Armed Services chairman challenges DoD on new rule for commercial acquisition

Secretary of Defense Ash Carter has told several audiences in recent weeks that he’s trying to drill tunnels through the “wall” that sits between the Defense Department and commercial innovators. But one of the most important Defense overseers on Capitol Hill said a new regulation DoD put forward one month ago does exactly the opposite.

At issue, said Sen. John McCain (R-Ariz), the chairman of the Senate Armed Services Committee, is an Aug. 3 proposed rule dealing with the Pentagon’s acquisition of commercial items. Following instructions from Congress, the department’s new rule offers guidance to contracting officers on when and how they should ask vendors for additional data to make sure DoD is getting a fair price.

It “sends a signal that DoD has little interest in realistic commercial acquisition practices and will continue to operate under its archaic, defense-unique, cost-based oversight system.” McCain wrote in a letter to Carter last week.

McCain’s critique echoes one that’s been leveled by industry about DoD’s commercial item practices for years: if the Pentagon is buying a commercial item, the price has already been determined by market forces and is therefore as reasonable as any Defense buyer can expect. But the rule continues to allow Defense contracting officers, in some circumstances, to ask vendors for “uncertified” data about their underlying costs. That’s a less cumbersome demand on industry than the certified and rigorously-audited cost data DoD requires in traditional weapon system procurements. But it is still a demand not levied by most commercial buyers, the thinking goes.

Advertisement

McCain also objected to guidance in the rule signaling to acquisition officers that an item’s price should generally be considered “market-based” (and therefore exempt from DoD’s usual cost and pricing data strictures) only when 50 percent or more of that item’s sales are to non-government customers.

“This would create a major disincentive for high-tech commercial firms to venture into the development of innovative new defense capabilities, such as first-to-market cyber tools, disruptive solutions that compete with existing DOD systems, and products similar to those in the commercial marketplace but modified to meet national security needs — thereby denying them to our warfighters,” he wrote.

DoD issued the proposed rule in response to the 2013 Defense authorization bill, which ordered the department to refine its processes for pushing acquisitions through more-streamlined procurement channels that have been on the books for commercial items since the mid-1990s.

The 2013 legislation forbade DoD from demanding cost data from firms in any form other than what’s already stored in their own bookkeeping systems. The letter of the proposed rule honors that particular requirement, so another McCain objection — that the rule “would effectively require high-tech commercial firms to build entirely new accounting systems just to do business with DoD” — seems somewhat questionable.

For the Pentagon’s part, officials have said recently that they’ve taken several steps to make it easier for DoD to do business with commercial firms. After an initial pilot program under the aegis of the Defense Contract Management Agency, DoD plans to stand up five centers of excellence to help contracting officers decide whether an item is, indeed, commercial. They’re charged with answering that question, and then, whether the price a vendor is proposing is fair and reasonable, within 72 hours.

This post is part of Jared Serbu’s Inside the DoD Reporter’s Notebook feature. Read more from this edition of Jared’s Notebook.