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Third Time Around: Inconsistencies Persist with Final DFARS Commercial Items Rule

On January 31, 2018, the Department of Defense (“DoD” or the “Department”) published a final rule regarding commercial item purchasing requirements.  Among other key amendments, the final rule modifies the Defense Federal Acquisition Regulation Supplement (“DFARS”) by:  (i) formalizing a presumption of commerciality for items that DoD previously treated as commercial; (ii) providing commercial item treatment to goods and services offered by nontraditional defense contractors; and (iii) prioritizing the types of information that the contracting officer (“CO”) can consider when determining price reasonableness in the absence of adequate competition.

The final rule adopts much of DoD’s August 2016 proposed rule, which itself was a revised version of a retracted August 2015 proposed version.  We discussed the August 2016 proposed rule on this subject (and linked to an article regarding the August 2015 version) in a prior post.  Despite receiving repeated input from industry and Congress, DoD’s final rule still provides little concrete guidance, and although these changes were made with the stated purpose of promoting consistency across purchasing components, it appears likely that inconsistencies will persist.  In particular, the final rule continues to leave the door open for individual contracting officers to make potentially burdensome requests for information to support the proposed pricing of commercial items.

1.  Presumption of Commerciality

The final rule establishes a presumption of commerciality in two ways.

First, the final rule updates DFARS 212.102 to allow contracting officers to presume that a prior DoD commercial item determination applies to subsequent procurements of the same item.  Fortifying this presumption, the final rule makes it difficult for COs to ignore a prior DoD commercial item determination.  COs 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 prior commercial item determination was improper.

While significant, it is important to understand the limitations of this presumption.  It does not apply to determinations by civilian agencies (such as the General Services Administration), nor does it allow agencies to rely on prior commercial item determinations made by prime contractors — which represent the overwhelming majority of commercial item determinations.  In the analysis of public comments on the final rule, DoD indicated that it had limited statutory authority and lacked to the ability to rely upon commerciality determinations made by civilian agencies or prime contractors.1

Second, the final rule adds DFARS 212-7001, 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 DoD component determined to be commercial valued up to $100 million from commercial procedures, the head of the contracting activity, upon recommendation from the cognizant contracting officer, must determine in writing that—(i) the earlier use of commercial procedures was in error or was based on inadequate information, and (ii) DoD 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 Under Secretary of Defense for Acquisition, Technology, and Logistics.2

2.  Nontraditional Defense Contractors

The final rule also contains an amendment that has the potential to encourage newcomers to the government market.  In this regard, the rule amends DFARS 212.102 to allow COs to treat supplies and services sold by “nontraditional defense contractors” as commercial items.  The provision defines “nontraditional government contractors” as those contractors that have not performed (and are not performing) any DoD contract or subcontract subject to full Cost Accounting Standards (“CAS”) coverage for at least one year preceding the solicitation.  Importantly, contracting officers are also permitted to treat items sold by business segments of traditional contractors not subject to full CAS coverage as nontraditional contractors.  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, so long as the company can demonstrate that it meets the definition.

3.  Hierarchy of Information to Determine Price Reasonableness

Lastly, the final rule updates DFARS 215.404-1 to include a hierarchy for the data that DoD contracting officers should rely on when conducting price reasonableness analyses for commercial and non-commercial items.

At the top of the hierarchy is “market research,” which the rule defines 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.  The review shall include, at a minimum, contacting knowledgeable individuals in Government and industry regarding existing market capabilities and pricing information, and may include any of the techniques for conducting market research provided in FAR 10.002(b)(2).”

If, however, the contracting officer determines that “market research” is insufficient, the final rule requires the contracting 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.”  And, if that information is also determined to be insufficient, the final rule provides that 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.

It is unclear that the hierarchy of data will have a meaningful impact on the actual behavior of contracting officers.  As we noted in our previous post regarding the proposed rule, the types of information that the contracting officer may request for this inquiry remain unbounded.  This is apparently intentional, given DoD’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, DoD 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.”3 Therefore, because contracting officers may unilaterally determine whether the different sources of pricing information are adequate when selling commercial items to the Government, contractors should not expect a significant change from the status quo, and should be prepared to provide each of the types of information that DFARS 215.404-1(b) identifies.

1. See Defense Federal Acquisition Regulation Supplement: Procurement of Commercial Items (DFARS Case 2016-D006), 83 Fed. Reg. 4431, 4435 (Jan. 31. 2018).

2. Section 901 of the FY 2017 NDAA split the Office of Acquisition, Technology, and Logistics into two components ((1) Acquisition and Sustainment and (2) Research and Engineering).  Presumably, either one or both of the newly established Under Secretaries should receive the determination.

3. 83 Fed. Reg. 4440.

© 2023 Covington & Burling LLPNational Law Review, Volume VIII, Number 51

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....

202 662 5412
Kevin T. Barnett, Government contracts attorney, Covington Burling

Kevin Barnett represents a broad array of clients, ranging from large defense contractors to small technology companies in all aspects of government contracts law.

He has litigated claims against the United States and has counseled clients on complicated regulatory compliance issues involving GSA schedule contracts, small business rules, Buy American Act and Trade Agreement Act issues. He also routinely assists clients on the Freedom of Information Act (FOIA) process from drafting through litigating in federal court.

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Ryan Burnette, Covington Burling Law Firm, Government Contracts Attorney

Ryan Burnette is an associate in the firm’s Government Contracts practice. He advises companies in all industries on a range of contracting issues, including compliance with complex regulations, assistance with potential corporate transactions, bid protest litigation before the Government Accountability Office, and public policy matters.

Prior to joining Covington, Mr. Burnette served in the Office of Federal Procurement Policy in the Executive Office of the President, where he helped to manage government-wide contracting regulations and...

Brian Byrd, Covington Burling Law Firm, Government Contracting Attorney

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.