Boeing's KC-45 Protest:That Dog Won't Hunt Part 1

Claim: Air Force Wrongfully "Rejected" Boeing's KC-X Cost/Price Data
After reviewing Boeing's 'executive summary' for public consumption, my initial impulse was to correspond on the most questionable of Boeing’s claims that I found within the protest. But after a short reflection on the matter, I decided to not let my distaste for Boeing’s business strategies reduce my efficiency in exposing potential misrepresentations. I decided if I set the low-hanging fruit aside, then others might address them and then I can link to those discussions while moving forward with the ‘harder’ and potentially more credible of Boeing’s complaints. As an aside, please note for future reference- I still expect to find SOME THINGS in Boeing's protest that cannot be proven or disproven without additonal information that may not be made available to the public.

Little did I know that the first complaint that I picked to analyze would turn out to be so relatively easy (albeit tedious) to defuse.

In Boeing’s ‘Executive Summary’ on page 3, we find that some of the most inflammatory rhetoric in the protest concerns the AF cost evaluation (Click on graphic to enlarge):




The ‘failed to comply with legal requirements’ factor is about the only thing that can get the GAO to uphold a protest, so is there any ‘meat’ later in the document to back up this complaint?
So IF the events transpired as described by Boeing (the magnitude of risk in this assumption cannot be ascertained) was the Cost Evaluator ‘right’ or ‘wrong’ in not accepting ‘commercial’ cost/price information for the ‘commercial’ part of the offer? Boeing expands on this complaint on page 15 of their ‘Executive Summary’:


Extracting the key information from the above:

"Accordingly, under the Federal Acquisition regulation, pricing of underlying commercial items and services must be based upon commercial pricing methodologies and need not be supported by detailed cost or pricing data normally relied upon in major weapons system procurements. See generally FAR Part 12."

Referencing ‘generally’ FAR part 12? Why not specific clauses? Well, let’s go to the source (source: Hill AFB Ogden ALC FAR website) .

[NOTE: I'm including a lot of irrelevant FAR content for transparency and perspective, but I'm highlighting what is important so you can skim or trudge through all of this - it's Reader's Choice!]

15.403-1 -- Prohibition on Obtaining Cost or Pricing Data (10 U.S.C. 2306a and 41 U.S.C. 254b).

(a) Cost or pricing data shall not be obtained for acquisitions at or below the simplified acquisition threshold

(b) Exceptions to cost or pricing data requirements. The contracting officer shall not require submission of cost or pricing data to support any action (contracts, subcontracts, or modifications) (but may require information other than cost or pricing data to support a determination of price reasonableness or cost realism) --

(1) When the contracting officer determines that prices agreed upon are based on adequate price competition (see standards in paragraph (c)(1) of this subsection);

(2) When the contracting officer determines that prices agreed upon are based on prices set by law or regulation (see standards in paragraph (c)(2) of this subsection);

(3) When a commercial item is being acquired (see standards in paragraph (c)(3) of this subsection);

(4) When a waiver has been granted (see standards in paragraph (c)(4) of this subsection); or

(5) When modifying a contract or subcontract for commercial items (see standards in paragraph c)(3) of this subsection).

(c) Standards for exceptions from cost or pricing data requirements --

(1) Adequate price competition. A price is based on adequate price competition if --

(i) Two or more responsible offerors, competing independently, submit priced offers that satisfy the Government’s expressed requirement and if --

(A) Award will be made to the offeror whose proposal represents the best value (see 2.101) where price is a substantial factor in source selection; and

(B) There is no finding that the price of the otherwise successful offeror is unreasonable. Any finding that the price is unreasonable must be supported by a statement of the facts and approved at a level above the contracting officer;

(ii) There was a reasonable expectation, based on market research or other assessment, that two or more responsible offerors, competing independently, would submit priced offers in response to the solicitation’s expressed requirement, even though only one offer is received from a responsible offeror and if --

(A) Based on the offer received, the contracting officer can reasonably conclude that the offer was submitted with the expectation of competition, e.g., circumstances indicate that --

(1) The offeror believed that at least one other offeror was capable of submitting a meaningful offer; and

(2) The offeror had no reason to believe that other potential offerors did not intend to submit an offer; and

(B) The determination that the proposed price is based on adequate price competition, is reasonable, and is approved at a level above the contracting officer; or

(iii) Price analysis clearly demonstrates that the proposed price is reasonable in comparison with current or recent prices for the same or similar items, adjusted to reflect changes in market conditions, economic conditions, quantities, or terms and conditions under contracts that resulted from adequate price competition.

(2) Prices set by law or regulation. Pronouncements in the form of periodic rulings, reviews, or similar actions of a governmental body, or embodied in the laws, are sufficient to set a price.

(3) Commercial items.

(i) Any acquisition of an item that meets the commercial item definition in 2.101, or any modification, as defined in paragraph (3)(i) of that definition, that does not change the item from a commercial item to a noncommercial item, is exempt from the requirement for cost or pricing data. If the contracting officer determines that an item claimed to be commercial is, in fact, not commercial and that no other exception or waiver applies, the contracting officer must require submission of cost or pricing data.

(ii) The following requirements apply to minor modifications defined in paragraph (3)(ii) of the definition of a commercial item at 2.101 that do not change the item from a commercial item to a noncommercial item:

(A) For acquisitions funded by any agency other than DoD, NASA, or Coast Guard, such modifications of a commercial item are exempt from the requirement for submission of cost or pricing data.

(B) For acquisitions funded by DoD, NASA, or Coast Guard, such modifications of a commercial item are exempt from the requirement for submission of cost or pricing data provided the total cost of all such modifications under a particular contract action does not exceed the greater of $500,000 or 5 percent of the total price of the contract.

(C) For acquisitions funded by DoD, NASA, or Coast Guard such modifications of a commercial item are not exempt from the requirement for submission of cost or pricing data on the basis of the exemption provided for at FAR 15.403-1(c)(3) if the total price of all such modifications under a particular contract action exceeds the greater of $500,000 or 5 percent of the total price of the contract.

So it appears Boeing’s case hinges on the definition of 'Commercial' in FAR 2.101. I highlighted the ‘modification’ subparagraphs above for reasons that will be revealed as we visit the FAR definition of “Commercial Items”. Again, I include extra information for perspective and transparency, but have highlighted only the relevant parts:

“Commercial item” means—

(1) Any item, other than real property, that is of a type customarily used by the general public or by non-governmental entities for purposes other than governmental purposes, and—

(i) Has been sold, leased, or licensed to the general public; or

(ii) Has been offered for sale, lease, or license to the general public;

(2) Any item that evolved from an item described in paragraph (1) of this definition through advances in technology or performance and that is not yet available in the commercial marketplace, but will be available in the commercial marketplace in time to satisfy the delivery requirements under a Government solicitation;

(3) Any item that would satisfy a criterion expressed in paragraphs (1) or (2) of this definition, but for—

(i) Modifications of a type customarily available in the commercial marketplace; or ii) Minor modifications of a type not customarily available in the commercial marketplace made to meet Federal Government requirements. Minor modifications means modifications that do not significantly alter the nongovernmental function or essential physical characteristics of an item or component, or change the purpose of a process. Factors to be considered in determining whether a modification is minor include the value and size of the modification and the comparative value and size of the final product. Dollar values and percentages may be used as guideposts, but are not conclusive evidence that a modification is minor;

(4) Any combination of items meeting the requirements of paragraphs (1), (2), (3), or (5) of this definition that are of a type customarily combined and sold in combination to the general public;

(5)Installation services, maintenance services, repair services, training services, and other services if—

(i) Such services are procured for support of an item referred to in paragraph (1), (2), (3), or (4) of this definition, regardless of whether such services are provided by the same source or at the same time as the item; and

(ii) The source of such services provides similar services contemporaneously to the general public under terms and conditions similar to those offered to the Federal Government;

(6)Services of a type offered and sold competitively in substantial quantities in the commercial marketplace based on established catalog or market prices for specific tasks performed or specific outcomes to be achieved and under standard commercial terms and conditions. For purposes of these services—

(i)“Catalog price” means a price included in a catalog, price list, schedule, or other form that is regularly maintained by the manufacturer or vendor, is either published or otherwise available for inspection by customers, and states prices at which sales are currently, or were last, made to a significant number of buyers constituting the general public; and

(ii) “Market prices” means current prices that are established in the course of ordinary trade between buyers and sellers free to bargain and that can be substantiated through competition or from sources independent of the offerors.

(7) Any item, combination of items, or service referred to in paragraphs (1) through (6) of this definition, notwithstanding the fact that the item, combination of items, or service is transferred between or among separate divisions, subsidiaries, or affiliates of a contractor; or

(8) A nondevelopmental item, if the procuring agency determines the item was developed exclusively at private expense and sold in substantial quantities, on a competitive basis, to multiple State and local governments.

Unless it is Boeing’s position that the modifications to the commercial B767 aircraft that turn it into their KC-X contender are ‘minor’, that turning the basic B767 airframe into a tanker does not "significantly alter the nongovernmental function or essential physical characteristics" or that the value of the minor modifications do not reach the threshold of ‘major’, or that they plan on selling the tanker to the general public, then they really don't have a very good case for insisting the 'commercial' part of their airplane is still commercial. It seems to me that there would be some wiggle room if the FARs did not expressly mention a dollar figure for modification limits on DoD programs. I can see why the contracting official determined he needed better-than-commercial price data that Boeing offered. It seems Boeing's position is that if a part of the end-item being procured wasn't modified, then they only needed to provide the commercial data for that part regardless of the total amount of modification to the end item.

It is therefore my considered opinion, that based upon the language of the protest and the FARs, the contracting official was performing due diligence in insisting upon proper cost/price data. This aspect of Boeing’s protest is probably Dead On Arrival at the GAO. In fact, from where I’m standing, it appears pretty frivolous.

It’s been about 20 years since I did the basic Acquisition Course, so there just might be something I'm missing on this-- so does anyone else see any merit to this particular Boeing complaint? If so, please point it out to me along with the relevant source material.