Wednesday, October 12, 2011

Subcontract Costs Based on Commercial Item Pricing

A couple of weeks ago, we ran a three part series dealing with the Government's purchases of commercial items and some of the factors that the Government considers in determining whether items meet the precise definition of "commercial items". Today we want to focus on prime contractor responsibilities when they include subcontract costs based on commercial item pricing in a proposal or public voucher.

When a prime/higher-tier contractor includes proposed subcontract costs for commercial items in its proposal, the prime/higher-tier contractor is required to make a commercial item determination (CID) and perform the appropriate cost or price analysis to establish a fair and reasonable price, in accordance with Department of Defense FAR Supplement (DFARS) 244.402 and Federal Acquisition Regulation (FAR) 15.404-3. The Government auditor (e.g. DCAA) or the price analyst/contracting officer (e.g. DCMA) will review the adequacy of the prime/higher-tier contractor’s CID and associated cost/price analysis as a basis for opining on the adequacy of the CID and the reasonableness of the proposed subcontract costs included in the prime/higher-tier contractor’s proposal.

Prime contractors and all of their subcontractors are required to purchase supplies and services from responsible sources at fair and reasonable prices, including those determined to be commercial items. DFARS 244.402(a) states "Contractors shall determine whether a particular subcontract item meets the definition of a commercial item.” Prime/higher-tier contractors are expected to exercise reasonable business judgment in making the CID and documenting its determination. In addition, FAR 15.404-3(b) states that the prime contractor shall conduct appropriate cost/price analyses to establish the reasonableness of proposed subcontract prices and include these analyses in its proposal.

An adequate CID clearly identifies and supports how the item meets the commercial item definition in FAR 2.101. Generally, support for a CID would include market analysis and sales history. Failure to include adequate support could result in an estimating system deficiency and possible withholds on billings.

In some cases, the contracting officer may not agree with a prime contractor/higher-tier subcontractor's CID. FAR 15.403-1(c)(3) states in part, “If the contracting officer determines that an item claimed to be commercial is, in fact, not commercial and that no other exception or waiver applies, … the contracting officer shall require submission of certified cost or pricing data.”

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