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Innovation and Commercial Items: The Department of Defense Can’t Have It Both Ways.


In policy pronouncements and public statements over the last year, the Department of Defense (DoD) emphasized, as a strategic imperative, gaining access to, and leveraging, innovative commercial technologies. For instance, on April 9th of this year, DoD issued Better Buying Power 3.0 – Achieving Dominant Capabilities through Technical Excellence and Innovation, and among the new focus areas it identified were cybersecurity, commercial technology, and global technology. Further, in a recent speech in California, DoD Secretary Ash Carter highlighted DoD’s desire and need to gain access to Silicon Valley’s innovative technology companies.

Fundamental to DoD’s efforts to gain access to innovative, cutting edge technologies are streamlining the processes and reducing the risks for firms producing those technologies to participate in the government market. Streamlining and risk reduction is achieved by eliminating, to the maximum extent practicable, government unique requirements that are inconsistent with the commercial practices that those firms encounter in the normal course of their business. Unfortunately, over the last decade, the procurement community has seen the erosion of commercial item contracting, not in law, but in practice. Specifically, the government has re-layered onto the commercial item contracting process government unique requirements that have increased costs and raised barriers to entry into the federal marketplace.

Now comes the latest assault on commercial item contracting. On August 3rd, DoD issued a proposed rule addressing the procurement of commercial items. The proposed rule essentially makes significant changes in the definition of “commercial item” for purposes of gaining access to price and/or cost data. This week’s Friday Flash includes a Legal Corner article highlighting the proposed rule’s fundamental changes in the definition of commercial item, and I recommend it to you for serious study.

The proposed rule includes a new definition that will be used as the standard for determining whether additional price or cost data can/may be requested for commercial items. It identifies this new standard as Market-based pricing and defines it as follows:

Market-based pricing means pricing that results when nongovernmental buyers drive the price in a commercial marketplace. When nongovernmental buyers in a commercial marketplace account for a preponderance (50 percent or more) of sales volume of a particular item, there is a strong likelihood the pricing is market-based pricing.

This definition, as well as other language in the rule, essentially seeks to revise the underlying statutory definition of “commercial item” by eliminating the statutory language “offered for sale” and “of a type.”

Indeed, the definition appears to use as an analog for price analysis the government-nongovernment distinction used in defining a commercial item. That approach, however, is flawed. For a commercial item, the government-nongovernment distinction addresses the features, use, and ubiquity that distinguish an item’s commercial character. All things being equal, price equilibrium in the commercial marketplace is driven by supply and demand and thus is virtually customer agnostic.

This attempt to narrow the definition of a commercial item could have far reaching implications for the procurement system. It risks reducing the government’s access to innovative services and solutions by creating a new, significant barrier to entry for firms already offering those services and solutions in the commercial marketplace. In essence, the proposed rule is an “anti-innovation” approach arising at a time when DoD has expressed a critical need to access innovation to “achieve dominant capabilities through technical excellence and innovation.” It begs the question: Can DoD have it both ways?

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