Type: Law Bulletins
Date: 02/07/2018

Commercial Items: Panel Recommends Defining Common Terms

The Department of Defense (“DoD”) Section 809 Panel on modernizing the defense acquisition process released its first of three voluminous reports in January. Established by Section 809 of the 2016 National Defense Authorization Act (“NDAA”), the Section 809 Panel is charged with reviewing and streamlining the acquisition regulations that have hamstrung the DoD’s efficiency and effectiveness. Under the recent 2018 NDAA, the panel was granted additional time and resources, along with an expectation that it produce significant actionable recommendations with supporting analyses and implementation recommendations by January 2019.

If the panel has its way, we would see a dramatic shift away from the “risk-averse” requirements-based acquisition system and a move toward an “innovation culture” with problem/solution-based acquisitions – all with an eye toward supporting the warfighter.

One example of how the panel proposes to reduce confusion and aid the acquisition process is by better defining the common terms “subcontract,” “subcontractor” and “commercial items” used in government commercial purchases.

So, after decades of uncertainty, what is a subcontract? The panel recommends the term “subcontract” in DoD acquisitions mean:

“a contract entered into by a prime contractor or subcontractor for the purpose of obtaining supplies, materials, equipment, or services of any kind under a prime contract. The term includes a transfer of a commercial product or commercial service between divisions, subsidiaries, or affiliates of a contractor or subcontractor, [and excludes] contracts which are applied to general and administrative expenses or indirect costs; or supply agreements for use in the performance of multiple contracts.”

The panel also recommends the term “subcontractor” mean:

“any person other than the prime contractor (including a supplier, distributor, vendor, consultant, or firm) furnishing supplies, materials, equipment or services under a subcontract.”

The panel advises bifurcating the term “commercial item” into two terms – “commercial products” and “commercial services” – and removing the distinction between the terms “commercial items” and “commercial off-the-shelf” items. It also suggests deleting the vast majority of DFARS mandatory flow down clauses for commercial item contracts and making it more difficult to add new flow down clauses in the future. One extremely important change suggested by the panel would be to revise DFARS clauses relating to technical data rights for commercial products.

While not earth-shattering, these changes would:

  1. Standardize more than two dozen versions of the term “subcontract” in the DFARS.
  2. Provide contractors with information to use in determining whether a company is a subcontractor subject to certain DFARS flow down clauses or a vendor that is exempt from compliance with those clauses.
  3. Clarify how to treat direct and indirect costs that are allocable to a contract.
  4. Exempt purchases of commodities, commercial products and commercial services that are being procured for multiple contracts from the flow down of government unique terms.
  5. Encourage participation in government acquisition by nontraditional companies.

Congress has sent clear signals in the last four NDAAs that it wants a reduction in regulations. With hard timelines, ample resources and a strong committee and staff, the panel is producing thoughtful recommendations. It will release two more reports in June 2018 and January 2019. As with so many of these reports, time will tell what recommendations actually get implemented.

For contractors, subcontractors and other interested stakeholders, the panel has asked for public input on the “50 Worst” – the regulations and policies that have a detrimental effect on providing goods and services to the federal government. To submit comments to the panel, visit: https://section809panel.org/50worst/.

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