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DoD Seeks New Commercial Buying Rules

Would Eliminate ‘Of a Type’ Sales

Apr. 30, 2012 - 03:37PM   |  
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They are three words that for years have been puzzled over, debated and occasionally abused. But U.S. Federal Acquisition Regulation (FAR) language that permits purchases to be considered commercial if they are “of a type” similar to items available for sale in the private sector may be facing its most serious challenge yet.

The U.S. Department of Defense has proposed striking the language from the FAR, the guiding document for all government acquisition, as part of a batch of legislative suggestions sent to Congress at the end of March. While the precise number of contracts considered commercial across the federal government under “of a type” classification is unknown, critics fear the proposal could have a chilling effect on the government’s ability to access commercial technologies.

The DoD says the change could help combat pricing issues in the agency for what are supposed to be non-DoD-specific items, issues that are facing greater scrutiny as the agency begins the process of making deep spending cuts.

Although there has been an interest in Congress for years to limit the definition, the fact that the DoD is behind this most recent initiative greatly increases the likelihood of passage, experts said.

“The problem lies not with the pricing of true commercial items but with the misclassification of items as commercial, i.e. commercial items ‘of a type,’” DoD spokeswoman Cheryl Irwin wrote in an email. “The overly broad definition of commercial item currently in effect affords items which are not truly commercial items and which are not sold to the general public to qualify as commercial items and as a result, contracting officers are unable to acquire the necessary data to make the price reasonableness determination.”

While it has occasionally required stretching the definition to classify a contract as commercial, there are benefits for both government and industry when the definition is applied. Commercial contracts, authorized under part 12 of the FAR, do not face the same data burden as other government contracts, requiring less pricing information and exempting the arrangements from a variety of auditing requirements, which results in quicker sales.

“It’s easier for everybody involved, it’s a much more streamlined process,” said Rob Burton, a contracting law expert and partner at the law firm Venable.

That quicker route of acquisition was intended to help the government pick up common items with ease, Burton said.

“The whole reason for this was to allow for garden-variety things that you would buy at your local drugstore,” he said. “The whole idea was this is simple stuff, these are routine items, why should we be going through a lot of complexity in the purchase of these? It was never intended for more complex military-oriented items.”

But with the easier route to acquisition comes abuses, famously in the form of the new U.S. presidential helicopter. The program, which was designed as a commercial acquisition of the AgustaWestland AW101, confronted spiraling costs when even fundamental elements of the aircraft, such as the composition of the metal used, were debated. If the program, which was canceled in 2009, had proceeded, the resulting helicopter would have been markedly different from the original commercially available aircraft, experts said.

The Navy’s Littoral Combat Ship (LCS) program, which has been the subject of media attention surrounding cost growth and maintenance concerns, was also initiated as a commercial program, with the two variants based on a high-speed ferry and a yacht.

In its written justification sent to Congress along with the proposal, DoD referred to the issues with pricing and abuses and cited the change as a necessary remedy. “The situation cannot be rectified unless the statutory definition of ‘commercial item’ is amended and clarified appropriately,” it read. “This proposal would permit the Government to acquire commercial items at better prices by ensuring that such items are only those goods or services that actually have been sold, leased, or licensed in comparable quantities in the commercial marketplace and therefore have prices that clearly are based on competitive market pricing or established catalog prices.”

Alan Chvotkin, the executive vice president of the Professional Services Council, said that while there have been abuses, the opportunities provided by the “of a type” criteria are important, especially for companies that do not primarily work with the government.

“Where there have been some publicly described abuses, boy, there are some doozies,” he said. “But because this definition is governmentwide, not just limited to DoD, it could have a significant effect of denying, particularly civilian agencies, access to technology and services that we don’t even know about. That’s the biggest concern; that we’ll shut off a marketplace.”

Chvotkin pointed to the example of mobile devices technology, an area where the government has been increasingly relying on commercial technology, but has been requiring manufacturers to modify the equipment to meet specialized security standards. Those companies, wary of the strict rules and careful oversight that accompany government contracts, may not work with the government if they cannot use the simpler commercial contracting route, he said.

“Do you think that Android or iPhone is going to provide the government with cost-to-pricing data? I don’t think so,” he said. “There may just be pockets of companies that say, ‘Too hard, if the government wants to buy it, they know where to find me, I’m not going to put up with that stuff.’”

If the aim of the change is to prevent abuses, Chvotkin said, the agency needs to wait to see if a new rule it put into effect at the beginning of March has the desired effect. The rule would require that all acquisition, when the determination to classify the contract is based on the “of a type” criteria, receive higher-level approval.

Even if “of a type” is removed, Burton said the definition of commercial is still sufficiently vague to allow needed flexibility in contracting practices.

“You can support a commercial item procurement without the wording ‘of a type,’” he said. “I don’t think that wording was ever needed. The times that the Department of Defense found it to be useful are very few and far between.”

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