The Department of Defense (DoD) issued a final rule on November 17, 2023, amending the Defense Federal Acquisition Regulation Supplement (DFARS) to clarify that certain DoD-unique statutes and DFARS clauses do not apply to DoD acquisitions for commercial products and services. The rule is DoD's latest attempt to reinforce some of the foundational protections of the Federal Acquisition Streamlining Act of 1994 (FASA), which aims to increase the government's access to commercial products and services by minimizing the federal laws and regulations with which commercial contractors are required to comply when contracting with the U.S. 

The true impact of the final rule remains to be seen, however, because DoD both left open the critical question of how "subcontract" will be defined in the DFARS and gave DoD contracting officers discretion to apply the new rule to existing contracts, leaving contractors to gather for Thanksgiving wondering when the next course of regulations will be served.      

Background

DoD's final rule springs from Section 874 of the National Defense Authorization Act (NDAA) of fiscal year 2017 (Public Law 114-328). Section 874 amended the provisions in Title 10 of the United States Code (U.S.C.) that govern the applicability of certain DoD-unique laws and regulations to the acquisition of commercial products and services (formerly 10 U.S.C. 2375, now 10 U.S.C. 3452). In broad terms, Section 874 requires DoD to adopt regulations that: (1) clearly delineate the DoD-specific laws and regulations that do and do not apply to contracts and subcontracts for commercial products and services, including those for commercially available off-the-shelf (COTS) items, and (2) redefine the term "subcontract" for purposes of determining the DFARS clauses that should and should not be flowed down to commercial subcontractors. 

In June 2018, DoD issued a proposed rule cataloguing the defense-specific statutes and DFARS clauses issued before and after Section 874 that should not be included in commercial items contracts or subcontracts. The proposed rule also signaled DoD's plan to adopt a definition of "subcontract" that would have included "any contract . . . entered into by a subcontractor to furnish supplies or services for performance of a prime contract or a subcontract," including "a transfer of commercial items between divisions, subsidiaries, or affiliates of a contractors or subcontractor," but not "agreements entered into by a contractor for the supply of commodities that are intended for use in the performance of multiple contracts with the Department of Defense and other parties and are not identifiable to any particular contract. (10 U.S.C. 2375(c)(3))."  

The Final Rule 

The final rule implements some of the suggested changes included in the proposed rule but leaves several important questions for another day. Most notably, the final rule:

1. Amends DFARS 212.301 to Limit DoD Contracting Officers' Authority to Adopt Non-Commercial DFARS Clauses in Commercial Products and Services Contracts. Prior to the final rule, DFARS 212.301 included a long list of "additional" DFARS provisions and clauses that "apply" to DoD solicitations and contracts for the acquisition of commercial products and services. However, DFARS 212.301 did not expressly state that the listed clauses were the only additional clauses that could be incorporated in a contract for commercial products and services. As a result, the provision was often miscited by DoD contracting officers as a grant of discretion to not only include the clauses listed in DFARS 212.301, but also any other clauses the contracting officer deemed necessary to meet the DoD's needs. Now, with the passage of the final rule, DFARS 212.301 makes clear that "[t]he contracting officer shall not use other [the Federal Acquisition Regulation (FAR)] or DFARS provisions and clauses unless required by the FAR or DFARS or consistent with customary commercial practices" (emphasis added). This subtle change places an important limit on the discretion that DoD contracting officers use to include non-commercial DFARS clauses in commercial products and services contracts.
2. Amends DFARS 252.244-7000 to Clarify When FAR and DFARS Clauses Should Not Be "Flowed Down" to Subcontracts for Commercial Products and Services. The clause at DFARS 252.244-7000 (Subcontracts for Commercial Items) provides guidance to DoD prime contractors regarding the regulatory clauses that they should flow down to commercial products and services subcontracts. Before the final rule, DFARS 252.244-7000 stated that prime contractors were "not required to flow down the terms of any [DFARS] clause in subcontracts for commercial items at any tier . . . unless so specified in the particular clause" (emphasis added). Too often, this permissive language was also a source of confusion, with some prime contractors asserting a right to flow down non-commercial items clauses on the theory that they were not prohibited from doing so. DoD's final rule shifts this paradigm by updating DFARS 252.244-7000 to state that prime contractors "shall not include" (emphasis added) any FAR or DFARS clause in a subcontract for commercial products or services (at any tier) unless expressly required by regulation. This is a win for commercial subcontractors, but also for prime contractors, because it provides needed clarity that will help streamline subcontract negotiations.
3. No DFARS Definition of "Subcontract" – For Now. If you've been around federal contracting long enough, you know there is no universal definition of the term "subcontract" in either the FAR or the DFARS. This gap in the regulations has confounded contractors and subcontractors for decades, leading to disagreements about whether certain FAR and DFARS clauses should or should not be incorporated into lower-tier agreements. Section 874 and DoD's proposed rule promised clarity on this question, but the final rule does not deliver. Noting that the FAR Council is working an open FAR Case (2018-006) to define "subcontract," DoD declined to provide its own definition and instead opened a new DFARS Case (2023-D022) to "facilitate alignment" in the regulations. Unfortunately, FAR Case 2018-006 has been pending since Fall 2019 and the DoD rule does not provide a timeline for completing the regulatory "alignment" it promises. 
4. DoD Contracting Officers Will Have Discretion to Decide if the Updated Regulations Should be Applied to Existing DoD Contracts. While the new rule limits DoD contracting officers' ability to impose certain DFARS clauses on commercial contractors, contracting officers do have discretion to apply (or not apply) the new rule to existing contracts. So, if you're a commercial contractor with an unhelpful non-commercial items DFARS clause in your existing contract, you will still have to ask your DoD contracting officer to remove the clause, likely via a contract modification.

Key Takeaways

On balance, the final rule should be welcome news to commercial products and services contractors and subcontractors — though industry should continue to monitor future regulatory developments because several key questions remain unanswered. 

1. For prime contractors, the rule makes clear that — for new contracts — DoD contracting officers have limited authority to insert non-commercial DFARS clauses into contracts for commercial products and services. On this question, the limits on DoD's authority will turn on whether a DFARS clause is required by regulation or otherwise "consistent with customary commercial practices." The first part of that question should typically present a straightforward issue of regulatory interpretation; the second part of that question (i.e., what constitutes a "customary commercial practice") could prove to be a new battleground for contract disputes. Also, prime contractors should keep in mind that the final rule does not strip contracting officers of their discretion to keep non-commercial items clauses in existing contracts. In appropriate circumstances, there is certainly no harm in asking for such clauses to be removed, however. 
2. For subcontractors, the rule should streamline negotiations with prime contractors about the DFARS clauses that do and do not belong in subcontracts for commercial products and services. Here, the test is purely regulatory. Under the revised version of DFARS 252.244-7000(a), clause negotiations should focus only whether the DFARS or FAR specifically require the inclusion of a particular clause in the subcontract. There is no need to debate if the clause is or is not also consistent with customary commercial practice. 
3. This brings us to the biggest question DoD's final rule does not answer: What is a "subcontract" for purposes of determining the DFARS and FAR clauses that should be included in a lower-tier agreement for commercial products or services? DoD's June 2018 proposed rule may provide some insight as to how that term will ultimately be defined. For now, though, contractors providing commercial products or services will have to continue to watch and wait for a clear definition. Hopefully that definition will land at the table before next Thanksgiving. 

If you have any questions about DoD's final rule or contracts for commercial products and services generally, please contact one of the Miller & Chevalier attorneys listed below. 

Alex L. Sarria, asarria@milchev.com, 202-626-5822

Connor W. Farrell, cfarrell@milchev.com, 202-626-5925

Jason N. Workmaster, jworkmaster@milchev.com, 202-626-5893

Scott N. Flesch, sflesch@milchev.com, 202-626-1584

Alexandra S. Prime, aprime@milchev.com, 202-626-5940

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