Another Tool in the COVID-19 Toolkit: DoD Encourages Industry/Government Collaboration by Expanding Access to Favorable “Commercial Item” Contracting Procedures

Historically, broad swaths of industry have shied away from contracting with the US Government due to a morass of statutory and regulatory contracting requirements without analog in commercial contracting. Recent amendments to the US Department of Defense (DoD) procurement regulations, effective October 1, 2020, reduce some of this contracting complexity by permitting DoD to use streamlined "commercial item" contracting practices—which are, among other things, far more protective of the private party's IP rights than more onerous forms of contracting—for procurement contracts with "nontraditional defense contractors." Ultimately, these changes, in DoD's words, are "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."

FAR Part 12 and Commercial Item Contracting

When DoD enters into a procurement contract with a non-government entity, there are hundreds of rules and contract clauses in the Federal Acquisition Regulation (FAR) and the DoD FAR Supplement (DFARS) that govern negotiations and contractual relationships between the parties. Recognizing that this procurement framework is unduly burdensome when the government is acting as a regular purchaser of commercial goods in the marketplace, a simplified set of rules is available for procurements of commercial goods and services. The general rules for commercial item contracting are laid out in FAR Part 12.

Generally, FAR Part 12 reduces the administrative cost and procurement lead times, both for the government and its suppliers. It permits the use of streamlined acquisition procedures, and only requires the use of a limited subset of the FAR's voluminous "boilerplate" contract terms and conditions— "those clauses (1) Required to implement provisions of law or executive orders applicable to the acquisition of commercial items; or (2) Determined to be consistent with customary commercial practice."¹ This includes the use of more contractor-friendly intellectual property provisions, generally requiring the government to acquire the item subject to the same IP terms and conditions as would be offered in the commercial marketplace (with some caveats, to be sure). FAR Part 12 also allows for relatively limited disclosure of cost and pricing information. While, in practice, these contracts will contain plenty of provisions that would never been seen in a commercial contract, FAR Part 12 does provide a degree of leverage for companies to object to government-unique provisions.

DFARS Amendment

Historically, in order for an agency to utilize FAR Part 12, the product or service to be procured must qualify as a "commercial item" as that term is defined in FAR Part 2.101.² However, recent amendments to the DFARS expand upon DoD's ability to use FAR Part 12 acquisition procedures for procurement contracts with "nontraditional defense contractors" whether or not the products or services meet the regulatory definition of commercial item, and without any requirement for a commerciality determination.³ This allows even developmental products or products tailored for DoD use to take advantage of commercial item contracting.

A company may qualify as a nontraditional defense contractor as long as it has not performed any DoD contract or subcontract that is subject to full Cost Accounting Standards (CAS) coverage for at least the one year period preceding DoD's solicitation of sources.⁴ CAS requires the use of specific accounting systems and software, and the unique compliance requirements involved are a major deterrent to many commercial companies from engaging in significant volumes of US government business. Indeed, due to the many exceptions available to avoid full CAS coverage, even many companies that regularly do business with DoD will qualify.⁵

The amended DFARS provision gives contracting officers discretion, "when appropriate," to apply commercial item procedures to business segments of traditional defense contractors that meet the definition of "nontraditional defense contractor."  This should provide clarity for those companies that maintain distinct business units for commercial and government work.

The regulations are not without nuance. First, the contracting officer is given discretion to decide when to use the commercial item procedures; use is not mandatory. Further, just because the rule permits the use of commercial item procedures "does not mean the item [itself] is commercial."⁶ Additionally, services provided by a business unit of a nontraditional defense contractor may be treated as commercial items only to the extent those services are (i) drawn from the same pool of employees who perform services for commercial customers, and (ii) priced using methodology similar to methodology used for commercial pricing.⁷ Finally, the rule does not flow down to the treatment of subcontractors.

Ultimately, while commercial item procedures have many advantages over more rigorous methods of procurement contracting, they are still procurement contracts with the federal government, subject to the FAR and DFARS. This inevitably means there will still be significant differences between "commercial item" contracts with DoD and true commercial contracts between private parties. Because commercial item contracts are procurement contracts, they remain far more regulated than the other form of instrument often employed with nontraditional defense contractors—DoD's "Other Transactions," which, in many respects, avoid the FAR and DFARS entirely. Before pursuing a commercial item procurement, companies should carefully consider the compliance implications and be familiar with the government's unique processes.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.