News
February 9, 2018

US Department of Defense Revisions for Commercial Item Contractors

Advisory

The Department of Defense (DoD) issued a final rule, effective on January 31, 2018, to implement sections of the National Defense Authorization Acts (NDAA) for Fiscal Years 2013, 2016, and 2018 related to commercial item acquisitions.1 The Federal Acquisition Regulation (FAR) defines a commercial item as an item that is "of a type customarily used by the general public or nongovernmental entities" that have been sold or offered for sale to the general public, or is a modification of such an item, and the Defense Federal Acquisition Regulation Supplement (DFARS) follows that definition.2 Although the DoD has expressed frustration in recent years over the definition of a commercial item, the rule does not attempt to alter the Federal Acquisition Regulation definition. This rule amends the DFARS to create new price reasonableness determination guidelines for commercial item contracts, add criteria for commercial item determinations, and expand opportunities for nontraditional defense contractors. The rule also provides guidance to contracting officers on defense commercial items or nontraditional defense contractor price reasonableness evaluations that diverges from the FAR price reasonableness evaluation rules for negotiated procurements.

Changes to the DFARS

Prior Commercial Item Determinations

Lately, there has been some controversy over whether a Contracting Officer can or even must render a new commercial item determination with each procurement. The new rule allows contracting officers to presume that a prior commercial item determination made by any DoD component can serve as a determination for subsequent procurements of that item.3 The rule does not extend this presumption to prior determinations made by civilian agencies; however, the final rule, does not preclude contracting officers from relying on civilian agency commercial item determinations.4

Nontraditional Defense Contractors

The rule defines "nontraditional defense contractor" as "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 or transaction . . .."5 The rule merely adopts the preexisting definition set forth in 10 USC § 2302(9), as required by the Fiscal Year 2016 NDAA.

Contracting officers are permitted to treat supplies and services from nontraditional defense contractors as commercial items.6 The DFARS provision states that this allowance is made to "enhance defense innovation and investment, enable DoD to acquire items that might not have been available, and create incentive for nontraditional defense contractors to do business with DoD."7 This permission extends to "when appropriate," categorizing as commercial items "the procurement of supplies and services from business segments that meet the definition of 'nontraditional defense contractor' even though they have been established under traditional defense contractors."8 Accordingly, a business unit of a defense contractor, or a contractor that performs DoD contracts subject to the CAS could, at the discretion of the contracting officer, be considered a nontraditional defense contractor.

Market Research

The rule adds a commercial item price reasonableness determination for procurements subject to the DFARS. The rule, present at DFARS 212.209, provides that market research shall be used for price reasonableness determinations where appropriate.9 Market research applies to all types of commercial item procurements—including prior commercial item determinations and nontraditional defense contractors—and exempts commercial item procurements from the requirement to provide cost and pricing data in a negotiated procurement.10 If market research is insufficient, the contracting officer shall "consider information submitted by the offeror of recent purchase prices paid by the Government and commercial customers for the same or similar commercial items" under similar terms and conditions, and determine that price is a "valid reference."11 Whether a price is a "valid reference" requires the contracting officer to analyze "the totality of other relevant factors" including whether the purchase was recent and for a comparable quantity.12 If the contracting officer cannot determine price reasonableness from market research or recent purchase prices, the contracting officer shall request information from the offeror on prices paid for similar items under different terms, prices for similar levels of work or effort on related products or services, prices for alternative solutions, or other relevant information.13 Despite the foregoing, the contracting officer is always permitted to require additional information from the contractor to establish the reasonableness of price.14 The DFARS rule flips the order of priority set forth in the FAR, which calls for comparison of proposed prices to other proposals or to historical data first and market research among the least-favored alternative.15

Very similar requirements apply to negotiated procurements without adequate price competition, as pricing based on market prices is the preferred method to establish a fair and reasonable price under DFARS 215.404-1(b), and to major systems acquisition under DFARS 234.7002.16 However, in a negotiated, noncommercial procurement, the contracting officer may ask for certified cost or pricing data only if he or she could not determine price reasonableness from market research or recent and relevant purchase prices.17

Limitation on Conversion of Commercial Item Procurements

The new provisions also limit DoD's ability to convert a commercial item procurement to another type of procurement, except in situations such as where the procurement was designated commercial in error, or where DoD would recognize cost savings.18

Negotiated Procurement and Major Systems Pricing Policy.

The new provisions impact the DFARS' contracting by negotiation provisions by adding a pricing policy that states a preference for market pricing.19 A similar pricing policy applies to major systems acquisition.20

Information Technology

The rule creates a policy preference for commercial item IT products.21 The rule also allows IT contractors an exception from the requirement to provide certified cost and pricing data by requesting a determination from DoD that they are either providing commercial items or otherwise excepted by law or regulation from providing certified cost and pricing data.22 Here again, nontraditional defense contractors are treated as commercial items contractors.23

Takeaways

The DoD's final rule seems to put to rest some uncertainties regarding commercial item determinations. Nevertheless, the proof is in the pudding, and in modification of the DoD Procedures, Guidance and Information (PGI) to conform with the new rules. Disputes will inevitably remain, and the Defense Contract Management Agency Centers of Excellence designed to address commercial item exemptions are not likely to be put out of business. There is, indeed, increased likelihood that more contracts will be considered commercial items, and the price reasonableness evaluation will be simplified for commercial item contractors. Contractors that do or seek to do business with DoD as a nontraditional defense contractor should therefore carefully review the new rule to determine how it could impact their business.

The rule clarifies that commercial items contractors include both contractors deemed to be commercial item contractors by a prior commercial item determination, and companies that have not done business with DoD under full cost accounting standards for one year prior to the solicitation and thus qualify as nontraditional defense contractors. Both groups stand to benefit under these rules because their products and services will be treated as commercial items. But, these changes invite other questions as well, not the least of which is how long such treatment will last.

The new rule also provides for DFARS provisions that differ from FAR rules with respect to price reasonableness determinations to the extent that they direct a preference for market research-based price reasonableness evaluations. Because this relaxed price reasonableness standard applies to commercial item contracts, this rule may incentivize DoD contracting with commercial item contractors, including commercial items contractors due to a prior commercial item determination, or nontraditional defense contractors. DoD may also face bid protests to the extent that new awards implicate these new requirements for price reasonableness determinations.

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  1. Department of Defense, Defense Federal Acquisition Regulation Supplement Procurement of Commercial Items, 83 Fed. Reg. 4431 (Jan. 31, 2018).

  2. FAR 2.101.

  3. DFARS 212.102(ii)(A).[[N:If the contracting officer chooses not to make that presumption, the head of contracting activity must review the subsequent commercial item determination.[[DFARS 212.102(ii)(B).

  4. 83 Fed. Reg. at 4435.

  5. DFARS 212.001.

  6. DFARS 212.102(iii).

  7. Id.

  8. Id.

  9. DFARS 212.209(a).

  10. DFARS 212.102(ii)(A).

  11. DFARS 212.209(b).

  12. Id.

  13. DFARS 212.209(c).

  14. DFARS 212.209(d).

  15. FAR 15.404-1(b)(3.

  16. DFARS 215.404-1(b), (c);DFARS 234.7002.

  17. DFARS 215.404-1(b), (c).

  18. DFARS 212.7001.

  19. Department of Defense, Defense Federal Acquisition Regulation Supplement Procurement of Commercial Items, 83 Fed. Reg. 4443 et seq., (Jan. 31, 2018).

  20. DFARS 234.7002.

  21. DFARS 239.101.

  22. DFARS 252.215-7010(b).

  23. DFARS 252/215-7013.

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