What is fair and reasonable: How many clauses are enough for a commercial item contract?

On November 17, 2023, DoD issued for public comment Proposed Rule, Defense Federal Acquisition Regulation Supplement (DFARS) Case 2018-D074, Inapplicability of Additional Defense-Unique Laws and Certain Non-Statutory DFARS Clauses to Commercial Item Contracts. The proposed rule seeks to implement paragraphs (b) and (c) of section 849 of the National Defense Authorization Act (NDAA) for fiscal year 2018 (Pub. L. 115–91). Paragraph (b) requires DoD to review the DFARS and propose regulations (except those required by law or executive order) applicable to Federal Acquisition Regulation (FAR) part 12 commercial acquisitions for revision unless the secretary of Defense determines otherwise. Paragraph (c) requires a similar exercise in connection with contract clauses applicable to commercially available off-the-shelf (COTS) item subcontracts. The Coalition for Government Procurement submitted comments on this DFARS case.

From a procedural standpoint, Section 849 of the FY2018 NDAA states that, in connection with contracts involving commercial item acquisition procedures, after reviewing regulations (which implicate the inclusion of contract clauses), DoD is to propose DFARS revisions to eliminate the regulations reviewed unless the secretary of Defense “determines on a case-by-case basis that there is a specific reason not to eliminate the regulation.” Notwithstanding this statutory direction, the proposed rule identifies for elimination only two provisions and one clause from the DFARS 212.301(f) list of provisions and clauses applicable to contracts and subcontracts for commercial products and commercial services.

The result reflected in the proposed rule here is significant, especially when one considers what has transpired since the procurement reforms of the 1990s. In 1996, DFARS Part 212 included only three clauses regarding the acquisition of commercial items. Today, there are over 100 such clauses driven by regulation that are required to be included in commercial product and services contracts (Cf. DFARS 212.301). What has prompted an over 33-fold growth in regulations (and associated clauses) applicable to commercial products and services contracts alone should spark at least an inquiry into why no determination has been issued from the secretary of Defense. The fact that the Advisory Panel on Streamlining and Codifying Acquisition Regulations (Section 809 Panel), created by Congress to review DoD acquisition, recommended eliminating 55 such DFARS provisions should only add to our curiosity.

The absence of the secretary of Defense’s case-by-case specific determinations not to eliminate the regulations involved here represents a matter of compliance with the statute. In addition, as the Coalition mentioned in its comments, without these determinations, stakeholders are denied an opportunity to provide meaningful input on the proposed rule. As a consequence, the government may remain burdened by unnecessary regulations. Equally as important, however, is the consequential effect unnecessary regulations have on the defense industrial base.

The Coalition has written about the challenges arising from a “systematic re-regulation of commercial products and services contracting” since the significant acquisition reform efforts enacted at the end of the last century. Our “compliance checklist” way of contracting has hamstrung efforts to address market changes beyond instituting new rules, with which parties must comply. Along with an increase in contracting clauses, these rules keep government on “a march backward to the over-bureaucratized environment that existed before acquisition reform.” We further stated:

Much has been made of the shrinking industrial base supporting the federal government, especially the falling number of small businesses in the federal market.

• According to the Small Business Administration, the number of small business prime contractors decreased by 6%, from 69,400 in 2020 to 65,428 in 2021.

• According to the Government Accountability Office, from FY2011 to FY2020, the number of small businesses receiving DoD contract awards decreased by 43%, despite obligations increasing by 15%.

• The number of large businesses receiving contract awards fell …[,] on average[,] by more than 7% annually over the same period.

GAO and SBA did not articulate what is causing this drop in industry participation in the government-wide industrial base. Much of the decrease, we believe, can be attributed to the re-regulation of commercial item contracting.

Indeed, if the system is burdensome, it motivates companies, especially commercial companies with needed technology, to seek alternative markets to maximize the capture dollars.

The challenges facing our nation are many and significant. They require agile means to access the innovation needed to address them. That agility cannot be found in a system made sclerotic by mechanisms focused on compliance without a concomitant demonstration of benefit.  It is for this reason that understanding the secretary of Defense’s reasoning for keeping in place each rule/clause here is important.

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