United States: DoD's New Proposed Guidance On Commercial Item Pricing No Longer Includes "Market Based Pricing"

Last Updated: August 19 2016
Article by Cynthia O. Akatugba

The Department of Defense (DoD) has reversed course on its proposed preference for "market-based pricing" and is instead now proposing rules under which it would use "market pricing" to determine whether prices are fair and reasonable.  While the terminology is similar, the legal difference is significant.

Last year, we reported on DoD's proposed guidance on commercial item pricing.  The August 2015 proposed guidance implemented section 831 of the NDAA for FY 2013, which required DoD to establish standards for determining the adequacy of pricing information and when uncertified cost data is required.  Among other things, this 2015 proposed rule introduced "market-based pricing" as the preferred method for determining a fair and reasonable price for commercial items in the absence of adequate competition.  It defined market-based pricing as the pricing that non-governmental buyers in the commercial marketplace pay for an item.  Contracting officers could presume that an offeror's price for a particular item was "market‑based" if non-government buyers purchased 50% or more of the item's sales volume.

The proposed rule proved controversial, however.  Among other things, commenters noted that the definition of market-based pricing did not include "items of a type" or those "offered for sale," which, under the FAR, could be nonetheless considered commercial items.  The proposed rule also included an overly broad definition of "relevant sales data," such that the contracting officer could demand an offeror provide any "data that as considered by a prudent person, could reasonably be expected to influence the contracting officer's determination of price reasonableness."  Critics expressed concern that, under this definition, contractors could not resist demands for more data from a particularly prudent contracting officer.  Additionally, as the proposed rule was pending, Congress and the President enacted the 2016 NDAA, which further expanded the information contracting officers may consider in making a determination of price reasonableness.  Based on these comments and the new 2016 NDAA, DoD issued a new proposed rule that addresses commercial item pricing, implements the commercial item sections of both the 2013 and the 2016 NDAA, and does not include market‑based pricing.

Under the new proposed rule, "market prices" replaces "market-based pricing" as the preferred method for determining a fair and reasonable price.  Just as the name suggests, "market prices" refers to current prices for the same or similar item in a competitive market place where buyers and sellers can bargain freely, as evidenced by "market research."  At a minimum, "market research" must include contacting government and industry experts.  DoD will perform the market research, and a newly established cadre of experts will advise contracting officers in making commercial item and price reasonableness determinations.  Where the contracting officer is able to make a price reasonableness determination based on non-governmental sales, the contracting officer may not require additional cost information from the offeror or prospective subcontractors.

If the contracting officer is unable to make a price reasonableness determination based on market research, the contracting officer must instead rely on recent, relevant prices paid by government or commercial customers submitted by the offeror.  If still unable to make a price reasonableness determination, the proposed regulation allows the contracting officer to request data from the offeror, including prices paid under different terms and conditions.  Finally, the contracting officer may request information regarding the basis for price or costs, including uncertified cost data.  This proposed rule does not change current regulations governing commercial item determinations for items "of a type" or "offered for sale" as used in the FAR definition of "commercial item."  As with last year's rule, contractors may request an exception from submitting certified cost or pricing data by submitting information prescribed in the specific rule.

As part of implementing the 2016 NDAA, the proposed rule provides that, in making a commercial item determination, contracting officers can rely on a commercial item determination made by another component of DoD and treat supplies and services by nontraditional defense contractors as commercial items. The proposed rule also includes changes to the definition of "relevant sales data."  In particular, it eliminates the prudent person standard for determining whether an offeror's sales data is relevant and focuses instead on whether the data provided by the offeror is about the same or similar items such that the contracting officer can establish price reasonableness in light of the age, volume, and nature of the transactions.

The proposed rule reflects the government's continued attempt to make the acquisition of commercial items more efficient.  However, unlike the rule proposed by DoD last year, this proposed rule defines and limits the information that the contracting officer may request from the offeror by simplifying some key definitions and creating a hierarchy of data considered by contracting officers, though the offeror will still bear the burden of making sure any information it provides is sufficient for a determination of price reasonableness.

Comments on the new guidance are due by October 11, 2016.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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Cynthia O. Akatugba
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