JFS 3/31/08 COMMERCIAL ITEM PROCUREMENT NDIA Educational Seminar March 31, 2008

JFS 3/31/08 BACKGROUND The Federal Acquisition Streamlining Act of 1994 mandated the use of commercial items –Jump started the Acquisition Reform movement –Significant benefits for DoD – expanded use of commercial products, reduced administration for Govt. & industry, exploited use of advanced R&D in commercial technologies DoD and Congress have proposed changes that alter many of the commercial acquisition reforms –At DoD’s request, the House and Senate proposed changes to commercial item procurement for FY 2008 –DoD has published proposed FAR changes for additional cost data (uncertified) for commercial items –DoD drafted a legislative proposal for FY 2009 Def Auth that would revise FASA commercial item definitions

JFS 3/31/08 FY 1999 National Defense Authorization Act (NDAA) –Definition of “non-governmental purposes” Legislative erosion of commercial item provisions –FY 2003 NDAA, SEC. 817 defined “exceptional circumstances”… also, applied it to all CAS waivers –FY 2005 NDAA, SEC. 818 required cost or pricing data for non-commercial mods to commercial items greater than $500K or 5% of total contract price –FY 2006 NDAA, SEC. 803 requires advance notification to Congress for purchasing a major weapons system as a commercial item (e.g. C-130J) Recent developments regarding commercial item procurement –2007 NDAA: Sec technical data rights for program sustainment; Sec Specialty metals-no commercial item exception included –DoD IG Report Sept. 29, 2006: Commercial contracting for the acquisition of defense systems –DoD IG Report Sept. 15, 2006: Hamilton Sundstrand’s commercial contracts for non-competitive spare parts –GAO Report Sept 2006: DoD contracting efforts needed to address AF commercial acquisition risk –DPAP Policy Letter March 2, 2007: Must document better commercial item determinations; May 31 st revision to PGI COMMERCIAL ITEM PROCUREMENT - THE DOWNHILL SLIDE

JFS 3/31/08 Mr. Shay Assad Director, Defense Procurement and Acquisition Policy Balance between Partnerships and Contractor Maintain Arms-Length Relationships Don’t Lose Objectivity “At the end of the day we are held accountable to the warfighter and taxpayer.”

JFS 3/31/08 Mr. Shay Assad Director, Defense Procurement and Acquisition Policy Cost or Pricing Data In the last 12 years, trend was not to get cost or pricing data. We need to get the data to do analysis and ensure fair and reasonable prices. Three years from now, no one will care whether a contract was awarded in 30 or 60 days, they will care whether the price you paid was reasonable. “Price is more important than early award.”

JFS 3/31/08 TINA UNCERTIFIED DATA LIMITED COST INFORMATION PRICE DATA ONLY 1996 PGI-2007PROPOSEDREQUESTED FARA/RULE ( )LEGISLATION 1994 FASA EVOLUTION OF COST OR PRICING DATA FOR COMMERCIAL ITEMS ٭ SEC. 815

JFS 3/31/08 CO MAY REQUIRE……..”COST INFORMATION THAT WOULD OTHERWISE BE DEFINED AS COST OR PRICING DATA IF CERTIFIED” ANNUAL REPORT TO CONGRESS OF COMMERCIAL ITEM EXCEPTIONS FOR ACTIONS GREATER THAN $15M DPAP MEMO MARCH 2, 2007; REQUIRES WRITTEN DOCUMENTATION FOR ALL COMMERCIAL ITEM DETERMINATIONS GREATER THAN $1M (ADDED to DFARS) SUFFICIENT STEPS MUST BE TAKEN TO VERIFY THE INTEGRITY OF SALES DATA; TO INCLUDE ASSISTANCE FROM DCAA PGI MAY 31, 2007

JFS 3/31/08 REQUIRE SUBMISSION OF DD-1921 FOR CONTRACTOR COST DATA REPORTING IN CERTAIN CASES IF PRICE ANALYSIS ALONE IS NOT SUFFICIENT TO ESTABLISH A FAIR AND REASONABLE PRICE, COST INFORMATION SHOULD BE OBTAINED. CO MUST COMMUNICATE THE COST INFORMATION THAT IS NEEDED CO SHOULD ACCEPT DATA THAT IS CONSISTENT WITH THE OFFEROR’S RECORDS. MUST “ALWAYS” CONSIDER THE NEED FOR DCAA SUPPORT PGI MAY 31, 2007 (Cont’d)

JFS 3/31/08 BLURS DIFFERENTIATION BETWEEN CERTIFIED AND UNCERTIFIED COST OR PRICING DATA. CURRENT DEFINITIONS OF CERTIFIED DATA AND INFORMATION OTHER THAN COST OR PRICING DATA ARE WELL UNDERSTOOD. ADDS AUDIT AND RECORDS REQUIREMENT FOR DATA OTHER THAN COST OR PRICING DATA. INCORRECTLY ASSUMES COMMERCIAL FIRMS HAVE SYSTEMS CAPABLE OF PROVIDING COST DATA OR WOULD BE WILLING TO DEVELOP SUCH SYSTEMS. NO DEFINITION OF WHAT COST DATA IS REQUIRED IN SUPPORT OF COMMERCIAL ITEMS. WOULD RESULT IN TINA-LIKE AUDITS OF COMMERCIAL ITEMS. ADDING JUDGMENTAL INFORMATION IS MORE THAN REQUIRED BY TINA CHANGING “INFORMATION” TO “DATA” CONFLICTS WITH THE INTENT TO ESTABLISH PRICE REASONABLENESS BASED ON SALES INFORMATION RATHER THAN COST DATA. EXPANDS DATA TO “COST DATA OR ANY OTHER INFORMATION THE CONTRACTING OFFICER REQUIRES.” Issues with Proposed Rule FAR Case Definition of Cost or Pricing Data

JFS 3/31/08 LEGISLATIVE PROVISION APPROVED BY HOUSE H.R. 1585, Sec. 811; Change to the Truth in Negotiations Act; Exception for the Acquisition of a Commercial Item: The exception does not apply in the case of a contract, subcontract, or modification of a contract or subcontract that is for a commercial item to be procured using procedures other than competitive procedures- (A)if the contracting officer determines that commercial sales data are insufficient to determine a fair and reasonable price; and (B)if the contractor’s business segment has submitted certified cost or pricing data in connection with at least one contract award or contract modification

JFS 3/31/08 LEGISLATIVE PROVISION APPROVED BY SENATE S.1547 Sec. 822 (1) clarify the circumstances in which a subsystem, component, or spare part for a major weapon system may be purchased as a commercial item; (2) clarify that the terms `general public' and `nongovernmental entity' do not include federal, state, local or foreign governments, or contractors acting on behalf of such governments for the purpose of determining whether an item qualifies as a commercial item; and (3) require the contractor offering a major weapon system, subsystem, component, or spare part as a commercial item to provide information other than certified cost or pricing data that is adequate for evaluating the reasonableness of the proposed price.

JFS 3/31/08 LEGISLATIVE PROVISION APPROVED BY SENATE Subsection B revised to add subparagraph (3) the contractor demonstrates that it has sold, leased, or licensed the subsystem or an item that is the same as the subsystem, but for the modifications described in subparagraphs (B) and (C) of section 4(12) of the Office of Federal Procurement Policy Act, in significant quantifies to the general public.”; Subsection C added for Components & Spare Parts Subparagraph (D) adds: (d) Price Information.—In the case of any major weapon system, subsystem, component, or spare part purchased under procedures established for the procurement of commercial items under the authority of this section, the contractor shall provide data other than certified cost or pricing data, including information on prices at which the same item or similar items have previously been sold to the general public, that is adequate for evaluating, through price analysis, the reasonableness of the price of the contract, subcontract, or modification of the contract or subcontract pursuant to which such major weapon system, subsystem, component or spare part, as the case may be, will be purchased.”

JFS 3/31/08 SEC 815:CLARIFICATION OF RULES REGARDING THE PROCUREMENT OF COMMERCIAL ITEMS Authorize the Contracting Officer in the procurement of a major weapon system, or subsystems, components, or spare parts for a major weapon system to require offerors to submit sufficient information to evaluate, through price analysis, the reasonableness of the proposed price. The information required to be submitted may include information on prices paid for the same or similar items under comparable terms and conditions and, if the contracting officer determines that price information is not sufficient to determine the reasonableness of price, other relevant information regarding the basis of price or cost, including information on labor costs, material costs, and overhead rates. The contracting officer’s written determination under this section will include an explanation of the basis for the Contracting Officer’s determination that (1) the item is a commercial item; and (2) the information provided by the contractor is sufficient to evaluate the reasonableness of price. NATIONAL DEFENSE AUTHORIZATION ACT FOR 2008

JFS 3/31/08 SEC 805:PROCUREMENT OF COMMERCIAL SERVICES Require the Administrator for Federal Procurement Policy to modify the FAR to narrow the regulatory definition of commercial services. Require the Secretary of Defense to modify the regulations of the Department of Defense to (1) authorize the contracting officer in the procurement of certain commercial services to require offerors to submit sufficient information to evaluate, through price analysis, the reasonableness of the proposed price; and (2) address the categories of services which may be purchased under commercial T&M contracts. NATIONAL DEFENSE AUTHORIZATION ACT FOR 2008

JFS 3/31/08 SEC. 815 KEY PROVISIONS Modifies 10 U.S.C applicable to only DoD contracts for major weapons systems. Expanded to cover subsystems, components and spare parts Excludes COTS items; 41 U.S.C. 431(c) Sec. 35 May be purchased as commercial only if: intended for a major weapons system or subsystem that is commercial, or 1)CO determines that the item meets the definition at 41 U.S.C 403 (12) and 2)the offeror has submitted sufficient information to evaluate, through price analysis, the reasonableness of the price Applies only to prime contracts (not subcontracts) unless the prime adds no or negligible value “Information” includes both government and commercial sales history for the same or similar items, or if sales information is insufficient, cost information on labor, material or overhead costs.

JFS 3/31/08 SEC. 815 KEY PROVISIONS (Continued) “Information” is similar to existing TINA language and FAR pricing policy Technical Data Amendment- elimination of presumption that technical data for commercial items is developed at private expense is modified by reinstating the presumption for COTS items Terms general public and nongovernmental entities do not include federal, state, local or foreign governments

JFS 3/31/08 SEC. 815 VS. FASA FASA describes a 3-step approach: 1.Market Research 2.Commercial item determination 3.Solicit under FAR Part 12 Sec. 815 combines the commerciality determination and pricing. If price reasonableness cannot be determined, the item is not commercial and TINA applies

JFS 3/31/08 SEC 814:CLARIFICATION OF SUBMISSION OF COST OR PRICING DATA ON NON-COMMERCIAL MODIFICATIONS OF COMMERCIAL ITEMS Clarify certain thresholds in the Truth in Negotiations Act (10 U.S.C. 2306a) for noncommercial modifications of commercial items. The TINA thresholds is increased from $500K to $650K NATIONAL DEFENSE AUTHORIZATION ACT FOR 2008

JFS 3/31/08 SEC 821:PLAN FOR RESTRICTING GOVERNMENT-UNIQUE CONTRACT CLAUSES ON COMMERCIAL CONTRACTS Require the Under Secretary of Defense for Acquisition, Technology, and Logistics to develop and implement a plan to minimize the number of government-unique contract clauses used in commercial contracts NATIONAL DEFENSE AUTHORIZATION ACT FOR 2008

JFS 3/31/08 SEC 822:EXTENSION OF AUTHORITY FOR USE OF SIMPLIFIED ACQUISITION PROCEDURES FOR CERTAIN COMMERCIAL ITEMS Extend the authority of the Department of Defense to use simplified acquisition procedures for the acquisition of certain commercial items. (FAR 13.5) NATIONAL DEFENSE AUTHORIZATION ACT FOR 2008

JFS 3/31/08 SEC 826:MARKET RESEARCH Require the Secretary of Defense to take certain steps to ensure that the Department of Defense and its prime contractors conduct appropriate market research before making purchases for or on behalf of the Department. Directs the Secretary to work to develop market research tools to assist Contracting Officers and prime contractors in performing market research NATIONAL DEFENSE AUTHORIZATION ACT FOR 2008

JFS 3/31/08 REGULATORY ISSUES – NON COMMERCIAL ITEMS Award & Incentive Fees –FY 07 NDAA Sec “Link Award and Incentive Fees to Acquisition Outcomes” –DPAP Policy letter April 24, 2007 –DFARS Case 2006 – D021 (Interim Rule) in process Fixed Price Development Programs –FY 07 NDAA Sec “Fixed Price Development Programs” –DFARS Case 2006 – D053. “Determination of Contract Type of Development Programs”

JFS 3/31/08 PENDING ISSUES DoD would like to change the commercial item definition to remove “of a type” and “offered for sale” to “has been sold” - drafted legislation for Panel on Contracting Integrity recommendation Assistant Secretary of the Air Force for acquisition is questioning commerciality of items that are no longer in production: If no relevant sales history, provide cost support (not cost or pricing data) as to how the proposed price was developed FAR Case is still alive. CODSIA letter 3/25/08 recommended a new rule based on Sec. 815 ARWG recommendation for no legislative changes this year

JFS 3/31/08 NEXT STEPS Industry continue to advocate against changes to the commercial item definition What does an acceptable submittal of sales history look like? Good topic for DoD Procurement Conference How can we ensure that the benefit of acquiring commercial items for the warfighter is recognized? How can we gain better insight into DoD acquisition policy?