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06/06/2018
Commerciality and the Memo of Understanding
In September of 2016, the Defense Contract Management Agency (DCMA) and Rockwell Collins signed a memorandum of understanding (MOU) that established an improved process for the procurement of commercial items for military applications.1
A memorandum of understanding is a written agreement between two or more parties. It is also referred to as a memorandum of agreement or a letter of intent. For legal purposes, the three terms are interchangeable. MOUs specify mutually-accepted expectations between two or more people or organizations as they work together toward a common objective or goal. The two primary features of an MOU are that they generally are not legally binding and they do not involve the exchange of money. Those key features are what differentiate a MOU from an actual contract, which is legal binding or can be enforced by a judge and often involves the exchange of money (i.e. elements of a contract). MOUs are less formal than contracts and typically include fewer details and complexities.2
A recent example of a MOU was signed by two U.S Department of Energy National Laboratories on March 6 of 2018. Representatives of Oak Ridge National Laboratory (ORNL) and the National Energy Technology Laboratory (NETL) agreed to collaborate on research related to using coal to create products such as pitches, fibers, and nanocarbon catalysts; reducing water consumption in energy production; and developing and testing materials for use in extreme environments.3 This is a perfect example of two organizations specifying mutually-accepted expectations as they worked together toward a common objective/goal. In this case, the MOU acted as the framework for which ORNL and NETL will conduct each of their respective businesses toward achieving a singular, common goal.
Per the Perry article referenced below, in the case of DCMA and Rockwell Collins, the MOU defined the type of information and specific data that Rockwell Collins is to provide to the government, to support their commerciality assertions and item pricing. Essentially, the MOU provides Rockwell Collins with an easy-to-follow requirements list (exactly what DCMA was looking for during their assessment of whether an item can be considered a commercial item) of information that must accompany their commercial item assertions.
As a result, per Air Force Lt. General Wendy Masiello, former DCMA Director, the MOU will “greatly streamline the acquisition process for commercial and commercial-like items” and will “set the standard by which future commerciality agreements will be measured.” Currently, similar agreements are being pursued by the government and defense contractors to give government agencies better access to commercial products and services and therefore providing the warfighter with the latest technology at the lowest cost to the government. Items classified as non-commercial typically require more time to develop, and are delivered at a greater cost to both the public and private sectors.
We agree that the DCMA and Rockwell Collins MOU will help remove inefficiencies and clarify the requirements in the acquisition process between the federal government and the private sector. In theory, this should result in lower cost purchases by the government, and cost savings to the tax payers. This opinion is shared by the executive vice president and chief operating officer for Government Systems at Rockwell Collins Phil Jasper, who stated that this MOU is “an important step in eliminating current inefficiencies associated with determining whether an item is considered commercial. By having a clearer understanding up front, we can spend less time doing paperwork and more time getting state-of-the-art technologies in the field.”
The reason this MOU is so helpful for Rockwell Collins is because they know exactly the type of information to submit with their commerciality assertions to DCMA to avoid expending significant resources on a commerciality assertion only to learn that they didn’t have the correct information and their commerciality determination has been rejected. In this scenario, Rockwell Collins would have had to start the whole process all over again, which takes even more time and resources. After the MOU, Rockwell Collins may have their commerciality determinations rejected or accepted after a single attempt and know exactly what needs to be included in that submission with no guessing as to what should and should not be included.
Although we do not know the details of the DCMA and Rockwell Collins MOU, we can make some assumptions based on the federal acquisition regulation’s requirements for commerciality determinations. First off, the item must meet the definition of a commercial item as defined in FAR 2.101. While the definition in that FAR clause is long with many different sub-definitions, it can generally be summed up as any item, other than real property, that has been sold, leased, or licensed to the public. The next best resource for contractors attempting to certify a commercial item is FAR 52.212-1, Instructions to Offerors – Commercial Items, FAR 52.212-2, Evaluation – Commercial Items, and FAR 52.212-4, Contract Terms & Conditions – Commercial Items. While these FAR clauses are not overly exciting and much too long to get into in too much depth here, the Instructions to Offerors clause will provide contractors with an exact play-by-play walk through of what DCMA is looking for and what the contractor needs to provide in their commerciality assertions.
In case you are still unsure as to why a contractor should care about this memorandum of understanding or about the benefits of receiving a commerciality determination for an item, then you probably haven’t tried to read through FAR 15.4 – Contract Pricing (most specifically, FAR 15.403-4), which contains all the information a contractor would need to know about submitting certified cost or pricing data. In general, contractors are required to submit certified cost or pricing data for all proposed items, which, depending on the solicitation, can be extremely time and resource consuming for contractors. The best and easiest way to avoid having to submit certified cost or pricing data for an item is if it has been certified as a commercial item. Once that determination has been earned, the contractor does not need to submit and update certified cost or pricing data for that item, saving them time and money in the long run.
Gain insight
For more information about commerciality determinations, please contact Chase Clark, manager, Government Contracting Industry Practice at chase.clark@cohnreznick.com or (858) 926-3813, or Kristen Soles, partner, Government Contracting Industry Practice Leader at kristen.soles@cohnreznick.com or (703) 847-4411.
1 Thomas Perry “DCMA, Rockwell Collins Sign Historic MOA”, September 30, 2016. DCMA.mil. 2 Nathan Chandler "How a Memorandum of Understanding Works", May 9, 2011. HowStuffWorks.com.3 Kevin Randolph “DOE National Labs Sign Memorandum of Understanding for Joint Research”, March 8, 2018. DailyEnergyInsider.com.
Subject matter expertise
Kristen Soles
CPA, Partner - Managing Partner, Advisory - Global Consulting Solutions and Government Contracting Industry Leader
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This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.