On Monday, August 3, 2015, the Department of Defense (DOD) issued a long-awaited proposed rulethat could have a significant impact on how the DOD and prime contractors procure commercial items.  80 Fed. Reg. 45918 (Aug. 3, 2015) (amending 48 CFR Parts 202, 212, 215, and 252) (the “Proposed Rule”).  The Proposed Rule is said to merely implement Section 831(a) of the Fiscal Year 2013 National Defense Authorization Act (NDAA), but goes much further, proposing significant substantive changes to what qualifies as a commercial item under DOD-funded contracts and imposing significant burdens on prime contractors to gather data from their commercial item subcontractors.

Section 831 directed DOD to, among other things, issue guidance including “standards for determining whether information on the prices at which the same or similar items have previously been sold is adequate for evaluating the reasonableness of prices.”  10 U.S.C. § 2306; National Defense Authorization Act for Fiscal Year 2013, Pub. L. No. 112-239; FAR § 52.215-20.  Section 831 was, in part, a response to DOD's recent efforts to narrow the broad commercial item paradigm created by Congress in the 1990s, including a 2012 DOD legislative proposal to change the statutory and regulatory definition of “commercial item.”  S. Rep. No. 112-73, at 143-44 (2012).  Specifically, DOD requested legislation to grant DOD greater access to cost or pricing data associated with commercial items and sought to change the definition of commercial items to exclude items that are merely “offered for sale” or “of a type” offered for sale in the marketplace.  Congress declined to make those changes, recognizing the Federal Acquisition Streamlining Act (FASA) purposefully includes a broad definition of commercial items in order to ensure that the federal government has access to products available in the commercial marketplace.  

Undeterred, DOD issued the Proposed Rule which would amend the Defense Federal Acquisition Regulation Supplement (DFARS) to add new definitions, instructions, solicitation provisions and clauses.  If issued as a final rule, these changes will:  (1) commonly require the submission of certified cost or pricing data or pricing data other than certified cost or pricing data; (2) add new clauses in place of FAR § 52.215-20 when “it is reasonably certain” that certified (or uncertified) cost or pricing data may be required to be submitted; and (3) require offerors to “obtain from subcontractors whatever information is necessary to support a determination of price reasonableness,” including “cost data to support a commerciality determination, cost realism analysis, should-cost review, or any other type of analysis addressed by FAR part 15 and DFARS part 215.” 

The new definitions will be located in DFARS §§ 202.1 and 215.401 and include definitions for “nongovernment sales,” “relevant sales data,” and “uncertified cost data.”  The two most notable definitions are “market-based pricing” and “sufficient government sales to establish reasonableness of price.”  “Market-based pricing” is defined as “pricing that results when nongovernmental buyers drive the price in a commercial marketplace” and there is a “strong likelihood the pricing is market based” when nongovernmental buyers account for at least 50% of sales by volume of a particular item.  “Sufficient government sales to establish reasonableness of price” are found when the data reflect “market-based pricing” and “are made available to the contracting officer to review and contains enough information to make adjustments covered by FAR 15.404 1(b)(2)(ii)(B).”

As a consequence of the definition of market-based pricing being pegged to actual sales, the term “offered for sale” is arguably read out of the statutory and regulatory definition of commercial item.  “Offered for sale” is an important concept that occurs frequently in services sales because customized offerings are frequently made and it is impracticable, if not impossible in some cases, for offerors to show that at least 50 percent of sales of that particular service are to nongovernment buyers.  Again, this isn’t the first time that DOD has tried to remove “offered for sale” from the commercial item definition.  In essence, DOD is attempting to unilaterally accomplish through a rule change what Congress declined to do through legislation.  There are also inconsistencies between DOD’s Proposed Rule and other legislative proposals currently in conference for the 2016 NDAA.  It remains to be seen how or if Congress will react as DOD continues working to narrow Congress' commercial item definition. 

In addition to the substantive narrowing of the commercial item definition, the Proposed Rule would impact how prime contractors procure commercial items from subcontractors.  Specifically, the Proposed Rule would require primes to obtain “whatever information is necessary” from subcontractors to support price reasonableness determinations.  Such information would include “cost data to support a commerciality determination, cost realism analysis, should-cost review, or any other type” of FAR Part 15 or DFARS Part 215 analysis.  Because DOD's view that cost data is somehow relevant to whether a commercial market exists for a particular item is nonsensical and wrong, this requirement is likely to create disputes between primes and subs regarding the types of information necessary to support a subcontractor's commercial item assertion.  These requirements would affect subcontractors at all tiers.  Importantly, this broad and poorly defined data collection requirement would give the government greater ability to effectively challenge the prime contractor’s costs incurred under cost-type contracts for commercial item subcontracts and provide fodder for challenging the adequacy of a prime contractor’s purchasing system. 

As we previously discussed, the federal government, and DOD in particular, is continuing to add requirements—and their associated costs—to what is said to be a streamlined acquisition process that was, originally, intended to move away from detailed cost insight and analysis.  Contractors should keep abreast of these changes and ensure they are prepared to comply with the new requirements should they become effective.  Comments on the Proposed Rule are due by October 2, 2015 and we fully anticipate there will be strong interest and reaction to this rule from industry and other organizations.