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For commercial item contractors, some improvements—mixed with new and old barriers—in DoD’s final rule on procurement of commercial items and accompanying guidebook

For commercial item contractors, some improvements—mixed with new and old barriers—in DoD’s final rule on procurement of commercial items and accompanying guidebook

Authors: Phil Seckman, Steve Masiello, Quincy Stott

At long last, the Department of Defense (DoD) on January 31, 2018, issued its final rule regarding the procurement of commercial items. On the same day, the DoD also published an updated two-part “Commercial Item Acquisition Guidebook,” a draft of which the DoD circulated last year. Dentons has been tracking both, including an analysis regarding the proposed rule and an earlier DFARS case that contributed to it. Although the final rule contains some beneficial elements for commercial item contractors and nontraditional defense contractors, it fails to overcome several of the barriers that deter such contractors from selling to DoD and sets the stage for possible problems down the road.

Starting with some potentially good news, it is helpful that the discussion and analysis in the final rule expressly acknowledges that the DoD considers the commercial item determination to be separate from the price reasonableness determination. This was an issue that was of particular concern in industry comments submitted in response to the DoD’s proposed rules. Moreover, the DoD’s acknowledgement of these separate inquiries is important because it also emphasizes and reinforces the avenue by which items that have not previously been sold may nonetheless qualify as commercial items if they are “of a type.” It was not long ago that the DoD was actively engaged in an effort to revise the statutory commercial item definition to remove this very concept.

Another bit of good news in the final rule relates to nontraditional defense contractors. The final rule defines a 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 [CAS] . . . for at least the 1-year period preceding the solicitation . . . .” The language at DFARS 212.102 states that contracting officers may treat supplies and services provided by nontraditional defense contractors as commercial items.

Although this permissive authority is not intended to “recategorize” current noncommercial items, the provision states that contracting officers may consider using the authority to procure supplies and services from business segments that meet the definition of nontraditional defense contractor even though they are affiliated with traditional defense contractors. The new guidance is enshrined in a new clause: DFARS 252.215-7013, Supplies and Services Provided by Nontraditional Defense Contractors. The provision may create incentives for nontraditional defense contractors to do business with the DoD (or for traditional defense contractors to spin off segments or affiliates that could qualify as nontraditional), but only time will tell whether contracting officers will exercise their discretion to do so.

On the other side of the ledger, the final rule potentially retains and creates new barriers for commercial item contractors. First, while the final rule’s treatment of data requirements for both commercial item determinations (CIDs) and price reasonableness offers additional clarity, it ultimately fails to meaningfully reduce barriers for commercial item contractors. As noted above, the DoD professes that it considers CIDs separately from price reasonableness determinations. Nonetheless, under the new DFARS provision, the DoD requires documentation in support of both to be included at proposal submission. The DoD’s rationale is that requiring commercial item contractors to turn over detailed pricing information up front with its proposal avoids delays in contract award. Of course, this likely invites contracting officers to ignore the FAR pricing policy at FAR 15.402 and the orderly sequence of information the government is to utilize before calling on the contractor to turn over its own information.

Moreover, while contracting officers may not request certified cost and pricing data for a commercial item acquisition, the final rule contemplates that they use business judgment and have broad discretion to require additional information from commercial item contractors for purposes of establishing price reasonableness. Again, contracting officers should be limited to the order of preference in FAR 15.402 for the type of data required. Nevertheless, the new language in DFARS 215.404-1(b) fails to curb potential overreach through onerous data requests by contracting officers determined to avoid any second guessing of their efforts in support of the commercial item price reasonableness determination. This dynamic may very well have the predictable result of causing many nontraditional defense contractors to turn away from the DoD market.

The final rule also implements DFARS 252.215-7010, Requirements for Certified Cost or Pricing Data and Data Other Than Certified Cost or Pricing Data. Building on FAR 52.215-20, the new DFARS provision adds additional detail regarding submission of other than certified cost or pricing data. Contracting officers will use this new provision in lieu of FAR 52.215-20 in solicitations, including those using FAR Part 12 procedures for commercial item acquisitions. Notably, however, the final rule reworded the solicitation provision at paragraph (d) to require only the “minimum information necessary,” rather than the previous version’s “all data,” to determine that the proposed price is fair and reasonable

Finally, under DFARS 212.102 in the final rule, a contracting officer may presume that a prior CID “made by a military department, a defense agency, or another component of DoD shall serve as a determination for subsequent procurements of such item.” If a contracting officer does not presume a prior CID is valid, the head of the contracting activity conducting the procurement must, within 30 days, confirm that the prior CID is appropriate and still applicable, or issue a determination that it is no longer appropriate to use FAR Part 12 procedures to acquire the item. It seems that the presumption that Congress created in Section 851 of the FY 2016 NDAA may have unintended consequences. Rather than facilitating the DoD’s reliance on prior CIDs, the final rule suggests that it is within the contracting officer’s discretion to disregard them, though the risk of such discretion being exercised is low. Finally, despite industry urging, the DoD declined to extend the presumption for prior CIDs to those made by non-DoD agencies.

Simultaneous with the DoD’s publication of the final rule in the Federal Register, the department also published its final Commercial Item Acquisition Guidebook. Unlike the final rule, the guidebook contains no clear summary of changes made in response to industry comments. For this reason, contractors should carefully study the final version for valuable insight into how the DoD is approaching commercial item and fair-and-reasonableness-price determinations, and and use it to bolster your approach to commercial item issues in the context of contractor purchasing systems.

The culmination of many years of effort by the DoD, the final rule provides some needed clarity for commercial item contractors and opens up avenues for nontraditional defense contractors to sell their supplies and services to the government. The final rule does not, however, meaningfully reduce certain barriers for commercial item contractors and may even create new barriers. In future NDAAs, Congress will need to provide additional clarity regarding its goals for commercial item acquisition and to continue incentivizing the adoption of practices by the DoD that genuinely reflect the commercial marketplace. Only through the reduction of unnecessary complexity and the avoidance of onerous information demands will the DoD continue to attract and benefit from the commercial market.

For commercial item contractors, some improvements—mixed with new and old barriers—in DoD’s final rule on procurement of commercial items and accompanying guidebook

DCAA issues MRD confirming auditors should not verify technical interchanges

 

On November 21, 2017, DCAA issued a Memorandum for Regional Directors (MRD) confirming that the Class Deviation 2017-O0010’s abrupt halt to technical interchange requirements as a condition of independent research and development (IR&D) cost allowability applies to auditors. Dentons previously discussed Class Deviation 2017-O0010 and its implications for contractors when the Class Deviation was issued in September 2017.

The MRD expressly applies the Class Deviation to DCAA auditors. It states that no IR&D costs should be questioned if an auditor finds that a technical interchange did not occur. This guidance applies retroactively to all audits performed of fiscal year 2017 costs, as well as current and future audits. The MRD is available on DCAA’s website.

DCAA issues MRD confirming auditors should not verify technical interchanges

FCA relator sanctioned nearly $170,000 for improperly taking employer’s privileged

Courts historically have been hesitant, for public policy reasons, to sanction relators for taking their former employers’ confidential documents to support their FCA claims. However, in US ex rel. Ferris v. Afognak Native Corp., a US District Court Judge for the District of Alaska sanctioned a plaintiff almost $17,000 for doing just that. We look at the key elements defense counsel in FCA actions should focus on when faced with a qui tam relator who has purloined his or her employer’s privileged (or non-privileged but confidential) documents.

Read the complete article here.

FCA relator sanctioned nearly $170,000 for improperly taking employer’s privileged

DCAA guidance clarifies cost or price analysis requirements for subcontractor proposals

The Defense Contract Audit Agency (DCAA) published a Memorandum for Regional Directors (MRD) last week that provides answers to frequently asked auditor questions regarding cost and price analyses to establish the reasonableness of proposed subcontract prices. Of particular note is the direction that DCAA auditors proceed with subcontract proposal audits even if contractor cost or price analyses are not yet available. Dentons’ Government Contracts team explains what the new guidance means for contractors and subcontractors.

Read the complete article here.

DCAA guidance clarifies cost or price analysis requirements for subcontractor proposals

Government Contracting Roundtable Discussion

May 19, 2017
12:30–1:30 p.m.
Lunch served at 12 p.m.

Please join Deloitte Advisory and Dentons at our quarterly government contracting roundtable. These discussions will foster a free exchange of ideas, insights and wisdom about government contracting hot topics, including:

• Regional trends
• Regulatory changes
• Significant developments in litigation and enforcement
• Defense Contract Audit Agency (DCAA) audit trends (Rocky Mountains region)

We are hoping that this will be a forum for area contractors to exchange ideas on pain points and gather intel on trends to proactively prepare and respond to potential DCAA audits or inquires.

Deloitte & Touche LLP
555 17th Street Suite 3600
Breckenridge Conference Room
Denver, CO
Please RSVP by May 10  

Government Contracting Roundtable Discussion

Marsh Government Contracting Risk Forum 2017

Growth in an Unpredictable World: Strategies for Resiliency

Tuesday, May 23, 2017
12–6 p.m.

The Ritz-Carlton, Tysons Corner
1700 Tysons Boulevard
McLean, VA 22102 l Map

We have partnered with Marsh to develop an afternoon of insightful panels and networking opportunities to help you better manage your risk in a changing environment.
Scheduled panels include:

  • Technology Disruption’s Impact on Strategy and Risk
  • Third-Party Uncertainty from Geopolitical Instability
  • Social Instability: Optimizing Talent During the Storm

The forum opens with a networking lunch and concludes with a cocktail hour.
For more information, please visit our event website.

Marsh Government Contracting Risk Forum 2017

Trump’s ‘Buy American, Hire American’ executive order advances his domestic preference agenda, but its impact may not be felt for months

Delivering on one of his signature campaign promises, President Trump signed an executive order (EO), dubbed “Buy American, Hire American,” on April 18, 2017, that focuses on the H-1B visa program and the procurement of American products by federal agencies.

On the “Buy American” front, the EO requires every agency to conduct, within 150 days of the date of the EO, a comprehensive assessment of the monitoring of, enforcement of, and compliance with the Buy American requirements within their respective agencies. The EO acknowledges the existence of several Buy America(n) preference frameworks, which it consolidates for purposes of the new policy position.

The EO further directs the agencies to assess their use of Buy American waivers, to minimize their use of such waivers and, prior to granting a public interest waiver, to assess whether the cost advantage associated with purchasing “a foreign-sourced product is the result of the use of dumped steel, iron, or manufactured goods or the use of injuriously subsidized steel, iron, or manufactured goods,” and to document their findings in any waiver determination. The EO also requires agencies to adopt policies and procedures to maximize the use of US goods, products, and materials in federal procurements.

The EO further directs the Secretary of Commerce and the United States Trade Representative to assess the impact that all US free trade agreements and the World Trade Organization Agreement on Government Procurement have on Buy American requirements within 150 days of the date of the EO and to submit a report to the President detailing their findings within 220 days of the EO date.

The “Hire American” element of the EO requires the Secretary of State, the Attorney General, the Secretary of Labor and the Secretary of Homeland Security to propose new rules and to issue new guidance aimed at protecting the interests of US workers from fraud and abuse. In addition, the EO directs the Secretary of State, the Attorney General, the Secretary of Labor and the Secretary of Homeland Security to suggest reforms to the H-1B program so that visas under the program are granted to “the most-skilled or highest-paid petition beneficiaries.”

As discussed here, government contractors should continue to monitor the administration’s activities with respect to domestic preference requirements, as changes appear to be on the horizon. Government contractors should also remain in strict compliance with domestic preference laws, regulations and contract terms, as the Trump administration appears set on vigorously enforcing existing domestic preference requirements. Finally, while the Buy American directives in the EO seem focused on construction and transportation projects and while it remains to be seen what comes of the report to be submitted to the President, it seems likely that there will be at least some changes to existing domestic preference obligations. And while any changes are not immediately forthcoming, contractors should evaluate their current supply chains so as to be prepared to make necessary adjustments should new domestic preference requirements be implemented.

Trump’s ‘Buy American, Hire American’ executive order advances his domestic preference agenda, but its impact may not be felt for months

You’re Invited: 2017 Denver Government Contracts Briefing

Please plan to join us at our annual Denver Government Contracts Briefing. As in previous years, the complimentary and exclusive meeting will cover the latest developments in the government contracting industry. The briefing will take place at our traditional venue, the Ritz-Carlton, Denver.

View the complete agenda and the latest updates on the event webpage

Thursday, May 11, 2017
Ritz-Carlton, Denver 1881 Curtis Street
Denver, CO

 

 

 

You’re Invited: 2017 Denver Government Contracts Briefing

DoD announces industry day to facilitate implementation of new network penetration reporting clause

In response to a chorus of implementation questions raised by the contracting community, the US Department of Defense (DoD) has announced an industry information day, during which contractors who have questions or wish to provide feedback regarding DoD’s Network Penetration Reporting and Contracting for Cloud Services final rule can raise those questions. On April 5, 2017, DoD published a notice of meeting in the Federal Registerannouncing the “Industry Information Day” on June 23, 2017.

The public meeting will address the implementation of DFARS Case 2013-D018, and the associated DFARS clauses, including DFARS 252.204-7012, Safeguarding Covered Defense Information and Cyber Incident Reporting (Oct. 2016). The final rule, published October 21, 2016, finalized an interim rule mandating that both prime and subcontractors safeguard covered defense information, report on network penetrations, and require adequate security from external cloud computing services. We have previously analyzed these new requirements.

The industry day announcement is an important reminder to contractors of the upcoming December 31, 2017, deadline for implementing the new security requirements required under the final rule to qualify for new DoD awards. The event will be held on Friday, June 23, from 9 a.m. to 1 p.m. at the Mark Center Auditorium in Arlington, VA. Any contractors with questions or feedback about the rule’s requirements or implementation should attend. The registration deadline is June 12, 2017.  Contractors may register via email at: OSD.DIBCSIAEvents@mail.mil. DoD will accept written questions until May 1 at the same address, and contractors grappling with various implementation questions are encouraged to submit questions in advance.

For additional details regarding the Industry Information Day, registration and process for submitting questions, please consult the meeting notice.

DoD announces industry day to facilitate implementation of new network penetration reporting clause

2017 Financial Forum Series

new-tax-picture

Dentons’ Government Contracts practice and the Public Contracting Institute (PCI) present a monthly webinar series offering practical advice and CLE credit. Each session will take an in-depth look at topics such as cost accounting compliance, cost and pricing trends, contractor best practices and more. The current schedule of dates and topics is below.

Contractors and government practitioners alike will benefit from this informative and exciting webinar series.

 
Every second Tuesday of the month
12–1 p.m. ET

January 10: Subcontract and vendor cost allowability and related issues

February 14: Final indirect cost rate proposals: auditor focus areas, trends and best practices

March 14: Selected FAR cost principles, Part 1: compensation, legal, consulting, organization, restructuring, tangible and intangible capital asset costs

April 11: Selected FAR cost principles, Part 2: IR&D, B&P, selling, advertising, public relations costs, other business development costs

May 9: Cost estimating and truthful cost or pricing data requirements

June 13: Cost reasonableness and travel and relocation cost allowability

September 12: Managing internal investigations into accounting matters: mandatory disclosures

October 10: CAS overview and best practices

November 14: Termination cost recovery

December 12: TBD

Register now for the 2017 Financial Forum Series. All sessions are complimentary for Dentons clients.

Each webinar will provide CLE credit and will be recorded and available online.

For more information, please contact Sofia Abraham Mendoza at sofia.mendoza@dentons.com.

[Register now]

2017 Financial Forum Series