Your Supply Chain at Risk: A Secret Blacklist for Government Contractors? Part 2

While Congress dithers about tax rates, a crucial piece of legislation, the National Defense Authorization Act of 2011, is still not resolved. This legislation may allow government officials to secretly blacklist contractors, with no notice, and no public accountability.

We examined some of the potentially alarming implications of Section 815 of this Act last week, and continue our analysis here.

Section 815 of the 2011 NDAA defines a supply chain risk as:

(4) The term ‘supply chain risk’ means the risk that an adversary may sabotage, maliciously introduce unwanted function, or otherwise subvert the design, integrity, manufacturing, production, distribution, installation, operation, or maintenance of a covered system or a covered item of supply so as to surveil, deny, disrupt, or otherwise degrade the function, use, or operation of the system or item.

An "adversary" is not defined by this legislation, and there is no reference to an accepted definition in the U.S. Code. An obvious example would be an al Qaida terrorist. No one wants such a person working for a government contractor or subcontractor.

But what about a mischievous person? Someone who slips in a line of code as a joke or calling card? How about a careless programmer? A quick jaunt around StackOverflow.com can yield plenty of examples of funny comments, little "features," and all manner of bugs that made it into programs because programmers were coding for three days straight on only eight hours' sleep and gallons of coffee. If a little joke affects the performance of a "covered system," will the whole company be debarred?

What about a bug? The section mentions "maliciousness," but it also says "and otherwise subvert"--meaning that maliciousness may not be a criteria for deciding whether a programmer's actions fall under the definition of subversion. All code has bugs; the open-ended language of this legislation makes it ambiguous whether those bugs could be fixed with a patch or bankrupt the contractor.

This bill basically puts a premium on prime contractors to closely monitor the actions of all their employees as well as the employees of their subcontractors. While a terrorist might not have the patience to infiltrate a major prime contractor, build up years of trust, and then quietly place malicious code into crucial systems, contractors will still face devastating outcomes if an employee goes rogue.

No prime contractor is going to have the ability to examine every line of code in every program supplied by a subcontractor for bugs, pranks, or malicious code. The cost of doing so is prohibitive. This doesn't even cover the intellectual property issues that might come into play; subcontractors may have trade secrets to protect in their code that they do not want a larger company to co-opt. Subcontractors may find that the increased scrutiny or intellectual property risks are not worth it, and are, in effect, self-selected out of government contracting. And, of course, the cost of whatever "qualification requirements" could be prohibitive to smaller businesses, leading to either more self-selection out of contracting or the de facto debarment that the American Small Business League warns about.

It is important to remember that we already have measures in place to effectively debar contractors who deal with foreign terrorists or whose practices might weaken the supply chain. In addition to the measures identified in the Federal Acquisition Regulations and supplements, the Excluded Parties List provides a means of achieving the goal of excluding potentially terrorist-linked firms without the secrecy and potential abuse at the hands of a consolidated few heads of agencies.

Even if Section 815 of this Act does not survive the legislative process to become law, a seed has been planted. The notion of withholding payments from contractors with "inadequate" business systems started in a proposed DFARS, and subsequently appeared in a modified form in Section 841 of the 2011 NDAA. Another version of Section 815 may crop up in the Federal Acquisition Regulations.

Not only that, but these legislative and regulatory moves point to a larger trend: federal government officials are increasingly seeking to monitor prime contractor and subcontractor work, with potentially crippling consequences if they don't like what they see. Subcontractors are coming under increasing scrutiny; they are taking unnecessary risk if they do not have an effective means to manage the information in the Federal Acquisition Regulations. Meanwhile, prime contractors are forced to become increasingly risk-averse and only deal with companies they can trust to follow regulations while they, themselves, grapple with managing the regulations that apply to them.

Your Supply Chain at Risk: A Secret Blacklist for Government Contractors? Part 1

The American Small Business League recently released a statement that Section 815 of Senate bill 3454, the National Defense Authorization Act of 2011, "may allow senior Department of Defense (DoD) officials to secretly 'blacklist' government contractors at their discretion and without notice to the contractor or accountability to the public."

This is, of course, the same bill that contains provisions for withholding payment from contractors whose business systems are deemed inadequate. The bill follows proposed changes to the DFARS that would withhold payments up to 100% for "inadequate" business systems, including purchasing systems, which in turn includes subcontracting.

That federal government officials want more and more control over the contracting and subcontracting process is nothing new. Section 815, which covers risk to the supply chain, poses additional challenges for contractors and subcontractors.

At first glance, Section 815 seems to apply only to technology vendors and their suppliers, and it seems to be intended to block terrorists and hackers from maliciously manipulating mission-critical hardware and software. It appears to be a well-intended provision for ensuring that crucial tech vendors--and the military groups who depend on them--can't be shut down by a weak link in the supply chain. Who would be against that?

But the devil is in the details. A more thorough reading reveals some very open-ended wording that could lead to the section being used to justify draconian measures taken arbitrarily against contractors and subcontractors, leaving them with no recourse to restore their businesses and good names.

Section 815 starts by giving the head of "an agency" (which agencies are allowed this power is not specified) to establish qualification requirements for the reduction of supply chain risk, and restrict competition to companies who can meet those requirements. Apparently irrespective of these qualification requirements, the agency head can establish supply chain risk as a major criteria for evaluation of a bid. This begs the question of whether Section 815 could be construed as giving agency heads the ability to exclude non-tech contractors and subcontractors.

The statute does not cover what happens when different agencies establish different qualification requirements. How can a small business keep up with these requirements on top of all the Federal Acquisition Regulations, even if it has an effective FAR management system? These requirements are only available upon request--so contractors must know to request them and contracting officers must be knowledgeable enough to deliver them.

The section goes on to outline how a company that either cannot meet qualification requirements or has been deemed to pose a "supply chain risk" can be restricted from competition either as a contractor or subcontractor. It then states that a determination against a company must be in writing but does not have to be disclosed via Federal Register, that it is at the sole discretion of the agency head or senior procurement executive, and is not subject to review by either a GAO protest or the Federal court.

It doesn't take a contracting expert or attorney to point out the obvious potential for abuse by agency leaders. There are no apparent checks and balances to this system. On top of this, there is another problem that the bill doesn't even address--how the actions of one agency head affects another. Can the head of one agency blacklist a contractor who does business with multiple agencies and therefore cause other agencies to terminate contracts and blacklist the contractor as well? If the answer is yes, then what happens when one agency head blacklists someone another agency head needs to provide crucial systems? And what about contractors who are caught in the middle of inter-agency power struggles?

This is only part of the problem with this pending legislation. We'll examine some of the implications for prime contractors as well as smaller subcontractors next week.

New Regulations Needed for Government IT Contracting

It's generally known that government IT projects are some of the riskiest projects out there. They are often enormous projects, with complicated specifications and requirements. At the same time, the nation has a greater need for efficient systems than ever before. Civilian and military agencies have a lot to manage, with projects ranging from defense systems for battlefield wireless networks to systems that support the recent changes in health care.

"Cloud computing" is one hot area of research and development, and a new GSA contract will have 11 different vendors providing cloud computing and storage to a number of different government agencies. Such interagency cooperation may require new ways of defining contracts, especially for projects that require delivering a wide array of services, from storage to software licensing. This is in keeping with President Obama's creation of a new task force on interagency contracting cooperation.

Meanwhile, government contracting specialists and industry analysists are experiencing a shift in perspective. Our current contracting models simply don't work for IT projects. Software cannot be produced the same way as, say, the F-22 Raptor, or a new levee for New Orleans. Our enemies and our project requirements are constantly evolving; massive contracts with set requirements are an anathema to our ability to respond.

On top of this, massive IT projects lend themselves to poor contracting procedure, a subject we've covered in our article series "Contracting Principles the DoD Forgot," about the DoD's withholding contractor payments due to poor contract management. When you combine this new penchant among legislators and members of the Executive branch to hold back payments, with little recourse and devastating consequences for small businesses, the implications are enormous. If we do not change how IT contracts are developed and written, it will be a wonder if we have any IT vendors willing to assume the risk of contracting with the federal government at all.

Two recent articles discuss some remedies: "Bite-size procurements can minimize big-time problems" at Federal Computer Week, and "Gov't IT Contracting Reform Needed" at PCWorld. Both suggest a smaller, bite-sized, incremental approach.

What this means for federal procurement regulations is up in the air right now, but it's clear that federal acquisition regulations would need to change to better accommodate this incremental approach. Contractors need to be familiar with the FAR now, but IT vendors in particular need to keep an eye on the regulations for the foreseeable future as the President's Interagency Task Force keeps working.