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Take Two: Proposed Defense Federal Acquisition Regulation Supplement Commercial Item Rule Still Fails to Rein in Contracting Officer Discretion

On August 11, 2016, the Department of Defense (“DoD”) published a revised proposed rule to amend the Defense Federal Acquisition Regulation Supplement (“DFARS”) to implement sections of the National Defense Authorization Acts for Fiscal Years 2013 and 2016 relating to commercial item acquisitions. This proposed rule replaces the rule that DoD proposed last August and retracted last December following critical commentary from the acquisition community.  While the revised proposed rule seemingly lessens the burden on contractors selling commercial items to the DoD by, among other things, restricting the contracting officer’s discretion to conclude that an item is not commercial when a DoD component has previously determined that it is and establishing a “hierarchy” of data for contracting officers to consider when making determinations of price reasonableness, both of these provisions fall short. 

A.  Only Prior DoD Commercial Item Determinations Presumed Effective

After noting that a number of comments on last year’s proposed rule disagreed with the requirement for sales data to support a commerciality determination, the revised proposed rule allows contracting officers to “presume that a prior commercial item determination made by a military department, a defense agency, or another component of DoD shall serve as a determination for subsequent procurements of such item.” Restricting a contracting officer’s ability to unilaterally conclude that an item previously determined to be a commercial item should not be procured using commercial item procedures, the revised proposed rule provides that “[i]f the contracting officer . . . chooses to proceed with a procurement of an item previously determined to be a commercial item using procedures other than the procedures authorized for the procurement of a commercial item, the contracting officer shall request a review of the commercial item determination by the head of the contracting activity that will conduct the procurement.”

Although this presumption of commerciality for items previously determined to be commercial lessens the contractor’s burden of showing that a proposed item is commercial, the presumption only arises when a DoD component has previously determined an offered item to be commercial.  The revised proposed rule is silent regarding the ability of a contractor who has provided items under commercial item procedures to a civilian agency to benefit from this presumption when providing the same items to DoD.  This distinction is antithetical to the revised proposed rule’s background section, which states that one purpose of the rule is to provide “guidance to contracting officers to promote consistency and uniformity in the acquisition process.”  It is inherently inconsistent and allows for a lack of uniformity when a contractor has to prove commerciality to DoD when it has already established commerciality with regard to the same item under a civilian procurement.  DoD contracting officers should be required to at least take into account a civilian agency’s determination of an item’s commerciality before concluding that such item offered to the DoD is not commercial.

B.  Information Required to Determine Price Reasonableness Remains Unbounded

Whereas last year’s proposed rule provided no clear guidance on how market research should be conducted or what data must be provided to support a price reasonableness determination, the revised proposed rule attempts to delineate what information a contracting officer should consider when making a reasonableness determination.

Beginning with the requirement that market research be used, when appropriate, to inform price reasonableness determinations, the revised proposed rule provides a new, broad definition of market research: “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.  The review may include any of the techniques for conducting market research provided in section 10.002(b)(2) of the FAR and shall include, at a minimum, contacting knowledgeable individuals in Government and industry regarding existing market capabilities.”  Then, recognizing that sometimes the data gathered through market research is insufficient to determine the reasonableness of price, the revised proposed rule requires that, when faced with insufficient data from market research, the contracting officer “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.”

Seemingly reining in the contracting officer’s discretion to request overly burdensome categories of price information to determine reasonableness, the revised proposed rule states that “DFARS 212.209, Determination of price reasonableness, is added to provide a hierarchy of data for contracting officers to consider when making determinations of price reasonableness.” However, there is no indication in DFARS 212.209, as proposed, that the categories of price data the contracting officer may request are hierarchical, i.e., that one category of information should be requested before the other.  Rather, the revised proposed rule simply directs that if the contracting officer determines that the offeror cannot provide sufficient sales information to determine the reasonableness of price, the contracting officer should request the offeror to submit information on—

(1) Prices paid for the same or similar items sold under different terms and conditions;

(2) Prices paid for similar levels of work or effort on related products or services;

(3) Prices paid for alternative solutions or approaches; and

(4) Other relevant information that can serve as the basis for determining the reasonableness of price.

Although proposed DFARS 212.209 insinuates that the contracting officer should request information on “prices paid for the same or similar items sold under different terms and conditions” before seeking information about “prices paid for similar levels of work or effort on related products or services,” this direction is not clear.  Further, the fourth category of information the contracting officer may request is generally unbounded:  “other relevant information that can serve as the basis for determining the reasonableness of price.”  To more clearly notify contractors of the primary type of price information that will be requested to establish commercial item price reasonableness, proposed DFARS 212.209 should be amended to specifically direct that the categories of price information the contracting officer may request are hierarchical.

Comments on the proposed rule are due by October 11, 2016.

© 2019 Covington & Burling LLP

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About this Author

Jason Workmaster, Litigation attorney, Covington
Of Counsel

Jason Workmaster focuses his practice on government contracts-related litigation, including civil False Claims Act (FCA) cases, contract disputes, and bid protests. He has represented a host of clients in these types of cases in U.S. District Court, the U.S. Court of Federal Claims (COFC), and the Government Accountability Office (GAO).

A nationally recognized leader on FCA issues, Mr. Workmaster has appeared on NBC’s The TODAY Show and Canadian TV’s National News to discuss the highly publicized FCA case against the cyclist Lance Armstrong. Mr....

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Brian Byrd, Covington Burling Law Firm, Government Contracting Attorney
Associate

Bryan Byrd has experience advising clients across a broad range of issues arising from their participation in government contracting.

Mr. Byrd’s practice covers multiple subject-matter areas, including: contract negotiations, bid protests, flow-down requirements, schedule contracts, compliance, and performance disputes. He works with clients in many industries, including life sciences, defense, and construction.

202-662-5704