On October 10, 2024, the U.S. Department of Defense (DOD) published a final rule to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to implement Section 874 of the 2022 National Defense Authorization Act (NDAA) as well as improvements contained in Section 872 of the 2024 NDAA. The rule is set to take effect on November 25, 2024.
The final rule incentivizes DOD contracting with wholly employee-owned businesses by creating a pilot program allowing contracting officers to award sole-source follow-on contracts to businesses that are 100% ESOP-owned. This does not extend to acquisitions below the Simplified Acquisition Threshold (a dollar amount, currently $250,000, under which contracting officers use simplified procedures), and there are limits on the percentage of the contract that can be subcontracted. DOD contracting officers will have to obtain approval from the Defense Pricing, Contracting, and Acquisition Policy office to use the authority. This will help facilitate data collection, which is also required by the rule to assess the effectiveness of the pilot program. The program is authorized for eight years, until December 27, 2029.
A study by Dr. James Hasik published earlier this year provides evidence of the positive impact of ESOPs on company performance and resiliency. Using Contractor Performance Assessment Rating System (CPARS) data to compare the scores of 100% ESOP-owned federal contractors to non-ESOP federal contractors, Hasik found that firms entirely owned by ESOPs achieve significantly higher ratings from federal officials than all other firms.