On January 31, 2018, the Department of Defense (“DoD” or the “Department”) published a final rule regarding commercial item purchasing requirements.  Among other key amendments, the final rule modifies the Defense Federal Acquisition Regulation Supplement (“DFARS”) by:  (i) formalizing a presumption of commerciality for items that DoD previously treated as commercial; (ii) providing commercial item treatment to goods and services offered by nontraditional defense contractors; and (iii) prioritizing the types of information that the contracting officer (“CO”) can consider when determining price reasonableness in the absence of adequate competition.

The final rule adopts much of DoD’s August 2016 proposed rule, which itself was a revised version of a retracted August 2015 proposed version.  We discussed the August 2016 proposed rule on this subject (and linked to an article regarding the August 2015 version) in a prior post.  Despite receiving repeated input from industry and Congress, DoD’s final rule still provides little concrete guidance, and although these changes were made with the stated purpose of promoting consistency across purchasing components, it appears likely that inconsistencies will persist.  In particular, the final rule continues to leave the door open for individual contracting officers to make potentially burdensome requests for information to support the proposed pricing of commercial items.

1.  Presumption of Commerciality

The final rule establishes a presumption of commerciality in two ways.

First, the final rule updates DFARS 212.102 to allow contracting officers to presume that a prior DoD commercial item determination applies to subsequent procurements of the same item.  Fortifying this presumption, the final rule makes it difficult for COs to ignore a prior DoD commercial item determination.  COs are not permitted to unilaterally overturn a prior determination and instead must “request a review of the commercial item determination by the head of the contracting activity that will conduct the procurement.”  To overturn a prior determination of commerciality, the head of the contracting activity must determine in writing that the prior commercial item determination was improper.

While significant, it is important to understand the limitations of this presumption.  It does not apply to determinations by civilian agencies (such as the General Services Administration), nor does it allow agencies to rely on prior commercial item determinations made by prime contractors — which represent the overwhelming majority of commercial item determinations.  In the analysis of public comments on the final rule, DoD indicated that it had limited statutory authority and lacked to the ability to rely upon commerciality determinations made by civilian agencies or prime contractors.[1]

Second, the final rule adds DFARS 212-7001, which limits an agency’s ability to use non-commercial procedures to procure items that were previously acquired under commercial procedures.  Specifically, prior to converting a procurement of items that a DoD component determined to be commercial valued up to $100 million from commercial procedures, the head of the contracting activity, upon recommendation from the cognizant contracting officer, must determine in writing that—(i) the earlier use of commercial procedures was in error or was based on inadequate information, and (ii) DoD will realize a cost savings by using other-than-commercial procedures.  For procurements over $100 million, a contract may not be awarded pursuant to such a conversion until the head of the contracting activity has provided a copy of the above determination to the Under Secretary of Defense for Acquisition, Technology, and Logistics.[2]

2.  Nontraditional Defense Contractors

The final rule also contains an amendment that has the potential to encourage newcomers to the government market.  In this regard, the rule amends DFARS 212.102 to allow COs to treat supplies and services sold by “nontraditional defense contractors” as commercial items.  The provision defines “nontraditional government contractors” as those contractors that have not performed (and are not performing) any DoD contract or subcontract subject to full Cost Accounting Standards (“CAS”) coverage for at least one year preceding the solicitation.  Importantly, contracting officers are also permitted to treat items sold by business segments of traditional contractors not subject to full CAS coverage as nontraditional contractors.  If contracting officers take sufficient advantage of this authority, it has the potential to lessen the burdens imposed on a company selling even complex items, so long as the company can demonstrate that it meets the definition.

3.  Hierarchy of Information to Determine Price Reasonableness

Lastly, the final rule updates DFARS 215.404-1 to include a hierarchy for the data that DoD contracting officers should rely on when conducting price reasonableness analyses for commercial and non-commercial items.

At the top of the hierarchy is “market research,” which the rule defines as “a review of existing systems, subsystems, capabilities, and technologies that are available or could be made available to meet the needs of DoD in whole or in part.  The review shall include, at a minimum, contacting knowledgeable individuals in Government and industry regarding existing market capabilities and pricing information, and may include any of the techniques for conducting market research provided in FAR 10.002(b)(2).”

If, however, the contracting officer determines that “market research” is insufficient, the final rule requires the contracting officer to “consider information submitted by the offeror of recent purchase prices paid by the Government or commercial customers for the same or similar commercial items under comparable terms and conditions.”  And, if that information is also determined to be insufficient, the final rule provides that the contracting officer should request the offeror to submit information on—

(1)  Prices paid for the same or similar items sold under different terms and conditions;

(2)  Prices paid for similar levels of work or effort on related products or services;

(3)  Prices paid for alternative solutions or approaches; and

(4)  Other relevant information that can serve as the basis for determining the reasonableness of price.

It is unclear that the hierarchy of data will have a meaningful impact on the actual behavior of contracting officers.  As we noted in our previous post regarding the proposed rule, the types of information that the contracting officer may request for this inquiry remain unbounded.  This is apparently intentional, given DoD’s response to public comments.  For example, in responding to a comment on the potential burden associated with the submission of cost data in some circumstances, DoD affirmed that “[t]he language does not create a prohibition [on cost data], but does provide a hierarchy that includes incorporation as to when to request other relevant information.”[3]  Therefore, because contracting officers may unilaterally determine whether the different sources of pricing information are adequate when selling commercial items to the Government, contractors should not expect a significant change from the status quo, and should be prepared to provide each of the types of information that DFARS 215.404-1(b) identifies.

[1] See Defense Federal Acquisition Regulation Supplement: Procurement of Commercial Items (DFARS Case 2016-D006), 83 Fed. Reg. 4431, 4435 (Jan. 31. 2018).

[2] Section 901 of the FY 2017 NDAA split the Office of Acquisition, Technology, and Logistics into two components ((1) Acquisition and Sustainment and (2) Research and Engineering).  Presumably, either one or both of the newly established Under Secretaries should receive the determination.

[3] 83 Fed. Reg. 4440.