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In l984, legislation was enacted to end DOD’s noncompetitive purchases of overpriced spare parts. Such legislation includes the Competition in Contracting Act (P.L. 98-369), the Defense Procurement Improvement Act of 1984 (P.L. 98·525), and the Small Business and Federal

Procurement Competition Enhancement Act of 1984 [P.L. 98-577]. As a result so-called “original equipment manufacturers” (OEMs) lost the replacement parts market to more efficient small business manufacturers. After the enactment of these reforms, the small businesses that had fought for them returned to their factories. For the next 10 years, they provided DOD with high­ quality parts at a fraction of the prices previously paid the OEMs. Meanwhile, representatives of the OEMs remained in Washington and lobbied for legislation to regain the spare parts business lost to competition. One result was enactment of the National Defense Authorization Act for Fiscal Year 1992 and 1993 (P.L. 102-190) which called for the creation of the § 807 Government/Industry Technical Data Committee. Appointments of industry members to the Committee were largely from the OEM community. As a result, the Committee’s technical data rights recommendations largely favor the interests of the OEMs.

The OEMs contend that adoption of the Committee recommendations will encourage “dual use technology” and the purchase of commercial products. However, as discussed in more detail below, adopting the § 807 Committee recommendations will cause substantial harm. There are three fundamental reasons. First, the Committee’s recommendations, if adopted, will result in DOD once again purchasing overpriced spare parts from OEMs on a noncompetitive basis. Second, the recommendations will result in DOD imposing its own noncompetitive practices on our domestic commercial markets and on sales to our allies. Third, U.S. manufacturing capability and jobs will be lost.

Overpriced Spare Parts- Under the current provisions of the DFARS, particularly DFARS 27.402-72(a),”Rights in Technical Data-Unlimited Rights,” DOD is entitled to unlimited rights

in data (1) required for the performance of a Government contract or (2) pertaining to items, components, or processes developed exclusively at Government expense. Unlimited rights data are in the public domain and can be used for any purpose, including competing for DOD, commercial, and foreign government requirements (see DFARS 227.401(19)).

Under the § 807 Committee’s recommendations-particularly DFARS 227.403, “Noncommercial items or processes,” and the contract clause found at DFARS 252.227-7013, “Rights in Technical Data-Noncommercial Items,” DOD would continue to be entitled to unlimited rights in data developed entirely at government expense. DOD would, however, no longer be entitled to unlimited rights in data required for the performance of a Government contract. Moreover, DOD’s technical data rights would tum in large part upon whether development is charged to DOD as a direct or indirect cost- a potential source of significant abuse.

The potential for abuse lies in the Committee’s recommended definition of “private expense.” Under the Committee’s recommended regulation and clause, indirect costs charged to a Government contract and paid for by DOD would nonetheless be treated as private expense (see recommended DFARS 252.227-7013(a)(7), (9)). Where an item, component, or process is paid for entirely at private expense, the Government would have only limited rights in the technical data pertaining to it (see recommended DFARS 227.403-5(c)). Limited rights data could not be used for competitive purposes as the data could not be disclosed or released outside the Government (see recommended DFARS 252.227-7013(a)(13)).

Moreover, even where only a portion of development is claimed to have been at private expense, the Government would automatically have only Government Purpose Rights (GPR) in the data for five years (see recommended DFARS 227.403-5(b)) as opposed to unlimited rights unless otherwise negotiated under existing regulations. Under the proposed regulations, an OEM would be able to limit DOD to GPR by paying for (or charging as an indirect cost) an insignificant portion of development while DOD funds the rest. Although a competitor could use GPR data to compete for DOD contracts, it could not use it to compete for commercial or direct foreign government sales (see recommended DFARS 252.227-7013(a)(11),(12)). Competition on DOD procurements would also be limited under the Committee’s recommended changes because there is no mechanism in place or provided for to permit potential competitors timely access to GPR data. Specifically, in order to compete, alternate sources need access to pertinent technical data before a solicitation is issued to obtain necessary source approvals and to submit a timely bid or proposal. Small business manufacturers currently use the Freedom of Information Act and agency “cash sales” programs to obtain this data before a solicitation is issued. Since GPR data are proprietary to the OEM, that data could be withheld under FOIA Exemption 4 governing confidential business information and not releasable under “cash sales” programs.

Thus, under the Committee’s recommendations, DOD would be entitled to unlimitedrights-i.e., the right to use, modify, reproduce, perform, display, release, or disclose technical data in whole or in part, in any manner, and for any purpose whatsoever, and to have or authorize others to do so (see recommended DFARS 227.252.7013(a)(15))-only in data pertaining to items, components, or processes paid for in full by the Government as a direct cost under a particular contract. Allocating technical data rights on the basis of the classification of the underlying costs as direct or indirect will severely limit the availability of technical data to spare parts manufacturers. This will in turn limit competition for these parts and facilitate pricing abuses. It follows, therefore, that when the OEMs speak of protecting “their” data, they are now referring to data whose development costs were charged to DOD as indirect expenses and paid for by the taxpayer. In other words, “what’s mine is mine and what’s yours is mine.”

The current FAR cost principles, the Cost Accounting Standards, and the case law permit OEMs to charge what can be significant amounts of de sign and development costs to indirect accounts.

No accounting changes may be needed for OEMs to charge certain development costs indirect and thereby preclude competition. For example, OEMs commonly charge the development of manufacturing process specifications essential for competition to DOD as indirect manufacturing and production engineering (M&PE) costs under FAR 31.205-25. So long as the Government’s rights in technical data did not turn on the manner in which M&PE was charged, how OEMs charged them was not critical from a competition standpoint. Where as now, however, the Committee has recommended changing the method for allocating technical data rights, the OEM’s practice is crucial. It is not surprising, therefore, that OEMs fought stridently to have indirect costs, particularly M&PE, characterized as private expense and to thereby limit the Government’s rights in the data and competition.

Costs other than M&PE expenses also may be charged indirectly. FAR 31.202(b) and CAS

402.50(e) permit “minor” amounts of otherwise direct costs, such as the costs of design development activity, to be charged indirect for reasons of practicality. This provides another means for an OEM to preclude data, whose development was paid for by the Government, from being used for competitive procurement purposes. The “minor” amounts of otherwise direct costs that can be charged indirect under this rule can be substantial. In Sperry Gyroscope Co., ASBCA 9700, 1964 BCA ¶ 4514, the Board held that $136,000 in otherwise direct pre-1964 development dollars could be charged indirect under this exception. How far the OEMs will be able to push this “minor amount” exception to direct charging in order to claim rights in data paid for by DOD is unclear.

Furthermore, costs that the Government views as direct development costs may nonetheless be chargeable indirectly in accordance with an OEM’s disclosed accounting practices. CAS 418.30(a) defines a “direct cost” as any cost that “is identified specifically with a particular final cost objective.” Thus, “[a]ll costs identified specifically with a contract are direct costs of that contract,” and “[a]ll costs identified specifically with other final cost objectives of the contractor are direct costs of those cost objectives” (emphasis added). Although the case law is murky, significant amounts may be chargeable indirect under this definition and under cases holding that cost objectives are determined by a contractor’s accounting system rather than contract requirements (see Texas Instruments, ASBCA 18621, 79-1 BCA ¶ 13800,affd., 79-2 BCA ¶ 14184, and Boeing Co. v. U.S., 862 F.2d 290 (Fed. Cir. 1988), 7 FPD ¶ 160; see also, Goodrich, “Identifying Final Cost Objectives & Classifying Direct Costs,” 91-7 CP&A REPORT 3 (JULY 1991)). Costs charged to a cost objective other than a contract are considered indirect costs unless a contractor elects to reallocate them from an intermediate cost pool to the contract as a direct charge (see Shapiro, “Direct vs. Indirect Costs-A Choice,” 89-2 CP&A REPORT 3, 8-9 (Feb. 1989)). Accordingly, a contractor could treat development expenses as indirect costs provided those costs benefit multiple final cost objectives under the contractor’s accounting system.

Additionally, the CAS do not preclude a contractor from changing its accounting practices to charge costs previously charged direct indirectly, thereby preventing DOD from obtaining rights in data necessary for competition notwithstanding that the items, components, or processes were developed at taxpayer expense (see FAR 30.602-3). The CAS only require advance notice of a change and that the contractor absorb any increase in contract price. DOD is without authority to withhold approval of a change unless the system, as changed, would not comply with the CAS or with the FAR cost principles (see FAR 30.602-3 and FAR 30.202-7).

Finally, the Committee’s recommendations also could be used by an OEM to preclude competition on previously competed spare parts. OEMs continually revise manufacturing process specifications during the life of a weapon system. From time to time, they also make minor design changes. These manufacturing process and design changes typically are paid for by DOD under component improvement programs. An OEM could preclude competition on previously competed spare parts by charging all or part of the development costs for these minor revisions to DOD as an indirect expense.

In light of the foregoing, it is evident that the Committee’s recommendation to allocate technical data rights on the basis of the classification of development costs as direct or indirect will have a detrimental effect on competition and the price of spare parts and presents a serious potential source of charging abuse.

Effect on Commercial and Foreign Government Buyers-Small business contractors use Government-owned technical data to compete for domestic commercial sales and direct sales to friendly foreign governments in addition to DOD requirements. (Direct sales are where a U.S. company sells directly to a foreign government. They are distinguished from sales under the Foreign Military Sales program, in which DOD acts as the purchaser for a foreign government.) If the Committee’s recommendations are adopted and OEMs can claim limited rights in data by charging the costs of all development indirect, data currently available to small business contractors would no longer be available to them and they would be precluded from competing on a large number of commercial and foreign government procurements.

Furthermore, under the Committee’s proposal, (a) GPR data could not be disclosed by DOD for use in connection with commercial or direct foreign government sales (see recommended DFARS 227.252.7013(b)(2)), and (b) an OEM could limit DOD’s rights in data to GPR for five years where it pays for as little as $1 of development costs itself, or worse, charges that $1 to DOD as an indirect cost. Therefore, competition by small business contractors on commercial and foreign government procurements would be further eroded at a minimum for the five-year period GPR data would be protected.

The absence of competition will increase costs to commercial and foreign government buyers.

Since many direct foreign government sales are funded with U.S. grants-in-aid, the Committee’s recommendations would correspondingly increase costs to the U.S. taxpayer.

Loss of U.S. Jobs and Manufacturing Capability-The inability of small business parts manufacturers to obtain vital information as a result of the Committee’s recommendations will likely result in the loss of many jobs. Specifically, an often-overlooked fact is that small businesses rather than OEMs are U.S. manufacturing capability. The OEMs for the most part are not manufacturers but rather are “assemblers,” “dealers,” or “importers.” They purchase parts from others and then assemble them into weapon systems or, after adding a hefty markup, merely resell them as replacement parts.

Until recently, the OEMs purchased parts from domestic small business manufacturers. Increasingly, however, they have been entering into offset agreements with foreign governments that require them, as a condition of sale, to subcontract abroad. As a result of these offset agreements and other arrangements, OEMs are increasingly purchasing parts abroad. If the § 807 Committee recommendations are adopted, contracts previously awarded to domestic small business parts manufacturers will be awarded noncompetitively to OEMs because small businesses will be unable to obtain critical manufacturing information. The OEMS will sub­ contract their work abroad. U.S. jobs and manufacturing capability will be lost forever causing substantial harm to the U.S. economy and defense industrial base.

Conclusion-The recommendations of the § 807 Committee will result in increased costs to the taxpayer, as well as a loss of U.S. jobs and manufacturing capability. As stated in the Minority Report of Committee Member Nick Reynolds, President of the Independent Defense Contractors Association: “Given a reduced defense budget, one would think that the politically astute thing for DOD to do would be to take steps to maximize its ‘bang for the buck’. In today’s economic scenario, DOD does not serve itself well playing Santa Claus to large defense contractors at the expense of the taxpayer.”

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