DoD Final Rule on Commercial Items: DoD Checks the Box for Congress But Still Unnecessarily Burdens Commercial Contractors

The Department of Defense (DoD) has issued a final rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) and implementing sections of the National Defense Authorization Acts (NDAAs) for Fiscal Years 2013, 2016 and 2018. This final rule results from Congressional pressure to reduce barriers to entry for commercial contractors and streamline commercial item procurement procedures. But, while making specific changes required in the NDAAs intended to foster the DoD’s ability to purchase commercial items and services, the final rule retains unnecessary burdens that may continue to discourage commercial contractors from entering into the federal marketplace.

   

At the same time, DoD has issued a new “Guidebook for Acquiring Commercial Items” available here, replacing a draft version issued in February 2017. This two volume Guidebook addresses both commercial item determinations (Part A) and pricing (Part B). This guidance will merit close scrutiny from contractors supplying commercial goods and services to DoD.

Notably, the final rule does not address changes required by the FY 2017 NDAA which, for example, required special treatment for nontraditional defense contractors supplying services, established commerciality for certain commingled items, and added preferences for commercial specifications. DoD has opened a separate DFARS case (No. 2018-D016) to address the reforms mandated by the FY 2017 NDAA, but no proposed rule has yet been issued.

In the sections below, we discuss key elements of the final rule, issued and effective on January 31, 2018, including provisions addressing:

• Reliance on prior commercial item determinations. 
  
• Conversion of acquisitions from commercial to non-commercial. 
  
• Special treatment for nontraditional defense contractors. 
  
• Requiring information to support price reasonableness. 
  
• Price analysis techniques.
  
• Changes to rules for major weapons systems.
  
• Preferences for commercial acquisition of information technology.
  
• Altered requirements for access to books and records.
  

Commercial Item Determinations

The final rule makes a number of changes to the process for commercial item determinations, including instructions for market research, reliance on prior commercial item determinations, limitations on converting procurements from commercial to non-commercial, special treatment for nontraditional defense contractors, and information required from contractors to support a determination.

Prior Determinations

The FY 2016 NDAA amended the Truth in Negotiations Act (TINA) provisions at 10 U.S.C. § 2306a to establish a presumption that a prior commercial item determination by a military department, a defense agency, or another component of DoD “shall serve as a determination for subsequent procurements of such item.” The amendment further established that, if a contracting officer seeks to treat such an item as non-commercial, then the contracting officer must request review by the head of the contracting activity (HCA), who must within 30 days either confirm commerciality or issue a revised determination including the basis for the decision. The final rule generally mirrors the statutory amendment, and clarifies that any revised determination by the HCA must be based upon a conclusion that either (1) the prior use of FAR part 12 procedures was improper or (2) it is no longer appropriate to acquire the item using FAR part 12 procedures. See DFARS 212.102(a)(ii).

Despite comments submitted before publication of the final rule, DoD failed to extend this presumption to prior commercial-item determinations from civilian agencies. Extending the presumption would improve consistency within federal government operations, avoid duplicative government reviews, and increase predictability for contractors. Comments particularly focused on items already being sold under active Federal Supply Schedule (FSS) contracts and thus already determined to be commercial items by the General Services Administration (GSA). In the preamble to the final rule, DoD provided no principled rationale for this omission, noting only that extension of the presumption was not required by statute. DoD did acknowledge, however, that “this does not preclude contracting officers from applying a commercial item exception when an item is sold via an active FSS contract.” See 83 Fed. Reg. 4431, 4435 (Jan. 31, 2018).

Conversion of commercial item acquisition to non-commercial acquisitions

The final rule establishes additional procedural hurdles for the conversion of commercial item acquisitions to non-commercial acquisitions. For procurements over $1 million previously procured under a prime contract using FAR part 12 procedures based on a determination made by a military department, a defense agency, or another DoD component, a conversion requires that the head of the contracting activity (HCA) first makes a written determination that:

• “The earlier use of commercial acquisition procedures under FAR part 12 was in error or based on inadequate information;” and
• “DoD will realize a cost savings compared to the cost of procuring a similar quantity or level of such item or service using commercial acquisition procedures.”
  

DFARS 212.7001 (implementing section 856 of the FY 2016 NDAA). When making that determination, the determining official must at a minimum consider the following:

• “The estimated cost of research and development to be performed by the existing contractor to improve future products or services;”
  
• “The costs for DoD and the contractor in assessing and responding to data requests to support a conversion to noncommercial acquisition procedures.”
  
• “Changes in purchase quantities.” 
  
• “Costs associated with potential procurement delays resulting from the conversion.”
  

In addition, if the procurement is valued at $100 million or more, a copy of the determination must be provided to the Under Secretary of Defense for Acquisition, Technology, and Logistics before DoD may proceed to award on a non-commercial basis.

Notably, this provision will expire on November 25, 2020.

Nontraditional Defense Contractors

Under the final rule, contracting officers may (but are not required to) treat supplies and services provided by “nontraditional defense contractors” as commercial items, regardless of whether the supply or service would otherwise qualify as commercial. DFARS 212.102(a)(iii). This reflects authority established by Congress under section 857(a) of the FY 2016 NDAA and codified at 10 U.S.C. § 2380a.

Nontraditional defense contractors are defined by statute (10 U.S.C. § 2302(9)) and are described in the final rule as follows:

Nontraditional defense contractor means an entity that is not currently performing and has not performed any contract or subcontract for DoD that is subject to full coverage under the cost accounting standards prescribed pursuant to 41 U.S.C. 1502 and the regulations implementing such section, for at least the 1-year period preceding the solicitation of sources by DoD for the procurement (10 U.S.C. 2302(9)).

The final rule also explains that business segments may be treated as nontraditional defense contractors, if they meet the definition above, “even though they have been established under traditional defense contractors.” DFARS 212.102(a)(iii).

Under a proposed rule published in August 2016, DoD described this permissive authority as “intended to enhance defense innovation and create incentives for cutting-edge firms to do business with DoD.” 81 Fed. Reg. 53,101 (August 11, 2016). It is not clear that Congress intended the permissive authority to be limited to such firms, and the proposed rule generated concern that contracting officers might narrowly interpret the circumstances in which commercial-item treatment could be applied. Acknowledging that concern, DoD included a revision in the final rule, stating more broadly that this permissive authority “is intended to enhance defense innovation and investment, enable DoD to acquire items that otherwise might not have been available, and create incentives for nontraditional defense contractors to do business with DoD.” DFARS 212.102(a)(iii).

Requirements for Supporting Information

When requesting commercial item treatment, contractors also will be required under the final rule to provide DoD with information to support a price reasonableness determination. As stated in the final rule, the contractor is to provide,

at a minimum, information that is adequate for evaluating the reasonableness of the price for this acquisition, including prices at which the same item or similar items have been sold in the commercial market.

DFARS 252.215-7010(b)(ii). The final rule also sets out more specific information contractors must provide based upon the circumstances of the request:

• For items previously determined to be commercial, specific information identifying the contract, agency, and government point of contact for the prior determination. See, e.g., DFARS 252.215-7010(b)(ii)(A).
• For items priced based on a catalog, a copy of the catalog showing the price and, if the proposed pricing is not “consistent with all relevant sales data” then also “a detailed description of differences or inconsistencies” between the sales data, proposed price, and catalog price “including any related discounts, refunds, rebates, offsets or other adjustments.” DFARS 252.215-7010(b)(ii)(B). 
• For items priced based on market pricing, a description of the commercial market, the methodology used to establish a market price, and “all relevant sales data.” DFARS 252.215-7010(b)(ii)(C). “Relevant sales data” are defined as

information provided by an offeror on sales of the same or similar items that can be used to establish price reasonableness taking into consideration the age, volume, and nature of the transactions (including any related discounts, refunds, rebates, offsets, or other adjustments).

DFARS 252.215-7010(a). 

• For items included on an active Federal Supply Services Multiple Award Schedule contract, proof that an exception has been granted for the schedule item. DFARS 252.215-7010(b)(ii)(D). 
• For items provided by nontraditional defense contractors, a statement that the entity meets the definition. DFARS 252.215-7010(b)(ii)(E). 
  

Much of this information should have no relevance to a determination of commerciality. DoD acknowledges this point in the preamble to the final rule, noting several times that DoD considers commercial item determinations separately from price reasonableness determinations, and that commercial item determinations are not dependent upon the offered price of an item. See, e.g., 83 Fed. Reg. 4431, 4433 (Jan. 31, 2018). Nevertheless, DoD has left the requirements for data to support commerciality price reasonableness conjoined. DoD explained that “[i]t would not be in the best interest of DoD or industry to delay acquisitions by establishing a formal two-step sequential proposal process of first requiring supporting information only for the purpose of making a commercial item determination, and then following up with a second request for information in order to make a determination of price reasonableness.” 83 Fed. Reg. 4431, 4434.

Price Reasonableness Determinations

Price Analysis techniques

Contracting officers must only require offerors to submit “the minimum information necessary to permit a determination that the proposed price is fair and reasonable . . . .” DFARS 252.215-7010(d). Contracting officers also are to consider information obtained from offerors only if the government’s own market research is insufficient to determine price reasonableness. This approach reflects the hierarchy established in FAR 15.402, under which contracting officers are to rely first upon data available within the government, second upon data obtained from sources other than the offeror and, only if those are insufficient, upon data from the offeror.

The final rule includes detailed confirmation of this hierarchy within DFARS 212.209, Determination of Price Reasonableness, and 215.404-1, Proposal Analysis Techniques. The additions to 215.404-1 are expressly included to meet the requirements of the section 831 of the FY 2013 NDAA. Contracting officers are to:

• First, rely on adequate price competition to establish price reasonableness.
  
• Second, if adequate price competition is not present, conduct market research to support price reasonableness.
  
• Third, if market research is insufficient, consider information from the offeror about prices paid by government and commercial customers for the same or similar items under similar terms and conditions.
  
• Fourth, if all of the above are insufficient, consider information from the offeror about:
  • Prices paid for the same or similar items sold under different terms and conditions.
  • Prices paid for similar levels of work or effort on related products or services.
  • Prices paid for alternative solutions or approaches.
  • Other relevant information that can serve as the basis for determining the reasonableness of price.
• Fifth, if all of the above are insufficient, request information regarding the basis for price or cost, including uncertified cost data.

DFARS 215.404-1(b); DFARS 212.209(b).

The additions to DFARS 215.404-1(b) also outline a number of factors for contracting officers considering pricing data. For example, the final rule acknowledges that whether data is “too old to be relevant” will depend upon the industry, product maturity, and other factors, and suggests that pricing data should include a “range of relevant sales to all types of customers” to be considered complete. See DFARS 215.404-1(b)(v)(A)-D).

Subcontracts

The final rule maintains prime contractor responsibility for obtaining subcontractor data necessary to support price reasonableness; however, where data other than certified cost or pricing data are required, prime contractors are instructed to “obtain from subcontractors the minimum information necessary . . . .” DFARS 252.215-7010(d)(4)(i). The final rule also includes specific limitations:

• No cost data may be required from a prospective subcontractor in any case in which there are sufficient non-Government sales of the same item to establish reasonableness of price.
• If the Offeror relies on relevant sales data for similar items to determine the price is reasonable, the Offeror shall obtain only that technical information necessary-- (A) to support the conclusion that items are technically similar; and (B) to explain any technical differences that account for variances between the proposed prices and the sales data presented.
  

DFARS 252.215-7010(d)(4)(ii)-(iii).

Major Weapon Systems

The final rule revises DFARS 234.7002 addressing the circumstances in which major weapon systems, subsystems of major weapon systems, and their components and spare parts may be treated as commercial items. The rule harmonizes the DFARS with the statutory requirements at 10 U.S.C. § 2379, as amended by the FY 2016 NDAA. For example, the final rule eliminates provisions that previously made status as a commercial item dependent upon a contracting officer determination that the offeror has fully supported price reasonableness. As with DFARS 212.209 and 215.404-1, discussed above, the final rule for major weapons systems employs the same hierarchy that contracting officers are to follow when making price reasonableness determinations, in order to minimize the data required from offerors. See DFARS 234.7002(d). To this, however, the rule for major weapons systems adds an express prohibition on obtaining uncertified cost data for commercially available off-the-shelf (COTS) items, and requires a written determination from the head of the contracting activity before such information can be obtained for any other item developed exclusively at private expense. DFARS 234.7002(d)(4).

Information Technology

The Final Rule revises DFARS 239.101 (48 C.F.R. § 239.101) to implement section 855(a)(1) of the FY 2016 NDAA. Under this revised rule, contracting officers are now prohibited from entering into a contract in excess of the simplified acquisition threshold for information technology products or services that are not commercial items, unless the head of the contracting activity determines in writing that there are no suitable commercial items to meet the agency’s needs, as determined by market research. This provision reinforces DoD’s preference for buying commercial, while encouraging and expanding the use of commercial item authorities.

Examination of Books and Records / Divergence from FAR

The final rule adds a new DFARS clause, DFARS 252.215-7010, Requirements for Certified Cost or Pricing Data and Data Other Than Certified Cost or Pricing Data, to be used in solicitations (including solicitations using FAR part 12 procedures for the acquisition of commercial items) when it is “reasonably certain that the submission of certified cost or pricing data or data other than certified cost or pricing data will be required.” Most terms of this new clause have been discussed above; however, an additional aspect of this new DFARS clause is notable. In particular, the clause includes a provision partially mirroring FAR 52.215-20(a)(2), stating that:

The Offeror grants the Contracting Officer or an authorized representative the right to examine, at any time before award, books, records, documents, or other directly pertinent records to verify any request for [a commercial item] exception under this provision and to determine the reasonableness of price.

FAR 52.215-20(a)(2); DFARS 252.215-7010(b)(2). In part reflecting the DoD decision to conjoin the commercial item determination with the government’s price reasonableness determination, however, DoD has excluded a statement in the FAR clearly stating that “for items priced using catalog or market prices . . . this access does not extend to cost or profit information or other data relevant solely to the offeror’s determination of the prices to be offered in the catalog or marketplace.” FAR 52.215-20(a)(2).

Prohibition on clauses limiting access to data

The final rule revises DFARS 215.402, Pricing Policy, to implement section 831 of the Fiscal Year 2013 NDAA. Among other things, this provision provides that the contracting officer cannot “limit the Government’s ability to obtain any data that may be necessary to support a determination of fair and reasonable pricing by agreeing to contract terms that preclude obtaining necessary supporting information.” Stated otherwise, this language “is intended to prohibit DoD contracting officers from agreeing to contract terms that preclude obtaining supporting information that may be necessary to support a determination of fair and reasonable pricing.” 83 Fed. Reg. 4431, 4434 (Jan. 31, 2018).

Conclusion

With publication of this final rule, DoD appears generally to have conformed to the express requirements in the implemented NDAA provisions. Unfortunately, however, DoD has missed a number of opportunities to better implement the spirit of those requirements and to avoid the unnecessary or burdensome demands that deter commercial suppliers from entering the government market.