[Federal Register Volume 74, Number 134 (Wednesday, July 15, 2009)]
[Rules and Regulations]
[Pages 34266-34269]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-16676]


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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 209, 237, and 252

RIN 0750-AF80


Defense Federal Acquisition Regulation Supplement; Lead System 
Integrators (DFARS Case 2006-D051)

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Interim rule with request for comments.

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SUMMARY: DoD has issued an interim rule amending the Defense Federal 
Acquisition Regulation Supplement (DFARS) to implement Section 802 of 
the National Defense Authorization Act for Fiscal Year 2008. Section 
802 places limitations on the award of new contracts for lead system 
integrator functions in the acquisition of major DoD systems.

DATES: Effective date: July 15, 2009.
    Comment date: Comments on the interim rule should be submitted in 
writing to the address shown below on or before September 14, 2009, to 
be considered in the formation of the final rule.

ADDRESSES: You may submit comments, identified by DFARS Case 2006-D051, 
using any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include DFARS Case 2006-D051 in the 
subject line of the message.
     Fax: 703-602-7887.
     Mail: Defense Acquisition Regulations System, Attn: Ms. 
Cassandra Freeman, OUSD (AT&L) DPAP (DARS), IMD 3D139, 3062 Defense 
Pentagon, Washington, DC 20301-3062.
     Hand Delivery/Courier: Defense Acquisition Regulations 
System, Crystal Square 4, Suite 200A, 241 18th Street, Arlington, VA 
22202-3402.
    Comments received generally will be posted without change to http://www.regulations.gov, including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Ms. Cassandra Freeman, 703-602-8383.

SUPPLEMENTARY INFORMATION:

A. Background

    DoD published an interim rule at 73 FR 1823 on January 10, 2008, to 
implement Section 807 of the National Defense Authorization Act for 
Fiscal Year 2007 (Pub. L. 109-364) with regard to limitations on the 
performance of lead system integrator functions by DoD contractors. On 
January 28, 2008, Section 802 of the National Defense Authorization Act 
for Fiscal Year 2008 (Pub. L. 110-181) placed additional limitations on 
DoD use of lead system integrators. This second interim rule amends the 
interim rule published on January 10, 2008, to implement Section 802 of 
Public Law 110-181.
    One source submitted comments on the interim rule published on 
January 10, 2008. A discussion of the comments is provided below.
    1. Comment: Section 802 of the Fiscal Year 2008 National Defense 
Authorization Act (Pub. L. 110-181), which was enacted after 
publication of the interim rule, contains a definition of ``lead system 
integrator'' that renders the interim rule definition obsolete.
    DoD Response: The definition of ``lead system integrator'' in this 
second interim rule has been amended for consistency with the 
definition in Section 802 of Public Law 110-181.
    2. Comment: The limitations on the award of new contracts for lead 
system integrator functions, in Section 802 of Public Law 110-181, will 
make any implementing regulations applicable to only a handful of 
contractors. Given the limited duration of ongoing contracts for 
programs that have been identified as lead system integrators, the 
newly created contract clauses in the interim rule are unlikely to be 
incorporated into a contract, because the fiscal year 2008 statutory 
prohibition effectively precludes their use. Therefore, DoD should 
withdraw or suspend the interim rule.
    DoD Response: DoD agrees that the rule will apply only to a limited 
number of contractors and only for a limited duration. However, the law 
must be implemented for those situations where it is applicable.
    3. Comment: It is inappropriate to require contractors to represent 
whether or not they propose to perform lead system integrator functions 
under vague definitions, given that the contract may be terminated for 
default or other remedies may be imposed at the sole discretion of the 
contracting officer if the contractor misrepresented its ``financial 
interests'' when that term is

[[Page 34267]]

not defined. Since a ``lead system integrator with system 
responsibility'' is essentially ``as determined by the Contracting 
Officer'' at the time of award, this presents an unacceptable situation 
where a contractor may be subject to penalty effectively for an errant 
determination by the Government. Moreover, successful offerors risk 
termination for default for misrepresenting their status at some later 
time if their lead system integrator status is found to be wrong, even 
if that representation was mistakenly, rather than knowingly or 
falsely, executed.
    DoD Response: The definitions in the clause at DFARS 252.209-7007, 
as amended by this interim rule, sufficiently address the compliance 
requirements of a contractor certifying as a lead system integrator. It 
is incumbent upon the contractor to ensure that certifications 
represent the most current, accurate, and complete information to avoid 
the misinterpretation of information by the contracting officer. 
Likewise, it is the responsibility of the contracting officer to ensure 
due diligence in the evaluation of contractor certifications.
    4. Comment: Existing regulations, such as those governing conflicts 
of interest, that are adequate to protect the public interest in 
situations where a prime contractor is responsible for integrating 
subsystems into a weapon system, are also adequate to protect the 
correlating situation in which a prime contractor is integrating 
systems into a ``system of systems.'' Additional policy guidance may be 
warranted to advise contracting officers to take appropriate steps in 
evaluating proposals to ensure mechanisms are in place to avoid 
conflicts of interest. In that case, the policy additions to Part 209 
of the DFARS are sufficient to implement Section 807 of the Fiscal Year 
2007 National Defense Authorization Act without the imposition of 
requirements for contractor representations and additional clauses in 
solicitations and contracts.
    DoD Response: DoD considers the rule's provision and clause to be 
the appropriate means of conveying this specific statutory requirement 
to offerors and contractors.
    5. Comment: Section 209.570-1 of the rule merely references the 
reader to the clause at 252.209-7007 for a definition of lead system 
integrator. The definition should be included in section 209.570-1 
instead of referring the reader to the clause section of the DFARS.
    DoD Response: The reference to the definition in the contract 
clause is consistent with the DFARS convention of minimizing repetition 
of text.
    6. Comment: The rule would benefit in the Definitions section by 
the addition of a cross-reference to the existing statutory or 
regulatory definition of a major system, so that it is clear exactly 
what type of standards (dollar threshold, etc.) apply to the rule.
    DoD Response: FAR 2.101 provides a definition of ``major system.'' 
It is not necessary to include a cross-reference in this DFARS rule, 
since the definitions in FAR 2.101 apply throughout the FAR system 
unless otherwise specified.
    7. Comment: Clarification is needed on the term ``substantial 
portion'' used in paragraph (a)(2) of the clause at 252.209-7007.
    DoD Response: Contracting officers have the discretion to determine 
whether an activity constitutes a ``substantial portion'' of the work 
on the system and the major subsystems. Factors to be considered in 
making this determination are the relative dollar value of the effort 
and the criticality of the effort to be performed.
    8. Comment: Section 209.570-2(b)(1) states that the statutory 
prohibition does not apply if the Secretary of Defense certifies to 
both the House and Senate Armed Services Committees that the lead 
system integrator contractor was selected through a competitive 
process, and any potential organizational conflict of interest was 
neutralized in the selection process. The certification requirement 
itself would benefit from some clarity, and both the certification 
level and the body to whom the certification is made would benefit from 
the flexibility to delegate the exception authority to another approval 
level, such as the head of the contracting activity.
    DoD Response: The certification requirement is consistent with 
Section 807 of the National Defense Authorization Act for Fiscal Year 
2007. In view of the limited number of contracts to which this 
requirement applies, DoD considers it unnecessary to delegate this 
exception authority.
    9. Comment: Section 209.570-2(b)(2), which cites another exception 
to the prohibition, is confusing. If the goal of this section is to 
allow for a lead system integrator to act as a subcontractor in the 
major system development/construction contract after completing lead 
system integrator functions, the standard for the exception is unclear. 
What exactly is a ``process over which the entity exercised no 
control''? The tiering of subcontractors as an ingredient to the 
selection process for an exception requires clarification.
    DoD Response: Section 209.570-2(b)(2) of the rule is consistent 
with the language in Section 807 of National Defense Authorization Act 
for Fiscal Year 2007. The record does not document the legislative 
intent; however, DoD believes that a ``process over which the entity 
exercised no control'' means that the entity was selected to perform as 
a lower-tier subcontractor as a result of an independent selection 
process in which the entity did not participate as a decision-maker.
    10. Comment: Section 235.008 contains language that is unclear. In 
particular, the statement ``See 209.570 for limitations on the award of 
contracts to contractors acting as lead system integrators,'' appears 
to prohibit the award of contracts for research and development efforts 
to lead system integrators.
    DoD Response: The cross-reference in DFARS 235.008 does not 
prohibit the award of contracts for research and development efforts to 
lead system integrators; it advises the reader to consider the 
limitations on contractors acting as lead system integrators when 
evaluating research and development proposals for contract award.
    11. Comment: Both the provision at 252.209-7006 and the clause at 
252.209-7007 present problematic interpretation issues. Both include 
references to two different types of lead system integrators: a lead 
system integrator with system responsibility and a lead system 
integrator without system responsibility. The distinction between these 
two types of lead system integrators is somewhat difficult to 
comprehend, but the offeror is asked to make written representations as 
to its lead system integrator status based presumably on the type of 
work statement contained in the solicitation (which may or may not 
state that the work is for integration or systems engineering, etc.).
    DoD Response: Consistent with the statutory provisions, the 
definitions recognize two categories of contracts for major systems: 
development/production contracts and service contracts. The offeror's 
representation will be based upon the contract work statement and any 
special provisions in the solicitation in light of the limitations and 
prohibitions in the provision at 252.209-7006 and the clause at 
252.209-7007.
    12. Comment: The definition of ``lead system integrator without 
system responsibility'' in the clause at 252.209-7007 anticipates that 
the lead system integrator understands and can make judgments about 
what is meant by inherently governmental functions. The definition 
references a section of the Federal Acquisition Regulation

[[Page 34268]]

completely unaddressed elsewhere in the rule. At no time prior to this 
juncture was the prohibition against lead system integrators receiving 
development/construction contracts tied to a determination that certain 
types of lead system integrator work were inherently governmental, a 
term evolving out of the FAIR Act and Competitive Sourcing/A-76 world 
of contracting. The clause states that contractors performing lead 
system integrator functions throughout the acquisition timeframe for a 
major system will refrain from acquiring a financial interest in any 
company anywhere that might be eligible to develop or manufacture the 
major system. Without addressing the impact on commerce by prohibiting 
business enterprises doing defense-related work for the Government from 
making strategic acquisitions, the timeframes for the complete 
acquisition cycle for major systems could last for years, effectively 
bringing legitimate and otherwise legal forms of economic activity 
(mergers and acquisitions) to a halt and extending the lead system 
integrator limitation period well beyond that envisioned by Congress 
when crafting the law.
    DoD Response: The definitions and the requirements in the contract 
clause are consistent with the statutory provisions.
    13. Comment: Paragraph (c) of the clause at 252.209-7007 imposes an 
unclear standard and undefined timeline for notice from a lead system 
integrator contractor to the contracting officer if the lead system 
integrator contractor acquires a financial interest in a relevant major 
system contractor. Additionally, the clause provides the contracting 
officer the unilateral right to impose a default termination in the 
event that a conflict cannot be mitigated or avoided after the contract 
has been awarded and/or in force for some time. Termination should not 
be made a specific requirement of this clause; rather, if a lead system 
integrator contractor is acting in good faith and otherwise complying 
with the requirements of the contract, but termination is still 
necessary to comport with the principle of any final lead system 
integrator limitation clause, termination should be one of convenience 
that allows the lead system integrator contractor to recoup all costs 
incurred prior to termination. Both paragraphs (c) and (d) of the 
clause should be rewritten to establish a reasonable standard for both 
timely notice and to clarify the extent of the Government's remedies in 
termination.
    DoD Response: A failure to comply with statutory prohibitions 
speaks to the lack of responsibility of a contractor, and could be 
reasonable justification to terminate a contract for default. However, 
the clause does not direct a default termination; it only provides for 
it and also allows other remedial action as may be appropriate.
    This rule was not subject to Office of Management and Budget review 
under Executive Order 12866, dated September 30, 1993.

B. Regulatory Flexibility Act

    DoD does not expect this rule to have a significant economic impact 
on a substantial number of small entities within the meaning of the 
Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because application 
of the rule is limited to contractors performing lead system integrator 
functions for major DoD systems. Therefore, DoD has not performed an 
initial regulatory flexibility analysis. DoD invites comments from 
small businesses and other interested parties. DoD also will consider 
comments from small entities concerning the affected DFARS subparts in 
accordance with 5 U.S.C. 610. Such comments should be submitted 
separately and should cite DFARS Case 2006-D051.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply, because the rule does 
not impose any information collection requirements that require the 
approval of the Office of Management and Budget under 44 U.S.C. 3501, 
et seq.

D. Determination To Issue an Interim Rule

    A determination has been made under the authority of the Secretary 
of Defense that urgent and compelling reasons exist to publish an 
interim rule prior to affording the public an opportunity to comment. 
This interim rule implements Section 802 of the National Defense 
Authorization Act for Fiscal Year 2008 (Pub. L. 110-181). Section 802 
places additional limitations on the performance of lead system 
integrator functions by DoD contractors. DoD may award a new contract 
for lead system integrator functions in the acquisition of a major 
system only if the major system has not yet proceeded beyond low-rate 
initial production; or if the Secretary of Defense determines that it 
would not be practicable to carry out the acquisition without 
continuing to use a contractor to perform lead system integrator 
functions, and that doing so is in the best interest of DoD. Comments 
received in response to this interim rule will be considered in the 
formation of the final rule.

List of Subjects in 48 CFR Parts 209, 237, and 252

    Government procurement.

Michele P. Peterson,
Editor, Defense Acquisition Regulations System.

0
Therefore, 48 CFR parts 209, 237, and 252 are amended as follows:
0
1. The authority citation for 48 CFR parts 209, 237, and 252 continues 
to read as follows:

    Authority: 41 U.S.C. 421 and 48 CFR Chapter 1.

PART 209--CONTRACTOR QUALIFICATIONS

0
2. Section 209.570-2 is amended by adding paragraphs (c) and (d) to 
read as follows:


209.570-2  Policy.

* * * * *
    (c) In accordance with Section 802 of the National Defense 
Authorization Act for Fiscal Year 2008 (Pub. L. 110-181), DoD may award 
a new contract for lead system integrator functions in the acquisition 
of a major system only if--
    (1) The major system has not yet proceeded beyond low-rate initial 
production; or
    (2) The Secretary of Defense determines in writing that it would 
not be practicable to carry out the acquisition without continuing to 
use a contractor to perform lead system integrator functions and that 
doing so is in the best interest of DoD. The authority to make this 
determination may not be delegated below the level of the Under 
Secretary of Defense for Acquisition, Technology, and Logistics. (Also 
see 209.570-3(b).)
    (d) Effective October 1, 2010, DoD is prohibited from awarding a 
new contract for lead system integrator functions in the acquisition of 
a major system to any entity that was not performing lead system 
integrator functions in the acquisition of the major system prior to 
January 28, 2008.

0
3. Section 209.570-3 is revised to read as follows:


209.570-3  Procedures.

    (a) In making a responsibility determination before awarding a 
contract for the acquisition of a major system, the contracting officer 
shall--
    (1) Determine whether the prospective contractor meets the 
definition of ``lead system integrator'';
    (2) Consider all information regarding the prospective contractor's 
direct financial interests in view of the prohibition at 209.570-2(a); 
and
    (3) Follow the procedures at PGI 209.570-3.

[[Page 34269]]

    (b) A determination to use a contractor to perform lead system 
integrator functions in accordance with 209.570-2(c)(2)--
    (1) Shall specify the reasons why it would not be practicable to 
carry out the acquisition without continuing to use a contractor to 
perform lead system integrator functions, including a discussion of 
alternatives, such as use of the DoD workforce or a system engineering 
and technical assistance contractor;
    (2) Shall include a plan for phasing out the use of contracted lead 
system integrator functions over the shortest period of time consistent 
with the interest of the national defense; and
    (3) Shall be provided to the Committees on Armed Services of the 
Senate and the House of Representatives at least 45 days before the 
award of a contract pursuant to the determination.

PART 237--SERVICE CONTRACTING

0
4. Section 237.102-72 is added to read as follows:


237.102-72  Contracts for management services.

    In accordance with Section 802 of the National Defense 
Authorization Act for Fiscal Year 2008 (Pub. L. 110-181), DoD may award 
a contract for the acquisition of services the primary purpose of which 
is to perform acquisition support functions with respect to the 
development or production of a major system, only if--
    (a) The contract prohibits the contractor from performing 
inherently governmental functions;
    (b) The DoD organization responsible for the development or 
production of the major system ensures that Federal employees are 
responsible for determining--
    (1) Courses of action to be taken in the best interest of the 
Government; and
    (2) Best technical performance for the warfighter; and
    (c) The contract requires that the prime contractor for the 
contract may not advise or recommend the award of a contract or 
subcontract for the development or production of the major system to an 
entity owned in whole or in part by the prime contractor.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
5. Section 252.209-7007 is amended by revising the clause date and 
paragraphs (a)(2), (a)(3), and (e) to read as follows:


252.209-7007  Prohibited Financial Interests for Lead System 
Integrators.

* * * * *

PROHIBITED FINANCIAL INTERESTS FOR LEAD SYSTEM INTEGRATORS (JUL 2009)

    (a) * * *
    (2) Lead system integrator with system responsibility means a 
prime contractor for the development or production of a major 
system, if the prime contractor is not expected at the time of award 
to perform a substantial portion of the work on the system and the 
major subsystems.
    (3) Lead system integrator without system responsibility means a 
prime contractor under a contract for the procurement of services, 
the primary purpose of which is to perform acquisition functions 
closely associated with inherently governmental functions (see 
section 7.503(d) of the Federal Acquisition Regulation) with respect 
to the development or production of a major system.
* * * * *
    (e) This clause implements the requirements of 10 U.S.C. 2410p, as 
added by Section 807 of the National Defense Authorization Act for 
Fiscal Year 2007 (Pub. L. 109-364), and Section 802 of the National 
Defense Authorization Act for Fiscal Year 2008 (Pub. L. 110-181).

 [FR Doc. E9-16676 Filed 7-14-09; 8:45 am]
BILLING CODE 5001-08-P