David Black is a Partner and Eric Crusius Is Senior Counsel in the Tysons office
Imagine if a DoD agency could purchase commercial-off-the-shelf products of any value simply by placing an order at an Amazon-like website – no need for solicitations, quotes, evaluation, or detailed price analysis and absolutely no government-unique terms and conditions. That is the vision of House Armed Services Committee Chairman Mac Thornberry (R-Texas) in a bill introduced on May 18, 2017. If enacted, this reform would revolutionize the way the Department of Defense acquires COTS products and likely diminish DoD's use of GSA's Federal Supply Schedules. However, as explained below, the prospects of the Bill being enacted into law without significant revision seem low because, as currently drafted, it contravenes many ingrained strands of Federal procurement policy and exposes DoD to unintended consequences and risks.
Proposed Acquisition Streamlining "on Steroids" by Bringing the Online Shopping Experience to Federal Procurement
The proposed use of online marketplaces is set forth in § 101 of the "Defense Acquisition Streamlining and Transparency Act" (H.R. 2511) (the Thornberry Bill). The Thornberry Bill directs the DoD Secretary to establish contracts with one or more "online marketplace providers" to enable DoD-wide use of such marketplaces. For reasons that are not clear, the Bill authorizes DoD to award contracts to marketplace providers without the use of full and open competition.
The purpose of the Thornberry Bill is to allow DoD to leverage existing, robust, privately run online portals for COTS items. The Thornberry Bill specifies that online marketplace providers must be commercial, non-government entities that provide an online portal for the purchase of COTS products (but not COTS services). The Thornberry Bill specifically excludes online portals managed by the Government, such as GSA's e-Buy. The Thornberry Bill requires that the online marketplaces used by DoD be "used widely in the private sector, including in business-to-business e-commerce." The Thornberry Bill also specifies an Amazon-like shopping experience that the online marketplaces must provide to DoD purchasers, including:
- Ability to sort or filter offers from multiple suppliers on similar products based on product, shipping price, delivery date, and reviews of suppliers or products;
- Dynamic selection and dynamic prices (i.e., where suppliers frequently update products and prices); and
- Consolidated invoicing, payment, and customer service functions on behalf of all suppliers.
To promote objectivity in product searches, qualified online marketplaces must not feature or prioritize products of any suppliers based on supplier fees paid to the marketplace provider. In addition, the technology platform of the marketplaces must provide procurement oversight controls, such as spending limits, order approval, and order tracking.
The Thornberry Bill contemplates that use of online marketplaces will result in a breathtaking streamlining of the procurement process for COTS products.
- As currently drafted, the Bill does not limit the use online marketplaces to micro-purchases, simplified acquisitions, or any other dollar limit. DoD agencies could satisfy requirements for COTS products of unlimited value by shopping online.
- As currently drafted, the Bill does not require any public notice of the DoD's requirements or any common cutoff date for the receipt of quotes. As long as there are offers from only two suppliers of a required product on the online marketplace, the online purchase will satisfy the Competition in Contracting Act (CICA), and no other competitive procedures are necessary.
- As currently drafted, the Bill prevents DoD from requiring any Government-specific terms and conditions as conditions of sale, including politically sensitive provisions such domestic preference requirements (other than the Berry Amendment and specialty metals), equal opportunity requirements, whistleblower protections, small business subcontracting requirements, prohibitions against child labor and human trafficking, audit rights, and contracting with inverted domestic corporations. Instead, the Bill requires that online purchases will be made under the standard terms and conditions of the online marketplace, and DoD "shall not require an online marketplace to modify its standard terms and conditions as a condition of receiving a contract" – including presumably dispute resolution procedures under the Contract Disputes Act and protest procedures authorized by CICA and the Tucker Act.
- The Bill also would obviate the need from any "commerciality" analysis by deeming such procurement to be commercial as long as the product has been purchased within the past year by a non-government entity through the online marketplace.
As currently drafted, the Bill makes only two nods to traditional Federal contracting. First, the online marketplace must allow DoD users to search and identify suppliers and products that are not authorized for Federal procurement because (1) the seller has been suspended or debarred; or (2) the seller's products do not comply with the Berry Amendment or specialty metals requirements; or (3) the products are on the Procurement List of products established by the Committee for Purchase from People Who Are Blind or Severely Disabled. Second, the Bill requires the online marketplace to provide sales data on at least a monthly basis that DoD can enter into the Federal Procurement Data System (FPDS).
If passed, the Bill could have a significant adverse impact on GSA and its Federal Supply Schedules Program and other GWAC programs. In comparison to the private sector online marketplaces contemplated by the Bill, GSA's online processes are slower, more cumbersome, and – with the 0.75% Industrial Funding Fee tacked on to every purchase – potentially more expensive. It is easy to imagine a scenario where, for COTS products, DoD agencies largely abandon the FSS Program in favor of the uber-streamlined process afforded by the private online marketplaces. Contractors seeking to sell COTS products to DoD would likewise shift their marketing and business development strategies away from GSA to the online marketplaces.
Uncertain Political Prospects Due to Policy Hurdles, Unintended Consequences, and Financial Risks
Although the idea of DoD acquisition professionals tossing out the FAR & DFARS and filling major COTS product requirements quickly online may have some surface appeal, the Thornberry Bill appears to cross numerous political "red lines" in Federal procurement policy and expose DoD to unintended consequences and risks. It is difficult to imagine the Bill passing the House and Senate and winning President Trump's approval without significant revisions that would counter its "streamlining" intentions. It is also possible this proposed reform may end up scuttled by the scope of its ambition.
The well-established procurement policies jettisoned by the Thornberry Bill are substantial. For example, as currently drafted:
- The Bill would authorize DoD to purchase hundreds of millions of dollars in COTS products made in any foreign nation (with the limited exception of products subject to the Berry Amendment and domestic preferences for specialty metals). The Bill would at long last open up the U.S. Defense market to lower cost COTS products manufactured in China, India, Malaysia, Thailand, and Taiwan (which are currently excluded under the Trade Agreements Act). This is because, outside of the Berry Amendment or specialty metals requirements, DoD will have no authority to impose "Buy American" domestic preferences, which are unlikely to exist in the standard terms and conditions of the online marketplace.
- The Bill would authorized DoD to spend millions in taxpayer dollars on purchases from companies who are inverted domestic corporations. Again, online marketplaces do not impose this kind of prohibition as a standard term and condition.
- Under the Bill, DoD could spend millions on products sold by contractors or who engage in objectionable employment practices, such as discrimination based on race, sex, national origin, religion, color, sexual orientation, or gender identity; use of child labor; practices that constitute human trafficking, or retaliation against whistleblowers.
- The Bill imposes no policy or plan to foster small business participation, such as set-aside requirements or a requirement that small business concerns have an opportunity to participate as subcontractors in the online marketplace contracting. (Instead, the Bill's small business provision is limited to allowing DoD to take credit for orders placed directly with prime contractors who happen to be small businesses.)
- The Bill would also expose DoD to risk of counterfeit electronic parts in COTS products. DoD would be prevented from requiring online marketplace contractors to implement an acceptable detection and avoidance system (as is required in commercial item subcontracts under DFARS 252.246-7007) unless such a requirement was already among the standard terms and conditions of the marketplace, which seems unlikely.
In addition, the Bill also appears to have the unintended effect of waiving of DoD's sovereign immunity from contract claims outside the forums provided by the Contract Disputes Act by subjecting DoD to the dispute resolution mechanisms provided by online marketplaces. The current version of the Bill has this effect by prohibiting DoD from requiring the online marketplace to accept any Government-specific terms and conditions – such as the "Disputes" clause at FAR 52.233-1. Likewise, the Government would be unable to terminate orders for default or convenience or issue stop work orders unless the standard terms and conditions of the online marketplaces already provided buyers with these rights.
Finally, it is unclear how GAO or the Court of Federal Claims could hear protests of orders if the terms and conditions of the online marketplace do not provide for this mechanism. It is not difficult to imagine potential violations of even the streamlined procedures required by the Thornberry Bill. For example, if offers from at least two suppliers of a product were not available, the agency would be required to use "traditional" competitive procedures under CICA. In addition, if an order was placed with a contractor whose product failed to comply with the Berry Amendment or the specialty metals requirement, then the order would be illegal – and compliant contractors would lose an opportunity to win this business. It is unclear how GAO's automatic stay and other protest procedures and remedies would overlap with the "standard terms and conditions" of the online marketplace. Considering that there is no monetary limit on the size of online purchases of COTS products, Congress should be concerned about providing interested parties with some avenue to ensure the integrity of this acquisition process − through which millions of dollars in annual appropriations may flow.
Furthermore, in light of the well documented problems the Government has experienced with the use of streamlined procurement methods – such as the use of government purchase cards for micro-purchases − the absence of internal controls for this kind of online "shopping" would likely expose DoD to increased risk of fraud, waste, and abuse.
Another political risk arises from advocates of GSA's FSS Program. It is possible that these advocates could seek to persuade Congress to either abandon the Thornberry Bill's proposal altogether or add requirements that bring the online marketplaces into competitive equivalence with GSA's eBuy portal, which will thwart the streamlining purpose of this reform.
COTS Product Contractors: "Wait and See" While Staying the Course with Existing Strategies
Contractors who sell COTS products to DoD should monitor this proposal as it develops over the next several months. If the Thornberry Bill becomes law, there will be delays associated with regulatory implementation and establishment of DoD's relationship with the online marketplace(s). Until contractors know which marketplace will be utilized by DoD, there is little to do but wait.
First, it will take time (approximately 6-12 months) to revise the DFARS to implement related regulations regarding award of the contracts with the online marketplaces and how DoD activities can place orders at the marketplaces. Awarding the contracts with the online marketplaces should also take some additional time. Thus, if the Thornberry Bill can find a path through Congress, any changes in how DoD purchases COTS products created by the Thornberry Bill are likely at least 18-24 months away from creating actual business opportunities for COTS product contractors.
Next, contractors must wait and see which online marketplace DoD will actually utilize. Contractors selling COTS products tend to be participating vendors in existing online marketplaces such as Staples and Office Depot, rather than providers of the online marketplaces themselves. While many already have a business presence in the online marketplaces that are possible candidates for a future relationship with DoD, opportunities will not arise until DoD finalizes its contract(s) with the provider(s) of such marketplaces.
Once DoD makes its choice, COTS product contractors will finally be in a position to implement a DoD-specific marketing strategy using the selected online marketplace and to optimize its product presence at such marketplace to maximize DoD sales. But until the online marketplaces become available to transact business with DoD, COTS product contractors should maintain focus on existing marketing and business development strategies in the Federal marketplace, such as the FSS Program and other GWAC vehicles.
The online marketplaces contemplated by the Thornberry Bill are a revolutionary concept that would, if enacted as currently drafted, radically streamline how DoD acquires COTS products and dramatically alter the business strategies of companies seeking to sell such products to DoD. But the first draft of the Bill seems to ignore harsh political, legal, and operational realities that make its passage seem unlikely in its current form. Because of the deeply ingrained procurement policies that would have to be abandoned, legal requirements of the Government "sovereign" when it acts in its proprietary capacity that would have to be ignored, and the potential of fraud, waste, and abuse within the bureaucratic operating environment, the legislative prospects of this reform as currently drafted seem uncertain at best.
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