The statute just says the agency must use the existing regulations. The regulations were promulgated by the agency to govern its own discretion. The executive reads the regulation to constrain the civil service to a particular process, but allow the negotiated indirects to be overridden by the head of the agency with a documented reason.

You’re assuming that the regulation would constrain the head of the agency but why would that be the case?

The purpose of many laws is to require documentation without imposing any new limits on what the government can do.