A rule going back several years lets Defense Department contracting officers treat stuff from so-called non-traditional vendors — known as NCDs — as commercial. Just this month, the Defense Pricing and Contracting unit issued a memo underscoring that authority. For why this matters,  The Federal Drive with Tom Temin  talked with Haynes & Boone procurement attorney Dan Ramish.

Interview Transcript: 

Tom Temin Dan, let’s just begin with why you would want to treat nontraditional suppliers as commercial in the first place. Is that because they are, they’re just new to DoD, or what was the thinking behind the original rule here?

Dan Ramish Well, Tom, nontraditional defense contractors are defined to include all contractors that do not have a subcontract or contract subject to full cost accounting standards coverage and have not had one in the preceding year. And so that group includes small businesses, who, by definition, are exempt from the cost accounting standards. And this is a group that the Department of Defense is really keen to have participate in the defense market, both because small businesses are always important to encourage and are the lifeblood of industry in this country, and also because that includes a lot of cutting edge technology companies that have innovation that the Defense Department needs.

Tom Temin So, treating them as commercial then avoids having some of the cost accounting rigmarole that swamps other companies, and therefore they don’t have to have all of this compliance mechanism and exposure. Is that the rationale?

Dan Ramish Yes, it’s a real deterrent, all the rules that apply in federal procurement. And that’s been one of the reasons that the number of small businesses participating in the defense market has dramatically decreased over the last ten years. And so, DoD, on the one hand, is pursuing a number of policies that are important for protecting national security and policy interests, whether that’s cyber security, supply chain restrictions, domestic preferences. But on the other hand, they have an awareness that this accumulation of rules affects whether the types of innovative companies they want to do business with are willing to participate. And so this authority that dates back to 2018 was intended to help relieve some of the burden for those companies, even if they’re modifying their products or services in a way that makes them no longer technically commercial, having a lower burden to allow them to participate and have a lower barrier to entry is a Defense Department priority.

Tom Temin And I suppose one other rationale is they may sell that innovative product on the commercial market also, which would indicate maybe it doesn’t become fully commercial like a commodity, but it means that their pricing is probably reasonable if somebody else is buying it.

Dan Ramish That’s true, and certainly, one of the other, besides the cost accounting standards, one of the other particularly onerous and risky obligations is certified cost or pricing data, and commercial products and services are exempt from that. So, that’s certainly one of the priorities with this rule.

Tom Temin Then the question becomes, were people actually using this rule and therefore fine, or were they not using it so much? And the Defense Department put out this memo just earlier this month.

Dan Ramish Well, you hit the nail on the head, Tom. This authority has existed since 2018, but it’s rarely been used, if at all, by contracting officers or by prime contractors. That’s one of the other things that this memo does, is it underscores that prime contractors can also use this authority with subcontractors and suppliers that are nontraditional defense contractors. So I think DPC was concerned that this authority has existed, but no one’s been taking advantage of it to increase nontraditional defense contractor participation in the defense market.

Tom Temin We’re speaking with Dan Ramish. He’s a procurement attorney with Haynes Boone. And what does the memo specifically say? ‘Hey folks, this has been around since 2018, get off your duff and use it’?

Dan Ramish Not in precisely those words, but yes, the memo points out that it’s important that nontraditional defense contractors play an important role in providing innovative capabilities to DoD, and it mentions that contracting officers have discretion to create nontraditional defense contractor products or services as commercial at both the prime and subcontractor levels, and that it specifically speaks to the exemption from certified cost or pricing data for nontraditional defense contractors, requiring, at a minimum, a statement to the contracting officer that the company meets the NDC statutory definition. So, as you say, that sort of a cost pricing data under the Truthful Cost or Pricing Data Act, or TINA, as it’s popularly referred to, is one of the risks and requirements that commercial and nontraditional companies aren’t used to complying with.

Tom Temin Sure, nobody wants to go to the dance with TINA if they can avoid it. Well, could contracting officers have been avoiding it because it requires them to use discretion and make an exception? And that’s always sticking your neck out a little bit. And, you know, it’s a pretty safe or conservative approaching type of community, COs.

Dan Ramish I think that’s exactly right, that contracting officers are not incentivized to take risks. They are incentivized to follow the rules, and they need sometimes additional encouragement and reminders that when the rules actually allow them to relieve contractors from obligations rather than to take them on. I think it’s a natural reflex. We live in this highly regulated world of government procurement and there are so many rules, they become a habit at some point. And so you need maybe some prompting to break free from that and use the authority. And as you alluded to before, it does also have a price impact on the government, having contractors and subcontractors comply with all these extra rules. And so there’s a benefit there as well, if companies don’t have to comply with rules that are applicable to noncommercial companies.

Tom Temin And from the contractor side, then, you know, if you’re going to be subject to TINA and cost accounting standards, then you have to have an accounting system that is acceptable to the department before you can even bid, basically, or you’re going to have to put it in. That’s expensive and complicated. So, a would-be contractor that just has a standard commercial accounting system would be advised to try to get in under this exception so that they don’t have to change their accounting system.

Dan Ramish That’s right. It’s a real barrier to entry for companies that are considering entering the defense market. And that’s borne out, as I say, by fewer companies, particularly small businesses choosing to do business with the Department of Defense. And so maybe this memo will do some good in that regard and remove that disincentive and allow access to innovative technologies.

Tom Temin Dan Ramish is a procurement attorney with Haynes Boone. As always, thanks so much.

Dan Ramish Thanks, Tom.

Tom Temin And we’ll post this interview along with a link to Dan’s article on this topic at federalnewsnetwork.com/federaldrive. Hear The Federal Drive on demand. Subscribe wherever you get your podcasts.

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