Pentagon acquisition chief Frank Kendall has heard the criticism of a draft acquisition rule that would further define what constitutes a “commercial item,” and agrees that it needs to be refined before it is put into place, he said Sept. 9.

“The rule as it’s read is very general,” he said after a speech at the ComDef 2015 conference. “I would like it, frankly, to be more specific, and I’m working with my contracting people on how to do that.”

Frank Kendall, Undersecretary of Defense for Acquisition, Technology and Logistics. Photo: DoD.
Frank Kendall, Undersecretary of Defense for Acquisition, Technology and Logistics. Photo: DoD.

The rule in question, Defense Federal Acquisition Regulation Case 2013-D034, would allow the Pentagon to determine whether a product qualifies as a commercial item using data other than certified cost or pricing data.

The Defense Department (DoD) wants to buy more commercial items and needs a simpler process to determine what products qualify, Kendall said.  However, making that decision is not always black and white, and the 2013 National Defense Authorization Act directed the department to create rules that would clarify the evaluation process.

“If there is true competition for those parts, it’s easy. We assume that competition has set a reasonable price for us and we take the price that’s offered, although we negotiate quantity discounts and so on,” Kendall said. “But if there’s no real competition, then we have to enquire and get some better basis for determining whether we’re paying a fair and reasonable price.”

Not doing that raises the risk of buying $600 hammers, he said.

However, some lawmakers and industry executives have said the new regulations could have unintended effects if they are put into action. Senate Armed Services Committee Chairman John McCain (R-Ariz.) on Tuesday sent a letter to Defense Secretary Ashton Carter calling for him to revoke the proposed rule, which the senator believes would undermine existing exemptions that make it easier for companies to sell commercial products to the Defense Department.

“This new regulation would likely deter privately held start-up companies from offering their products and services to DoD because it would impose cumbersome and excessive bureaucratic requirements on these firms to provide detailed cost data for precisely the types of solutions that DoD needs,” McCain wrote in the letter.

“Put simply, this kind of red tape would effectively require high-tech commercial firms to build entirely new accounting systems just to do business with DoD,” he added. “This will not happen.”

In response, Kendall said that he took McCain’s concerns seriously. However, he reiterated that the rule was not yet set in stone.

“We’re open to input on this. We struggled with it, frankly, to get the right balance,” Kendall said. However, “I don’t think anybody should be overly concerned about this rule yet. It’s not a final rule.”

Asking companies for uncertified cost and pricing data will be a “last resort” used only when necessary to ensure that the department is paying a reasonable cost for an item, he said. The Pentagon is also setting up a group at the Defense Contract Management Agency to help contracting officers ensure that a price is fair.

One of the more controversial parts of the proposed rule states that any item where more than half of its sales are commercial will be considered a commercial product. The fear from industry, Kendall said, is that contracting officials will strictly apply this standard and use it to disqualify products that might otherwise be deemed commercial.

That’s a fair criticism, but “that’s not the intent,” he said. Instead, it is meant to ensure that any product that meets that standard can quickly be labeled commercial.  “We don’t want to make it harder” for commercial manufacturers to do business with the government, he added.

Comments on the rule are due Oct. 2.