Specialty Metals Presented By: Dave Riley Deputy Counsel

1. Specialty Metals Presented By: Dave Riley Deputy Counsel Space & Missiles, Ground Systems & Munitions DCMA Carson

2. First, some background on the Berry Amendment and Specialty Metal Requirements…

3. Berry Amendment: It’s not intuitive! It’s kind of odd that chopped liver might be covered; silver bullets aren’t.

4. Berry Amendment Background • Earliest version – 1940 Naval Appropriations Act. • 1941: Restriction was included in the General Appropriation Act. Thereafter, the annual Defense Appropriation Acts contained the Berry Amendment restrictions. • 1992: Becomes a note to 10 U.S.C. § 2241. • 2002: Codified at 10 U.S.C. 2533a (FY02 Defense Authorization Act). The legislative history of the Berry Amendment indicates that the purpose of the amendment was and is to maintain and support the defense industrial base for those items it covers.

5. Berry Amendment Coverage Restricts the use of DoD funds to pay for certain items that are not grown, reprocessed, reused, or produced in the U.S. • Food, Clothing, Tents/Tarpaulins/Covers • Cotton and Other Natural Fiber Products • Woven Silk or Woven Silk Blends • Spun Silk Yarn for Cartridge Cloth • Synthetic Fabric or Coated Synthetic Fabric • Canvas Products • Wool (including in manufactured articles) • Individual Equipment manufactured from or containing such fibers, yarns, fabrics, or materials • Specialty Metals, including stainless steel flatware, unless the metals were melted in manufacturing facilities located within the United States • Hand or Measuring Tools Added to Berry Amendment coverage in 1972. Consider the timing of this addition – Vietnam War

6. Exceptions for Specialty Metals Note: This list only includes those applicable to Specialty Metals • At/below Simplified Acquisition Threshold • In support of Contingency Operations • Under other than competitive procedures approved on the basis of unusual and compelling urgency -- 10 USC § 2304(c)(2) • When acquisition furthers an agreement with a foreign government (Qualifying Country sources) • Domestic Non-Availability Determination (DNAD) at Secretariat level Satisfactory quality and sufficient quantity of specialty metals (including stainless steel flatware), cannot be acquired as and when needed at U.S. market prices. • Outside the United States in support of combat operations

7. Qualifying Countries The following Qualifying Countries are treated equally* with “domestic” sources for specialty metal and other restrictions (see DFARS 225.872-1) * equally? or better? • Australia • Belgium • Canada • Denmark • Egypt • Federal Republic of Germany • France • Greece • Israel • Italy • Luxembourg • Netherlands • Norway • Portugal • Spain • Sweden • Switzerland • Turkey • United Kingdom of Great Britain and Northern Ireland

8. Anti-Deficiency Violations • “….Funds appropriated or otherwise available to the Department….” • It is statutory violation if DoD pays for equipment that is non-compliant. • 31 U.S.C. 1350 • Fines up to $5000.00 • Imprisonment up to 2 years • Adverse personnel actions

9. Why do we need the Berry Amendment? Some examples (from American Manufacturing Trade Action Coalition): • Vietnam War – Sony withheld cameras used to guide tactical missiles • In 1983, the socialists in the Japanese Diet blocked the sale of ceramic packaging used in U.S. cruise missiles • JDAM bomb production was delayed during Iraq war because of a Swiss industrialist concern about Swiss neutrality • Hellfire Missile production was stopped during West Coast dock strike because critical parts sourced in Japan were awaiting off-loading

10. Now, let’s talk about the current situation… As of April 17, 2006: 254 Potentially noncompliant Suppliers

11. DCMA’s Specialty Metals Instruction • DCMA’s Specialty Metals Clause Compliance Instruction • It’s an interim approach to allow for shipments of supplies to our customers. • Reflects short-term pragmatism while complying with the letter of the law • Attempts to foster consistency – we had received complaints about disparate treatment (especially on withhold calculations – still a problem) • It’s not a long-term option or new way of doing business • Available on DCMA Website at… http://guidebook.dcma.mil/225/instructions.htm • We expect OSD Policy soon to mandate use of DCMA’s Instruction across DoD (as an interim measure)

12. Recent Berry Issues • Army black berets from China, Romania and Sri Lanka • Russian titanium fraud case of late 90s – spawned the withhold methodology • Specialty Metal issues arising primarily at major subs * Providing non-conforming goods is a fraud indicator; investigative referrals have been made in some instances

13. Biggest Concern – Specialty Metal • Has arisen most often at sub level in programs where flow-down required: • Aircraft; missile and space systems; ships, tank-auto; weapons; ammo (Laird Memo – DFARs 225.7002-2) • See also DFARS 252.244-7000 (subcontracts for commercial items) • It’s still the Prime’s problem

14. Main Problems • Prime didn’t flow down clause to subs • Prime contract used confusing or inappropriate language – duty to inquire? • Prime contract omitted required language – Christian Doctrine? • (GAO reports 60% of contracts have “problems”) • Prime not taking ownership (overseeing) sub compliance – getting a cert is not enough • General lack of understanding of the requirement

15. DCMA Interim Guidance • Supplants the fire-proofing memo as the primary DCMA Berry guidance document • Fire-proofing memo still good background info • Main issues addressed by guidance: • Authority to accept with a withhold • Calculation of withhold • Conditional acceptance language • Accounting for withholds • WAWF test of invoicing process has been successful

16. What ACOs Expect From PCOs • Tell us if a Berry Amendment exception applies to this acquisition. • Tell us if you intend to obtain a DNAD (Secretarial Exception). • Tell us if you want to reject the item. • If the answers to 1-3 are all no, tell us if we are authorized to conditionally accept the non-conforming part with a withhold calculated per the DCMA Interim Guidance. • Execute contract mods, as appropriate.

17. What DCMA Will Do • Work with DCAA, PCO and Primes to determine appropriate withhold amounts • Process Conditional Acceptance (modified DD250) incorporating withhold after PCO approval • Perform normal quality function w/r/t tendered product including release of product from subs where source inspection is authorized

18. Administration Issues • Conditional Acceptance & Withholds vs. “Conclusive” Acceptance & Price Reduction Mods • Administrative Requirements • Obtaining PCO Concurrence • Invoicing Requirements • Quality Certification • ACO Reporting Requirements • Closeout (Physically Complete & Active w/Withholds)

19. Controversial Areas • Amount of withhold: • Contract end item, major sub-assembly, lowest level auditable part, or metal only? • What about FAR 46.407 (replace at no cost)? • Burdened amount from all subs and withheld at prime level – impact of different accounting systems • Lowest Level Auditable Part Plus Burden • This calculation is auditable, does not rely on an estimate, includes all costs associated with the non-compliant part, and is in synch with replace option. • We create an ADA violation if we pay for items containing non-domestic metals. • Our withhold approach is based on DoJs position in actual fraud case.

20. Related Issues • What about FMS? • Statute restricts use of funds “appropriated or otherwise available to DoD” • Industry position – FMS funds not “otherwise available” to DOD • DCMA defers to PCO on funds availability issues • GAO opinions, case-law on false claims act, long-standing positions of Defense Security Cooperation Agency and DoJ are at odds with industry position • FMF is distinct from FMS as to funding. • The part is still contractually non-compliant.

21. Definition Issues • What constitutes an ALT 1 major program? • DPAS rating is instructive but not necessarily determinative. • Not all contracts are rated – or rated correctly. • DPAS system is a Dept of Commerce reg. • Safe approach: • If contract rated DPAS A1-A6 – ALT 1 likely applies. • If you think something has been ordered for an ALT 1 program but it isn’t rated DPAS A1-A6, ask PCO for a definitive determination. This may turn on who placed the order – contractor or government.

22. More Definition Issues • Why isn’t the US considered a qualifying country? Won’t this drive business off-shore? • This issue was considered by DAR Council. • Making US a qualifying country would “gut” the statutory intent. • DAR Council considered and rejected requirement for metal in article from qualifying country to also be smelted in a qualifying country. • The qualifying countries list results from various trade agreements.

23. Fiscal Issues • The amount of withhold is so small it costs more to work the fix than is being saved. • That may be so but fiscal law does not recognize a de minimis threshold. • Contractors can make a business decision to set the withhold amount at a higher component level if obtaining auditable data for lowest level non-compliant part is difficult, not cost-effective, or impossible.

24. New Discovery Issues • Lag-time presents real problems: • New noncompliant suppliers being identified daily – 274 at last count. Expect many more. • Getting PCO approval for withhold/conditional acceptance takes time (often over a week) • DD250 needs to be accurate at point of signature (QARs can’t sign up to an inaccuracy) • Invoicing after DD250 signing takes time (as much as a week) • How can new discoveries be worked without a do-loop?

25. General DNAD Process/Contents • See DFARS 225.7002-2(b), PGI 225.7002-2(b)(3) and your agency procedures • General Content: 1. Item or class of items, quantity, length of time DNAD is needed 2. Current and detailed market research justifying the non-availability of item(s) in satisfactory quality and sufficient quantity at U.S. market prices 3. Analysis of alternatives that would not require a domestic non-availability determination 4. Written certification by the requiring activity, with specificity, why such alternatives are unacceptable. 5. Report and recommendation of the Contracting Activity Commander discussing supply and procurement situation (mission impacts), commercial practices, and other relevant facts in greater detail 6. Potential political ramifications, Congressional involvement, small business concerns, etc. 7. Expected outcome if a DNAD is not approved

26. General DNAD Process/Contents • Coordinate with Legal and organizational levels as required • Obtain Approval: Secretary of Army, Navy, Air Force, or USD(AT&L) • Once granted, annually assess necessity of the DNAD and determine if market conditions have changed or acceptable product substitutions have become available • Notifications for titanium and clothing/textiles • Titanium – USD(AT&L) Memo of October 22, 2004 requires notification to Congressional defense committees 10 days prior to award • Clothing/textiles - Section 833 of the FY2006 NDAA requires notification in FEDBIZOPS within 7 days of award.

27. Now, let’s talk about the path forward…

28. Long-term Solution Combination of: • Compliance (Strict adherence to contractual terms is a must) • DNAD discussions and determinations at point of award vice point of delivery • Possible Legislative Changes (submitted to OMB) • “Market Basket” Approach to encourage Civil-Military Integration • De Minimis Threshold (10% of price or SAT) It would also be reasonable to expect to see training, more Government Oversight (e.g., CPSRs) and possibly some refinement of regulatory language But before we get there…

29. Corrective Action Plan Requirement • OSD Policy anticipated soon to require Contractors to submit comprehensive plans identifying: • Noncompliant items • Reason why • Date compliance can be achieved (if ever) • Plans can be submitted on a shipment, contract, program, segment, sector or corporate basis • Plans will be evaluated and may justify DNADs for individual items (or, perhaps in some cases, groups of items) Including manufacturer, quantity, value, NAICS code, etc.

30. Summary • OSD is engaged and they know we are looking for policy • OSD knows how DCMA has recommended conducting business in the interim • Industry (AIA and others) has engaged OSD at the AT&L level and above • Serious people on both sides of the legislative debate over Berry restrictions will be heard from