The comment period for a proposed Department of Defense (DOD) rule allowing 100% ESOP-owned companies to receive sole source follow-on contracts ends on July 29.

The National Defense Authorization Act for fiscal year 2022, signed into law on December 27, 2021, contained the first-ever government contracting program to specifically encourage employee ownership. Section 874 directed the DOD to establish a pilot program allowing 100% ESOP-owned companies to receive sole source follow-on contracts for the work. To qualify, the ESOP must be the incumbent and receive a “satisfactory” rating or above in the applicable past performance database. The pilot program allowed for 10 contracts to be rebid under this provision, and all 10 slots were used.

Section 872 of The National Defense Authorization Act for fiscal year 2024, signed into law on December 22, 2023, amended Section 874 to direct the DOD to prescribe regulations, modify language on subcontractors, and extend the program by three years expiring on December 27, 2029.

Section 874, as amended by Section 872, now states: “Notwithstanding the requirements of section 2304 of title 10, United States Code, and with respect to a follow-on contract for the continued development, production, or provision of products or services that are the same as or substantially similar to the products or services procured by or for the Department of Defense under a prior contract held by a qualified business wholly-owned through an Employee Stock Ownership Plan, the products or services to be procured under the follow-on contract may be procured by or for the Department of Defense through procedures other than competitive procedures if the performance of the qualified business wholly-owned through an Employee Stock Ownership Plan on the prior contract was rated as satisfactory (or the equivalent) or better in the applicable past performance database.”

A recently released proposed rule implementing Sections 874 and 872 from the Defense Federal Acquisition Regulation Supplement specifies that the ESOP company must work with the agency contracting officer to submit a proposal, that only 100% ESOP-owned companies that have already received an award are eligible, that only one sole-source follow-up contract may be awarded, and that not more than 50% of the award may be subcontracted. The proposed rule also requires an evaluation of the program and specifies what information the contractors must provide for the assessment.

Comments on the proposed rule can be submitted at the Federal eRulemaking Portal at https://www.regulations.gov. Follow the link above or search for DFARS Case 2024-D004. Select “Comment” and follow the instructions to submit a comment. Please include “DFARS Case 2024-D004” on any attached documents. You also can email [email protected]. Include DFARS Case 2024-D004 in the subject line of the message. Comments on the proposed rule should be submitted in writing on or before July 29, 2024, to be considered in the formation of a final rule.

Thank you to our colleagues at the Employee-Owned Contractors Roundtable (ECR) for their input on this blog post. The ECR has been deeply involved in this and related bills. A 2024 study on behalf of ECR compared the Contractor Performance Assessment Rating System scores of 100% ESOP-owned federal contractors to non-ESOP federal contractors and found that firms entirely owned by ESOPs achieve significantly higher ratings from federal officials than all other firms.