Bringing the Issues Posed by the DFARS PGI to Light

Bringing the Issues Posed by the DFARS PGI to Light Created as a means to simplify and streamline the Department of Defense's DFARS, the "Procedures, Guidance and Information" publication (PGI) accomplishes neither; only adding additional complexity to an already complex process. 42 Contract Management July 2008

BY charles r. thompson Contract Management July 2008 43

In 2004, the Department o f D e f e n s e ( D O D ) b e g a n t o r e d u c e t h e content of its D e f e n s e Federal Acquisition Regulation Supplement ( DFARS) by moving some of it into a new p u b l i c a t i o n c a l l e d t h e P r o c e d u r e s, G u i d a n c e, and Information (PGI). T h e o r i g i n a l c o n t e n t o f t h e P G I w a s p u b l i s h e d serially in the Federal Register for public comment. According to United States Code (U.S.C.), Title 41 U.S.C. 4 1 8 b r e q u i r e s p u b l i c a t i o n of contracting rules in the Federal Register i f t h e y w i l l h a v e a significant effect b e y o n d a g e n c y i n t e r n a l o p e r a t i n g p r o c e d u r e s o r w i l l h a v e a s i g n i f i c a n t c o s t o r a d m i n i s t r a t i v e i m p a c t o n c o n t r a c t o r s o r o f f e r o r s. B u t d o e s t h e c o n t e n t o f t h e P G I h a v e n o s i g n i f i c a n t i m p a c t o u t s i d e o f D O D, and no significant a d m i n i s t r a t i v e i m p a c t o n contractors or offerors? Is DOD obeying the law? In February 2004, DOD issued DFARS Case 2003-D090, titled DFARS Procedures, Guidance, and Information. DOD proposed to add the PGI to the DFARS as follows: DOD is proposing to amend DFARS to define a companion resource to the DFARS that will contain mandatory and non-mandatory internal DOD procedures, non-mandatory guidance, and supplemental information. This new resource, titled Procedures, Guidance, and Information (PGI), is a result of a transformation initiative undertaken by DOD to dramatically change the purpose and content of the DFARS. 1 The proposed policy regarding the content of the DFARS and the PGI is: DOD implementation and supplementation of the [Federal Acquisition Regulation (FAR)] is issued in the [DFARS] under authorization and subject to the authority, direction, and control of the Secretary of Defense. The DFARS contains i. ii. iii. iv. v. Requirements of law, DOD-wide policies, Delegations of FAR authorities, Deviations from FAR requirements, and Policies/procedures that have a significant effect beyond the internal operating procedures of DOD or a significant cost or administrative impact on contractors or offerors. Relevant procedures, guidance, and information that do not meet the [above] criteria are issued in the DFARS [PGI]. 2 In April 2003 nearly a year before DFARS Case 2003-D090 was issued DOD officials announced a project to reduce the DFARS by 40 percent. The honorable Michael Wynne, the acting under secretary of defense for acquisition, technology, and logistics (USD (AT&L)) endorsed this initiative. The question then was: How can we do this? One idea was to create a nonmandatory procedures and information document that would contain the material removed from the DFARS, thus achieving the directed 40 percent reduction of the DFARS. 3 DOD decided that the DFARS should focus only on requirements of law, DOD-wide policies, delegations of FAR authorities, deviations from FAR requirements and policies, and procedures that have significant effect beyond the internal operating procedures of DOD or that have a significant impact on the public. This decision also meant that a significant portion of the DFARS that did not meet those criteria should then be removed from the DFARS and placed in the PGI. The PGI is described as an online resource to help acquisition professionals more effectively and efficiently do their jobs. The PGI exists as a Web site that enables DOD policymakers to more rapidly communicate internal administrative and procedural information to the acquisition workforce. In February 2004, a Defense Acquisition University seminar discussed DOD s plans to reduce the DFARS by creating a subset of the DFARS the PGI. Two significant requirements of the PGI were stipulated. The new PGI must: 1 2 Have no significant impact on the public, and Not be a codified federal regulation. The first requirement is a suitable one, as long as it is truly maintained. However, as this article will attempt to show, this standard has not been maintained and the public is likely being adversely impacted by PGI changes. The second requirement can be seen as a euphemism for making policy changes that DOD wants, but cannot afford the delay or the risk of public challenge. Since the PGI is not a codified federal regulation, a new or revised policy posted in the PGI need not be disclosed to the public prior to implementation. The PGI, and thus DOD policy, can therefore be changed at will; sometimes retroactively. 44 Contract Management July 2008

In November 2004, DOD issued a final rule and adopted the PGI without change from the proposed version. Only one comment was received on the proposed rule; it was deemed to be outside the scope of the case and was therefore not considered further. In announcing the final rule, DOD certified that the rule will not have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act 4 because the new DFARS companion resource will contain only procedures, guidance, and information that have no significant effect beyond the internal operating procedures of DOD and no significant cost or administrative impact on contractors or offerors. 5 The PGI site was actually born out of an initiative to redefine and better focus the content of DFARS, according to DOD Deputy Director of Defense Procurement and Acquisition Policy (DPAP) Ron Poussard. 6 Also, as stated in a DOD press release on November 1, 2004, the PGI site has really evolved into a solution for rapidly communicating DOD policy and guidance. 7 How the PGI Really Works In practice, the PGI s evolution has become more than a method of communicating internal administrative and procedural information. In fact, it has become a new channel of DOD acquisition policy that affects all contractors (i.e., the public, as well as government contracting personnel). For example, a PGI case titled Economic Price Adjustment Provisions (PGI Case 0000-P074) updates guidance on the use of economic price adjustment (EPA) provisions in DOD contracts. 8 The newly added PGI 216.203, Fixed-Price Contracts With Economic Price Adjustment, provides more than four pages of guidance on the use of EPA clauses. This PGI section was revised January 10, 2008, and was made effective that same date. However, no prior public notice of the change was provided. Since this PGI information affects the pricing of DOD contracts, DOD contractors would likely have an interest in the formulation of this guidance. Further, contractors and offerors are usually expected to provide rationale to support their proposals. An offeror proposing an EPA provision would likely base its rationale on the regulatory requirements of that clause, including the guidance at PGI 216.203. Thus, the PGI becomes not only guidance for the contracting officer (CO), but also for a contractor/offeror. Since this PGI revision was not subject to the usual process of proposal in draft form and published for public comment, industry had no opportunity to provide its endorsement, opinions, or objections. In another case, the USD (AT&L) issued a memorandum on June 8, 2007, that informed the U.S. military departments and defense agencies that PGI 215.4 had been revised on May 31, 2007. The DOD memo cited revised, retroactive guidance regarding the application of existing FAR/ DFARS requirements for determining fair and reasonable contract prices for commercial Contract Management July 2008 45

items, especially those being procured in a sole-source situation. The memo also explained that the changed PGI pricing guidance was in response to several oversight reports, including a DOD inspector general (DODIG) report that found errors in the government s pricing of a commercial items contract. 9 We note that the DODIG found that the government negotiating team used questionable commercial item determinations, yet the corrective action and the onus of the revised PGI is ultimately on the contractor to provide more pricing data. 10 A final DFARS change was published in the Federal Register on May 31, 2007, and was made effective that same date. 11 The final rule amending the DFARS was billed as Technical Amendments, and only made reference to the revised PGI 215.4 (the text of which was not provided in the Federal Register notice). No public comment was sought for these revised PGI pricing procedures that do, in fact, have a significant impact on the public. For example, refer to DFARS PGI 215.403-3, Requiring Information Other Than Cost or Pricing Data. In this particular section, the procedural changes and policy clarifications list four kinds of data the CO may require of offerors when justifying price reasonableness. These changed requirements can be viewed as DOD s de facto repeal of features of the Federal Acquisition Streamlining Act (FASA) that authorized and encouraged commercial item procurement without reliance on detailed cost or pricing information. Contractors who entered the DOD market under the rubric of the commercial item purchasing concepts legislated in FASA now find themselves without those statutory and policy features that were adopted by Congress to encourage their participation. This policy reversal by DOD may come as a surprise to Congress and the general public, including contractors. Concerning this pricing PGI revision, one professional article states: By eliminating the requirement for submission of cost or pricing data in commercial item acquisitions, Congress clearly intended to encourage greater participation by commercial vendors in government 46 Contract Management July 2008

procurements. The revised PGI requirements that include obtaining detailed cost information from commercial vendors will once again make it difficult for many commercial companies to compete in the government market. 12 Another article analyzes this PGI pricing guidance revision and offers this summary: DOD s revised PGI signals a shift away from reliance on the protections inherent in the commercial marketplace and towards reliance on the verification of pricing. While [t]he request for additional information shall be limited to only that needed to determine prices to be fair and reasonable, the policies and procedures outlined in DOD s revised PGI place an increased burden on the contracting officer to obtain additional data, even for items that are clearly commercial. DOD s requirements provide for little of the simplification and streamlining the procurement community has come to expect from commercial item procurement. Contractors should anticipate increased requests for cost information other than DOD has interpreted statute and FAR policy to publish DOD policy using the PGI that does, in fact, affect contractors, and the use of the PGI to do so avoids advance public notice. cost or pricing data to support their prices on modifications. 13 A third example is derived from a commenter on www.wifcon.com. The comments specifically address PGI 205.207. This proposed contract is being considered as a 100 percent set-aside for historically black colleges and universities (HBCUs) and minority institutions (MIs), as defined by the clause at 252.226-7000 of the [DFARS]. Interested HBCUs and MIs should provide the contracting office as early as possible, but not later than 15 days after this notice, evidence of their capability to perform the contract, and a positive statement of their eligibility as an HBCU or MI. If adequate response is not received from HBCUs and MIs, the solicitation will instead be issued, without further notice, as: (indicate if unrestricted, or restricted for small business or small disadvantaged business, etc.). Therefore, replies to this notice are also requested from (enter the types of firms to be solicited in the event an HBCU or MI set-aside is not made). The Wifcon.com commenter cites this section, then asks, Why is that in PGI and not Contract Management July 2008 47

DFARS? How does that constitute internal agency guidance such as designations, workflow procedures, etc.? It seems to me that the notice could have a significant effect beyond internal operating procedures. 14 These three examples clearly show that the PGI impacts the public, and that stated requirements of PGI have been abrogated in practice. There are likely other PGI sections that impact contractors as well. So now, industry has at least three levels of regulation it must be aware of and review before engaging in the defense market the FAR, the DFARS, and the PGI. These three levels of policy and procedure must be consulted to obtain all the federal and DOD policy that may apply to an acquisition. In an effort to streamline and simplify, DOD has managed to achieve neither; only adding a layer of complexity for itself and for contractors or offerors. As a policy vehicle, there is a lack of an audit trail of policy requirements for the PGI. There is no record when a PGI section becomes effective, nor what the preceding language, if any, states. A contractor/offeror (and a government CO, for that matter) must be very careful to monitor PGI policy at the outset of an acquisition and at all times during the life cycle of the acquisition. While it is entirely possible that a PGI section could establish a baseline of requirements, in the course of a protracted negotiation, or even during contract performance, that PGI could change, leaving the contractor without the basis for its position, even though the basis may have existed previously. Public Comment to be Sought for Proposed Procurement Policies Current statute states: [T]he head of the agency shall cause to be published in the Federal Register a notice of the proposed procurement policy, regulation, procedure, or form and provide for a public comment period for receiving and considering the views of all interested parties on such proposal. The length of such comment period may not be less than 30 days. 15 The FAR implements this statute when it states: Views of agencies and nongovernmental parties or organizations will be considered in formulating acquisition policies and procedures. The opportunity to submit written comments on proposed significant revisions shall be provided by placing a notice in the Federal Register. 16 Therefore, the very existence of the PGI violates this FAR policy when the PGI is used to issue policy that affects the public but is not publicized before it is made effective. The FAR Allows Internal Agency Acquisition Regulations FAR 1.303, regarding agency supplemental regulations, states that issuances under 1.301(a)(2) need not be published in the Federal Register. 17 According to FAR 1.301(a) (2), an agency head may issue or authorize the issuance of internal agency guidance at any organizational level (e.g., designations and delegations of authority, assignments of responsibilities, work-flow procedures, and internal reporting requirements). 18 The FAR requires that views of agencies and nongovernmental parties or organizations will be considered in formulating acquisition policies and procedures. 19 The opportunity to submit written comments on proposed significant revisions shall be provided by placing a notice in the Federal Register. 20 The FAR defines significant revisions as those that alter the substantive meaning of any coverage in the FAR system, including the DFARS, having a significant cost or administrative impact on contractors or offerors, or significant effect beyond the internal operating procedures of the issuing agency. 21 The PGI examples previously cited clearly demonstrate that some of DOD s PGI are, in fact, significant revisions because in at least the three instances cited, DOD has used the PGI to announce or amend policies that affect the public. Since the DFARS does not supplement FAR 1.501-2 regarding opportunity for public comment, we can assume that DOD supports that FAR policy and the 48 Contract Management July 2008

law requiring public comment on its acquisition rules. As was proposed and adopted without change, the DFARS and the PGI are consistent with FAR policy, but the PGI is not consistent with practice (as shown in the cited PGI examples). It is logical and fair to equate DOD s significant effect with the FAR definition of significant revisions. Conclusions It is clear from this evidence that the PGI is being used for more than internal agency guidance. DOD has interpreted statute and FAR policy to publish DOD policy using the PGI that does in fact affect contractors, and the use of the PGI to do so avoids advance public notice. Some PGI sections and revisions are significant revisions and should be offered for public review and comment before adoption. Recommendations Action is needed to bring the issues posed by the PGI to light. Contractors and their advisors and associations should: Gather additional evidence to support the thesis that DOD uses the PGI to publish acquisition policy without public comment, Publicize any evidence obtained, and Advocate reform of the PGI to avoid publishing acquisition policy that affects the public. About the Author CHARLES R. THOMPSON, CPCM, Fellow, is a former U.S. Army contracting officer. He is now a contracts management consultant supporting COGP, Inc., a small consulting firm with large and small clients. He has been a member of NCMA since 1978. Mr. Thompson gratefully acknowledges comments and assistance by Vernon J. Edwards and RADM Joseph S. Sansone, SC, USN (Ret.), the principal of COGP, Inc. Send comments about this article to cm@ncmahq.org. Endnotes 1. 35 Federal Register 8145, 2/23/2004. 2. Ibid. 3. Defense Task Force on DFARS Transformation, Briefing Slides. Mr. Ron Poussard, deputy director, defense acquisition regulation system, defense procurement and acquisition policy, April 2, 2003 briefing at Defense Supply Center Columbus 2003 Supplier Conference. 4. 5 U.S.C. 601, et seq. 5. 210 Federal Register 63326-63327, 11/1/04. 6. DFARS Transformation Briefing by Ron Poussard, deputy director, DPAP, February 19, 2004, at Defense Acquisition University Annual Conference. 7. DOD Press Release: Newly-Launched DFARS Companion Guide to Serve as Powerful Resource for DOD Contracting Professional. Arlington, Virginia, November 1, 2004. 8. 9. 10. This change to the PGI is part of the DFARS Change Notice 20080110, and was made available on DOD s Web site for defense procurement and acquisition policy on January 17, 2008. DODIG Report D-2006-122, Commercial Contract for Noncompetitive Spare Parts with Hamilton Sundstrand Corporation. September 29, 2006. Office of the USD (AT&L) memorandum, Determining Fair and Reasonable Contract Prices Revised Procedures, Guidance, and Instruction (PGI), June 8, 2007. 11. 104 Federal Register 30278, 5/31/07. 12. 13. Vacura, Richard J. and Keric Chin, Commercial Item Pricing Changes Will Impact Government Sales, October 2007. Morrison & Foerster, LLP. Pearson, Rebecca and Jackson Reams, Government Contracts Update Price Reasonableness: DOD Revises Procurement Policy to More Closely Scrutinize Commercial Prices, Venable. No. 2007-8, July 2007. 14. Wifcon.com forum comment posted Friday, January 25, 2008 at 07:49am. Vern Edwards, #316. 15. 16. 17. 18. 19. 20. 21. 41 U.S.C. 418b(b). FAR 1.501-2, Opportunity for Public Comments. FAR 1.303(b), Publication and Codification (Agency Acquisition Regulations). FAR 1.301(a)(2), Policy (Agency Acquisition Regulations). FAR 1.501-2, Opportunity for Public Comments. Ibid, Section (b). FAR 1.501-1, Definition (Solicitation of Agency and Public Views; Agency and Public Participation). One solution is to merge the PGI back into the DFARS and eliminate the PGI altogether. However, this may require admission that attempting to reduce a regulation by some arbitrary amount was an unrealistic goal. But perhaps others have better solutions. CM Contract Management July 2008 49