Problems Persist with Commercial Item Rule

Photo: iStock

On Jan. 31, the Defense Department published a final rule regarding commercial item purchasing. Among other amendments, the rule modifies the Defense Federal Acquisition Regulation Supplement by: formalizing a presumption of commerciality for items that the department previously treated as commercial; providing commercial treatment to items offered by nontraditional defense contractors; and prioritizing the types of information that the contracting officer can consider when determining price reasonableness in the absence of adequate competition.

However, despite receiving repeated input from industry and Congress, the rule still provides little concrete guidance. Although these changes were made with the stated purpose of promoting consistency across purchasing components, it appears likely that inconsistencies will persist. In particular, it continues to leave the door open for contracting officers to make potentially burdensome requests for information to support proposed pricing for commercial items.

The rule establishes a presumption of commerciality in two ways.

First, it updates regulations to allow contracting officers to presume that a prior Defense Department commercial item determination applies to subsequent procurements of the same item. Contracting officers are not permitted to unilaterally overturn a prior determination, and instead must “request a review of the commercial item determination by the head of the contracting activity that will conduct the procurement.”

To overturn a prior determination of commerciality, the head of the contracting activity must determine in writing that the determination was improper.

While significant, it is important to understand the limitations of this presumption. It does not apply to determinations by civilian agencies, nor does it allow agencies to rely on prior commercial item determinations made by prime contractors — which represent the overwhelming majority of such determinations.

In the analysis of public comments on the final rule, the department indicated that it had limited statutory authority and lacked the ability to rely upon commerciality determinations made by civilian agencies or prime contractors.

Second, the final rule adds a regulation which limits an agency’s ability to use non-commercial procedures to procure items that were previously acquired under commercial procedures. Specifically, prior to converting a procurement of items that a Defense Department component determined to be commercial valued up to $100 million from commercial procedures, the head of the contracting activity must determine in writing that the earlier use of commercial procedures was in error or was based on inadequate information, and the department will realize a cost savings by using other-than-commercial procedures.

For procurements over $100 million, a contract may not be awarded pursuant to such a conversion until the head of the contracting activity has provided a copy of the above determination to the appropriate undersecretaries of defense.

"It continues to leave the door open for contracting officers to make potentially burdensome requests for information to support proposed pricing for commercial items."

The rule also contains an amendment that has the potential to encourage newcomers to the government market. It allows contracting officers to treat supplies and services sold by “nontraditional defense contractors” as commercial items. If contracting officers take sufficient advantage of this authority, it has the potential to lessen the burdens imposed on a company selling even complex items.

Lastly, the rule updates DFARS to include a hierarchy for the data that contracting officers should rely on when conducting price reasonableness analyses.

At the top of the hierarchy is “market research,” which the rule defines, in part, as “a review of existing systems, subsystems, capabilities and technologies that are available or could be made available to meet the needs of DoD in whole or in part.”

If, however, the contracting officer determines that “market research” is insufficient, the rule requires the officer to “consider information submitted by the offeror of recent purchase prices paid by the government or commercial customers for the same or similar commercial items under comparable terms and conditions.”

If that information is also determined to be insufficient, it provides that the officer should request that the offeror submit information on specified categories of prices paid and “other relevant information that can serve as the basis for determining the reasonableness of price.”

It is unclear whether the hierarchy of data will meaningfully impact the behavior of contracting officers. The types of information that they may request for this inquiry remain unbounded. This is apparently intentional, given the department’s response to public comments. For example, in responding to a comment on the potential burden associated with the submission of cost data in some circumstances, the department affirmed that “[t]he language does not create a prohibition [on cost data], but does provide a hierarchy that includes incorporation as to when to request other relevant information.”

Therefore, because contracting officers may unilaterally determine whether the different sources of pricing information are adequate, contractors should not expect a significant change, and should be prepared to provide each of the types of information that DFARS 215.404-1(b) identifies. 

Kevin Barnett and Bryan Byrd are associates, and Jason Workmaster is of counsel at Covington & Burling LLP. Ryan Burnette, who contributed to this story, is an associate at the firm.

Topics: Defense Contracting, Defense Department, Government Collaboration, Government Contracting Insights