Nontraditional Defense [Sub]Contractors

[WifWaf]

In the following memo the Director, DPC, states, "[T]his memo reminds Contracting Officers (COs) that contractors may make an NDC determination about their suppliers and subcontractors, so long as the suppliers and subcontractors meet the definition of an NDC, as defined in 10 United States Code (U.S.C) § 3014." (Emphasis added).

https://www.acq.osd.mil/dpap/policy/policyvault/USA000996-24-DPC.pdf

Until case law challenges it, this statement settles a debate from the above thread.  The holes in DOD COs' noncommercial subcontract arguments make it not worth delaying award.  Instead, I will foot-stomp my advice to COs: "[R]ead, as your DFARS PGI 215.403-1 instructs, the DOD Guidebook for Acquiring Commercial Items Part B: 'Pricing Commercial Items'.  Be ready for sole-source contractors to challenge you by saying there is no requirement in your solicitation for their subcontractor to submit cost data...So embrace the challenge of having to throw out your old process and templates where the sub submits a cost build-up and gets audited, and begin gathering market research on your upcoming subcontract costs instead."

Whether Congress intended this, or if, instead, the rule's promulgators were unclear about contractors' authorization to make NDC determinations, would be up to the courts to decide.  Don't count on it - just do the price analysis!

[Fara Fasat]

2 comments:

First, the memo says it "reminds" COs that contractors may make NDC determinations for their subs. That's a bit disingenuous. DoD's position before this was that the authority to make a NDC determination did not extend to primes. Are they now pretending that it did? See the federal register notice for the rule (https://www.federalregister.gov/documents/2018/01/31/2018-01781/defense-federal-acquisition-regulation-supplement-procurement-of-commercial-items-dfars-case) and the response to a question about extending the authority to primes: "This authority was neither mandatory nor was it extended to prime contractor commercial item determinations for subcontracted items and services." I may have missed it, but I don't think the NDC determination authority has been given to primes since the publication of that rule. If it has been, then I withdraw comment #1.

Second, other than the "reminder" sentence, the remainder of the memo talks about COs and offerors. No more mention of subs. You would think that if this were truly a reminder, it would go into more detail about a prime's responsibilities in making the determination. Instead, it simply restates the relationship and duties between a CO and an offeror.

[WifWaf]

2 hours ago, Fara Fasat said:

First, the memo says it "reminds" COs that contractors may make NDC determinations for their subs. That's a bit disingenuous. DoD's position before this was that the authority to make a NDC determination did not extend to primes.

Are you referring to the Director, DPC, or to the DAR Council?  Government by bureaucracy means one unelected official is not accountable to the others' statements, unless some sort of charter (e.g., the U.S. Constitution) establishes a check and balance making one beholden to the other.  Can you identify one here?

2 hours ago, Fara Fasat said:

Second, other than the "reminder" sentence, the remainder of the memo talks about COs and offerors. No more mention of subs.

I think you may have missed the memo.  If one analyzes it to have a proper introduction, body, and conclusion - as mandated in Chapter 7 of Department of the Air Force Handbook (DAFH) 33-337, The Tongue and Quill Guidance Memorandum, dated 14 Dec 2023 - then the memo not only explicitly addresses subcontractor NDC determinations in both the intro and the conclusion (quoted below), but also implicitly addresses them in the body.

Quote

Whether an offeror seeks the exception or not, contracting officers may use their discretion about the treatment of NDCs, at both the prime and subcontractor level.

 

[Fara Fasat]

When the NDC rule came out, the FR notice specifically said that the statue did not extend the authority to primes. I know of no statutory changes since then. What exactly is DoD "reminding" us of, if it first said that primes did not have the authority?

[Don Mansfield]

12 hours ago, Fara Fasat said:

First, the memo says it "reminds" COs that contractors may make NDC determinations for their subs. That's a bit disingenuous.

Completely agree.

[Don Mansfield]

10 hours ago, WifWaf said:

Are you referring to the Director, DPC, or to the DAR Council?  Government by bureaucracy means one unelected official is not accountable to the others' statements, unless some sort of charter (e.g., the U.S. Constitution) establishes a check and balance making one beholden to the other.  Can you identify one here?

You think the DAR Council doesn't coordinate their FR comments with the Director of DPC? 

[WifWaf]

7 hours ago, Don Mansfield said:

You think the DAR Council doesn't coordinate their FR comments with the Director of DPC? 

Yes, I'm sure they coordinate, but the result of all that coordination in 2017-18 was an ambiguity between the rule's prefatory statements and its amendment of the DFARS.  Practitioners must have been following the DFARS provision rather than the prefatory statements.

Conduct of the parties may prevail in deciding an ambiguity.  It's been six years.

[Fara Fasat]

What ambiguity? The response to comments specifically said that the authority did not extend to primes. The DFARS states that a CO may treat a contractor as an NDC, and says nothing about primes doing this for subs. 

The only ambiguity has now been created by the DPC memo, which purports to "remind" contractors that they always had this authority.

[WifWaf]

The Federal Register's ambiguity was that its prefatory statements said the authority is not extended to primes, yet further down its DFARS amendment can be read to indeed extend the authority to primes, by the DFARS 252.215-7010(e) flowdown provision.  In essence the Council's response to that comment failed to eliminate the commenter's rightfully identified ambiguity.  The statute is silent on the matter.

From the effective date of that rule on, now, every affected solicitation's ambiguity is that the -7010 provision's flowdown requirement can reasonably be perceived to allow offerors to use a NDC commercial exception on their subs, instead of just the FAR 15.403-1(b) exceptions cited in FAR 52.215-12.  In 2022 I said the removal of the flowdown provision would clear up the ambiguity.  Instead, the recent DPC memo goes the opposite direction and doubles down on the Federal Register's ambiguity.

If you believe the -7010 provision can only be read one way and is practicable on its face, then you may say there is no ambiguity.  But I think the DPC memo is proof that is not the case.

[Fara Fasat]

I think you are trying too hard to make 252.215-7010 fit your theory. Sure it has a flowdown requirement, but nowhere in the provision does it say that the CO (and when flowed down, the prime) may treat the supplies provided by an NDC as commercial products. That authority is in 212.102(a)(iv), which states: “contracting officers -- (A) … may treat supplies and services provided by nontraditional defense contractors as commercial products or commercial services.” 212.102(a)(iv) is DFARS text. As such, it is an instruction to the government, and is not a clause and does not get flowed down. Moreover, no clause or provision in the DFARS says the CO has this authority. It only shows up in 212.102. Therefore that authority cannot be flowed down.

Yes, 252.215-7010(E) does say that as part of the information an offeror must submit when claiming the commercial item exception, an NDC must submit a statement that it meets the criteria, i.e. no CAS contracts in the prior year. But again, nothing in that provision says that the CO, let alone a prime, may treat the products of an NDC as commercial. (E) is an empty statement between a prime and a sub. If a sub submits the required documentation, it accomplishes nothing.

So – can a prime treat a sub’s products as commercial? No. The statute does not authorize it; the explanation in the rule specifically says no, and 252.215-7010 does not authorize it. What more do you need?

Oh, and unless someone comes up with other evidence, the DPC memo is wrong.

[here_2_help]

18 hours ago, Fara Fasat said:

I think you are trying too hard to make 252.215-7010 fit your theory. Sure it has a flowdown requirement, but nowhere in the provision does it say that the CO (and when flowed down, the prime) may treat the supplies provided by an NDC as commercial products. That authority is in 212.102(a)(iv), which states: “contracting officers -- (A) … may treat supplies and services provided by nontraditional defense contractors as commercial products or commercial services.” 212.102(a)(iv) is DFARS text. As such, it is an instruction to the government, and is not a clause and does not get flowed down. Moreover, no clause or provision in the DFARS says the CO has this authority. It only shows up in 212.102. Therefore that authority cannot be flowed down.

Yes, 252.215-7010(E) does say that as part of the information an offeror must submit when claiming the commercial item exception, an NDC must submit a statement that it meets the criteria, i.e. no CAS contracts in the prior year. But again, nothing in that provision says that the CO, let alone a prime, may treat the products of an NDC as commercial. (E) is an empty statement between a prime and a sub. If a sub submits the required documentation, it accomplishes nothing.

So – can a prime treat a sub’s products as commercial? No. The statute does not authorize it; the explanation in the rule specifically says no, and 252.215-7010 does not authorize it. What more do you need?

Oh, and unless someone comes up with other evidence, the DPC memo is wrong.

I think the DPC memo would make an excellent exhibit if, in some wild circumstance, a CO should decide in a Final Decision that a prime contractor may not designate a supplier as being a NDC when the supplier meets the statutory criteria, and the contractor decides to appeal.

[Fara Fasat]

Here's the wording from the statute (the 2016 NDAA, section 857): "‘‘Notwithstanding section 2376(1) of this title, items and services provided by nontraditional defense contractors (as that term is defined in section 2302(9) of this title) may be treated by the head of an agency as commercial items for purposes of this chapter.’’ Note - "by the head of an agency." That was implemented by DoD at 212.102(a)(iv), which gave COs that authority. It did not further delegate it to contractors. 

I think a contractor would have a hard time arguing against the clear words of the law and the implementing rule. The DPC memo is not a rule; it did not go through the rulemaking process; it is not a deviation; it is not in the contract. 

Look, my company is a sub in most cases. I would love to take advantage of this and not have to do commercial item justifications for every contract. Even better, not have to submit certified C or P data for non-commercial products. But for now I'm taking a wait and see approach.

[here_2_help]

1 hour ago, Fara Fasat said:

Here's the wording from the statute (the 2016 NDAA, section 857): "‘‘Notwithstanding section 2376(1) of this title, items and services provided by nontraditional defense contractors (as that term is defined in section 2302(9) of this title) may be treated by the head of an agency as commercial items for purposes of this chapter.’’ Note - "by the head of an agency." That was implemented by DoD at 212.102(a)(iv), which gave COs that authority. It did not further delegate it to contractors. 

I think a contractor would have a hard time arguing against the clear words of the law and the implementing rule. The DPC memo is not a rule; it did not go through the rulemaking process; it is not a deviation; it is not in the contract. 

Look, my company is a sub in most cases. I would love to take advantage of this and not have to do commercial item justifications for every contract. Even better, not have to submit certified C or P data for non-commercial products. But for now I'm taking a wait and see approach.

Nobody could criticize you for waiting to see if DPC withdraws the guidance memo. But if it is not withdrawn, I will be recommending that subcontractors and prime contractors go for it.

[WifWaf]

The "commercial item" definition was always a negotiation standard.  A negotiation standard is briefly described in the below link:

https://www.pon.harvard.edu/daily/salary-negotiations/the-power-of-standards-how-not-to-negotiate-your-salary/

Between the people at DOD and at prime contractors that negotiate proposals, the veracity of whether or not an item is "commercial" is often only tenuously obtained.  This is why a later NDAA had to mandate "no givesies backsies" on CIDs - because adherence to the commercial item definition was usually in the eye of the beholder.  Each beholder independently found the definition to be subjective, rather than objective.  Just look at it - and try to do so intently.  Think back to the last CID you wrote that was challenged by DOD, and how simple it seemed to you.  Your counterpart, likely approaching the proposal with a compliance-with-the-law mindset, was left unable to judge compliance with this gobblety-gook:

Quote

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;

(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;

(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;

(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

(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.

The DPC memo is wise enough to realize this, and to apply that same experience to this new negotiation standard.  Look and see, the standard is objective!  Not having to define "evolved from" or take any sort of training to try and judge compliance (just to seem, by the way, like a tyrant during negotiations)?  Sign me up!  I will do the price analysis and move onto the next cost element, thank you very much.

Quote

(E) For items provided by nontraditional defense contractors, a statement that the entity is not currently performing and has not performed, for at least the 1-year period preceding the solicitation of sources by DoD for the procurement or transaction, any contract or subcontract for DoD that is subject to full coverage under the cost accounting standards prescribed pursuant to 41 U.S.C. 1502 and the regulations implementing such section.

Yes, that's much better.

[Fara Fasat]

WifWaf -- Sooo, the commercial item definition is subjective, therefore DPC is wise to allow primes to ignore it in favor of the definition of an NDC, which is objective? Because of some theory of a negotiation standard? When I said you were trying too hard, that may have been an understatement.

To all - I do want to correct a comment I made above. I said that the authority for COs only shows up in DFARS 212.102. Actually there is another place -- 252.215-7013, where it advises offerors that the  government may treat items from NDCs as commercial items. However, consistent with what I have been saying, it is (a) only between the government and the offerors, (b) a provision, not a clause, and (c) does not get flowed down. 

Tell you what - here's what I will do. For the next few offers we submit where the prime requires a CI justification, we will show them the DPC memo and tell them we no longer have to. I will let this forum know how it goes. I won't use names, but among our customers are all the major defense contractors. I don't think it will be well received, but I'm ready to be surprised. 

[Patrick Mathern]

I'd like to re-open this discussion, particularly this piece:

On 5/9/2024 at 5:20 PM, Fara Fasat said:

Look, my company is a sub in most cases. I would love to take advantage of this and not have to do commercial item justifications for every contract. Even better, not have to submit certified C or P data for non-commercial products. But for now I'm taking a wait and see approach.

We have advised a number of clients (all Subs to large Primes so far) on this and our guidance is that since they're not subject to full CAS, they're exempt from certified cost or pricing data.

We just got our first two responses from the Primes.  Both responses are from "top-three" Defense Contractors.  The first Prime responded by modifying their "standard flowdowns" on their website.  In those flowdowns, they note that "252.215-7010(b)(ii)(e) is deleted."  Put aside the fact that they're applying "standard flowdowns" for the moment and focus on the idea that they're choosing to delete a documented exception to certified cost or pricing data.  I've never heard of such a thing and can't imagine that it's valid.

The second Prime (a top 10 Defense Contractor) decided to instead flow down 52.215-20, which is unaffected by this change.  Again, this approach is invalid since the Prime Contract is a DoD contract that includes other DFARS flowdowns.  One cannot be substituted for the other.

It appears that large Primes are unsure of how to handle this and are therefore inventing weak workarounds.  We are advising our clients to stay the course until clarity is provided or the memo is rescinded.  Otherwise, it is what it is and no certified cost or pricing data can be required unless the sub is subject to full CAS.

Anybody have thoughts or further experience with this since the previous round of discussions? 

[Fara Fasat]

Are you advising your clients that not being subject to full CAS is an exception to certified cost or pricing data? That's not correct. The five exceptions are 1) adequate price competition, 2) prices set by law or regulation, 3) a commercial product or commercial service is being acquired, 4) a waiver has been granted, and 5) modifying a contract or subcontract for commercial products or commercial services. 

If your client is offering a commercial product or commercial service, then that is also a CAS exception, but you can be exempt from full CAS when offering non-commercial products or services too, simply by not meeting the threshold. But in that case, you would not be exempt from certified cost or pricing data.

If you were being inexact, and meant that by not being subject to full CAS, they were an NDC, then your conclusion is still not correct. Being an NDC is not an exception to anything. It merely allows the CO (or a prime, according to the DPC memo), to treat the contract as a commercial item contract. The operative word is may treat; it is not required nor does it provide an exception.

[WifWaf]

Good morning, Patrick: I don’t know if your background is in contracting, accounting, or computer science.  I just ask you to please tell whomever wrote your recent ad about this DPC memo to read this reply in the thread.  Thank you for attention to this matter.

In its context, the DPC memo is placed in a military-industrial culture of compliance, which is only a corpse of what it should be.  There are no ligaments or sinews connecting this complex organism to its foundational principles.  There are only bones left, because decades of decaying foundational knowledge has retired or inflated into Senior Executive Service and corner offices without passing itself down.  The knowledge that has been passed down has been unprofessional because that is easier to teach (and easy = lucrative).  As a result, nowadays the people that should serve as those connections are not daily seeking partnerships over a shared connection to a head: professionalism.  Your report of problematic pushback should be taken with this in mind.

As a professional, when I say above that I would prefer price analysis, I would really like to make connections with my counterpart to respectfully partner up and understand the price.  I would then like to posit the Government’s interest into what is being offered because only I can do that.  My counterparts will not and cannot offer this interest due to their shareholder interests.  The recent NDAAs have assisted with this in the rules, and you can find specifics about those changes via research here on WIFCON, but really what it all comes down to is working the rules to meet this need.  That’s horse before cart.  A compliance culture is cart before horse.  And I would just like to ride into battle against our enemies on a properly oriented chariot.  I hope you do too.

To partner, we must take regulation and apply professional interpretations.  And we must care for each other’s interest in doing so.  The prime contractors that are following Table 15-2 instructions to “Conduct price analyses of all subcontractor proposals” should be fully enabled to do so with your help on the subcontractor end.  You can play a part in creatively identifying the great unknown “data other than certified cost or pricing data obtained from a subcontractor” these instructions mention at II.A.(2) that catalyzes our exodus out of the military-industrial culture of compliance, and into partnership.  Your background and breadth of understanding can be instrumental in this if you would only connect to the same head to which your counterpart should connect – and insist on no less.

I am asking you to breathe new life into this corpse and be creative.  We have an opportunity here, to connect together and meet each other’s interests.  Sales and buying should always have been this way: please, try to remember.

[ji20874]

19 minutes ago, WifWaf said:

...which is only a corpse of what it should be.  There are no ligaments or sinews connecting this complex organism to its foundational principles.  There are only bones left, because decades of decaying foundational knowledge...

I love the imagery!

[Fara Fasat]

On 5/31/2024 at 5:16 PM, Patrick Mathern said:

In those flowdowns, they note that "252.215-7010(b)(ii)(e) is deleted."

Would you please check the reference. 252.215-7010 goes from (b) to (1) to (i) and (ii). There is an (E) under (ii), but not an (e). There is a 252.215-7010(e). What are you referring to? 

On 5/31/2024 at 5:16 PM, Patrick Mathern said:

no certified cost or pricing data can be required unless the sub is subject to full CAS.

This is a follow-up to my first response to you. Are you really saying that a sub is not required to submit certified cost or pricing data unless it is subject to full CAS?

[AlsoExDCAA]

On 5/31/2024 at 8:16 PM, Patrick Mathern said:

We have advised a number of clients (all Subs to large Primes so far) on this and our guidance is that since they're not subject to full CAS, they're exempt from certified cost or pricing data.

😳😳😳

The crossover between 48 CFR 9903.201-1(b) and 48 CFR 15.403-1(b) is a Venn diagram, not a circle...

 

[Fara Fasat]

Just attended a webinar presented by an established government contracts practice, and the subject of an NDC and the DoD memo came up. Here is their take:

A prime can determine whether a sub is an NDC, but the prime must submit this determination to the CO, who then decides whether to accept the determination and allow the prime to treat the NDC's products and services as commercial items.

Re-reading the memo, this sounds right. It's poorly worded, but the concluding paragraph does say that the CO uses his or her discretion about the treatment of NDCs, both at the prime and sub level. So ultimately, it's the CO who decides whether an NDC, either prime or sub, gets treated as a commercial item supplier. I also read this as saying that an NDC determination, and the treatment as a commercial item, are two different decisions. A prime or sub may meet the definition of an NDC, but the CO still has discretion on whether to treat the products or services as commercial.

And Patrick, you still haven't answered whether you believe that not being subject to full CAS is an exception to certified cost or pricing data.

 

[WifWaf]

On 6/18/2024 at 1:54 PM, Fara Fasat said:

A prime can determine whether a sub is an NDC, but the prime must submit this determination to the CO, who then decides whether to accept the determination and allow the prime to treat the NDC's products and services as commercial items.

I honestly thought I said that.  See above where I drone on about a “negotiation standard”.

Okay, sounds good.

[here_2_help]

On 6/18/2024 at 10:54 AM, Fara Fasat said:

Just attended a webinar presented by an established government contracts practice, and the subject of an NDC and the DoD memo came up. Here is their take:

A prime can determine whether a sub is an NDC, but the prime must submit this determination to the CO, who then decides whether to accept the determination and allow the prime to treat the NDC's products and services as commercial items.

Re-reading the memo, this sounds right. It's poorly worded, but the concluding paragraph does say that the CO uses his or her discretion about the treatment of NDCs, both at the prime and sub level. So ultimately, it's the CO who decides whether an NDC, either prime or sub, gets treated as a commercial item supplier. I also read this as saying that an NDC determination, and the treatment as a commercial item, are two different decisions. A prime or sub may meet the definition of an NDC, but the CO still has discretion on whether to treat the products or services as commercial.

I don't disagree. Seems like a good, reasonable, interpretation.

[danchalfant]

We just sent our first NDC determination request for a subcontractor to our CO.  Will let you know if it is acceptable or not.