[Federal Register Volume 85, Number 189 (Tuesday, September 29, 2020)]
[Rules and Regulations]
[Pages 60918-60921]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-21249]


-----------------------------------------------------------------------

DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 212, 244, and 252

[Docket DARS-2019-0052]
RIN 0750-AK66


Defense Federal Acquisition Regulation Supplement: Treatment of 
Certain Items as Commercial Items (DFARS Case 2019-D029)

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: DoD is issuing a final rule amending the Defense Federal 
Acquisition Regulation Supplement (DFARS) to implement several sections 
of the National Defense Authorization Act for Fiscal Year 2017 that 
address treatment of commingled items purchased by contractors and 
services provided by nontraditional defense contractors as commercial 
items.

DATES: Effective October 1, 2020.

FOR FURTHER INFORMATION CONTACT: Ms. Amy G. Williams, telephone 571-
372-6106.

SUPPLEMENTARY INFORMATION:

I. Background

    DoD published a proposed rule in the Federal Register at 84 FR 
65322 on November 27, 2019, to implement sections 877 and 878 of the 
National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2017 
(Pub. L. 114-328) and further implement section 848 of the NDAA for FY 
2018 (Pub. L. 115-91). Section 877, Treatment of Commingled Items 
Purchased by Contractors as Commercial Items, adds 10 U.S.C. 2380b. 
Section 878, Treatment of Services Provided by Nontraditional 
Contractors as Commercial Items, amends 10 U.S.C. 2380a. Section 848 
modifies 10 U.S.C. 2380(b) to provide that a contract for an item using 
FAR part 12 procedures shall serve as a prior commercial item 
determination, unless the appropriate official determines in writing 
that the use of such procedures was improper or that it is no longer 
appropriate to acquire the item using commercial item acquisition 
procedures. Two respondents submitted public comments in response to 
the proposed rule.

II. Discussion and Analysis

    DoD reviewed the public comments in the development of the final 
rule. A discussion of the comments and the changes made to the rule as 
a result of those comments is provided, as follows:

A. Summary of Significant Changes From the Proposed Rule

    Further implementation of section 848 of the NDAA for FY 2018 (Pub. 
L. 115-91) has been removed from the final rule under this case. DoD 
plans to publish a new proposed rule under a separate case (DFARS Case 
2020-D033).

B. Analysis of Public Comments

    1. Treatment of commingled items as commercial items (section 877 
of the NDAA for FY 2017).
    a. Strike ``when purchased'' from proposed DFARS 244.402(S-70) and 
the proposed clause at DFARS 252.244-7000(c).
    Comment: One respondent suggested removal of the words ``when 
purchased,'' which were added as a clarification to the statutory text 
in the proposed rule, suggesting that the addition ``serves only to 
erode the purpose of the law, and will increase administrative burden 
of identifying comingled items.''
    Response: The statutory change adding a new section 10 U.S.C. 2380b 
is titled, ``Treatment of commingled items purchased contractors as 
commercial items.'' The statute is intended to

[[Page 60919]]

address the common situation in which a contractor purchases items in 
bulk, intending to use the items for its general business, as 
distinguished from a specific subcontract, identifiable at the time of 
purchase with a specific prime contract. This is consistent with the 
legislative history quoted by the respondent with regard to cases where 
contractors often place orders with subcontractors for material, 
supplies, and parts that may be applicable to several Government 
programs in advance of any Government contract or RFP. The text of the 
enactment is fully consistent with this interpretation: ``items . . . 
that are purchased by a contractor for use in the performance of 
multiple contracts with the Department of Defense and other parties and 
are not identifiable to any particular contract.'' The language ``when 
purchased'' was added to avoid a possible application to items that 
were in fact purchased for specific purposes, as subcontracts subject 
to the wide range of contract terms that the purchaser might be 
required to ``flow down'' to the particular subcontracts. Many of those 
``flow down'' clauses are required by other laws, or otherwise reflect 
important procurement policies, and any exceptions must be applied 
narrowly. It is contrary to the intent of the underlying laws if those 
items are to be ``treated as commercial items'' on the sole basis that 
after acquisition, the prime contractor commingles them with other 
materials in inventory, whether by policy or in error, so that they 
lose their ``identification.''
    b. Clarify that items are not ``identifiable to any particular 
contract'' if they are not specifically identified, are 
indistinguishable, and are not serialized (DFARS 244.402(S-70)).
    Comment: In connection with this issue, one respondent suggested 
that DoD define the term ``identifiable to any particular contract'' as 
stated. The respondent argued that this is ``in the Government's best 
interest'' on the basis of an example in which the prime contractor 
purchases items in bulk, apparently ``for use in the performance of 
multiple contracts with the Department of Defense and other parties.'' 
In the example, the items are ``identifiable to any particular 
contract'' only to the extent that DPAS ratings are ``flowed down'' to 
the supplier as to a small proportion of the total quantity purchased. 
On this basis, the respondent suggests, while the subcontract order did 
not identify any particular items as designated for the DPAS-rated 
prime contract; the items are physically indistinguishable from each 
other; and they will be commingled in inventory; yet because the costs 
of the few items will be allocable to the particular prime contract, 
they will be considered ``identifiable to [the] particular contract'' 
and thus effectively excluded from the coverage of 10 U.S.C. 2380b 
unless the suggested amendment is adopted.
    Response: This clarification is unnecessary. The Congressional 
intent to allow contractors to buy relatively low-value items in bulk, 
for various customers, appears to be directly applicable to the 
described situation. There is no single definition of the term 
``identifiable,'' as used in the NDAA, but the statute is written in 
regard to items, not the cost of the items. DoD does not consider that 
unspecified items procured as part of a bulk purchase for multiple 
customers are ``identifiable to [a] particular contract'' on the sole 
basis that a related portion of the cost is allocable to the contract.
    There may, however, be other bases on which particular items or 
subdivisions of a single purchase may be identifiable with a particular 
contract, and creating a criterion that the items must be identifiable 
by individual serial number is not warranted.
    c. Strike ``The Contractor shall ensure that any such items to be 
used in performance of this contract meet all terms and conditions of 
this contract that are applicable to commercial items'' from the clause 
at 252.244-7000(c).
    Comment: One respondent suggested that the quoted language ``would 
require specific clauses to be applied `after the fact' in direct 
conflict with Section 877 and negate its intent.''
    Response: Section 877 only specifies that the items shall be 
treated as commercial items. It is not in conflict with section 877 to 
state that items treated as commercial items must comply with 
requirements that are applicable to commercial items. The respondent is 
apparently concerned that because the items are not purchased for a 
specific Government contract, that the contractor will not have imposed 
Government requirements upon the suppliers. The proposed language 
simply clarifies that if certain items are to be ``treated as 
commercial items'' pursuant to the first sentence and 10 U.S.C. 2380b, 
on the basis that they are ``valued under $10,000 and [were] purchased 
by a contractor for use in the performance of multiple contracts with 
the Department of Defense and other parties and are not identifiable to 
any particular contract,'' then in place of clauses that might 
otherwise apply, the items must comply with the clauses that apply to 
commercial items. If the respondent is suggesting that section 877, by 
providing that the items are to be ``treated as commercial items,'' was 
intended to further excuse a contractor from compliance with the 
clauses identified in FAR 52.244-6(c) (and any authorized agency 
supplements), DoD disagrees. One of the criteria for an acceptable 
purchasing system requires the contractor to ensure that all applicable 
purchase orders and subcontracts contain all flowdown clauses . . . 
needed to carry out the requirements of the prime contract (DFARS 
252.244-7001(c)(2)).
    d. Clarify what is meant by ``treatment as'' a commercial item 
(DFARS 244.402(S-70)).
    Comment: One respondent suggested that the term ``shall be treated 
as commercial items'' be supplemented by adding language to the effect 
that ``treatment'' of an item as a commercial item under the authority 
provided in 10 U.S.C. 2380b means that FAR part 12 applies, as it would 
apply under the proposed rule applicable to 41 U.S.C. 1903, Special 
Emergency Procurement Authority, and 10 U.S.C. 2380a, Treatment of 
Services Provided by Nontraditional Contractors as Commercial Items.
    Response: 41 U.S.C. 1903 provides that in defined circumstances in 
which its ``special emergency procurement authority'' applies, an 
executive agency ``may treat the property or service as a commercial 
item for the purpose of carrying out the procurement.'' 10 U.S.C. 2380a 
provides the same ``treatment'' by an agency for items and services 
provided by nontraditional defense contractors. Both of these 
provisions apply to acquisitions by an agency. To the extent that an 
agency ``may treat the property or service as a commercial item for the 
purpose of carrying out the procurement,'' this logically implies 
application of FAR part 12 procedures. 10 U.S.C. 2380b, however, 
applies to purchases by a contractor. The requirements of FAR part 12 
do not apply to purchases by a contractor, it would be extremely 
burdensome on contractors to make its requirements applicable, and DoD 
did not propose to do so.
    Comment: The respondent further suggested that language be added to 
specify that when 10 U.S.C. 2380b applies, ``a commercial item 
determination is not required.''
    Response: By the proposed language, contractors are entitled to 
treat items as commercial items when they are ``purchased by a 
contractor for use in the performance of multiple contracts'' and meet 
the other criteria of the

[[Page 60920]]

section. The following has been added: ``, even though the items may 
not meet the definition of ``commercial item'' at FAR 2.101 and do not 
require a commercial item determination.
    e. Retain existing language at DFARS 244.402(a).
    Comment: One respondent questioned why the wording at DFARS 244.402 
was changed from ``Contractors shall determine whether a particular 
subcontract item meets the definition of a commercial item'' to 
``Contractors are required to determine whether a particular 
subcontract item meets the definition of a commercial item.''
    Response: This change is to conform to the DFARS drafting 
convention that provisions and clauses are the appropriate place to 
direct contractors to do something. The text of the DFARS that is not a 
provision or a clause is directed to the contracting officer. 
Therefore, DFARS 244.402(a) should not tell the contractor that it 
shall do something, but should inform the contracting officer of a 
requirement applicable to contractors.
    f. Need to add Government checks on industry's new responsibility 
to treat certain items as commercial items.
    Comment: One respondent stated that even the DAR Council's proposed 
rule itself says there are checks to be made on industry in determining 
an item is commingled. The respondent requests that the administrative 
contracting officer (ACO) to be given the authority to examine 
industry's rationale against the Council's stated stipulations, by 
assigning this responsibility to the ACO and adding contractual 
requirement for the contractor to provide the requested documentation. 
Specifically, the respondent requested the following:
     DFARS 244.303(a)--Add the requirement, as part of the 
Contractors' Purchasing System Review, to review the adequacy of 
rationale documenting how items were purchased for use in the 
performance of multiple contracts with the Department of Defense and 
other parties and were not identifiable to any particular contract when 
purchased.
    Response: The contracting officer already has the authority to 
request and review contractor supporting documentation. Those 
performing a CPSR or audit may adjust their requests to ensure that 
``treated as commercial'' items are included in their reviews.
     FARS 252.244-7001, Contractor Purchasing System 
Administration, paragraph (b)--Add a new subparagraph to require the 
following: ``Upon request by the Contracting Officer, the Contractor 
shall provide rationale documenting commercial item determinations to 
ensure compliance with the definition of `commercial item' in FAR 
2.101. In addition, the Contractor shall provide rationale documenting 
how it determined items were purchased for use in the performance of 
multiple contracts with the Department of Defense and other parties and 
were not identifiable to any particular contract when purchased.''
    Response: This change does not fit in this clause on Contractor 
Purchasing System Administration. Paragraph (b) addresses the general 
requirement to establish and maintain an acceptable purchasing system. 
Paragraphs (a) and (c) provide applicable definitions and the criteria 
for an acceptable system. This change would duplicate requirements in 
other clauses. The contractor has the obligation to document and 
justify purchasing commingled items under this authority.
    2. Treatment of services provided by nontraditional contractors as 
Commercial Items (section 878 of the NDAA for FY 2017).
    a. Authorize prime contractors to treat supplies and services from 
nontraditional contractors as commercial items.
    Comment: One respondent recommended that authorizing prime 
contractors to utilize 10 U.S.C. 2380a (a) and (b) in their 
subcontracts and treating the supplies and services as commercial 
items, will help attract nontraditional defense contractors to do 
business with DOD. The file documentation proposed under DFARS 
212.102(iv)(C) to use either authority would be a representation by the 
subcontractor in accordance with DFARS 252.215-7013, and the prime 
contractor should be able to rely on such.
    Response: Both the permissive authority of 10 U.S.C. 2380a(a) and 
the mandatory treatment of 10 U.S.C. 2380a(b) apply only on the 
Government (prime contract) level. The statute does not allow DoD to 
flow down the authority.
    Comment: One respondent commented that additional direction is 
needed for certain nontraditional services that shall be treated as 
commercial items.
    Response: The DFARS final text includes DFARS 212.102(a)(iii)(B), 
which provides sufficient direction.
    b. Retain existing language at DFARS 212.102(a)(iii).
    Comment: One respondent recommended retention of the existing 
language at DFARS 212.102(a)(iii), which states explicitly that the 
decision to apply commercial item procedures to the procurement of 
supplies and services from nontraditional defense contractors does not 
require a commercial item determination and does not mean that the item 
is commercial.
    Response: Concur.

III. Applicability to Contracts at or Below the Simplified Acquisition 
Threshold and for Commercial Items, Including Commercially Available 
Off-the-Shelf Items

    This rule proposes to modify the clause at DFARS 252.244,7000, 
Subcontracts for Commercial Items, but does not modify its 
applicability. The clause is applicable to all solicitations and 
contracts, including solicitations and contracts using FAR part 12 
procedures for the acquisition of commercial items and solicitations 
and contracts valued at or below the simplified acquisition threshold. 
However, the amendment to DFARS 252.244-7000 proposed by this rule does 
not impose any burdens on contractors, but allows treatment of certain 
items as commercial items, that do not otherwise meet the definition of 
``commercial item'' in FAR part 2.

IV. Executive Orders 12866 and 13563

    Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). E.O. 
13563 emphasizes the importance of quantifying both costs and benefits, 
of reducing costs, of harmonizing rules, and of promoting flexibility. 
This is not a significant regulatory action and, therefore, was not 
subject to review under section 6(b) of E.O. 12866, Regulatory Planning 
and Review, dated September 30, 1993. This rule is not a major rule 
under 5 U.S.C. 804.

V. Executive Order 13771

    This rule is not subject to E.O. 13771, because this rule is not a 
significant regulatory action under E.O. 12866.

VI. Regulatory Flexibility Act

    A final regulatory flexibility analysis (FRFA) has been prepared 
consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. 
The FRFA is summarized as follows:
    This final rule is issued in order to implement sections 877 and 
878 of the National Defense Authorization Act (NDAA) for Fiscal Year 
(FY) 2017 (10 U.S.C. 2380a and 10 U.S.C. 2380b). The objective of this 
rule is to address the

[[Page 60921]]

treatment as commercial items of services provided by nontraditional 
defense contractors and certain items purchased by a contractor for use 
in the performance of multiple contracts. The legal basis for the rule 
is the NDAA section cited as the reasons for the action.
    There were no significant issues raised by the public comments in 
response to the initial regulatory flexibility analysis.
    Based on FY 2018 data from the Federal Procurement Data System 
(FPDS), awards of commercial contracts were made to 15,231 
nontraditional defense contractors that were also small entities. It is 
unknown how many of those entities might provide services that use the 
same pool of employees used for commercial customers and are priced 
using methodology similar to the methodology used for commercial 
pricing.
    Also based on FPDS data for FY 2018, DoD awarded 110,000 contracts 
for the purchase of supplies, commercial or noncommercial, exceeding 
$10,000, to 13,892 unique small entities. This rule will affect an 
unknown number of those 13,892 small entities, if such small entities 
purchase noncommercial items valued at less than $10,000 per item that 
are not identifiable to any particular contract when purchased and are 
for use in the performance of multiple contracts with DoD and other 
parties.
    This rule does not impose any new reporting, recordkeeping, or 
other compliance requirements. The rule does remind the contractor of 
the responsibility to ensure that items treated as commercial items 
pursuant to section 877 of the NDAA for FY 2017 that are to be used in 
the performance of the DoD contract meet all terms and conditions of 
the contract that are applicable to commercial items.
    DoD did not identify any significant alternatives that would 
minimize or reduce the significant economic impact on small entities, 
because there is no significant impact on small entities. Any impact is 
expected to be beneficial.

VII. Paperwork Reduction Act

    The rule does not contain any new information collection 
requirements that require the approval of the Office of Management and 
Budget under the Paperwork Reduction Act (44 U.S.C. chapter 35).

List of Subjects in 48 CFR Parts 212, 244, and 252

    Government procurement.

Jennifer D. Johnson,
Regulatory Control Officer, Defense Acquisition Regulations System.

    Therefore, 48 CFR parts 212, 244, and 252 are amended as follows:

0
1. The authority citation for parts 212, 244, and 252 continues to read 
as follows:

    Authority:  41 U.S.C. 1303 and 48 CFR chapter 1.

PART 212--ACQUISITION OF COMMERCIAL ITEMS

0
2. Amend section 212.102 by revising paragraph (a)(iii) to read as 
follows:


212.102   Applicability.

    (a)(i) * * *
    (iii) Nontraditional defense contractors. In accordance with 10 
U.S.C. 2380a, contracting officers--
    (A) Except as provided in paragraph (a)(iii)(B) of this section, 
may treat supplies and services provided by nontraditional defense 
contractors as commercial items. This permissive authority is intended 
to enhance defense innovation and investment, enable DoD to acquire 
items that otherwise might not have been available, and create 
incentives for nontraditional defense contractors to do business with 
DoD. It is not intended to recategorize current noncommercial items; 
however, when appropriate, contracting officers may consider applying 
commercial item procedures to the procurement of supplies and services 
from business segments that meet the definition of ``nontraditional 
defense contractor'' even though they have been established under 
traditional defense contractors. The decision to apply commercial item 
procedures to the procurement of supplies and services from 
nontraditional defense contractors does not require a commercial item 
determination and does not mean the item is commercial;
    (B) Shall treat services provided by a business unit that is a 
nontraditional defense contractor as commercial items, to the extent 
that such services use the same pool of employees as used for 
commercial customers and are priced using methodology similar to 
methodology used for commercial pricing; and
    (C) Shall document the file when treating supplies or services from 
a nontraditional defense contractor as commercial items in accordance 
with paragraph (a)(iii)(A) or (B) of this section.
* * * * *

PART 244--SUBCONTRACTING POLICIES AND PROCEDURES

0
3. Amend section 244.402 by--
0
a. In paragraph (a) removing ``shall'' and adding ``are required to'' 
in its place; and
0
b. Adding a new paragraph (S-70).
    The addition reads as follows:


244.402  Policy requirements.

* * * * *
    (S-70) In accordance with 10 U.S.C. 2380b, items that are valued at 
less than $10,000 per item that are purchased by a contractor for use 
in the performance of multiple contracts with the Department of Defense 
and other parties and are not identifiable to any particular contract 
when purchased shall be treated as commercial items, even though the 
items may not meet the definition of ``commercial item'' at FAR 2.101 
and do not require a commercial item determination.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
4. Amend section 252.244-7000 by--
0
a. Removing the clause date of ``(JUN 2013)'' and adding ``(SEP 2020)'' 
in its place;
0
b. Redesignating paragraph (c) as (d);
0
c. In the newly redesignated paragraph (d), removing ``(c)'' and adding 
``(d)'' in its place; and
0
c. Adding a new paragraph (c).
    The addition reads as follows:


252.244-7000  Subcontracts for Commercial Items.

* * * * *
    (c)(1) In accordance with 10 U.S.C. 2380b, the Contractor shall 
treat as commercial items any items valued at less than $10,000 per 
item that were purchased by the Contractor for use in the performance 
of multiple contracts with the Department of Defense and other parties 
and are not identifiable to any particular contract when purchased.
    (2) The Contractor shall ensure that any items to be used in 
performance of this contract, that are treated as commercial items 
pursuant to paragraph (c)(1) of this clause, meet all terms and 
conditions of this contract that are applicable to commercial items in 
accordance with the clause at Federal Acquisition Regulation 52.244-6 
and paragraph (a) of this clause.
* * * * *
[FR Doc. 2020-21249 Filed 9-28-20; 8:45 am]
BILLING CODE 5001-06-P