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.

Phillip Seckman

About Phillip Seckman

Phillip Seckman represents clients concerning government and commercial contract matters. His practice spans a broad range of subjects related to federal procurement law, state and local procurement law, and complex federal regulatory issues. He concentrates his practice in the areas of commercial item acquisitions, GSA schedule contracting, cybersecurity, compliance, internal investigations, and bid protests (both federal and state). A significant component of his practice involves government contract cost allowability, proper cost accounting, and contract cost and pricing issues.

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