LESSON 4 Commercial Contracts 15November2013 Lesson 4: Safety Stock

Lesson Introduction Given a commercial contract, students will be able to determine required Quality Assurance (QA) requirements.

Lesson Objectives Upon completion of this lesson, you should be able to: Distinguish the difference between commercial items and commercially available off-the-shelf items. Examine Federal Acquisition Regulation (FAR) polices regarding commercial contracts. Identify the responsibilities of the Quality Assurance Specialist (QAS) regarding corrective actions on commercial contracts. Determine DCMA’s QA surveillance responsibilities in regard to commercial contract. Identify commercial contract scenarios that warrant escalation. Lesson 4: Safety Stock

Lesson Topics During this lesson, you will complete the following topics: Commercial Items vs. COTS QAS Corrective Action Responsibilities QA Surveillance Responsibilities Escalation

WIIFM? This lesson will help you understand: The difference between standard Government contracts and commercial contracts Why the QAS has limited surveillance responsibilities on commercial contracts The importance of an addenda in commercial contracts

“Part 12 Contracts” Commercial Contracts

Commercial items vs. COTS Lesson Topics: Commercial items vs. COTS QAS Corrective Action Responsibilities QA Surveillance Responsibilities Escalation

Topic 1: Commercial Items vs. COTS Commercial item is any item that is generally used by the public. Commercial-Off-The-Shelf (COTS) item is a commercial item offered to the Government through a contract without modification. Lesson 4: Safety Stock

Commercial Item FAR 2.101 (1) Any item, other than real property, that is of a type customarily used by the general public or by non- governmental entities for purposes other than governmental purposes, and - Has been sold, leased, or licensed to the general public Has been offered for sale, lease, or license to the general public U.S. Navy photo/Released

Commercial-Off-The-Shelf (COTS) Item FAR 2.101 (1) Means any item or supply (including construction material) that is - (i) A commercial item (ii) Sold in substantial quantities in the commercial marketplace; and (iii) Offered to the Government, under a contract or subcontract at any tier, without modification, in the same form in which it is sold in the commercial marketplace.

FAR Part 12 (1 of 4) Subpart 12.1 - Acquisition of Commercial Items - General 12.101 - Policy Agencies shall - (a) Conduct market research to determine whether commercial items or non-developmental items are available that could meet the agency's requirements; (b) Acquire commercial items or non-developmental items when they are available to meet the needs of the agency; and (c) Require prime contractors and subcontractors at all tiers to incorporate, to the maximum extent practicable, commercial items or non-developmental items as components of items supplied to the agency.

FAR Part 12 (2 of 4) Subpart 12.208 - Contract Quality Assurance Contracts for commercial items shall rely on contractors’ existing quality assurance systems as a substitute for Government inspection and testing before tender for acceptance unless customary market practices for the commercial item being acquired include in-process inspection. Any in-process inspection by the Government shall be conducted in a manner consistent with commercial practice.

FAR Part 12 (3 of 4) Subpart 12.402 - Acceptance (a) The acceptance paragraph in 52.212-4 is based upon the assumption that the Government will rely on the contractor's assurances that the commercial item tendered for acceptance conforms to the contract requirements. The Government inspection of commercial items will not prejudice its other rights under the acceptance paragraph. Additionally, although the paragraph does not address the issue of rejection, the Government always has the right to refuse acceptance of nonconforming items. This paragraph is generally appropriate when the Government is acquiring noncomplex commercial items.

FAR Part 12 (4 of 4) Subpart 12.402 - Acceptance (cont.) (b) Other acceptance procedures may be more appropriate for the acquisition of complex commercial items or commercial items used in critical applications. In such cases, the contracting officer shall include alternative inspection procedure(s) in an addendum and ensure these procedures and the Postaward remedies adequately protect the interests of the Government. The contracting officer must carefully examine the terms and conditions of any express warranty with regard to the effect it may have on the Government’s available Postaward remedies.

FAR 52.212-4 FAR 52.212-4 – Contract Terms and Conditions – Commercial Items (Jul 2013) (a) Inspection and Acceptance (1) The Government has the right to inspect and test all materials furnished and services performed under this contract, to the extent practicable at all places and times, including the period of performance, and in any event before acceptance. The Government may also inspect the plant or plants of the Contractor or any subcontractor engaged in contract performance. The Government will perform inspections and tests in a manner that will not unduly delay the work.

QAS Corrective Action Responsibilities Lesson Topics: Commercial items vs. COTS QAS Corrective Action Responsibilities QA Surveillance Responsibilities Escalation

Topic 2: QAS Corrective Action Responsibilities When a commercial item is nonconforming, corrective actions would be limited to: “Info Only” to supplier Repair or replace Limited corrective action (C/A) verification Photo by Jo Adail Stephenson, DCMA Public Affairs

Info only to Contractor When a commercial item is nonconforming, corrective actions would be limited to: “Info Only” to supplier If the QAS has a corrective action, it is issued as “Info Only” to the supplier. Repair or replace Limited corrective action (C/A) verification Photo by Jo Adail Stephenson, DCMA Public Affairs

Repair or Replace When a commercial item is nonconforming, corrective actions would be limited to: “Info Only” to supplier Repair or replace The supplier will either repair or replace it. Limited corrective action (C/A) verification Photo by Jo Adail Stephenson, DCMA Public Affairs

Limited C/A Verification When a commercial item is nonconforming, corrective actions would be limited to: Info only to supplier Repair or replace Limited corrective action (C/A) verification Not involved in process review. If items are bad, supplier replaces the defective items. Photo by Jo Adail Stephenson, DCMA Public Affairs

QA Surveillance Responsibilities Lesson Topics: Commercial items vs. COTS QAS Corrective Action Responsibilities QA Surveillance Responsibilities Escalation

Topic 3: QA Surveillance Responsibilities Surveillance responsibilities for commercial contracts with or without addenda. Practical guidance FAR Part 12 Supplemental guidance Lesson 4: Safety Stock

Contracts with Addenda Commercial contract with addenda Follow the added customer instructions What about risk assessment? ADDENDA CONTRACTS

Contracts without Addenda Product examination at supplier’s final inspection Records - if available

Practical Guidance DCMA Quality Assurance Surveillance on Commercial Contracts In response to Department of Defense (DoD) direction to make greater use of commercial specifications/standards in lieu of military specifications and standards, DoD buying activities are issuing more commercial item contracts. Even some complex items like aircraft engines or aircraft overhauls are now being procured as commercial items.

Practical Guidance (cont.) FAR Part 12 provides guidance to contracting officers (CO) on the acquisition of commercial items. FAR 12.208, Contract quality assurance, is of particular interest. Photo by Brian M. Hahn, DCMA-GDLS protocol officer

FAR 12.208 “Contracts for commercial items must rely on the contractors’ existing quality assurance systems as a substitute for Government inspection and testing before tender for acceptance unless customary market practices for the commercial item being acquired include in-process inspection. Any in-process inspection by the Government shall be conducted in a manner consistent with commercial practice.”

FAR Part 12 FAR Part 12 provides direction to COs and is not a contractual requirement; the intent is reflected in the following contract clause: FAR 52.212-4 reads, “The Government reserves the right to inspect or test supplies or services that have been tendered for acceptance.” Photo by Patrick Tremblay, DCMA, PAO ,Fort Lee, VA

FAR Part 12 (cont.) FAR 12.302 (b) and (c) give the CO limited latitude to tailor portions of FAR 52.212-4. FAR 12.302 (d) reads, “tailoring shall be by addenda to the solicitation and contract.” Contract Management Office (CMO) attention to these provisions is necessary to avoid providing QA surveillance where contractually prohibited and to recognize tailoring of the FAR requirements.

Supplemental Guidance CMOs may receive contracts that are ambiguous or even contradictory regarding the extent of DCMA QA surveillance permitted. Document this situation as a contract deficiency and refer it to the Administrative Contracting Officer (ACO)/Procuring Contracting Officer (PCO) for resolution. ACO PCO

Note to the QAS Contracting offices have struggled to adapt to the commercial contracting requirements of FAR Part 12. Some commercial contracts are unclear making it very difficult for DCMA personnel to understand exactly what the PCO intended. Of course, this also makes it difficult for the QAS to develop appropriate risk-based surveillance plans. ?

Escalation Lesson Topics: Commercial items vs. COTS QAS Corrective Action Responsibilities QA Surveillance Responsibilities Escalation

Topic 4: Escalation The following slides introduces four situations that a QAS may encounter. How would the QAS escalate each to obtain a resolution? Lesson 4: Safety Stock

Group Discussion of Escalation Understand that the specific terms of individual contracts may warrant a different response. Where the Government’s rights under an individual contract are unclear, seek advice from the local office of counsel.

Group Discussion of Escalation (cont.) Where QAS communications with the PCO are advocated, they should always be accomplished in coordination with the ACO, if practicable. Any problems obtaining necessary direction/clarification from a PCO should be promptly escalated up the management chain for resolution.

Summary Having completed this lesson, you should now be able to: Distinguish the difference between commercial items and commercially available off-the-shelf items. Examine FAR polices regarding commercial contracts. Identify the responsibilities of the QAS regarding corrective actions on commercial contracts. Determine DCMA’s QA surveillance responsibilities in regard to commercial contract. Identify commercial contract scenarios that warrant escalation. Lesson 4: Safety Stock

Questions

Review Question 1 Commercial contracts are commonly referred to as what kind of contracts? FAR Part 52.212-4 FAR Part 12.402 FAR Part 21 FAR Part 12

Review Question 2 According to FAR Part 12.402- Acceptance, what does the Government have a right to do with nonconforming items? Refuse acceptance of nonconforming items Conduct market research to determine whether commercial items are available for acceptance Refuse acceptance of a conforming or nonconforming commercial item Accept or reject a product based on the accuracy of a contractor’s inspection system

Review Question 3 A Level I corrective action request is issued as “Info Only” to the supplier to document a nonconformance in the Corrective Action Report (CAR) eTool when which of these FAR clauses is in the contract? FAR 12.402 FAR 16.202 FAR 52.212-4 FAR 52.246-2

Review Question 4 On a commercial contract, when is the only time a QAS can do anything other than surveillance commonly referred to as “kind, count, and condition” at final? An addenda is written into the contract No addenda is written into the contract On a commercial contract If a QAS suspects the supplier is producing a nonconforming item