Preliminary Observations About DOD Class Deviation for Specialty Metals

On December 6, 2006, the Director of Defense Procurement and Acquisition Policy issued a memorandum and class deviation to DFARS 252.225-7014 entitled "Preference for Domestic Specialty Metals." The guidance and class deviation implements the changes required by repeal of the prior statutory provisions relating to specialty metals and the enactment of new provisions codified at 10 U.S.C. § 2533b. Not surprisingly, in light of the short time available to DOD to draft this guidance, it is incomplete in many instances and confusing or internally inconsistent in a few areas. In the interest of promptly publishing our preliminary observations, we are assuming that the readers of this analysis will have some familiarity with the issues. Because the direction deals with a very complicated statutory and regulatory scheme – one that is not always entirely rational to begin with – it is likely that things will change as DOD responds to questions and clarifies this direction. We emphasize that these are preliminary observations, not legal advice about specific facts.

Deliveries Under Old Contracts

• DOD has authority to waive inadvertent noncompliance on deliveries under old contracts if the noncompliant product was produced, manufactured, or assembled before November 16, 2006, and the contracting officer makes certain determinations regarding the lack of an intentional violation and the existence of an effective compliance plan

• • The guidance says that for violations involving the purchase of commercial items, "it is likely that the noncompliance was inadvertent"
  • The guidance suggests that waivers may be granted without consideration
  • There is no guidance about how the waiver process will work such as who makes the request for a waiver (i.e., the prime contractor or the supplier of the noncompliant item) or how broadly waivers will be implemented once granted, but publication of the waivers in FedBizOps suggests an intent to permit all affected contractors to take advantage of all relevant waivers

• "One-time waivers" are clearly available for "old" contracts awarded prior to November 16, 2006
• Not covered in the new guidance, however, is whether repeal of the old statute provides DOD with discretionary authority – separate from the new statutory waiver authority – to waive non-compliances as to contracts awarded on or before November 16, 2006 as some Senate staffers have suggested
• Could old contracts be amended to permit contractors to take advantage of the new exemption for commercially available electronic components?

Deliveries Under New Contracts

• Withholdings will no longer be permitted as a remedy for noncompliance
• The guidance does not address whether waivers for noncompliant products manufactured before November 16, 2006 would permit delivery of those products from inventory for new contracts
• The rules differ about compliance depending on whether DOD is buying directly from a prime contractor or from a lower-level subcontractor

• • If the Government is buying directly from a prime contractor, from a supplier of first-tier components, or from a supplier of second-tier components, those end items and components must comply with the specialty metals provisions
  • If the Government is buying directly from a supplier of third-tier or lower-tier components, neither the Government nor the supplier are required to comply with the specialty metal provisions
  • Prime contractors and suppliers of first and second-tier components are required to ensure compliance with the specialty metal requirements at all tiers in the supply chain
  • As a result of this tiered structure, different rules will apply when the Government is buying directly from suppliers of third-tier and lower components, parts, and assemblies as compared to when the Government is buying from second-tier and higher suppliers – precisely the same situation that has lead to confusion about what rules apply at different tier levels
  • Consider: If a product is a second-tier component on one platform and a third-tier on another platform, is it covered or not covered by the specialty metals provisions?
    
• New exemption for "commercially available" electronic components with de minimis specialty metal content seems helpful, but confusing in some contexts
  • "De minimis" value is defined in way that appears intended to make it very easy to qualify by applying a threshold of 10 percent
  • "Commercially available" is not defined and is not a standard term in the FAR
  • There appears to be some internal inconsistency in the way the “components” eligible for this exemption are identified

Domestic Non-availability Determination (DNAD)

• For contracts awarded on or after November 16, 2006, all deliveries must be completely compliant or covered by a DNAD (as mentioned, the guidance does not address whether the "one-time waiver" would be available to permit use of previously made non-compliant components in the performance of post-November 16, 2006 contracts)
• There are no details in the guidance about how the DNAD process will work or how long it will take, but there is some encouraging language
  • DNADs will be available when the specialty metal cannot be procured "as and when needed" in the "required form," including both bar stock and in "the forged or milled form"
  • The "milled form" appears to include items in their finished form
  • In considering a DNAD, one of the factors to be considered is whether the price of compliant metal is fair and reasonable
• It remains unclear who is responsible for and eligible to submit a DNAD
  
  
  

 

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