DoD Proposes to Amend Definition of Commercial Items

On November 27, 2019, the Department of Defense (DoD) issued a proposed rule to amend the Defense Federal Regulation Supplement (DFARS) regarding the Treatment of Certain Items as Commercial Items (DFARS Case 2019-D029). The proposed rule has three main elements:

1. It implements Section 877 of the National Defense Authorization Act (NDAA) for Fiscal Year 2017, providing for the Treatment of Commingled Items purchased by Contractors under DoD contracts as Commercial Items
2. It implements Section 878 of the NDAA for Fiscal Year 2017 by providing for the Treatment of Services Provided by Nontraditional Contractors as Commercial Items; and 
3. It further implements Section 848 of the NDAA for Fiscal Year 2018, which provides that a contract for an item using FAR part 12 procedures shall serve as a prior commercial item determination. The proposed rule would apply only to DoD acquisitions.

Main Elements of Proposed Rule

First, the proposed rule will implement FY 2017 NDAA Section 877 – Treatment of Commingled Items. This proposed change will add a section to DFARS 252.244-7000 Subcontracts for Commercial Items that will provide that: "The Contractor shall treat as commercial items any items valued at less than $10,000 per item that were purchased by the Contractor for use in the performance of multiple contracts with the Department of Defense and other parties and are not identifiable to any particular contract when purchased. The Contractor shall ensure that any such items to be used in performance of this contract meet all terms and conditions of this contract that are applicable to commercial items."

The clause explicitly provides that “this does not apply to items that were purchased specifically for a DoD contract but were subsequently commingled with similar items purchased for other contracts.” DoD describes this proposed change as an exception to the general rule of granting the agency discretion to treat supplies and services provided by nontraditional defense contractors as commercial items.

Second, the proposed rule will implement FY 2017 NDAA Section 878 – Treatment of Services Provided by Nontraditional Contractors. As proposed, this will add a new subsection, DFARS 212.102(a)(iv)(B). This subsection will provide that, with respect to nontraditional government contractors, contracting officers "Shall treat services provided by a business unit that is a nontraditional defense contractor as commercial items, to the extent that such services use the same pool of employees as used for commercial customers and are priced using methodology similar to methodology used for commercial pricing."

Third, the proposed rule will implement FY 2018 NDAA Section 848 – Use of FAR Part 12 As Prior Commercial Item Determination. This proposed rule will change a few things. First, it clarifies that for the acquisition of items that do not meet than FAR definition of "commercial item" and do not require a commercial item determination, those items can still be treated as commercial items due to the applicability of 41 U.S.C. 1908 (inflation adjustment of acquisition-related thresholds) or 10 U.S.C. 2380a (by the head of an agency). Second, the proposed rule provides that "a contract for an item acquired using commercial item acquisition procedures under FAR part 12 shall serve as a prior commercial item determination, unless the item was acquired pursuant to one of those statutes and therefore did not require a commercial item determination."

Key Takeaways

The main elements of the proposed rule discussed above will broaden the scope of items qualifying as commercial items. The proposed rule is welcome news for contractors who routinely purchase items valued at less than $10,000 for use in performing multiple DoD and non-DoD contracts. By treating such items as commercial, the proposed rule should ease administrative burdens for prime contractors with regard to subcontract management and flow down requirements. Similarly, by treating services provided by nontraditional defense contractors as commercial items, the proposed rule will facilitate the purchase of such services while enabling such contractors to benefit from the regulatory exemptions applied to commercial item purchases. Finally, the proposed changes to implement section 848 of the Fiscal Year 2018 NDAA should promote the greater use of commercial items by DoD. By clarifying that items not meeting the FAR definition of “commercial item” and that do not require a commercial item determination, can still be treated as commercial items, along with the provision that a contract for an item using FAR part 12 procedures serves as a prior commercial item determination, the proposed rule seeks to simplify the process for making commercial item determinations while, as noted, expanding the scope of items that can be treated as commercial items.

Comments to the proposed rule can be made through January 27, 2019. We will, of course, monitor the proposed rule and provide an update when a final rule is issued.