Fair Prices for Commercial Items in Government Contracts

On September 1, 2014, National Defense Magazine reported “Pentagon Will Demand ‘Fair Prices’ From Commercial Vendors.” Director of Defense Pricing,  Shay Assad claims that contractors utilizing the “of a type” commercial items in government contracts are overcharging for their products. This argument has been echoed in recent years with attempts to change the definition of commercial items – particularly to remove the phrase “of a type” – by groups such as the Project on Government Oversight (POGO). POGO supports changes to the definition of a commercial item to stop what it calls the “waste of taxpayer dollars,” and has recommended changes to the definition of a commercial item in 1999 and 2005, among other petitions for change. On April 19, 2012, the Professional Services Council opposed the Defense Department’s legislative proposal to change the definition of a commercial item as part of the 2013 National Defense Authorization Act.

“Of a type” determinations have plagued the Pentagon and government contractors for years. Audit guidelines released by DCAA in September 2011, have further strained this relationship as items acquired as commercial for many years are now being called into question at each and every procurement and re-procurement.  DoD contracting officers have pushed for cost or pricing data related to commercial items and government contractors have pushed back equally as strong with the reminder that commercial items are exempt from TINA and the submission of certified cost or pricing data. This is where I have to remind clients that FAR 15.402 still requires the the contracting officer to make a determination of fair and reasonable pricing. Semantics and historical acquisitions of non-commercial items tend to cloud the conversation. Note that “certified” cost or pricing data is not required for commercial items, though “other than certified cost or pricing data” may, in fact, be the exact same data minus the certification.

As part of FAR 10 Market Research, the contracting officer should have some information available for comparison in making a commercial item determination. If that data is insufficient, then the contracting officer may ask for the following types of data related to prices (not cost) such as established catalog prices and sales to governmental and non-governmental agencies. In order of precedence, the contractor officer shall consider information available within the government such as historical prices for the same or similar items, information available from sources other than the offeror (market-based data), and, if necessary, information directly from the offeror. Cost data should be obtained as a last resort and only to the extent necessary to determine a fair and reasonable price.

Assad claims, “There are thousands of contracting officers in the field right now who do not believe they have gotten a good deal from vendors.” Who’s fault is that? If the contracting officer cannot make a determination of fair and reasonable pricing, then they should not award the contract. And, if Assad believes that so many contracting officers feel they were duped, maybe he should consider internal agency training and accountability as both the source and solution of the problem. Contractors have no authority to issue contracts, so I am not sure how they are responsible for creating this situation.

Assad’s claim that requests for certified cost or pricing data are not the default is clearly not on the front lines of defense acquisition. I have yet to see an RFP/Q for commercial items in government contracts that did not default to the requirements in FAR 15.408 Table 15-2. In fact, many contracting officers immediately through up flags and defenses at the mention of commercial items and clarification that cost data will not be submitted.

Granted, contractors have pushed back on the request for cost data often times because they have invested millions of dollars developing a product at private expense. Companies develop technology at private expense because they want to maintain ownership and licensing rights (intellectual property rights) in their products – another battleground for contractors selling commercial items to the Government. In June 2014, Politico reported on “2 tech firms shun inside Defense game” where SpaceX and Palantir battled the Pentagon over its massive and staid acquisition program, a sign that barriers are still in full force. Frank Kendall, Undersecretary of Defense for Acquisition, Technology and Logistics (Assad’s boss), has repeatedly called for the Government to remove barriers to entry to newcomers, and there are signs of hope in his August 21, 2014 memo, “Actions to Improve Department of Defense Competition.”

In addition to development and private expense and intellectual property concerns, commercial entities often do not have accounting systems that are compliant with government regulations – another reason many companies choose not to do business with the Government. Requests for unnecessary data lead to increased proposal costs, extended acquisition lead time, and consume additional contractor and Government resources.

William J. Broderick, CFO of AGI, summarized the whole debate:

The attitude seems to be that commercial companies are greedy, make too much profit and have to “open up their numbers,” he says. The reality is that commercially funded products could save the Pentagon billions of dollars if the government were willing to give them a try. While Kendall is asking the Defense Department’s acquisition workforce to encourage commercial procurements, officers in the field are doing the opposite, he says. Instead of trying to understand the features and capabilities of products, DoD officials will spend most of their time arguing “that we are not a commercial company because our predominant source of revenue is from government sales … even though all our products were built at private expense.”

Assad promises new guidelines “in to stop overpaying for items,” and Kendall promises “DoD Competition Handbook, A Practical Guide for Program Managers.” I eagerly await my opportunity to review both.


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