E9-30294. Defense Federal Acquisition Regulations Supplement; Statutory Waiver for Commercially Available Off-the-Shelf Items (DFARS Case 2008-D009)

AGENCY:

Defense Acquisition Regulations System, Department of Defense (DoD).

ACTION:

Final rule.

SUMMARY:

DoD has adopted as final, without change, an interim rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to conform to the FAR changes implementing the waiver of the component test of the Buy American Act to contracts and subcontracts. The Federal Acquisition Regulation (FAR) Case 2000-305 implemented 41 U.S.C. 431 with respect to the inapplicability of certain laws to contracts and subcontracts for the acquisition of commercially available off-the-shelf (COTS) items.

DATES:

Effective Date: December 24, 2009.

FOR FURTHER INFORMATION CONTACT:

Ms. Amy Williams, Defense Acquisition Regulations System, OUSD(AT&L) DPAP(DARS), IMD 3D139, 3062 Defense Pentagon, Washington, DC 20301-3062. Telephone [phone]; facsimile 703-602-7887. Please cite DFARS Case 2008-D009.

SUPPLEMENTARY INFORMATION:

A. Background

The Buy American Act (41 U.S.C. 10a-10b) uses a two-part test to define a “domestic end product” (manufactured in the United States and a formula based on cost of domestic components) (see FAR 25.001(c)(1) and definition of “domestic end products” at 25.003). The second part of this test is referred to as the “component test.”

DoD published an interim rule on January 15, 2009 (74 FR 2422), to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to conform to the FAR changes implementing the waiver of the component test of the Buy American Act for the acquisition of commercially available off-the-shelf (COTS) items (FAR Case 2000-305), published as a final rule in the Federal Register on January 15, 2009 (74 FR 2713), and effective February 17, 2009.

The comment period on the DFARS interim rule closed on March 16, 2009.

DoD received two responses, both representing the view of manufacturers of specialty metals.

1. The rule has been promulgated and justified based on circular logic.

One respondent objects that the final rule under FAR Case 2000-305 and the interim rule under DFARS Case 2008-D009 employ circular reasoning in changing the definition of COTS item. The respondent states that “each of the two rules is justified by pointing to the other.” The respondent objects that GSA and DoD have adopted a rule without meaningfully addressing comments on the new COTS definition submitted in response to DoD's proposed rule 2008-D003.

Response: This case was not based on circular logic but on a progression from the DFARS proposed rule 2008-D003 to the FAR Case 2000-305 and to the interim rule under this DFARS Case 2008-D009. The comments submitted in response to the proposed rule were thoroughly reviewed and analyzed prior to the decision to incorporate this definition in the FAR rule and this DFARS rule and were then addressed in the Federal Register when the final rule 2008-D003 was subsequently published on July 29, 2009 (74 FR 52895).

2. Definition of COTS item should not allow modification to COTS items at higher tiers in the supply chain.

Both respondents opposed the definition of “commercially available off-the-shelf (COTS) item” because they consider it inconsistent with the statutory definition of COTS item (41 U.S.C. 431(c)) to allow modifications to occur at the next higher tier in the supply chain.

The respondents were concerned that an item could be substantially modified by downstream contractors prior to delivery to the Government.

• One respondent stated that under this definition, a COTS item can be modified in any way and still retain its character as a COTS item.
• The respondent further stated that this definition of COTS items results in the COTS exception applying to all commercial items.
• The respondent is concerned that contractors may opt to deconstruct major equipment end items such as green aircraft with the expectation that this approach would leave them with just a very small set of items requiring compliance. The respondent considered that the use of the commercial derivative military article exception would be more appropriate.
• The respondents cited language from the House Armed Services Committee report which stated that the exception for COTS items and components generally applies to items incorporated in non-commercial end items. The Committee also stated that if a contractor is using COTS items with more substantial modifications, it must use the de minimis or commercial derivative military article (CDMA) exceptions.
• The respondents requested that DoD allow only modifications that are incidental to installation, joining, or incorporation into the non-commercial end item.

Response: The arguments of these respondents are not pertinent to this DFARS rule and this DFARS rule has no impact on these respondents. This case implements a waiver of the component test under the Buy American Act for end items that are COTS items. The concern of these respondents relates to treatment of components containing specialty metals as COTS items. Their rationale is applicable to the restrictions of 10 U.S.C. 2533b on acquisition of specialty metals, but not to the Buy American Act.

The comments relating to the House Report that accompanied the FY-09 Duncan Hunter National Defense Authorization Act are inapplicable to this case, as are the comments regarding exceptions for commercial derivative military articles and de minimis amounts of specialty metals, as these apply only to the specialty metals restriction at 10 U.S.C. 2533b.

The comments with regard to treatment of components as COTS items were addressed in more detail in the preamble to the final rule under DFARS Case 2008-D003 (74 FR 52895). However, the statement that, under this definition, COTS items that have been substantially modified are still considered to be COTS items is not accurate. The item must be provided to the next higher tier of the supply chain without modification. Whether it is a COTS item is determined at the time of transfer. DoD considers it reasonable to view COTS items that are provided from the global supply chain to the next higher tier supplier, without any modifications, to be “delivered to the Government” by those suppliers without modification. If DoD were not to view such items in this way, these COTS suppliers would not be able to provide globally available COTS items to the Government without burdensome investigations to track the eventual use of the COTS item to the end of the final assembly. Further, the COTS item definition, unlike the definition of “commercial item”, requires that the item must be sold in substantial quantities in the commercial marketplace.

This rule was subject to Office of Management and Budget review under Executive Order 12866, dated September 30, 1933.

B. Regulatory Flexibility Act

DoD certifies that this final rule will not have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. Under the rule, all offerors and contractors (including small businesses) that provide U.S.-made items will no longer have to track the origin of the components in order to determine whether the items qualify as domestic end products or domestic construction material under the Buy American Act. While beneficial in acquisitions subject to the Buy American Act, the impact of this change is not considered to be a significant economic impact on small businesses, because DoD has already waived the component test for U.S.-made items in acquisitions that are subject to the World Trade Organization Government Procurement Agreement (WTO GPA), and contractors generally pass on to the Government the administrative costs incurred in complying with burdensome Government regulations such as the component test under the Buy American Act, or decline to sell to the Government. No comments were received with regard to impact on small business.

C. Paperwork Reduction Act

The Paperwork Reduction Act (Pub. L. 104-13) applies, because this rule will result in some reduced burdens under OMB Control number 0704-0229, DFARS Part 225 and associated clauses. A Paperwork Burden Act Change to pertinent existing burdens has been submitted to the Office of Management and Budget under 44 U.S.C. 2502, et seq.

List of Subjects in 48 CFR Part 252

• Government procurement

Amy G. Williams,

Executive Editor, Defense Acquisition Regulations System.

PART 252—[AMENDED]

Interim Rule Adopted as Final Without Change

Accordingly, the interim rule amending 48 CFR Part 252, which was published at 74 FR 2422 on January 15, 2009, is adopted as a final rule without change.