United States: New DFARS Proposed Rule On Commercial Items Acquisitions And Subcontracting: An End Run Of Congress?

On Monday, August 3, 2015, the Department of Defense (DOD) issued a long-awaited proposed rule that 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.  Stay tuned!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
17 Jan 2018, Seminar, Los Angeles, United States

Dentons is pleased to offer a full day of California CLE-approved classes, just in time to meet the California MCLE compliance period deadline of February 1, 2018.*

18 Jan 2018, Conference, Washington, DC, United States

Please join us for the Dentons Forum for Women Executives luncheon featuring Rebecca Boggs Roberts, NPR journalist and author of Suffragists in Washington, D.C.: The 1913 Parade and the Fight for the Vote.

24 Jan 2018, Seminar, San Francisco, United States

Dentons will host our Fourth Annual Courageous Counsel Leadership Institute in January, centered on the theme "Cultivating Innovation."

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions