The Section 809 Panel, created in section 809 of the FY 2016 National Defense Authorization Act (NDAA), is charged with recommending improvements to the defense acquisition process. In January 2018 the panel released their first volume of three, which provides guidance for simplifying the DoD procurement process in ways that could benefit contractors. Their insights shed light on the obstacles contractors face, and pave the road for changes in law to help overcome them.
Inconsistencies in Basic Terminology
The panel has come up with some intriguing suggestions for commercial item contracting, ranging from broad rules to narrow adjustments. They found excessive complexity related to even the basic terms used in acquisition. Consider that the panel found the word “subcontract” has around 27 definitions, 11 of which are entirely unique from the others. The absence of clear and consistent terminology leads to unnecessary confusion. The panel recommends clarifying those definitions to improve defense acquisition starting at the most perfunctory level.
A Bold Suggestion For Flow Down Requirements
The panel’s treatment of subcontracting also contains sweeping reforms for flow down clauses. The term “flow down” refers to a clause inserted in a subcontract because the prime contract requires that it be applied to subcontractors. The clause can extend through the first tier of subcontracts, or apply to every tier all the way down through the supply chain. As such, flow down requirements can be propagated not only to companies that intentionally do business with the Government, but also to those companies that merely sell to Government contractors. Flow down requirements can be a big obstacle for commercial item contractors who buy parts for their inventory that go into all their products, whether they ultimately go to the Government or to private buyers.
Because flow down requirements pose such a large burden for contractors, the panel urges that Congress and the DoD exempt inventory purchases from flow down clauses by saying that inventory purchases for commercial production are not “subcontracts.” Their idea is that if the DoD lightens the compliance burden, they can induce more commercial companies to do business with the Government, and the Government would get better, and perhaps cheaper, goods.
Commercial vs. Commercial Off The Shelf
Adding to the already complex definitions in regulation, there’s a distinction between commercial and commercial off the shelf (“COTS”) items. COTS are a subset of commercial items that are bought and sold in the commercial marketplace and used unmodified in Government contracts. COTS are given special treatment, such as exemption from a variety of important statutes and policies. Specifically, they are exempt from the Buy American Act component test, Employment Eligibility Verification, and even the trafficking in persons requirement. As such, the compliance burden is reduced for contractors with COTS.
The panel considers the COTS distinction to be unnecessary; it argues that DoD get rid of the definition of COTS and extend the same treatment to all commercial items. Continuing this theme, the panel proposes that the DoD enormously limit the number of Government-specific clauses applied to commercial items. Currently, there are over 160 clauses that apply to commercial items in Government contracts, a number that’s grown continuously since the mid 1990s when the commercial item policy was introduced. If the DoD follows the panel’s recommendations, the cost burden on commercial items would be greatly reduced, making doing business with the Government more feasible for a wider range of commercial vendors.
What This All Means for Contractors
The net effect of conflicting definitions, excessive clauses, and burdensome compliance regulations is that contractors find themselves in one of two positions: they adhere to the rules, and suffer high costs; or they skip the requirements they see as meaningless, and wind up in noncompliance (which invites real trouble down the road). This is the dilemma the system faces. The panel wants to reduce that quandary by at least limiting it to a few key issues. In the face of abundant requirements, one has to wonder whether they are absolutely necessary. The panel’s resounding conclusion is that most are not.
It’s true that panels like this often come up with recommendations that don’t lead to any real change. The 809 Panel has simplified implementation by including specific legislative language and regulatory steps to enact their recommendations. For now, defense contractors will have to wait and see whether the powers that be will follow the panel’s guidance on these critical issues.
For more information on this topic, listen to my interview with Tom Temin on Federal News Radio’s “Federal Drive” podcast.