In a July 18, 2014 blog, we noted that a summation from a recent DOD-IG report (DODIG-2014-088) indicated that DLA (Defense Logistics Agency) had potentially overpaid about $9 million on 33 of 35 spare parts which were sole-sourced to the particular government contractor. At the time, we only had the summary conclusion (the report was non-releasable); however, we recently obtained (through FOIA) a redacted copy of the DOD-IG report and that provides more clarity in terms of the alleged failings of DLA. Coincidentally, we’ve recently read an article (Defense E-Brief published by NDIA) which emphasized that the Pentagon is putting defense contractors on notice that DOD contracting officers will demand fair prices for commercial items.
In terms of the DOD-IG report, we now know that it obtained cost data (through an IG subpoena) for a non-statistical sample of 42 parts. The IG performed cost analysis on 35 of those parts where parts selected were those i) having significant price increases and ii) which did not have significant commercial sales. In particular (and highlighted) was an IG statement that “the contracting officer failed to determine the percentage and quantity of commercial to Government sales”. Although the contractor provided sales data documenting sales to commercial customers, the IG injected past acquisition guidance (no longer applicable) which had (when applicable) indicated that sales data would only be sufficient (to determine a fair and reasonable price) if an item had 55 percent or more commercial sales. Per the IG report, DDP (Director Defense Pricing) is now contemplating a DOD policy which would consider 50 percent (percentage of commercial sales to total sales for each item) as sufficient to accept market based pricing.
In reference to the NDIA Defense E-Brief, the specific DOD source is none other than DDP who asserts that contractors are overcharging for their products and abusing “commercial of a type” contracting. In remediating this perception of overcharging, DDP insists that the government is going to press vendors for foolproof evidence of what the market pays for the product. Translated, undeniable evidence of commercial sales which represent at least 50 percent of the total sales for any particular part number/item. Absent this “foolproof” evidence, DDP expects government contracting officers to demand other than certified cost or pricing data which would allow the contracting officer to determine and to document a fair and reasonable price determination on an item by item basis. Translated, the government contracting officers will be demanding cost data when the sales (pricing) data falls short of meeting the test of “foolproof” evidence for each commercial item (with no common groups or family of commercial items).
DDP goes on to state that contracting officers only ask for certified cost or pricing data as a last resort; however, DDP never attempts to reconcile as a “last resort” with his expectation for foolproof evidence. Foolproof evidence is an extremely high standard which will rarely be met in situations involving anything but COTS (commercial off-the-shelf) items which are absolutely identical in application to government and commercial sales. For any item which requires any customization, the customized item will become a different item (part number) which will have to stand on its own in terms of meeting the 50 percent test (commercial sales). Particularly daunting for spare parts pricing/sales for which annual sales of any particular part number are anything but constant (another issue noted in the DOD-IG report was the absence of commercial sales for a period of time as if the manufacturer can do anything to ensure continuity of the demand for spare parts).
Although DDP disingenuously downplays the significance of it, vendors selling commercial items (sold at market-based prices) cannot produce cost data consistent with government regulations. In particular, commercial item prices include costs for actual or implied deferred development costs and storage and handling costs. Hence, cost data provided after-the-fact to support a new government expectation will predictably leave the contractor under-recovering total costs because government regulations rarely if ever recognize deferred development costs. Imagine that, a new government strategy which won’t allow full cost recovery.