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Conference Report 107-772 - National Defense Authorization Act for Fiscal Year 2003

Conference Report Section

Legislative History

(a) GUIDANCE FOR EXCEPTIONS IN EXCEPTIONAL CIRCUMSTANCES- Not later than 60 days after the date of the enactment of this Act, the Secretary of Defense shall issue guidance on the circumstances under which it is appropriate to grant an exceptional case exception or waiver with respect to certified cost and pricing data and cost accounting standards.

(b) DETERMINATION REQUIRED FOR EXCEPTIONAL CASE EXCEPTION OR WAIVER- The guidance shall, at a minimum, include a limitation that a grant of an exceptional case exception or waiver is appropriate with respect to a contract, subcontract, or (in the case of submission of certified cost and pricing data) modification only upon a determination that--

(1) the property or services cannot reasonably be obtained under the contract, subcontract, or modification, as the case may be, without the grant of the exception or waiver;

(2) the price can be determined to be fair and reasonable without the submission of certified cost and pricing data or the application of cost accounting standards, as the case may be; and

(3) there are demonstrated benefits to granting the exception or waiver.

(c) APPLICABILITY OF NEW GUIDANCE- The guidance issued under subsection (a) shall apply to each exceptional case exception or waiver that is granted on or after the date on which the guidance is issued.

(d) ANNUAL REPORT ON BOTH COMMERCIAL ITEM AND EXCEPTIONAL CASE EXCEPTIONS AND WAIVERS WITH PRICE OR VALUE GREATER THAN $15,000,000- (1) The Secretary of Defense shall transmit to the congressional defense committees promptly after the end of each fiscal year a report on commercial item exceptions, and exceptional case exceptions and waivers, described in paragraph (2) that were granted during that fiscal year.

(2) The report for a fiscal year shall include--

(A) with respect to any commercial item exception granted in the case of a contract, subcontract, or contract or subcontract modification that is expected to have a price of $15,000,000 or more, an explanation of the basis for the determination that the products or services to be purchased are commercial items, including an identification of the specific steps taken to ensure price reasonableness; and

(B) with respect to any exceptional case exception or waiver granted in the case of a contract or subcontract that is expected to have a value of $15,000,000 or more, an explanation of the basis for the determination described in subsection (b), including an identification of the specific steps taken to ensure that the price was fair and reasonable.

(e) DEFINITIONS- In this section:

(1) The term `exceptional case exception or waiver' means either of the following:

(A) An exception pursuant to section 2306a(b)(1)(C) of title 10, United States Code, relating to submission of certified cost and pricing data.

(B) A waiver pursuant to section 26(f)(5)(B) of the Office of Federal Procurement Policy Act (41 U.S.C. 422(f)(5)(B)), relating to the applicability of cost accounting standards to contracts and subcontracts.

(2) The term `commercial item exception' means an exception pursuant to section 2306a(b)(1)(B) of title 10, United States Code, relating to submission of certified cost and pricing data.

Conference Report 107-772 

The Senate amendment contained a provision (sec. 812) that would require the Department of Defense (DOD) to issue guidance on grants of exceptions to cost or pricing data certification requirements and waivers of cost accounting standards. The provision would also require the Secretary of Defense to report to the congressional defense committees on certain exceptions to the Truth in Negotiations Act and waivers of the cost accounting standards. (See Senate Amendment and Senate Report 107-151 below)

The House bill contained no similar provision. 

The House recedes with an amendment that would modify the guidance to be issued on waivers and exceptions to ensure that DOD has the flexibility it needs to grant waivers and extensions when: (1) the property or services could not reasonably be obtained from the contractor or subcontractor without the grant of the exception or waiver; (2) the price can be determined to be a fair and reasonable price; and (3) there are demonstrated benefits from granting the waiver or exception. The conference amendment would also streamline the reporting requirements in the provision by requiring an annual report instead of a semiannual report and eliminating the requirement in the Senate bill for advance notice to Congress of certain waivers and exceptions.

Senate Amendment

SEC. 812. GRANTS OF EXCEPTIONS TO COST OR PRICING DATA CERTIFICATION REQUIREMENTS AND WAIVERS OF COST ACCOUNTING STANDARDS.

(a) GUIDANCE FOR EXCEPTIONS IN EXCEPTIONAL CIRCUMSTANCES- (1) Not later than 60 days after the date of the enactment of this Act, the Secretary of Defense shall issue guidance on the circumstances under which it is appropriate to grant--

(A) an exception pursuant to section 2306a(b)(1)(C) of title 10, United States Code, relating to submittal of certified contract cost and pricing data; or

(B) a waiver pursuant to section 26(f)(5)(B) of the Office of Federal Procurement Policy Act (41 U.S.C. 422(f)(5)(B)), relating to the applicability of cost accounting standards to contracts and subcontracts.

(2) The guidance shall, at a minimum, include a limitation that a grant of an exception or waiver referred to in paragraph (1) is appropriate with respect to a contract or subcontract, or (in the case of submittal of certified cost and pricing data) a modification, only upon a determination that the property or services cannot be obtained under the contract, subcontract, or modification, as the case may be, without the grant of the exception or waiver.

(b) SEMIANNUAL REPORT- (1) The Secretary of Defense shall transmit to the congressional defense committees promptly after the end of each half of a fiscal year a report on the exceptions to cost or pricing data certification requirements and the waivers of applicability of cost accounting standards that, in cases described in paragraph (2), were granted during that half of the fiscal year.

(2) The report for a half of a fiscal year shall include an explanation of--

(A) each decision by the head of a procuring activity within the Department of Defense to exercise the authority under subparagraph (B) or (C) of subsection (b)(1) of section 2306a of title 10, United States Code, to grant an exception to the requirements of such section in the case of a contract, subcontract, or contract or subcontract modification that is expected to have a price of $15,000,000 or more; and

(B) each decision by the Secretary of Defense or the head of an agency within the Department of Defense to exercise the authority under subsection (f)(5)(B) of section 26 of the Office of Federal Procurement Policy Act to waive the applicability of the cost accounting standards under such section in the case of a contract or subcontract that is expected to have a value of $15,000,000 or more.

(c) ADVANCE NOTIFICATION OF CONGRESS- (1) The Secretary of Defense shall transmit to the congressional defense committees an advance notification of--

(A) any decision by the head of a procuring activity within the Department of Defense to exercise the authority under subsection (b)(1)(C) of section 2306a of title 10, United States Code, to grant an exception to the requirements of such section in the case of a contract, subcontract, or contract or subcontract modification that is expected to have a price of $75,000,000 or more; or

(B) any decision by the Secretary of Defense or the head of an agency within the Department of Defense to exercise the authority under subsection (f)(5)(B) of section 26 of the Office of Federal Procurement Policy Act to waive the applicability of the cost accounting standards under such section to a contract or subcontract that is expected to have a value of $75,000,000 or more.

(2) The notification under paragraph (1) regarding a decision to grant an exception or waiver shall be transmitted not later than 10 days before the exception or waiver is granted.

(d) CONTENTS OF REPORTS AND NOTIFICATIONS- A report pursuant to subsection (b) and a notification pursuant to subsection (c) shall include, for each grant of an exception or waiver, the following matters:

(1) A discussion of the justification for the grant of the exception or waiver, including at a minimum--

(A) in the case of an exception granted pursuant to section 2306a(b)(1)(B) of title 10, United States Code, an explanation of the basis for the determination that the products or services to be purchased are commercial items; and

(B) in the case of an exception granted pursuant to section 2306a(b)(1)(C) of such title, or a waiver granted pursuant to section 26(f)(5)(B) of the Office of Federal Procurement Policy Act, an explanation of the basis for the determination that it would not have been possible to obtain the products or services from the offeror without the grant of the exception or waiver.

(2) A description of the specific steps taken or to be taken within the Department of Defense to ensure that the price of each contract, subcontract, or modification covered by the report or notification, as the case may be, is fair and reasonable.

(e) EFFECTIVE DATE- The requirements of this section shall apply to each exception or waiver that is granted under a provision of law referred to in subsection (a) on or after the date on which the guidance required by that subsection (a) is issued.

Senate Report 107-151

Grants of exceptions to cost or pricing data certification requirements and waivers of cost accounting standards (sec. 812)

The committee recommends a provision that would require the Department of Defense (DOD) to issue guidance on grants of exceptions to cost or pricing data certification requirements and waivers of cost accounting standards. The provision would also require the Secretary of Defense to report to the congressional defense committees on certain exceptions to the Truth in Negotiations Act and waivers of the cost accounting standards.

Over the last ten years, the Truth in Negotiations Act and the Cost Accounting Standards have been substantially modified to provide DOD and other federal agencies additional flexibility to purchase commercial items without imposing burdensome requirements on contractors. The committee continues to believe that this flexibility plays an important role in ensuring that the Department has rapid access to high-technology products developed in the private sector.

At the same time, however, the committee is concerned that the Department has not always exercised this new flexibility in a responsible manner. Last year, the DOD Inspector General reviewed sample sole-source contracts valued at $652.0 million for which the Department did not obtain certified cost or pricing data. The Inspector General determined that contracting officials lacked valid exceptions from obtaining certified cost or pricing data in 32 percent of the contracting actions reviewed

and failed to conduct adequate price analysis to support price reasonableness in 86 percent of the contracting actions reviewed.

Earlier this year, at the request of the committee, the General Accounting Office (GAO) reviewed waivers of certified cost or pricing data requirements for 20 contracts valued at $4.4 billion. The GAO determined that: (1) most of the waivers were based solely on a determination that sufficient information was available to determine the price to be fair and reasonable without the submission of cost or pricing data; and (2) in many of these cases, the Department was not obtaining sufficient data or conducting adequate price analysis to ensure price reasonableness. The GAO recommended that the Department develop guidance to better define when waivers should be used and how prices should be assessed in the event that they are used.

The committee has consistently taken the position that a determination that sufficient information is available to determine a price to be fair and reasonable without the submission of cost or pricing data is not alone sufficient to justify an `exceptional circumstances' waiver. The committee's view, as stated on page 775 of the conference report on the National Defense Authorization Act for Fiscal Year 2000 and page 690 of the conference report on the Strom Thurmond National Defense Authorization Act for Fiscal Year 1999, is that such a waiver should be granted `only when a waiver is necessary to meet the needs of an agency, i.e. when the agency determines that it would not be able to obtain needed products or services from the vendor in the absence of a waiver.'

The DOD Inspector General Report and the GAO report demonstrate that the Department's approach to `exceptional circumstance' waivers has led to higher prices and increased risks on DOD contracts. Accordingly, the provision recommended by the committee would require the Department to take additional steps to ensure that waivers to cost or pricing data requirements are granted only when properly justified and that DOD officials take appropriate steps to ensure price reasonableness when these requirements are waived.