Infotech and the law: Latest FAR rule remains a juggling act

Eliza Nagle

On June 8 the interim Federal Acquisition Regulation rule implementing Section 818 of the 2005 National Defense Authorization Act was published. Section 818 was Congress' response to the Boeing KC-767A Tanker Aircraft acquisition and the related Defense Department inspector general's report that criticized it.

Section 818 and the interim rule require submission of cost or pricing data for a noncommercial modification of a commercial item expected to cost more than $500,000 or 5 percent of the price of the contract, whichever is greater.

The acquisition involved modifying Boeing Co.'s 767 aircraft to be a military tanker. The Air Force used a commercial-item procurement strategy that waived the cost and pricing data submission requirement. The Air Force supported its commercial acquisition strategy on the basis that under FAR, the modifications of the 767 were minor. A debate then followed on the definition of "minor."

The IG disapproved the Air Force's commercial-item strategy, finding it left the government without access to cost and pricing data to make its procurement decision. The IG also disagreed that modifications to the 767 were minor.

Statute and the FAR let the government purchase some commercial items without cost and pricing data if they've had minor modifications. Modifications are considered minor if they do not significantly alter the nongovernmental function or essential physical characteristics of an item or component. The dollar value and percentage of the acquisition also are considered, but are not conclusive evidence, that a modification is minor.

However, Congress settled the debate of what is a minor modification, at least for Defense Department, NASA and Coast Guard acquisitions. The interim rule makes it clear that Section 818 requirements apply only to acquisitions funded by these three agencies.

Congress appears to have decided that "minor" means $500,000 or 5 percent of the total price of the contract. Interestingly, this decision seems to suggest that dollar values and percentages of the acquisition are conclusive evidence that a modification is minor, without regard to the impact on the nongovernmental function or essential physical characteristics of the item.

On its face, Section 818 appears to be legislation responding to the flaws of the Boeing acquisition. The Senate Armed Services Committee's recommendations clearly indicate that a contractor would not have to provide additional information on the commercial part of the contract.

Nevertheless, it remains unclear whether Section 818 also is a foreshadowing of future legislation that may rein in some of the commercial-item acquisition reforms of the 1990s. Both the committee and the Defense Department IG have commented on the lack of access to cost and pricing data.

Although the government feels more comfortable when it can access cost and pricing data, this should not encroach on protections from submitting this data that the statutes and regulations offer to commercial-item contractors.

Further restrictions on commercial-item procurements, particularly new requirements that would give the government insight into commercial cost and pricing, may have the practical effect of limiting the number of commercial companies that are willing to do business with Uncle Sam.

In fact, commercial contractors that are not equipped to provide routine cost and pricing data now will need to closely monitor modifications of their prime and subcontracts to ensure they do not trigger the new requirements.

Eliza Nagle is an associate in the Government Contracts practice of DLA Piper Rudnick Gray Cary LLP in Washington. Her e-mail address is eliza.nagle

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