Pentagon Seeks Regulatory Reforms to Stop Price Gouging

4/27/2012
By Sandra I. Erwin

Pentagon contractors are contesting Defense Department efforts to change the definition of “commercial items” in the procurement rulebook.
Industry groups argue that the change, which Congress would have to approve, would narrow the field of what is considered off-the-shelf procurement, and would increase red tape for an industry that already is buried by regulations.
Pentagon procurement officials contend that the change in the language is necessary to prevent companies from overcharging the government.
Under procurement regulations, a company that sells the government an item that is defined as “commercial” does not have to share its internal cost data as it is assumed that the price is driven by free market forces.
But in recent years, Defense Department acquisition officials have become suspicious of contractors’ prices for products and services. With budget cuts on the horizon, Pentagon buyers would like to be able to challenge contractors’ pricing. If the item in dispute is commercial, the government cannot demand “certified cost and pricing data” from the contractor. Conversely, a federal agency can obtain a supplier’s pricing data if the item in question is a government-unique product.
If Congress agrees to the regulatory changes sought by the Pentagon, Defense Department buyers would have greater power to define items as government-unique and to audit contractors’ pricing methods.
A white paper released by the Acquisition Reform Working Group says industry adamantly opposes this change, as it would “further limit DoD access to the commercial market.”
But the Pentagon is taking a strong stance on the issue.
Richard T. Ginman, director of defense Procurement and acquisition policy at the Defense Department, says the purpose of the proposed change in the rules is to protect taxpayers.
“The Department consistently emphasizes the importance of ensuring that the prices we pay for supplies or services are fair and reasonable,” Ginman says in an e-mailed statement sent by his spokesperson.
“In the past several years, reports by the Government Accountability Office, the DoD Inspector General and various senior level advisory panels have criticized the ability of the federal government, including the Department of Defense, to acquire commercial goods and services at fair and reasonable prices,” he says. “The problem lies not with the pricing of true commercial items but with the misclassification of items as commercial.”
The current definition is too broad, and applies to items that are not truly commercial because they are not sold to the general public, Ginman adds. “As a result, contracting officers are unable to acquire the necessary data to make the price reasonableness determination.”
The proposal that the Pentagon submitted to congressional committees would eliminate commercial items "of a type" and eliminate items that have been "just offered for sale" instead of sold from the existing statutory definition. “It is believed that these changes would eliminate a vulnerability that currently exists in pricing commercial items,” Ginman says.
The acquisition reform white paper, signed by a coalition of industry associations, warns that by changing the definition of commercial item, the Pentagon risks alienating companies and restricting the military’s access to the latest advances in technology, particularly in markets in which the government is not a dominant force.
“The proliferation of government-unique requirements imposed on companies interested in selling commercial products or services to the government undermines the public policy to maximize government commercial item acquisition,” the document says.
Contractors also see this issue as an indicator of government red tape spiraling out of control.
“The number of government-unique clauses that are required in a FAR [Federal Acquisition Regulation] Part 12 commercial item prime contract has grown from the original dozen to about 50 provisions (FAR 52.212-5) and another 40 or so clauses under DFARS, 252.212-7001,” the industry paper states.
The defense acquisition regulations system, the paper says, “continues to add additional government-unique clauses at both the prime and the subcontract level, making it more difficult for commercial companies to do business with the Department of Defense, whether as a prime or subcontractor. … The message from the last several years is that the government is moving incrementally backward toward more burdensome acquisition policies.”
Roger Jordan, a procurement expert at the Professional Services Council — one of the industry groups that endorsed the white paper — says that if the Pentagon successfully gets the rule changed, the impact would be felt dramatically by suppliers of information technology and cybersecurity products. This might prove to be counterproductive for the government, Jordan says, as agencies seek to modernize IT systems and bolster cybersecurity. He suggests that additional regulations could slow those efforts.
This debate is unfolding at the same time that the Pentagon is about to unveil a new plan to “fast track” the procurement of cybersecurity technology in response to rising threats.
“Cyber defense and offense are top priorities even though the Defense Department budget is shrinking,” says Dismas Locaria, a federal procurement attorney at Venable LLP.
Under the proposal, the Defense Department would set up a separate track for the acquisition of urgent cyber warfare products and services.
To manage the process, the Pentagon would create a high-level “cyber investment management board.” Details on this plan are still fuzzy, Locaria says.
Whether the commercial-item rule will have any bearing on the fast-track procurement plan remains to be seen, he says. The government clearly has become more aggressive in demanding that contractors charge fair and reasonable prices, Locaria adds. “In recent years it’s been uncovered that a lot of prices were not being driven by commercial forces.”
Anything that narrows the definition of a commercial item, he says, “would have a huge impact on government contractors in general.”

Topics: Defense Department, DOD Policy, Procurement, Acquisition Reform, Defense Department

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