limited in that it generally may not pay more than “the total amount provided by other parties” to the transaction. 10 U.S.C. 2371(e)(1)(B). Congress has since expanded the Department of Defense’s OT authority to include the acquisition of weapon and weapon-system prototypes. Under the HSA, DHS may employ the Department of Defense’s OT authority to the same extent and under the same conditions that it is available to the Department of Defense. Thus, DHS will be authorized to acquire unique, cutting-edge technologies and research capabilities with substantially reduced competition requirements and without requiring extensive government data rights. Just as with the Department of Defense, DHS generally will not be permitted to pay more than half of the total cost of the OT project. Research entities offering unique technologies and cutting-edge capabilities should be aware of the opportunities presented under OT programs. Emergency contracting The HSA also grants special contracting authority, on a one-year test basis, to all executive agencies in the acquisition of goods and services necessary to combat terrorism. This governmentwide contracting authority is triggered when the head of any agency determines that the goods or services to be acquired will facilitate in the defense against or recovery from a terror attack or an attack employing a weapon of mass destruction. In such circumstances, executive agencies are authorized to use streamlined procedures similar to the streamlined procedures available exclusively to DHS. Executive agencies acquiring anti-terrorism goods or services, therefore, may employ the increased micropurchase threshold of $7,500 and increased simplified acquisition threshold of $200,000 for domestic contracts and $300,000 for foreign contracts. Agencies also are authorized to acquire unlimited quantities of anti-terrorism goods and services under modified commercial-item procedures. Once the special acquisition procedures have been triggered, any executive agency may acquire unlimited quantities of covered goods using modified commercial item acquisition procedures. Given the potentially unlimited scope of this emergency authority, any federal agency may conduct large-scale procurements under the significantly streamlined acquisition procedures of the HSA’s emergency procedures. David M. Nadler ([email protected]) is a partner at Washington’s Dickstein Shapiro Morin & Oshinsky, where he represents companies in government contract matters. Robert J. Moss is an associate at the firm.

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