House drops DoD request to change definition of commercial products

The Pentagon says the way it buys certain commercial products has been abused for more than a decade. The Defense Department asked Congress to include new rules...

The Pentagon says a streamlined acquisition process designed in the 1990s to let federal agencies buy commercial products under less-cumbersome procedures has been abused for years. So this year, the Defense Department asked Congress to change it.

While the House Armed Services Committee adopted many of DoD’s suggestions when it passed the fiscal 2013 Defense authorization bill, lawmakers decided against including this one, which at least one industry group has called a “radical” proposal that would alter the process by which all agencies have been allowed to buy commercial items for the past decade and a half.

At issue is a concept in federal acquisition law known as “commercial-of-a-type.” While federal procurement policy has long urged agencies to buy products or services that already exist in the marketplace rather than building new systems from the ground up, commercial-of-a-type gives agency contracting officers some wiggle room: they can allow vendors to make adjustments to commercial products so that they meet government requirements, but are close enough to what everybody else can buy off the shelf so that quick acquisition procedures still apply.

The assumption is that the price tag must be fair since it’s already been subject to the competitive marketplace outside the Pentagon.

Studies show the law is too broad

But DoD, citing various reports by the Government Accountability Office and internal study groups, believes current law is so broad that it lets a product be called “commercial” even when it’s been changed so much that the military is the only meaningful customer for a given product or service.

Shay Assad, director of pricing, Defense Department
Shay Assad, the Pentagon’s director of pricing, said commercial-of-a-type is the number one issue he hears about from contracting officers in the field.

“They’re very frustrated that they’re getting claims by companies who we wouldn’t normally think of as commercial companies, claiming that they have commercial-of-a-type services or products, and then not being able to substantiate with any kind of pricing information why the price we should pay is legitimate,” he told an industry gathering assembled by the Coalition for Government Procurement recently.

GAO and internal Pentagon studies over the past several years have found that DoD has had a tendency to misclassify the items it wants to buy in order to use the simplified acquisition procedures even when those items aren’t sold in a commercial setting and haven’t been subject to competitive price pressure, according to Pentagon officials.

DoD’s proposal would narrow the definition of what a commercial item is: only products that have actually been sold in the commercial world, and only in similar quantities to what the government would buy would count as commercial.

Industry groups not happy with DoD’s proposal

Assad suggested contracting officers already have been instructed not to use the streamlined commercial procedures when DoD is the only customer, or almost the only customer.

“If we’re the dominant player in your marketplace, and 50, 60 or 70 percent of your sales come from the Department of Defense, we’re likely to question you on the basis of your pricing,” he said.

The Professional Services Council, one of the groups urging Congress to ignore the DoD proposal, says the change would roll back some of the success the government has had in lowering barriers for entry for government contracting.

“Prior to those 1994 and 1996 changes, many commercial companies simply refused to do business with the federal government because of the unique government and administrative requirements which don’t bear any resemblance to generally accepted practices in the commercial world,” said Alan Chvotkin, senior vice president and general counsel for PSC. “In the first two decades after the enactment of that legislation, the government generally honored its stated preference for commercial items and limited the imposition of government-unique terms and conditions. Today though, I worry that we’re risking a return to those standards and creating an insurmountable barrier to competition.”

Chvotkin said the DoD proposal would narrow the definition of commercial items so much that the government would lose access to key, rapidly-changing technologies that are on the market today.

For example, smartphones: DoD can’t use most commercial mobile devices straight off the shelf because of the military’s carefully-defined security requirements. The modifications necessary, Chvotkin said, would make the version DoD buys commercial-of-a-type.

Sole source contracts are the biggest area of abuse

Assad said DoD’s skepticism toward commercial-of-a-type definitions only applies in sole-source procurements. Where multiple bidders are involved, competition takes care of the problem, he said.

In situations where a company can show that the military is only one of several customers, the government is happy to pay the going rate. Companies need only show what other buyers have paid, he said.

But in sole-source competitions where DoD is the only real customer for a product offered by a commercial company, contracting officers will want to see both cost and pricing information, though the process would not be excessively burdensome, he said.

“We’re not going to ask companies to take their commercial data and somehow translate it into something that a government contracting officer is used to seeing.

That’s not fair [to industry]” Assad said. “Whatever your costing information is, that’s what it is. It’s up to us to analyze that data and determine if we’re paying a fair and reasonable price.”


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