Redstone Government Consulting Blog | Commercial Item Determination (2)

A commercial item determination should define the item or service, document market research, identify the FAR 2.101 Commercial Item definition, and include a “determination” that the item is commercial. Sounds easy right!

DCAA/DCMA Viewpoint

If you look through the DCAA audit guidance and the DCMA Contractor Purchasing System Review guidance, you would think that the Government is only concerned with a Commercial Item Determination when the purchase value exceeds $2M. This is all based on commerciality being an exception to the requirement for certified cost or pricing data at FAR 15.403-1(b)(3) & (c)(3).

Here are the Details

DoD issued DFARs Final Rule D2019-D029 – Treatment of Commingled Items Under $10K, effective October 1, 2020, to implement several sections of the National Defense Authorization Act for Fiscal Year 2017 that addresses treatment of commingled items purchased by contractors and services provided by nontraditional defense contractors as commercial items. This blog only addresses the DFARS change relative to the treatment of commingled items purchased by a contractor. The final rule is applicable to all solicitations and contracts, including solicitations and contracts using FAR Part 12 procedures for the acquisition of commercial items and solicitations and contracts valued at or below the simplified acquisition threshold.

Our Commercial Item Expert, Lynne Nalley, discusses and clarifies common questions and issues associated with commercial items and Commercial Item Determinations (CID).

In an Executive Orders (EO) issued on Labor Day, President Obama continued to display his willingness to manage the personnel policies of government contractors. This latest EO, one of many directed solely at Government contractors, will require contractors to provide up to seven days paid sick leave (annually) for employees. The EO comes with the typical unsupported rhetoric that “we’ve seen that many companies, including small businesses, support these policies because they understand it’s helpful with recruitment and retention” and a separate assertion “that paid sick leave will improve contractor performance”. Perhaps unintended, but it is noteworthy that the White House did not state that many companies support the notion that paid sick leave will “improve contractor performance”; by implication, the White House could not find any companies which were sufficiently naive to buy-in to that highly speculative and wholly unsupported assertion.

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.

Although the DODIG report (DODIG-2014-088) was not released because of FOUO (For Official Use Only) restrictions, the summary statements published by the DOD-IG suggest that the DOD-IG has absolutely no interest in adhering to the long-standing acquisition principles concerning commercial items and commercial item pricing (wherein the price is the price and the contractor’s profit or loss is not a factor).  The DOD-IG reported that a government contractor had significantly over-charged the government for spare parts for certain military helicopters (which presumably have commercial variants); specifically, 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.  To preclude this from recurring, the DOD-IG recommended a DOD acquisition policy “to establish a percentage of commercial sales that is sufficient to determine fair and reasonable prices when items are being acquired on a sole-source contract and market-based prices are used”.  Translated, the DOD-IG wants DPAP (Defense Procurement Acquisition Policy) to provide percentages of commercial sales (presumably versus sales to the Government) to “add clarity” to the FAR 2.101 definition of items or services customarily used by the general public or by non-government entities.