Commercial Item Determination and Price Reasonableness EVERYONE – quick intro Presented by: DCMA CIG 8 March 2017

Agenda General Overview DCMA Commercial Item Group (CIG) Commercial Acquisition FAR Commercial Item Definition The Evolution of Commerciality DCMA Commercial Item Group (CIG) Group Overview Establishing a Common Framework Determining Commerciality Market Research Price Analysis Industry Takeaways Examples: Part and Services RYan

Overview- Commercial Acquisition Highlights 3 Commercial Acquisition is a streamlined AQ process Reduced acquisition costs, cycle times Commercial Optimization Less legacy issues, obsolescence, diminishing manufacturing sources New innovations in technology New companies can be introduced to defense procurement without investment in compliant business systems and processes FAR Clause 52.244-6 To the maximum extent practicable, the Contractor shall incorporate, and require its subcontractors at all tiers to incorporate, commercial items or nondevelopmental items as components of items to be supplied under this contract. Ryan NDAA and DPAP memos tell us that rules regarding commerciality are changing. Reliance on prior CIDs. The market research which is a foundation for those CIDs is becoming inherently more important. Understanding the delta.

Overview - Commercial Item Definition 2.101 4 “Customarily” means “usually” CIG Interpretation: A commercial item is any item…similar to items usually used by the public for commercial purposes and– the item or the similar item has been sold or offered for sale to the general public. Definition 1 leads into Definition 2, 3, 4, 5 and 7. Definitions 6 & 8 are the only ones that don’t revert back to Definition 1.

Overview – Definition Clarifications 5 “Of a Type” “Similar” “Customarily” used How to evaluate “Similar” item Form, Fit, and Function Essential characteristics that define a product Technical specifications Customarily used “Usually” or “Commonly” What industries & applications? Size of the market Ryan

Overview – “Modification” Definition 6 Modification should be: “Customarily” available to the public, OR Required to meet specific Government reqs; but are minor modifications What constitutes a “minor” modification? Are there changes to the essential physical characteristics? Is the non-governmental function significantly altered? Value and size of the modification Certified cost and pricing data may be required FAR 15.403 the greater of 5% of total price or the certified cost and pricing threshold Non-minor, non-commercial modification Un-modified item may still be commercial and exempt from TINA Ryan

Commercial Services 7 (5) Installation services, maintenance services, repair services, training services, and other services if-- (i) Such services are procured for support of an item referred to in paragraph (1), (2), (3), or (4) of this definition, regardless of whether such services are provided by the same source or at the same time as the item; and (ii) The source of such services provides similar services contemporaneously to the general public under terms and conditions similar to those offered to the Federal Government; (6) Services of a type offered and sold competitively in substantial quantities in the commercial marketplace based on established catalog or market prices for specific tasks performed or specific outcomes to be achieved and under standard commercial terms and conditions. For purposes of these services— Ryan

Overview – Nondevelopmental Item 8 Nondevelopmental Item (NDI) Defined in 2.101 as (1) Any previously developed item of supply used exclusively for governmental purposes by a Federal agency, a State or local government, or a foreign government with which the United States has a mutual defense cooperation agreement; (2) Any item described in paragraph (1) of this definition that requires only minor modification or modifications of a type customarily available in the commercial marketplace in order to meet the requirements of the procuring department or agency; or (3) Any item of supply being produced that does not meet the requirements of paragraph (1) or (2) solely because the item is not yet in use. Commercial NDI is defined in the commercial item definition Developed exclusively at private expense, sold in substantial quantities, on a competitive basis, to multiple State and local governments. Ryan

Evolution of Commercial – Recent NDAAs Implements Commercial Centers of Excellence (COEs) Set the mandate for a “Cadre of Experts’ within DoD Industry reacts negatively to DFARS changes NDAA 2016 Restricts PCO’s ability to change commercial decision; to HCA Reliance on prior Government prices paid for price reasonableness Added scrutiny to convert from FAR 12 to FAR 15 NDAA 2017 Market research for price analysis Create a non-public database to collect PCO CIDs Many Pilot programs for commercial items Joe

Commercial Item Group (CIG) - Mission Develop a robust “cadre” of commercial acquisition expertise to support buying commands and DCMA for commercial item recommendations and pricing Lynne DCMA-AQKT) was established to provide direct support regarding Commercial Item acquisitions to: ----- Buying commands, DoD ----- Buying commands, Federal Civilian with reimbursable agreements ----- DCMA ACOs" Commercial@dcma.mil OPERATIONAL 30 JUNE 2016 Imperative: 2013 NDAA, Section 831(b)

Commercial Item Group (CIG) - Setup Boston Markets: Services (MRO), Chemicals and Materials Denver Markets: Space (Spacecraft and Lift), C4I (Systems, Cyber and Services), Indianapolis Markets: Automotive, Aeronautics, Aircraft Engines Phoenix Markets: Heavy Machinery, Missiles Philadelphia Markets: Naval Transport & Equipment, Troop Supply (Shelters, Personal Equipment) Lynne St. Petersburg Group HQ Markets: Special Operations (Vehicles, Weapons, Ammo) Currently Being Refined

Commercial Item Group (CIG) – Capabilities & Goals Requests (From ACO/PCO or DCMA internal) Technical and pricing analysis Market analysis Commercial item determination recommendations Price Reasonableness Analyses Negotiation Support Training and Assistance Establish Commercial Item Database Establish a “Common Framework” with industry Lynne

Common Framework - Commerciality Identify the specific FAR 2.101 definition – paragraphs (1) to (8) Item nomenclature, Description - Pictures Side-by-side comparison proposed item vs. similar commercial item(s) noting any differences and similarities.   Functionality – of the proposed item and the “similar” commercial Application – how / what is the item used for (both proposed / “similar”) Physical characteristics Evidence of sales or offered for sale Website, catalog Sales history Services -- Compare/contrast key terms & conditions vs. customary commercial terms & conditions Pricing, Warranty, Test, Inspection, Technical data rights - as applicable; Lynne MOAs are established to reach agreement on the process for DCMA to evaluate commerciality and commercial prices Common framework – DCMA data needed is identified and Contractor agreement to provide the data Other caveats – communication of recommendation / last chance / to ensure clear

Common Framework - Pricing Sales data/Invoices; proposed item and “similar” item Unredacted All sales data / not a subset of sales data / Govt. and commercial sales Identification and agreement of specific SAP/ERP reports Agreement to allow DCMA to review sales data/Invoices Unredacted, names, dates, item description, quantities Sales orders (not just invoices – total quantities, terms/conditions) Catalog prices – excerpt applicable catalog pages Price lists – published prices lists Explanation of sales data anomalies Explanation of price differences – proposed vs sales data of “similar” Relevant strategic pricing agreements – i.e. long term agreements Lynne Proposal / CID Walkthrough

Common Framework - MOA Agreements establish a process for review of commerciality and commercial pricing Agreement is between DCMA and “Contractor” Does not bind Contracting Officers DCMA’s authority is limited to recommending commerciality and recommending price reasonableness Common framework – Data DCMA needs to evaluate commerciality Data DCMA needs to evaluate pricing Agreement to provide data / access to sales data Unredacted invoices Other caveats – communication of preliminary recommendation Commerciality & Proposal Walkthrough Lynne Proposal / CID Walkthrough

Determining Commerciality – FAR 12 and FAR 15 16 Step 1. Does a prior PCO CID exist? Step 2. Market Research Is this part/service available to the commercial market? Is it customarily used by non-governmental entities Are similar parts being used by non-governmental entities How similar are they? “Of-A-Type” – side by side comparison Step 3. Review Contractor Supplied information Step 4. Make a determination, citing which part of the definition the part or service meets, using market research and proposed information Lynne

Determining Commerciality – PreAward Implications Pursue Other Than Commercial Item Procurement Are Commercial Items Available? Can Commercial items be reasonably modified? Can the requirements be modified No No No Lynne This goes back to the requirements, pre solicitation. The altimeter is a great example. Ok we do our market research and the required Altimeter NSN 1000 900 4444 is not commercially available. Don’t stop there. What about that Garmin one we talked about, if I were to put that in my aircraft, do I simply need to add a different bracket so it can bolt in? Yes Yes Yes Pursue Commercial Item Procurement IAW FAR Part 12

Determining Commerciality – Sharing the Decisions Spreadsheet retained by CIG – Commercial@dcma.mil Future database will incorporate PCO decisions Helps both Industry and Government Once commercial always commercial “Once Commercial” refers to a PCO determination Prime determination of a subcontractor does not count CIG non-commercial recommendations revisited with additional data or evidence of market changes Lynne

Determining Commerciality - Responsibilities 19 Determining Commerciality - Responsibilities Government issues FAR 12 Solicitation Government performs market research to determine commerciality (FAR 12 or 15 RFP) Prime contractor needs to support price reasonableness in the sole source proposal Government PCO should engage experts pricing, engineering & DCMA CIG, for support Government PCO is required to have a written D&F – CID on any commercial buys over $1M FAR 15 Non-Commercial Prime with commercial Subcontracts Prime Contractor shall perform a Commercial Item Determination, using Market Research and guidelines in FAR Part 10. (244.402) Prime contractor submitting a Subcontractor “assertion of commerciality” is not meeting the requirement Prime Contractor shall perform price analysis on the subcontractor PCO still has responsibility to make sure prime proposal, including CIDs is adequate and price is fair and reasonable Decisions, no matter who is responsible, rely heavily on Market Research Lynne

Market Research Price Analysis? or Commerciality? 20 Market Research What is Market Research? FAR 2.101 “Market research” means collecting and analyzing information about capabilities within the market to satisfy agency needs FAR Part 10 - use the results of the market research to determine if commercial items can be used to meet the agency’s needs. Price Analysis? or Commerciality? Who’s is responsible? Importance Commerciality - Reliance on future CIDs Pricing – Understanding the delta Ryan The FAR 2.101 tells us “Market research” means collecting and analyzing information about capabilities within the market to satisfy agency needs FAR 10 tells us that we shall use the results of the market research to determine commercial items can be used to meet the agency’s needs. Market research, in our group, is used for both commerciality and pricing. Assessing the market to see if the product meets the definition, and seeing what fair prices the market will bear Be resourceful. Market research isn't limited to Google. – talk more about resources later

Market Research Collect Organize Present Maintain 21 Collect Market research is a continuous process designed to gather data on products and services, market capabilities and the business practices associated with them. Organize Data is used to evaluate trade-offs among the various ways of meeting an organization’s requirements. Present Market research is also the documentation of the data collected and its presentation in a way to facilitate acquisition decisions. Maintain Keep your market research for future decision makers to understand the products and services and how your decisions were made. Ryan Collecting information, putting it into an organized, useable format, being able to extrapolate information from that data, and present it clearly. Old supervisor told me that you could be the best price analyst, but if you can’t take the information or work that you performed, and organize and present it in a meaningful manner, what good is the data. Lastly, Maintain the information for future. I cant tell you how many times we have found out that a prior CID was written and we find a PCO who knows the prior PCO who’s uncle’s brother

Market Research Is one source good enough? Are two sources good enough? Does 1 commercial sale = Commercial? What about 1 commercial sale 4 years ago? Does 1 quote showing an offered price mean its fair? Is the catalog price fair? Is a % off catalog price fair? Ryan Hopefully everyone in this room has conducted market research. For work, buying a car, buying a home, Need to take that experience, the methods, and means in which you research and apply it here. Sources will typically be limited to the internet, google, prior history, be resourceful Challenges: time, available sources with information, our own blinders

Commercial Item Pricing 23 Price Analysis Techniques Comparison to other prices received from other companies Comparison to historic prices paid Parametric estimating methods Government cost estimates Market research on same or similar items (NDAA 2017 – required) Data other than certified cost or pricing data Value based pricing (NDAA 2017 – allowable) Ryan

Commercial Item Pricing 24 Evaluate price, not cost Cost plus a certain profit is not the F&R way to look at commercial pricing Peanut butter and jelly sandwich Be a prudent business person Understand the competitive market conditions Direct competition, if commercial, why isn't it being competed Who makes products/services similar? Who buys besides USG? Reasonable knowledge of the market What has the Government paid, what do others pay? What is the value of the item/service; complexity, risk, difficulty Negotiate a fair and reasonable price Ryan

Commercial Item Pricing 25 Step 1. Evaluate contractor provided information Step 2. Collect as much information as necessary What are prices like in the market – on commercial similar-to items Understand the difference Has Government bought it before, how much? How long ago? Quantity? Are there any market standards i.e. price per pound/foot, etc Step 3. Form a recommendation Compile as many pricing data points as possible Use all the points with varying levels of fidelity to recommend a price/range Step 4. Document your analysis Ryan

Common Misconceptions 26 A company is a commercial company A facility is commercial Nondevelopmental items are commercial If it is developed at private expense, it is commercial You have no commercial sales, so it’s not commercial It is listed for sale on our website, so it’s commercial Sales data is too old for consideration into commerciality It is commercial so the price is fair and reasonable The price is in our catalog so it’s fair and reasonable Joe

Commercial Service Example Case 27 Helicopter Blade Repairs Commercial services for repairs on a military helicopter rotor blades Review the contractors proposal Contractor provides data showing that they provide similar services to commercial customers & the rotor blades are considered commercial Contractor states the proposed services meet FAR 2.101 definition 5 Are these commercial services? RYan Definition 5 (ii) …under similar terms and conditions (T&Cs) as in the commercial marketplace RFI to get more information regarding T&Cs, as well as market research to see what commercially normal T&Cs.

Commercial Service Example Case 28 T & C Government Commercial Pricing FFP per repair category (i.e. Cat1, Cat2, Cat3) Inspect / Propose Firm Fixed Price Scope Multiple repair scopes grouped into Categories (CAT 2 and CAT 3) Scope established post inspection Contract Term 5 years Per repair Materials Furnished by Govt. Included in price Ryan Are these commercial services? CIG opinion is no. While the service itself is commercial, it is not being offered in the same/ similar manner as in the commercial market. This could be because of the RFP or because of the proposal.

Commercial Part Example 29 Buying a Valve Contractor makes custom valves for various military and commercial application Review the contractors proposal Contractor provides data showing various part numbers and technical specifications, including price for each valve they made Never made this specific valve before, but they have sold valves commercially Is the valve commercial? Ryan We are going to review to see if it fits into “of a type” Compare the Form, Fit and Function of the commercially sold valves, to the one we are buying.

Commercial Part Example 30 Contractor provided sales history of commercial sales CIG performed mkt research and found other similar for sale Government-requirements 2.25” diameter 2000 PSI 10” long Max Temp 2,000 degrees Is the valve commercial? Ryan CIG opinion is yes. This fits into the “of a type” scope. Inbounds

Commercial Part Example 31 What about pricing? KTR proposed $50k Some are higher some are lower Is $50k reasonable? Ryan Let’s Compare various technical specs to the average price sold/offered for sale

Commercial Part Example 32 Ryan

Commercial Part Example 33 Using the model that Temperature is a cost driver 12.284(2000) +8975.3 = $33,543 Is $50k reasonable? RFI to contractor. You haven’t given us supporting data for a $50k price Government Requires additional testing, that we don’t do commercially Wait, is this still a commercial valve? RFI to contractor. Need more information regarding the testing Ryan Tests are all offered/performed commercially, frequency was different CIG bottoms up estimated the value of the tests, $2,500; total $36,043 Is $50k reasonable? – No, not based off the information provided, plus market research. CIG recommends $36k

Summary NDAAs added emphasis on market research & price analysis 34 NDAAs added emphasis on market research & price analysis Collect as many fact based pieces of information to build story Added emphasis on commercial acquisition Changes affect both Industry and Government CIG is Commercial@dcma.mil Building database Agreements with Industry Ryan

Questions