As we await the NDAA for 2019, DoD focuses on 2017 mandates aiming to ease requirements for commercial item companies. Despite Congress’ 1994 acquisition streamlining bill, the administrative burden for Defense contractors supplying commercial items to the Federal Government has grown quite cumbersome. Here is an update on DoD’s progress, and how the proposed changes may affect some Defense contractors.
A Win for Some Commercial Item Companies
The most significant change defines what is a subcontract as it relates to flow down clauses. And the most interesting part is what a subcontract isn’t. Specifically, subcontracts aren’t agreements for commodities intended for use and performance of multiple contracts with DoD (and other agencies), which are not identifiable to any particular contract. You may recall this change was one recommendation made by the section 809 panel back in January, which will now become a reality when this regulation is issued in final form.
And that will be good news for commercial item companies buying raw materials and parts for their product lines. When they purchase parts, companies don’t necessarily know which will later be sold to the Government. When the proposed rule are adopted, it won’t be necessary to include the required flow down clauses in such agreements, with one important exception…
The Counterfeit Electronic Parts Loophole to the Subcontract Exception
The one exception to the change in flow down requirements applies to purchases of electronic parts. As part of the continued crackdown on counterfeit electronic parts, DoD wants to ensure that the clauses addressing such parts are flowed down to the lowest tier in the supply chain. So the new definition won’t exempt those purchases because the relevant clause requires flow down to contractual instruments other than subcontracts. To ensure counterfeit parts don’t make it into the system, bulk buys by commercial item suppliers (even though they aren’t subcontracts) need traceability all the way down through the supply chain.
Easing the Burden for Subcontractors, But Not for Prime Contractors
Beyond the change in flow down requirements, part of the definition in the new regulation restricts prime contractors from being able to flow down clauses in the regulations other than the mandatory flow downs to their commercial item subcontractors. Currently, prime contractors can flow down a “limited” number of non-required clauses in order to meet their own contractual obligations under the prime contract by making sure subcontractors are similarly bound. Burdened subcontractors complain that some prime contractors are abusing the privilege by inserting long, laundry lists of clauses that aren’t really applicable into all their subcontracts.
If the proposed changes go through, prime contractors will no longer be able to flow down all their own obligations to subcontractors. Instead, they will have to extract the relevant obligations of non-mandatory clauses and put them into the subcontract in full text (as opposed to just listing all the clauses in an addendum or another portion of the subcontract). This can be a fairly big administrative burden for the purchasing department or the lawyers for the prime contractor, but will make things more manageable for the subcontractor. So there’s ultimately a tradeoff being made here, in favor of the subcontractor.
What Happens Next
Comments on the proposed rules are due by August 28th. In addition to these rules, there’s a lengthy list of clauses adopted since January 1, 2015 that companies can weigh in on. DoD wants to know whether or not they should be exempt from commercial items prime and subcontracts.
83 Federal Register 30646-01, June 29, 2018
For more on acquisition regulatory changes, check out my interview on Federal News Radio’s “Federal Drive with Tom Temin”.