Presented By: Cost & Pricing Center Tom Walker November 15, 2013 COMMERCIAL ITEM DETERMINATION & PRICING (CID&P) PILOT - PATH FORWARD

GOAL Develop options for enhanced capability within DCMA to meet buying office and internal DCMA requests for commercial item determination and pricing support; A (CID&P) “Cadre” 2 New imperative: 2013 NDAA, Section 831(b)

WHY? 2013 NDAA, Section 831(b) (b) Training and Expertise- Not later than 270 days after the date of the enactment of this Act, the Under Secretary of Defense for Acquisition, Technology, and Logistics shall develop and begin implementation of a plan of action to-- (1) train the acquisition workforce on the use of the authority provided by sections 2306a(d) and 2379 of title 10, United States Code, in evaluating reasonableness of price in procurements of commercial items; and (2) develop a cadre of experts within the Department of Defense to provide expert advice to the acquisition workforce in the use of the authority provided by such sections in accordance with the guidance issued pursuant to subsection (a). DCMA designated by Director, Defense Pricing to pilot this role 3

Commercial Item Determinations More commercial “of a type” items are pushing the boundaries of the definition Prime contractors are prone to simply accepting subcontractor commerciality assertions at face value Pricing Subcontractors – particularly true commercial vendors – are not providing the information necessary to determine fair and reasonable prices Low quantities of commercial sales present issues concerning price validation Prices for high quantities of government purchases not reflective of expected volume discounts Currency of historical data is often an issue 4 Observations to Date

Commercial Definition “Commercial item” means -- (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-- (i) Has been sold, leased, or licensed to the general public; or, (ii) Has been offered for sale, lease, or license to the general public; (2) Any item that evolved from an item described in paragraph (1) of this definition through advances in technology or performance and that is not yet available in the commercial marketplace, but will be available in the commercial marketplace in time to satisfy the delivery requirements under a Government solicitation; 5

Commercial Definition (Cont.) “Commercial item” means -- (3) Any item that would satisfy a criterion expressed in paragraphs (1) or (2) of this definition, but for -- (i) Modifications of a type customarily available in the commercial marketplace; or (ii) Minor modifications of a type not customarily available in the commercial marketplace made to meet Federal Government requirements. Minor modifications means modifications that do not significantly alter the nongovernmental function or essential physical characteristics of an item or component, or change the purpose of a process. Factors to be considered in determining whether a modification is minor include the value and size of the modification and the comparative value and size of the final product. Dollar values and percentages may be used as guideposts, but are not conclusive evidence that a modification is minor; 6

Commercial Definition (Cont.) “Commercial item” means -- (4) Any combination of items meeting the requirements of paragraphs (1), (2), (3), or (5) of this definition that are of a type customarily combined and sold in combination to the general public; (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; 7

Commercial Definition (Cont.) “Commercial item” means -- (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— (i) “Catalog price” means a price included in a catalog, price list, schedule, or other form that is regularly maintained by the manufacturer or vendor, is either published or otherwise available for inspection by customers, and states prices at which sales are currently, or were last, made to a significant number of buyers constituting the general public; and 8

Commercial Definition (Cont.) “Commercial item” means -- (ii) “Market prices” means current prices that are established in the course of ordinary trade between buyers and sellers free to bargain and that can be substantiated through competition or from sources independent of the offerors. (7) Any item, combination of items, or service referred to in paragraphs (1) through (6) of this definition, notwithstanding the fact that the item, combination of items, or service is transferred between or among separate divisions, subsidiaries, or affiliates of a contractor; or (8) A nondevelopmental item, if the procuring agency determines the item was developed exclusively at private expense and sold in substantial quantities, on a competitive basis, to multiple State and local governments. 9

Commercial Item Determinations SUBPART 212.1—ACQUISITION OF COMMERCIAL ITEMS - GENERAL (Revised March 12, 2012) Applicability. (a)(i) When using FAR part 12 procedures for acquisitions exceeding $1 million in value, except for acquisitions made pursuant to FAR (f)(1), the contracting officer shall— (A) Determine in writing that the acquisition meets the commercial item definition in FAR or meets the criteria at FAR (g)(1); (B) Include the written determination in the contract file; and (C) Obtain approval at one level above the contracting officer when a commercial item determination relies on subsections (1)(ii), (3), (4), or (6) of the “commercial item” definition at FAR (ii) Follow the procedures at PGI (a) regarding file documentation.PGI

CIDs (Cont.) PGI ACQUISITION OF COMMERCIAL ITEMS— GENERAL PGI Applicability. (a) Contracting officers shall ensure that contract files fully and adequately document the market research and rationale supporting a conclusion that the commercial item definition in FAR has been satisfied. Particular care must be taken to document determinations involving “modifications of a type customarily available in the marketplace,” and items only “offered for sale, lease, or license to the general public,” but not yet actually sold, leased, or licensed. In these situations, the documentation must clearly detail the particulars of the modifications and sales offers. When such items lack sufficient market pricing histories, additional diligence must be given to determinations that prices are fair and reasonable as required by FAR Subpart

Commercial Pricing Prohibition on Obtaining Certified Cost or Pricing Data (10 U.S.C. 2306a and 41 U.S.C. 254b). (3) Commercial items. “… is exempt from the requirement for certified cost or pricing data.” “modifications of a commercial item are not exempt from the requirement for submission of certified cost or pricing data on the basis of the exemption provided for at FAR (c)(3) if the total price of all such modifications under a particular contract action exceeds the greater of the threshold for obtaining certified cost or pricing data in or 5 percent of the total price of the contract at the time of contract award.”

Commercial Pricing Proposal Adequacy Checklist. 19. FAR , Table 15-2, Section II Paragraph A - Does the proposal include a price analysis for all commercial items offered that are not available to the general public? 13

Commercial Pricing Price Analysis Comparison of proposed prices (competition) Historical Pricing Parametrics Competitive published prices Comparison to IGCE Comparison to prices obtained through market research Data other than certified cost/price data from offeror 14

Commercial Pricing Subcontract Price Analysis ( ) CO is responsible for the determination of a fair and reasonable price for the prime contract, including subcontracting costs prime contractor or subcontractor shall Conduct appropriate cost or price analyses to establish the reasonableness of proposed subcontract prices Include the results of these analyses in the price proposal When required, submit subcontractor certified cost or pricing data as part of its own certified cost or pricing data. 15

Major Weapon Systems Secretary of Defense determines Subsystems If system is commercial or CO determination of commercial AND sufficient info to determine reasonableness Components/Spares (other than COTS) System or Subsystem determined commercial or CO determination AND sufficient information 16

Way Forward Not later than 270 days after the date of the enactment of this Act, the Under Secretary of Defense for Acquisition, Technology, and Logistics shall develop and begin implementation of a plan of action………. 28 September The DCMA/Navy Pricefighter team currently working pilot projects fulfills this mandate: Results previously briefed indicate opportunities for improved Commercial Item Determinations and pricing of Commercial Items across the Department

Resources available for DoD Commercial pricing capability will be constrained in accordance with DoD POM submissions to comply with Budget Control Act Continued Navy Pricefighter Support is a priority Will require both additional budget and manpower authorizations DPAP funding for DCMA travel and Pricefighter support (labor and travel) will be available Commercial pricing path forward dependent upon policy/regulatory framework to be established 18 Assumptions/Caveats

Management Analyst CID&P Structure – Next Step 19 Commercial Pricing Hub Site Lead (Supervisor) 1102 CID&P Analysts Navy Price Fighters -Analysts -Engineers - 6 C/P Analysts Dedicated Organizational Structure Within Cost & Pricing Center Cadre of experts = Commercial Pricing Hub Site (8 FTEs)* DCMA Engineering Hub Site Director Intend to hire incrementally Demand/funding will drive pace Key unknown is the extent to which DoD PCOs are driven to use capability

Pros Creates “real” organizational entity responsible for commercial pricing Simplifies reporting Eliminates competition for resources (Overhead Should Cost Reviews and pricing surge efforts currently compete for same expertise) Focuses functional experience/expertise Consistency in Commercial Item Determinations and Pricing across services Facilitates training of Commercial Pricing Cadre Facilitates standardized Commercial Item Determination/Pricing Tool development Cons Creates specialized niche in terms of Cost & Pricing Center skillsets Not resource neutral 20 Pros/Cons Substantial uncertainty as to demand for support. Policy/regulatory direction as to breadth and depth of review on proposed commercial items will be the key determinant of resources required

Summary 21 Development of a Commercial Capability is required by law Director of Defense Pricing has identified DCMA to pilot this effort Pilot project underway to determine needs and structure Recommend a core capability to be developed within the DCMA Cost & Pricing Center and Navy Pricefighters Initial DCMA team will stand up under an existing hub site When mature, a readily identifiable capability will stand up to provide: Assistance with Commercial Item Determinations Price Reasonableness evaluations Policy framework will determine magnitude of effort and drive funding requirements Pilot is Proceeding and DCMA is Ready for the Next Step Toward a Full Commercial Pricing Capability!

Backup Slides 22