Fair Pricing Challenges at the Defense Department

For all of you Defense Department contractors out there, I read a very interesting article recently in NationalDefenseMagazine.org, on the pressure the Pentagon faces trying to attract innovative commercial suppliers vs. the need to ensure suppliers are charging fair commercial prices for their products.

This has been a significant problem for the Defense Department and suppliers for decades, as it often means that contractors are being asked to provide very sensitive internal company data simply to justify the prices they charge (for products that are already sold commercially and which pricing data already exists).  For instance, commercial products sold in the open marketplace usually are considered to be “fairly” priced due to competition in the marketplace.  When selling to the DoD, on the other hand, the marketplace is more “controlled” and determining what is commercial is more difficult. 

Some products, like screws, bolts, washers, etc, may have established commercial products with many competitors and it is clear they are commercial items.   On the other end of the spectrum, many defense technologies and products are unique and highly specialized, AND their development was funded by the US Government.  The government feels that when these conditions apply, then these goods require certified cost and pricing data to ensure the government of the best pricing. 

But beyond these types of goods, there is also a gray area (that several of our current and previous clients may be familiar with in the DoD and NASA world), where highly specialized and unique products may have no competition, nor do they have any price data, further complicating the issue for the Government and contractor (as once can imagine, this undoubtedly leads to friction between the contractor and Government).  Traditionally the government has erred on the conservative side and required certified cost and pricing data.  This tends to burden the supplier and drive costs up.  In its continued efforts to pursue fair pricing---yet not scare away the highly skilled and high tech contractors our nation’s Military needs, the Defense Department’s Procurement Chief, Frank Kendall, has instructed the DCMA study better ways to “make determinations of commerciality, to make the system more predictable and more expeditious.” 

Though there is no silver bullet here, at least the DoD recognizes the problem and is actively trying to reduce the friction between the world’s largest customer and the contractors that supply it every day.

Beyond this, the Pentagon also proposed a new rule to amend DFARS to provide guidance on evaluating the reasonableness of prices using data other than certified cost or pricing data. The purpose being to spell out exactly what data an agency can use to establish price reasonableness in situations where there is no market competition. Hopefully, with this type of measure, the process can at least become more standardized and potentially fair to contractors.  However, contractors are skeptical and instead, many think it may have the opposite effect.

To read the full blog, click the link: http://www.nationaldefensemagazine.org/blog/lists/posts/post.aspx?ID=1938