In-house counsel perspective Bryan Van Brunt Associate General Counsel Director of Division Domestic Contracts 31 March 2008

2 Berry Amendment Compliance l Multiple changes and new guidance over past 2 years ä Rule changes (COTS) ä Class deviations ä Discontinuance of “conditional acceptance” l Different rules depending on which time period in which a contract was formed ä Ex. n Fasteners exempted in 2007, but no longer with passage of NDAA n Conditional acceptance MAY permitted on older ongoing contracts, but not on those awarded since October 2006 l Challenges for in-house counsel ä Ensuring education and compliance at operating locations n Changes are numerous, confusing, and complex ä Working with USG to define rules on a contract n Conservative vs. more lenient approaches

3 Berry Amendment Continued l Subcontractor compliance can be difficult ä Small parts on subcontractor components require them to expend resources to find out where they were last melted ä Some would rather refuse the contract l Will legislative and rule-making activity continue? ä Latest NDAA shows congress is still very interested in Berry Amendment n Protect U.S. sources of supply/ National security ä NDAA did provide clarity to what had been rule-making n COTS exception codified n Diminimus exception l Unanswered questions ä Level of “policing” required of prime contractors for subs ä Standardized response to late discovered non-compliance

4 National Industrial Base Clauses l Local clauses l Meant to protect industry deemed vital to maintain in the industrial base for national security reasons ä Can only use U.S. or Canadian Sources ä Often there is only one available source l Issue is presented when the only source for a component which meets the clause standards is a competitor, who is competing against you for the same prime contract. l Competition vs. protection of industrial base is a difficult balance – Solutions in such situations? ä Waiver of clause? ä Mandatory unit price equality?

5 Dealing with commodity risk l Negotiating contract terms to reduce risk of loss from erratic rises commodities are limited to FAR and statutory rules setting limits on allowable risk l FAR provides for EPA provisions for commodities, but some markets have recently seen unprecedented significant fluctuations ä Ex. Due to several factors, metal prices have been excessively erratic n Developing country demand for metals n Speculative investing in uncertain worldwide markets n Labor strikes at large mining operations l Clause caps, especially those in older contracts, can be grossly inadequate to account for the markets l Index-based clauses sometimes do not result in a realistic outcome ä Different regions of world have different actual pricing ä Indexes are often times incorrect estimates or forecasts

6 Dealing with commodity risk l Potential solutions ä Waiver of 10% FAR cap (rare) ä Actual cost-based clauses n Better than index-based for contractor, but limited by caps. ä Hedge agreements for supply of metal with USG agreement for responsibility in event of T for C n Can be a win-win if the hedge is long enough for performance and USG agrees up front with the strategy l What about older contracts? ä Any relief available for contractors? ä Contractor assumed risk vs. Unforeseen circumstances