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Senator John McCain Calls for the Rescission of Proposed DFARS Rule on Commercial Item Procurements

In a letter to Secretary of Defense Ashton Carter on September 8, 2015, Senator John McCain called for the immediate rescission of the Department of Defense’s (DOD) proposed rule on evaluating price reasonableness for commercial items (DFARS Case 2013-D034). The proposed rule, which was published on August 3, 2015, would result in significant, substantive changes to commercial item acquisitions under DOD-funded contracts, including requiring the use of market-based pricing that is based on actual, nongovernmental sales in the absence of adequate price competition. Prime contractors would also be required under the proposed rule to obtain cost data to support commerciality determinations for subcontractors. Other key elements of the proposed rule are summarized in Dentons’ advisory, available here.

In the letter, Senator McCain stated that the proposed rule’s “cumbersome and excessively bureaucratic requirements” to provide cost data for commercial item procurements “could effectively preclude any significant participation by commercial firms in defense programs.” Senator McCain recognized that the requirements in the proposed rule would, in effect, require commercial item contractors to create new accounting systems before conducting business with the DOD. He further stressed that commercial item contractors are likely to exit the government procurement market rather than undertake these significant regulatory obligations, depriving the DOD of the opportunity to procure vital, cutting-edge technologies.

Moreover, the increased regulatory burdens for commercial item procurements in the proposed rule, according to Senator McCain, are directly contrary to the DOD’s ongoing efforts to engage more high-tech commercial firms in the government procurement market and serve as “a signal that DOD has little interest in realistic commercial acquisition practices.”

Comments on the proposed rule must be submitted to DOD on or before October 2, 2015. Dentons will continue to monitor developments associated with the proposed rule and provide updates here.

Senator John McCain Calls for the Rescission of Proposed DFARS Rule on Commercial Item Procurements

COMMERCIAL ITEMS – Changes on the Horizon

Since the acquisition reforms of the 1990s—i.e., the Federal Acquisition Streamlining Act, the Federal Acquisition Reform Act, and Clinger-Cohen—the federal government’s oversight and audit communities have periodically criticized the perceived manipulation and abuse of commercial item status.  The claim is that contracting officers too often incorrectly determine something is a commercial item or fail to adequately justify the prices paid are fair and reasonable, the latter being most recently reflected in a series of DODIG reports on certain spare parts acquisitions.

In reaction to this type of criticism, commercial item acquisitions are facing increasing scrutiny and the potential for regulatory and legislative changes.  Presently, these changes come in the form of policy initiatives and guidance out of DOD as well as certain proposals being exchanged between the United States Senate and House of Representatives relating to the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2016.

Developments to watch for in the coming months include DFARS Case No. 2013-D034.  When issued, this DFARS rule will implement Section 831 from the 2013 NDAA, which directed the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics to issue guidance on DOD pricing policy regarding evaluating price reasonableness for commercial items.

In the meantime, on February 4, 2015, the Office of Defense Pricing issued a memorandum partially addressing Section 831.  In that memorandum, the Director of Defense Pricing stated the commercial item determinations (“CIDs”), generally, should be completed within 10 business days.  Regardless of that determination, however, the key question that contracting officers must answer is, “Am I paying a fair and reasonable price?”  To aid contracting officers in that inquiry, DOD is establishing centers of excellence and a cadre of personnel with a particular focus on these issues.

Additionally, under Better Buying Power (BBP) 3.0, the Office of Defense Pricing has further indicated that it will issue a legislative proposal to revise the definition of the term “commercial item,” potentially eliminating items and services which are merely offered for sale, lease, or license.  This change could narrow the current definition of “commercial item” in ways similar to a 2012 DOD legislative proposal that was, at that time, unsuccessful.  While such a change is specifically called for in BBP 3.0, it is seemingly at odds with one of the overall goals of BBP 3.0:  removing barriers to commercial technology utilization.  These changes are expected by September 2015.

Moving from regulatory and policy changes, there are potential legislative changes relating to commercial items that appear to run contrary to the trend coming out of DOD.  Specifically, both the Senate and House bills would confirm the ability of contracting officers and contractors to look to and rely upon prior CIDs.  In our experience, contracting officers have recently been reluctant to utilize prior CIDs, preferring to revisit the threshold question of commercial item status.

Below we briefly identify the current Senate and House sections in the 2016 NDAA relating to commercial items that are under consideration.

Senate Provisions:

  • Section 863 would permit contracting officers to presume that prior commercial item determinations are valid for subsequent procurements of the same commercial item, paralleling H.R. 1735 Section 804, discussed below.
  • Section 862 would require that DoD issue guidance to ensure full compliance with 10 U.S.C. § 2377.  At a minimum, the guidance must:  (1) provide that the head of an agency may not enter 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 agency determines in writing that no commercial items are suitable to meet the agency’s needs based on market research as provided in 10 U.S.C. § 2377(c)(2); and (2) ensure that such market research is used, where appropriate, to inform price reasonableness determinations.

House Provision:

  • Section 804 would require that DOD establish and maintain a centralized capability with the requisite necessary expertise and resources to oversee the making of commercial item determinations.
  • Permit contracting officers to presume that prior commercial item determinations, made by a military department or DoD agency, are valid for subsequent procurements of the same commercial item.
  • Provide public access to DoD commercial item determinations for the purposes of DoD procurements.

Despite the passage of 20 years since the commercial item reforms of the mid-1990s, the federal government is not yet satisfied with the balance between streamlined acquisition that ensures access to cutting-edge technologies on the one hand, and detailed cost insight and analysis and all the regulatory burden that comes with it on the other.  We will continue to monitor these developments and will report back here with updates.

COMMERCIAL ITEMS – Changes on the Horizon

DC Office to Host ABA Committee Panel on Recent Trends in Subcontractor Claims and Disputes

On Wednesday, February 11, 2015, at noon our DC office (located at 1900 K Street NW) will host a joint meeting between ABA PCLS Contract Claims and Disputes Resolution Committee and the Strategic Alliances, Teaming and Subcontracting Committee. This lunch meeting will feature a panel discussion about recent trends in subcontractor claims and disputes. The panel will be moderated by Dentons colleague John Sorrenti, and will feature the following panelists: Linda Maramba (Northrop Grumman), Lewis Wiener (Sutherland Asbill & Brennan), Beth Ferrell (Dentons), Jeff Regner (Department of Justice) and Kyle Chadwick (Trial Attorney, United States Army Legal Services Agency Contract and Fiscal Law Division). Please contact Andrea Tanner if you would like to attend in-person. If you wish to participate by phone, please use the following dial-in number: 1-888-887-4214 (access code: 584917).

DC Office to Host ABA Committee Panel on Recent Trends in Subcontractor Claims and Disputes

Dentons lawyers to Participate in Webinar About Opportunities in Government Contracting for IT and Commercial Companies, and How Companies Can Stay Out of Trouble

On November 12, 2014 from 1:30 pm to 3:00 pm ET, our colleagues Mike Rizzo, Gary Chadick and Todd Canni will present at a PCI webinar entitled “IT and Service Contracting with the Government: How Commercial Companies Can Stay Out of Trouble and Off the Radar.”  Their presentation will focus on the federal government contracting opportunities that IT and commercial companies have to increase their revenue.  The webinar also will discuss: (1) developments in the Department of Defense’s Mandatory Disclosure Rule; (2) how to mitigate litigation, government investigation, and suspension and debarment risks by creating a culture of compliance; and (3) best practices in ethics and compliance.  (CLE, CEU, and CPE credit may be earned.)  This is a great learning opportunity, and shouldn’t be missed.

Dentons lawyers to Participate in Webinar About Opportunities in Government Contracting for IT and Commercial Companies, and How Companies Can Stay Out of Trouble

Government and Commercial Contract Compliance Briefing

Join us on September 30 at the Hyatt Regency Santa Clara for a Government and Commercial Contract Compliance Briefing, co-hosted with Navigant, a global expert services firm. This will be a two hour long discussion surrounding investigations and attorney-client privilege concerns, mandatory disclosure requirements, data rights, cybersecurity and many more topics relevant to the Southern California region. The event will start around 8 am and breakfast will be served. Don’t miss the chance to interact with key personnel from Dentons and Navigant as they come together on stage for the first time. CLE credit is pending approval.

Government and Commercial Contract Compliance Briefing

ASBCA Reminds Contractors Not To Look The Other Way When An RFP Is Missing Documents or Information

When an RFP is missing an attachment or information, contractors simply should not look the other way.  This is the lesson of CAE USA, Inc., ASBCA No. 58006, where the ASBCA denied a contractor’s appeal due to its failure to inquire about missing information in an RFP before preparing and submitting its bid.

Pursuant to FAR 22.1008-2 and in compliance with Service Contract Act of 1965, 41 U.S.C. § 6707 (c)(1), the contracting officer (the “CO”) provided all bidders with a copy of a collective bargaining agreement (the “CBA”) that would apply to the contract.  The CBA indicated that the contractor’s employees would participate in a corporate benefit program, but did not provide specific details.  The CBA was missing certain relevant attachments but, rather than asking for that information, CAE USA, Inc. (“CAE”) made certain general assumptions about fringe benefits when calculating its proposed rates.  After award, the CO informed CAE that the missing attachments in the CBA required the payment of additional benefits, which CAE had to pay.  CAE submitted a claim for the cost of these additional benefits, which the CO denied, and CAE appealed to the ASBCA.

Although the ASBCA noted that “[t]here can be no reasonable doubt that pursuant to FAR [22.1008-2], it was the responsibility of the CO to provide a complete CBA,” it found that “[i]t is equally without doubt that CAE knew the CBA did not contain the complete information necessary to determine what the full wage and fringe benefit amounts necessary to comply with the SCA [Service Contract Act] and FAR were.”  Because CAE chose to “submit an offer on the basis of its own assumptions, without notice to the government of the incompleteness of the CBA or what CAE’s assumptions were, it cannot now be heard to complain that its assumptions were not correct.”  (The ASBCA analogized to those cases “dealing not with contract provisions that are difficult to interpret due to an ambiguity, but those that have relevant information missing.”)  Further, the ASBCA determined there was no language in the SCA or the FAR that would “require the government to become the indemnitor” for differences in the rates resulting from the missing attachments, or to be a “guarantor of the correctness of CAE’s assumptions when [CAE] failed to inquire regarding these assumptions.”

This decision demonstrates the importance of (i) carefully analyzing an RFP to verify that all relevant attachments have been provided and (ii) clearly stating any assumptions on which the bid is based.  Although these types of cases are highly fact dependent, the principals of CAE USA would be applicable to any bid or proposal.

ASBCA Reminds Contractors Not To Look The Other Way When An RFP Is Missing Documents or Information