September 15, 2017
Prime Contractors are expected to use the same or similar procedures as government buyers to make “commercial item determinations.”
Under U.S. government cost-based contracts, prime contractors and all of their subcontractors are required to purchase supplies and services from responsible sources at fair and reasonable prices, including those determined to be commercial items. The U.S. government definition of “subcontract” is contained in the Federal Acquisition Regulation (FAR), Part 2, entitled Definitions, and includes any goods or services purchased for a U.S. government contract.
The contractor’s actual or proposed costs are subject to audit whenever the U.S. government is basing contract pricing on actual or proposed costs. The contract clause at FAR 52.244-6, entitled Subcontracts for Commercial Items, requires contractors to incorporate, to the maximum extent practicable, commercial items or non-developmental items as components of items to be supplied in their U.S. government contracts.
The contract clause at FAR 52.210-1, entitled Market Research, requires contractors to conduct market research to determine if these items will satisfy requirements. However, when the contractor concludes that commercial items will meet contractual needs, additional effort and documentation is required to meet other related regulatory requirements.
The Defense Federal Acquisition Regulations Supplement (DFARS 244.402(a)) requires a contractor to determine whether a particular subcontract item meets the definition of a commercial item. Contractors are expected to support and document their commercial item determinations. In addition, FAR 15.404-3(b) requires the contractor to conduct appropriate price or cost analyses to establish the reasonableness of proposed subcontract prices and include these analyses in cost proposals. Contractors are expected to have policies and procedures to ensure appropriate accomplishment of these efforts.
Generally, there are no regulatory requirements for the U.S. government contracting officer to approve subcontract commercial item determinations. Nevertheless, FAR 15.403-1(c)(3) indicates that should the contracting officer determine that an item claimed to be commercial does not meet the relevant criteria, and the Truth In Negotiation Actapplies, then subcontractor certified cost or pricing data may be required.
When performing forward pricing proposal audits, an auditor will review and report on the adequacy of contractor actions to make the commercial item determinations and perform the associated price or cost analysis.
An adequate commercial item determination clearly identifies and supports how the item meets the commercial item definition in FAR 2.101. A commercial item determination should include market analysis and, if applicable, subcontractor sales history. Technical analysis, logic, explanations and justifications supporting conclusions that items are “of a type,” “evolved” or “modifications” should also be included to support the determination.
An adequate price analysis will usually be based on one or more of the techniques described in FAR 15.404-1(b)(2). If the price cannot be determined to be reasonable based on price analysis alone, then a cost analysis may also be used. The contractor is expected to verify the supplier’s supporting data (sales and/or cost based) to the subcontractor’s books and records. If denied access, then the contractor is expected to proceed with its analysis to the extent possible and notify the contracting officer of the supplier’s denial and its effect on the price or cost analysis. The contracting officer or auditor may then request and evaluate the sales information or other supporting data, or arrange for U.S. government assist audits and provide the results of their audit or analysis. The contractor is then expected to consider these results in subsequent price negotiations.
Failure to follow policies and procedures or the FAR/DFARS and complete the required actions will be considered a significant estimating deficiency and a flash report will be issued to all the contractor’s U.S. government customers.