Trends in Government Contracting: Commercial items

I saw an article in a Defense E-Brief from NDIA this week entitled “Pentagon Will Demand ‘Fair Prices’ From Commercial Vendors”.  The essence of the article is that apparently the Defense Department is starting to ask for cost & pricing data from vendors supplying commercial items.  The Defense Department, of course, is saying that this is an exaggeration by industry and they are not doing anything different than they have done in the past.  They claim that there are two types of commercial items: “commercial items” and “commercial of a type”.   The first type are normally undisputed as these are items that are sold in the open marketplace and the government pays the market price for acquiring these items.  The government spent $60 Billion last year on these types of purchases.  This might include items like office supplies, commercial computer systems, etc.  The issue seems to be with the “commercial of a type” items.  These are items that might be similar to commercial items but not sold to the general public.  In this case, the government is the only customer, the government wants to make sure they are paying a fair price.  Examples of this might be a high tech product developed for the commercial marketplace and then slightly modified to sell into a specific government application.  The vendor views this as the product was developed with money from the private sector and therefore a commercial product.  The government is contending that the company may be overcharging for the modifications and therefore the government is paying more than they should.  The result is the government will ask for cost & pricing data to validate the price in these instances. 

Another area where this comes into play is when the vendor sells the product only to the government.  Even if they have been selling this product to the government for many years, that doesn’t mean that it is commercial pricing when the government is the only customer.  In the past, the government may have looked the other way but now that budgets are so tight, the contracting office is looking at the pricing on items that have only been sold to the government to make sure the pricing is fair.  Previous pricing levels will not be automatically accepted as fair in these instances and vendors should be prepared to validate their pricing on other basis.  For a few vendors, this may prove difficult, especially if they have not used a traditional government pricing model to generate pricing.  Using a FAR & DCAA compliant accounting system would help with this effort but is not the only answer.  There is a term I have been familiar with in my career called “Basis of Estimate”.  This implies a justification, including hard documentation, for the pricing levels.  This is very difficult to come up with after the fact.  Companies need to be aware of this prior to the first sale.  I call it good business practices.  If government contractors do this, they would be in a good position in the future to support their pricing and achieve the established price.  Contractors that don’t have a solid basis of estimate may be faced with price reductions and/or loss of contracts.  Yes, the government may be changing slightly what they are doing but they are not doing anything that has not been a requirement for years.  The government contracting arena is changing and in order to play the game, government contractors need to understand and play by the rules.