The Defense Acquisition Regulation Supplement (DFARS) 215.408(5) requires contracting officers (CO) to insert the provision at DFARS 252.215-7010 when reasonably certain that the submission of certified cost or pricing data or data other than the certified cost or pricing data is required, or in procurements where there is only one offer and the provision at DFARS 252.215-7008 is utilized. This requirement to include the provision at DFARS 252.215-7010 applies to FAR part 12 procurements for the acquisition of commercial products and services but not to contracts below the Simplified Acquisition Threshold (SAT) or Commercial Off the Shelf (COTS) items. DFARS 252.215-7010(b) lists the exceptions to providing certified cost or pricing data in major weapon systems procurements, including their components, subsystems, or spare parts. Specifically, under DFARS 252.215-7010(b)(1), defense contractors are excepted from providing certified cost or pricing data in such procurements if they can provide information demonstrating that the prices at issue are set by law or regulation or alternatively, prove the commerciality of the product that is a component, subsystem, or a spare part of a major weapon system. Additionally, to be granted an exception from the requirement to submit certified cost or pricing data in such procurements, defense contractors must also demonstrate that their offered prices are fair and reasonable.
The Department of Defense (DoD) issued a final rule, effective May 30, 2024, which impacts the supporting data requirements in the acquisition of commercial products that are components, subsystems, or spare parts for major weapon systems. Specifically, the new rule implements § 803 of the 2023 National Defense Authorization Act (NDAA), which modifies 10 U.S.C. § 3455 and provides additional clarification and guidance about data requirements needed to support a determination of commerciality and price reasonableness for such major weapon systems procurements. The final rule amends the provision at DFARS 252.215-7010, “Requirements for Certified Cost or Pricing Data and Data Other Than Certified Cost or Pricing Data,” impacting the acquisition of component, subsystem, or a spare part of a major weapon system that are commercial products as defined in Federal Acquisition Regulation (FAR) 2.101.
- Impact on Commerciality Determination for the Commercial Product Exception
Under DFARS 252.215-7010(b)(1)(ii), defense contractors need not provide certified cost or pricing information if they can demonstrate the applicability of the commercial product exception, along with price reasonableness. For products that are components, subsystems, or spare parts of a major weapon system but do not have a previous commerciality determination – DFARS 252.215-7010(b)(1)(ii)(B) requires defense contractors to identify a comparable commercial product that the offeror sells to the general public or non-governmental entities and provide a comparison between the physical characteristics and functionality of the two products. That is, as a requirement for a determination of commerciality, defense contractors must now identify the comparable commercial product they sell to the general public or nongovernmental entities and provide a comparison between the physical characteristics and functionality of the comparable commercial product, and the subsystem, component, or spare part of the major weapon system for which they are seeking a determination of commerciality. Depending on the product that is the component, subsystem, or spare part of a major weapon system, and its claim to commerciality – contractors must meet the following requirements of DFARS 252.215-7010(b)(1)(ii)(B), in submitting documents and materials supporting a commerciality determination.
o For claiming commerciality determination for subsystems, components, or spare parts qualifying under the “customary commercial modifications” definition of a commercial product in FAR 2.101.
The FAR definition of commercial products includes any items that meet the definition of a commercial item as described in points (1) and (2) of the commercial product definition in FAR 2.101, but also contain modifications of the type that are customarily available in the commercial marketplace. In other words, commercial products with modifications of the type that are generally available in the commercial marketplace are also considered commercial products, and therefore, exempt from the requirement of providing certified cost or pricing data under DFARS 252.215-7010, provided they are reasonably priced. Under the new rule, defense contractors claiming a commerciality determination for their products on this basis must now provide a description of the modification, along with supporting documentation to demonstrate that the modification at issue is the type that is customarily available in the commercial marketplace.
o For claiming commerciality determination for subsystems, components, or spare parts qualifying under the “minor modifications” definition of a commercial product in FAR 2.101.
The FAR definition of a commercial product additionally includes any items that meet the definition of a commercial item as described in points (1) and (2) of the commercial product definition in FAR 2.101, including such items that contain minor modifications not customarily available in the commercial marketplace but made specifically to meet the government’s requirements. The FAR definition explains that minor modifications do not significantly alter the nongovernmental function or essential physical characteristics of an item or component. Additionally, such minor modifications also do not change the purpose of a process. Factors generally considered in determining whether a modification is minor include the value and size of the modification and the comparative value and size of the final product. Under the new rule, DFARS 252.215-7010(b)(1)(ii)(B)(2)(ii) will now require defense contractors to provide a detailed description of the minor modification, along with detailed technical data to adequately demonstrate that the modification at issue is in fact a minor modification.
To obtain a commerciality determination for the components, subsystems, or spare parts of major weapon systems, DFARS 252.215-7010(b)(1)(ii)(B) now also requires defense contractors to provide the national stock number (NSN) for the comparable commercial product they sell in the commercial marketplace, provided an NSN has been assigned. Additionally, contractors must also provide the NSN for the subsystem, component, or spare part of the major weapon system for which the contractor is seeking a determination of commerciality if one has been assigned. Finally, in case the contractor does not sell a comparable commercial product, it must notify the CO in writing to this effect and provide the CO with a comparison of the physical characteristics and functionality of a commercial product in the commercial marketplace that is most comparable to the subsystem, component, or spare part of the major weapon system for which the contractor is seeking a commerciality determination.
- Impact on Price Reasonableness Determination
In addition to meeting one of two exceptions under DFARS 252.215-7010(b), defense contractors selling subsystems, components, or spare parts of major weapon systems must also demonstrate that their product pricing is fair and reasonable to avoid submitting certified cost or pricing data. Contractors can demonstrate the reasonableness of their pricing through catalogs or based on market pricing. For items priced based on market pricing, contractors must provide a description of the nature of the commercial market, the methodology used to establish a market price, along with all relevant sales data. According to the DoD, contractors can now provide the CO a representative sample of prices paid for the same or similar commercial products under comparable terms and conditions. If providing such a representative sample of prices is not feasible, contractors may provide the prices paid for the same or similar commercial products sold under different terms and conditions. When providing such price samples for the purposes of the CO’s determination of price reasonableness, contractors are permitted to redact client information, which alleviates any potential concerns surrounding business risks posed by the potential release of commercial sales data to competitors.
While the DoD maintains that the new final rule implementing § 803 of the 2023 NDAA does not impose additional administrative costs or recordkeeping burdens on contractors, it still requires contractors to understand the expanded framework of requirements for demonstrating commerciality and price reasonableness of their products qualifying as subsystems, components, or spare parts of major weapon systems. Understanding the types of documents, materials, and technical and pricing data that will now be needed to support the commerciality and price reasonableness determination requests for their products will prove critical for contractors in this space. Additionally, while the DoD describes the new rule as merely providing additional guidance and clarifications for demonstrating commerciality and price reasonableness, in its implementation, the new rule will likely serve to practically limit how requests for exceptions from providing certified cost and pricing data can be supported under DFARS 252.215-7010(b). Therefore, defense contractors and their suppliers participating in such major weapon systems procurements at various tiers should reinforce, or implement, if necessary, adequate systems to gather, maintain, and produce the types of technical and pricing data and materials that are now required for supporting commerciality and price reasonableness determination petitions.
This Federal Procurement Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.
