Defense Contracts: Recent Legislation and DOD Actions Related to Commercial Item Acquisitions
Released: 2017-07-17T00:00:00

Letter

Background

The Federal Acquisition Streamlining Act of 1994 established a preference within the federal government to procure commercial items rather than items developed exclusively for the government. FAR Part 12—Acquisition of Commercial Items—prescribes the policies that apply to commercial item acquisitions. For example, contracting officers can use streamlined solicitation procedures, which can reduce the time needed to solicit offers. Contracting officers are required to use fixed- price contracts to buy commercial items, though the FAR also allows for the use of other contract types under certain circumstances. We have previously reported on various aspects of commercial item procurements at DOD, including pricing and the commercial item test program.

During the pre-award process for most procurement actions, a contracting officer must determine whether the product or service being procured is commercial. Once the product or service is deemed commercial, the contracting officer, prior to award, must determine that the price is fair and reasonable.

Commercial Item Determinations

The commercial item definition includes items customarily used by and sold (or offered) to the general public, including products and services with minor modifications. The decision to fulfill a government requirement using a commercial item is based on market research to determine whether an item satisfies the commercial item definition. Under DOD guidance, a DOD contracting officer must document the market research and commercial item determination in the contract file. According to DOD’s Commercial Item Guidebook, the commerciality determination should clearly identify which elements of the definition qualify the item as commercial and therefore eligible for procurement under FAR Part 12 procedures.

Price Reasonableness Determinations

Prior to contract award, contracting officers must determine that the price of the product or service the government is buying is fair and reasonable and document the determination. When purchasing commercial items, firm knowledge of market pricing information is necessary and the contracting officer must obtain sufficient information to negotiate a fair and reasonable price. At a minimum, the contracting officer must use some type of price analysis—such as comparing proposed prices in response to a competitive solicitation. As stated in DOD’s Commercial Item Guidebook, the fact that a price is included in a catalog does not necessarily establish that the catalog price is fair and reasonable.

If, after market research has been conducted, additional information has been obtained from sources other than the offeror, and the appropriate price analysis techniques have been applied, the contracting officer still cannot make the determination that the offeror’s price for a commercial item is fair and reasonable, then the contracting officer must obtain additional data from the offeror to support further analysis. According to DOD guidance, contracting officers should not request more data than necessary to make the price reasonableness determination and they may not require contractors to certify any supporting cost information. DOD contracting officers must document any response to their request for additional data, including a contractor’s failure to provide the requested data.

DOD’s Use of Commercial Item Procedures Has Gradually Declined Over 10 Years Within a Narrow Range DOD’s Use of Commercial Item Procedures Was Consistently Less than 25 Percent of Total Obligations

FPDS-NG data show that obligations under DOD contracts awarded using commercial item procedures (i.e. FAR Part 12) declined since fiscal year 2007, yet as a proportion of DOD’s total contracting obligations they have remained within a narrow range from 22 to 16 percent. Figure 1 depicts DOD’s total obligations and commercial item obligations from fiscal years 2007 through 2016. To obtain a more in-depth view of commercial item spending, we analyzed spending for fiscal year 2016. For that year, DOD spent $47.6 billion in commercial item obligations—a decrease of $35.1 billion since fiscal year 2007. However, overall DOD contract obligations also declined during this time frame.

In fiscal year 2016, DOD obligated $4.5 billion of its $47.6 billion in commercial item obligations through the General Services Administration’s (GSA) Federal Supply Schedule (FSS) program. The GSA’s FSS program provides agencies a simplified method of purchasing commercial products and services at prices associated with volume buying. This $4.5 billion includes nearly $1.1 billion obligated through blanket purchase agreements. Blanket purchase agreements can be established under any FSS contract to fill repetitive needs for supplies or services.

We could not determine the full extent to which DOD is procuring commercial items because FPDS-NG only captures information on whether or not commercial item acquisition procedures were used to acquire the product or service, and not whether items purchased are commercial or not commercial. Further, DOD can purchase commercial items through a subcontract. Also, the data we present above do not include obligations on contracts awarded by other agencies on behalf of DOD through interagency agreements. We were unable to obtain reliable data in this area for our 10-year time frame; however, in fiscal year 2016, $2.1 billion were obligated on contracts awarded using FAR Part 12 procedures, through interagency agreements, on behalf of DOD.

DOD Procures a Broad Variety of Products and Services, Most Competitively Under Firm- Fixed-Price Contracts, Using Commercial Item Procedures

DOD procures a broad range of products and services, using commercial procedures, from the relatively simple, such as office furnishings and housekeeping services, to the more complex, such as space vehicles and maintenance services. In fiscal year 2016, products accounted for 54 percent of DOD’s commercial item obligations, while services accounted for 46 percent. Figure 2 depicts DOD’s commercial item obligations by top three types of products and top three types of services in fiscal year 2016.

Four components within DOD make up 82 percent—or $39.1 billion—of DOD’s total commercial item obligations in fiscal year 2016.

According to FPDS-NG data, 68 percent of DOD’s commercial item obligations were awarded competitively in fiscal year 2016. Competition helps agencies get lower prices on products and services, and get the best value for taxpayers. The remaining 32 percent of obligations were coded as noncompetitive, such as sole source contracts or follow-on purchases. For example, we reviewed a $295,000 sole source contract for a commercial geolocation system for the National Air and Space Intelligence Center. The Air Force justified this as a sole source contract because the contractor is the only provider of the geolocation system, and this system is the only one fully compatible with existing hardware that the agency previously purchased from the same contractor through a competed contract.

Finally, FAR Part 12 requires that agencies use firm-fixed-price contracts or fixed-price contracts with economic price adjustment for acquiring commercial items, with some exceptions. In fiscal year 2016, $46.8 billion, or 98 percent, of DOD’s commercial item obligations were on firm- fixed-price contracts ($40.8 billion) and fixed-price contracts with economic price adjustment ($6 billion). The remaining $738.6 million, or 2 percent, were on time and materials or labor hour contracts.

DOD Has Taken Action in Response to Recent Commercial Item Acquisition Legislation

Recent legislation from Congress includes a number of provisions related to commercial item acquisitions, including both commercial item determinations and price reasonableness determinations. The provisions touch on a variety of areas, from ensuring DOD uses commercial standards instead of military standards when possible, to developing a database of commercial item determinations, to improving guidance and training on how to determine the reasonableness of a commercial item price.

Figure 3 shows the distribution of NDAA sections containing provisions related to DOD’s acquisition of commercial items for fiscal years 2013 through 2017. Although this figure highlights the increase in activity in the fiscal year 2016 and 2017 NDAAs, section 831 of the fiscal year 2013 NDAA resulted in a substantive shift in how DOD is to buy commercial items.

Several of the key actions DOD has taken in response to the recent legislation are highlighted below. For more details on all sections within the 2013, 2015, 2016, and 2017 NDAAs related to DOD’s acquisition of commercial items, see Appendix I.

Fiscal Year 2013 NDAA

As noted above, section 831 of the fiscal year 2013 NDAA resulted in a substantive shift in DOD commercial item practices. This section required DOD to: issue guidance on standards for determining price reasonableness; ensure that requests for uncertified cost information, for the purposes of evaluating price reasonableness, are sufficiently documented; develop and begin implementation of a plan to train the acquisition workforce in the use of certain authorities for evaluating price reasonableness when procuring commercial items; and develop a cadre of experts within DOD to provide advice to the acquisition workforce with regard to commercial item authorities.

As a result, DOD issued memorandums in February 2015 and September 2016, which provided specific guidance to contracting officers on commercial items and price reasonableness determinations such as specific information that should be included in the contract file for ensuring that requests for cost information are sufficiently documented. DOD is also in the process of updating its Guidebook for Acquiring Commercial Items. The purpose of the Guidebook is to assist acquisition personnel in developing sound acquisition strategies for procuring commercial items.

To address the issue of training the acquisition workforce, according to Defense Procurement Acquisition Policy officials, all commercial item courses are being assessed and will be revised to be consistent with the legislation concerning commercial items as well as the DOD Guidebook for Acquiring Commercial Items. We have previously reported on the status of DOD’s actions to develop guidance and training on determining price reasonableness. We also reported on circumstances under which DOD requested cost or pricing information from contractors for use in determining price reasonableness for noncompetitive contracts for commercial items awarded between January 2, 2013 and January 1, 2015. Overall, we found that contracting officials faced challenges when determining price reasonableness, such as data currency and contractor reluctance to share data.

To develop a cadre of experts within the Department to provide advice to the acquisition workforce, DCMA’s Commercial Item Group created six Commercial Item Centers of Excellence, aligned to various contractor market sectors, to assist in both the timeliness and consistency of commercial item determinations. The centers are staffed with engineers and price/cost analysts to advise procuring contracting officers in their determinations of commerciality. Specifically, these centers assist with and make recommendations on market analysis, commercial item reviews and determinations, and commercial pricing analysis. Additionally, the centers provide training and assistance to the DOD acquisition community on various techniques and tools used to evaluate commercial items and commercial item pricing. According to DCMA officials, experts at these centers began reviewing cases in June 2016 and since then have examined 437 cases that contained approximately 2300 items. They recommended that the contracting officer make a determination that an item was commercial in 94 percent of the cases reviewed. Results are included in a final report prepared by DCMA and provided to the requesting official. According to DCMA officials the average turnaround time to complete a review, for both a commercial item recommendation and a price reasonableness determination, is 46 days.

Fiscal Year 2015 NDAA

The fiscal year 2015 NDAA had only one provision relevant to commercial items, which made permanent DOD’s authority to use simplified acquisition procedures for certain commercial items.

Fiscal Year 2016 NDAA

The fiscal year 2016 NDAA included provisions that required DOD to provide guidance related to commercial items and price reasonableness determinations, among other things. For example, a contracting officer must consider recent prices paid by the government to determine price reasonableness of a commercial item if the prices previously paid are valid references for comparison, based on factors such as the quantities purchased by the government and how long ago the prices were paid. In 2016 DOD issued a proposed DFARS rule, which, when finalized, is intended to address many of these provisions by providing guidance to contracting officers for making price reasonableness determinations and promoting consistency in making commercial item determinations. It also is intended to expand opportunities for nontraditional defense contractors to do business with DOD by treating products and services offered by these companies as commercial items.

The 2016 legislation also required the Secretary of Defense to establish and maintain a centralized capability to oversee commercial item determinations for DOD procurements, and provide public access to these determinations. Subsequent legislation in fiscal year 2017 removed public access to this information and expanded the scope to include market research and price reasonableness analysis. Originally, DCMA intended to leverage the Contract Business Analysis Repository (CBAR), a DCMA database that captures contract-related information about companies, but DCMA officials later concluded that using CBAR would not be feasible due to the high cost of implementing technical changes. Instead, according to DCMA officials, they plan to create a new database; however, the system they will use for the database has not been determined, and there is no funding or timeline to complete the database. As an interim solution, DCMA has created a publically available source that identifies certain items and services acquired by DOD where commercial item recommendations and determinations have been made.

Additionally, the fiscal year 2016 NDAA required the Secretary of Defense to establish an advisory panel on streamlining the defense acquisition process, with a focus on reviewing acquisition regulations applicable to DOD and making recommendations for amendment or repeal. The panel issued an interim report in May 2017, which describes the panel’s objective as making recommendations that, if adopted, will enable the Department of Defense to more consistently buy what it needs in a timely and cost-effective manner—whether that be commercial items, information technology, services, weapon systems, or the full range of tools and equipment on which warfighters depend. The panel is working on its final report; no date has been set for issuance.

Fiscal Year 2017 NDAA

The fiscal year 2017 NDAA has numerous sections that relate to DOD’s acquisition of commercial items. For example, it establishes a preference for certain commercial services by providing that the head of a DOD agency cannot enter into a contract above $10 million for certain services, such as facilities-related or knowledge-based services, that are non- commercial unless a written determination is made that no commercial services can meet the agency’s needs. Another provision requires DOD to use commercial or non-government standards instead of military standards and specifications, unless no practical alternative exists to meet user needs. DOD is drafting several proposed DFARS rules that would implement these provisions.

DOD Is Using Memorandums of Agreement to Support Commercial Item and Price Reasonableness Determinations

In addition to the actions mentioned above, while not a direct action in response to specific commercial item legislation, the Director, Defense Pricing and the DCMA Cost & Pricing Center Director are working closely with interested companies to define, through the use of memorandums of agreement, the types of information needed to support commercial item determinations and associated pricing determinations. According to DCMA, memorandums of agreement can be useful when delineating such processes and information. For now, DCMA has uploaded these agreements to CBAR but plans to include these agreements in its new commercial item database for use in the future by procuring contracting officers. Currently, three agreements have been completed and three are in process.

Agency Comments

We are not making any recommendations in this report. The Department of Defense had no comments on a draft of this report.

We are sending copies of this report to the appropriate congressional committee and the Secretary of Defense. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-4841 or woodsw@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. In addition, Tatiana Winger (Assistant Director), Kathryn (Emily) Bond, Michael Grogan, Julie Hadley, Julia Kennon, Liam O’Laughlin, Raffaele (Ralph) Roffo, Roxanna Sun, and Carmen Yeung made key contributions to this report.

Appendix: Summary of Recent National Defense Authorization Act Sections Related to DOD’s Acquisition of Commercial Items

Fiscal Year (FY) 2013 NDAA Sections

Summary of Sections regarding Commercial Items Requires DOD to develop and begin implementation of a plan to train the acquisition workforce in the use of certain authorities for evaluating price reasonableness in procurements of commercial items and develop a cadre of experts within DOD to provide advice to the acquisition workforce.

Department of Defense (DOD) Actions as of May 2017 Training:

Conferences addressing commercial item pricing occurring in 2014, 2015, 2016, and 2017 Industry day on contracting with DOD November 2014

DOD-wide pricing webinars

Week-long procurement contracting officer training for evaluating price reasonableness of commercial items According to Defense Procurement Acquisition Policy officials, the agency is coordinating with Defense Acquisition University to update training to be consistent with the DFARS and DOD Guidebook for Acquiring Commercial Items, both of which DOD is working to finalize.

Cadre of experts:

Defense Contract Management Agency created six Commercial Item Centers of Excellence.

Appendix: Summary of Recent National Defense Authorization Act Sections Related to DOD’s Acquisition of Commercial Items Appendix: Summary of Recent National Defense Authorization Act Sections Related to DOD’s Acquisition of Commercial Items Appendix: Summary of Recent National Defense Authorization Act Sections Related to DOD’s Acquisition of Commercial Items Summary of Sections regarding Commercial Items Requires a contracting officer to consider recent prices paid by the government to determine price reasonableness of a commercial item if the officer is satisfied the prices previously paid are a valid reference for comparison, based on factors such as the quantities purchased by the government and how long ago the prices were paid.

Department of Defense (DOD) Actions as of May 2017 Proposed DFARS rule (case 2016-D006) would implement this provision when finalized.

Requires the Secretary of Defense to submit a report identifying the defense-unique law provisions that are applicable for commercial item procurements, at the prime contract and subcontract levels, to the congressional defense committees.

DOD issued “Report to Congress on Defense-Unique Laws Applicable to the Procurement of Commercial Items and Commercially Available Off-The-Shelf Items” in June 2016.

Requires DOD to issue guidance concerning market research and commercial items, to ensure acquisition officials comply with the legal requirements concerning preference for acquiring commercial items. The guidance must provide that the head of an agency cannot enter into a contract above the simplified acquisition threshold for non-commercial IT products or services unless he or she determines that no commercial items are suitable to the agency’s needs.

Proposed DFARS rule (case 2016-D006) would implement this provision when finalized.

Limits conversion of commercial item procurements under Federal Acquisition Regulation (FAR) Part 12 to Part 15 in excess of $1 million. If the contracting officer wants to convert a procurement from FAR Part 12 to Part 15, he or she must determine, in writing, that the use of Part 12 was in error or based on inadequate information and that converting to Part 15 would result in cost savings. For procurements above $100 million, the head of the contracting activity must approve of the written determination and provide a copy to the Under Secretary of Defense for Acquisition, Technology, and Logistics. Requires the Secretary of Defense to develop procedures to track conversions of future contracts and subcontracts, from Part 12 to Part 15 and to submit a report on the implementation of Sec. 856, including any procurement converted pursuant to this section, to the congressional defense committees.

Proposed DFARS rule (case 2016-D006) would implement this provision when finalized.

Provides that items and services provided by nontraditional defense contractors may be treated as commercial items.

Proposed DFARS rule (case 2016-D006) would implement this provision when finalized.

Appendix: Summary of Recent National Defense Authorization Act Sections Related to DOD’s Acquisition of Commercial Items Appendix: Summary of Recent National Defense Authorization Act Sections Related to DOD’s Acquisition of Commercial Items Establishes a preference for certain commercial services by providing that the head of a DOD agency cannot enter into a contract above $10 million for services that are facilities- related, knowledge-based (except engineering), construction, medical, or transportation that are non-commercial unless a written determination is made by specified high-level officials, such as the service acquisition executive, that no commercial services are suitable to meet the agency’s needs. Also, the head of a DOD agency cannot enter into a contract for these same services above the simplified acquisition threshold and below $10 million unless he or she makes a written determination that no commercial services are suitable to meet the agency’s needs.

DOD is drafting the proposed DFARS rule (case 2017-D020) that would implement this provision.

Requires items valued at less than $10,000 that are purchased by a contractor for use in the performance of multiple contracts with DOD and others, and are not identifiable to any particular contract, be treated as a commercial item.

DOD is drafting the proposed DFARS rule (case 2017-D020) that would implement this provision.

Requires that services provided by a business unit of nontraditional defense contractor be treated as commercial items if they are priced using a similar method to develop commercial pricing and are provided by a similar pool of employees who also assist commercial customers.

DOD is drafting the proposed DFARS rule (case 2017-D020) that would implement this provision.

Provides the Secretary of Defense and the Service Secretaries with the authority to carry out the “defense commercial solutions opening pilot program,” under which the Secretary can acquire innovative commercial items, such as technologies and services, through the competitive selection of proposals via peer review under a general solicitation. Requires the Secretary to issue guidance for the implementation of this pilot program, and to notify congressional defense committees, within 45 days after award, about contracts over $100 million awarded under this pilot program.

DOD received the draft proposed DFARS rule (case 2017-D029) that would implement this provision.

Requires the Secretary of Defense to enter into contract with an independent entity to conduct a review of contractual flow- down provisions related to major defense acquisition programs on contractors, including, among other things, determining the effect, if any, of these provisions on the participation rate of commercial item contractors. A report on the findings of this review is due to congressional defense committees no later than August 1, 2017.

DOD has contracted with an independent entity to conduct this review and plans to brief the congressional defense committees on the interim findings of the independent entity by July 1, 2017.