The Department of Defense (DOD) wants to make it easier for companies with innovative solutions, such as startups, to bid on and receive federal government contracts. As such, DOD recently proposed a Defense Federal Acquisition Regulations (DFARS) amendment to implement provisions of the 2022 and 2023 National Defense Authorization Acts, which provide DOD with the authority to acquire “innovative commercial products and commercial services” under general solicitations using a new, more streamlined competitive selection process called a “commercial solution opening” (CSO). The amendment will add a new subpart to DFARs Part 212 at 212.7X. DOD expects the proposed process to reduce transaction costs for both private and public sectors, which it hopes will encourage smaller companies with innovative ideas and proven solutions to take part in the federal government contracting marketplace.
I. The 2018 Pilot Program
In 2018, DOD initiated a pilot program of the CSO process with the goal of expanding DOD procurement methods beyond those authorized under the Federal Acquisition Regulation (FAR) to streamline its approach for acquiring innovative commercial items. As designed and implemented, the CSO process provides startups and other companies not experienced in federal contracting with several advantages:
- Reduced volume of corporate and technical information in proposals;
- Greater flexibility in merit-based evaluation of offers and expedited source selection;
- Simplified contract administration procedures;
- Flexible contract termination rights;
- Contractor favorable tailoring of intellectual property (IP) rights.
II. The CSO Process Will Apply to “Innovative” Commercial Solutions
Through the CSO process, DOD looks to “obtain innovative solutions or potential capabilities” and “close capability gaps or provide potential innovative technological advancement.” “Innovative” is defined as: “(1) any technology, process, or method, including research and development, which is new as of the date of submission of the proposal; or (2) any application that is new as of the date of submission of a proposal of technology, process, or method … .”
The CSO process will only apply procurements conducted under FAR Part 12 for the acquisition of commercial products and commercial services. The new CSO process will further streamline the FAR Part 12 contracting process.
It may seem that DOD’s application of the CSO process to routine commercial goods and services (i.e., goods and services typically offered to the general public) conflicts with its goal to seek innovative solutions (solutions that by definition may not yet be available to the general public). However, vendors should instead focus on the definition of commercial goods and services in conjunction with DOD’s mandate to procure solutions that provide competitive advantages and close capability gaps. The definition of a commercial product or service requires that the solution is “of a type” sold to the general public. Therefore, a vendor does not have to demonstrate to the government that an identical item is offered or sold to the public. Rather, a vendor need only show that the product or service is offered to the public in some similar form. Because DOD makes clear that it is seeking innovative solutions, DOD is looking to streamline the process of procuring cutting-edge consumer items that will give DOD the benefit of incremental advances in process or technology — or at least keep pace with leading developments in the private sector.
III. Contractor Favorable Retention of IP Rights
For a startup company, its IP portfolio (trade secrets, know-how, patents) is the heart and soul of the business. Startups are naturally reluctant to jeopardize the value of its IP portfolio by inadvertently obligating itself to grant rights to the government. Using the CSO process, contracting officers are granted broader discretion to negotiate IP rights that are more favorable to the contractor. While the proposed amendment to the DFARS does not provide specifics, the context suggests that the parties have maximum latitude to reach a workable arrangement with respect to IP rights.
It is also notable that the CSO process, if approved, may be used “to fulfill requirements for research and development, ranging from advanced component development through operational systems development.” Thus, a startup may find it advantageous to contract with the government under the CSO process to further its own R&D efforts, particularly if the startup can negotiate favorable rights in IP developed under the agreement.
IV. Other Notable Characteristics of the CSO Process
The CSO process is limited in scope. Aside from the requirement reserving the CSO process FAR Part 12 procurements, a number of additional criteria may be crafted into the CSO process, such as applicability to fixed price contracts, and contract valuation triggers. Also, CSO contracts valued above $100 million will be subject to congressional notification requirements.
The DOD posted the DFARS-proposed amendment to the Federal Register on January 31. Companies wishing to submit comments must do so through the Federal eRulemaking Portal or by emailing email@example.com by April 1. If you are a startup or a small business with innovative solutions, it may behoove you to submit your comments “in favor” of the proposed rule.
V. Why It Matters
Federal contracting can be challenging under the best of circumstances, and compliance requirements are to blame in no small part for those challenges. For small businesses and startups, the proposed adoption of the CSO process presents a much-needed safe harbor for those entities to participate meaningfully in the federal marketplace. The proposed CSO process — if adopted — will make the contracting process easier for those entities capable of delivering innovative commercial products and services.
Troutman Pepper’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group’s dedicated and experienced government contract attorneys serve clients in all aspects of federal, state, and local government contracting, helping them navigate the complex and evolving regulatory landscape that governs public sector contracting.