On Wednesday, November 27, the Department of Defense (DoD) published a proposed rule that simplifies the acquisition of commercial products to meet military requirements. Two key elements:
(1) Allows government contracting officers to accept commercial determinations made by prime contractors during the acquisition process.
What does this mean? When a prime contractor assembles a team to bid on a major weapons system, often times they turn to commercial companies to leverage their technology to meet design and specification requirements. The prime contractor makes a determination that the product is a commercial product – and that excludes the commercial company from meeting hundreds of military unique, federal contracting requirements.
That was from Joseph Fangler on LinkedIn, discussing proposed changes to the DFARS. I’ll get to the second part, but first I wanted to touch on exactly what he just said. The prime contractor will determine whether an item is commercial at lower tiers. Not the government. That might sound alarming. For example, the prime could subcontract to another subsidiary of the same company and pay whatever is asked for. No data, no questions.
Of course, if there is adequate competition, then such a strategy would lead to a losing bid. Or if the government managers know something about the products, they should catch bad-faith pricing and seek alternatives. This brings up so many other questions that its hard to say what generalized outcomes would be.
My rule of thumb is that this doesn’t work very well for big, once in a generation, cost-plus developments of a major weapon system. This works better for everything else, especially where it’s fixed price and competition exists. Perhaps that means this policy is best used an “unbundling” approach to systems, such as using government furnished equipment (GFE).
In any case, allowing primes to determine lower-tier commerciality will cut out a lot of red tape that certainly contributes to compliance costs. It is interesting to think that government commercial item determinations may be a reason firms refuse to bid, making an item that would otherwise be commercial to become sole source.
Here’s a second big change from an often onerous control system mandated by government:
(2) Allows government contracting officers to treat items valued under $10,000 as commercial items if they are used on multiple contracts and not identifiable to any contract when purchased.
What does this mean? Commercial companies order bench stock, raw materials, assemblies and components based on the total amount of projected workload for the year in order to leverage market pricing. This allows the DoD to receive the same advantages as commercial companies when they acquire military items.
This one is interesting. Usually, companies buy piece parts in bulk, send them into inventory, and then bring them out for use as needed. They do not purchase each and every thing uniquely for a contract, and justify costs in their proposal accordingly. Of course they could, and this would better suit government requirements, but that would be incredibly inefficient. So that’s what is meant by items under $10,000 which are used by multiple contracts or not identified by a particular contract.
The process, however, complicates accounting data. It often requires a company to have an earned value management system and a material inventory system that allocates the charges to specific contract work orders. All this tends to happen outside the standard ERP systems from which financial reports are made, creating a second set of books. Requirements for such systems is just part of the reason firms stay away from working with government, or prefer being “shielded” by compliance-specializing primes.
Leave a Reply