On November 17, the Department of Defense (DoD) issued a final rule, implementing Section 874 of the National Defense Authorization Act (NDAA), clarifying that certain DoD-unique statutes and Defense Federal Acquisition Regulation Supplement (DFARS) clauses are inapplicable to DoD commercial item procurements, including acquisitions of commercial off-the-shelf items and commercial services. The changes aim to reduce barriers to entry and administrative burden for nontraditional defense contractors and streamline DoD procurement of innovative technologies from the private sector.
A complex and lumbering federal acquisition system often makes integration into government work difficult for nontraditional contractors, however, the DoD has consistently worked to remove obstacles to entry through programs like Other Transaction Authorities (OTAs), the Middle Tier of Acquisition pathway, Small Business Innovation Research (SBIR) research grants, and the establishment of entities like the Defense Innovation Unit. At a recent House Armed Services Cyber, Information Technologies and Innovation Subcommittee hearing, Arthur Herman, a senior fellow at the Hudson Institute, stated, “[t]he question is how to better incorporate the innovations taking place in our private sector—from AI and robotics to cyber and quantum—into our defense industrial base.” This final rule is the latest attempt to inject innovation, resiliency, and increased capacity into the defense industrial base.
The rule clarifies that Contracting Officers (COs) may not include noncommercial DFARS clauses in commercial products and services contracts. Prior to this rule, DFARS 212.301 listed DFARS clauses that COs could include in contracts for commercial products and services, but it did not expressly state these were the only DFARS clauses that could be added. Therefore, confusion grew as to whether COs could add other DFARS clauses they believed were necessary, creating a patchwork of contracts with varying DFARS requirements, adding to a commercial perception that doing business with the government can be costly. Following the issuance of the final rule, COs no longer have the discretion to choose other DFARS clauses to include. Rather, DFARS 212.301 now states the “contracting officer shall not use other [Federal Acquisition Regulation] FAR or DFARS provisions and clauses unless required by the FAR or DFARS or consistent with customary commercial practices.”
In addition, the rule instructs DoD prime contractors that they should not flow down additional FAR or DFARS clauses in a subcontract for commercial products or services at any tier. Again, prior guidance included permissive language, which prime contractors mistook as discretion. The clarification should be a welcome sign for subcontractors who worry prime contractors flow down unnecessary FAR and DFARS clauses to insulate themselves from risk while impairing the government’s ability to procure innovative technologies in the process.
Notably, the final rule does not define “subcontract,” which creates ambiguity as to what FAR and DFARS clauses should be flowed down to lower-tier agreements. A comment on the proposed rule asked the DoD to replace subcontractor with “or subcontractor at any tier” to clarify that the rule applies to all subcontractors. However, the final rule declined to do so. Instead, it pointed to FAR Case 2018-006, an open case where the FAR Council will define subcontract once and for all.
The final rule qualifies the general prohibition of inserting noncommercial FAR and DFARS clauses into commercial acquisitions. Those clauses required by regulation or “consistent with customary commercial practices” are still permitted to be added. What constitutes “customary commercial practices” seems likely to become a key battleground in future contract disputes.
Lastly, while the final rule restricts certain clauses from being added to prime contracts, it is unclear how it will work with FAR 12.302(c) language, which allows COs to obtain a waiver and “include any additional terms or conditions in a solicitation or contract for commercial products or commercial services in a manner that is inconsistent with customary commercial practice.”
The final rule will help to reduce the burden nontraditional defense contractors face when trying to sell commercial products or services to the government. With contracts that minimize the number of government-specific clauses, thereby more closely resembling commercial contracts, nontraditional companies will be more likely to enter contracts with the DoD. These changes should reduce the administrative and compliance burden nontraditional contractors face when attempting to perform on government contracts and bolster innovation and redundancy within the defense establishment. However, questions do remain. Contractors should remain vigilant for future guidance.
If you have any questions about the new rule, please contact the author.