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This article first appeared in Government Contract Services, May 30, 1996, Number 10-96, Procurement Associates (Last Updated April 11, 2019)
For many years the United States Government has been one of the largest, if not the largest, consumer of supplies and services in the world. As such, there have been those in the US Government who have advocated aggressively wielding its purse in order to increase its buying power. The result has been a plethora of statutory and regulatory nonsense designed to shift the consequence of the government’s narcissism onto the shoulders of its contractors at the expense of taxpayers.
While the consequence of the US Government’s procurement practices have always loomed large and ominous, those chickens have truly come home to roost and they are defecating profusely on everyone in the vicinity. Evidence of this has been clearly visible for more than a decade. Moreover, a recent study confirms only what many have always believed--the government is paying more and getting less.[EN-1]
The consequence has not just been financial, however. Even if it had the money, the government is finding fewer vendors willing to tolerate its vanity and abusive behavior. From 1982 to 1987 nearly two-thirds of the companies selling to the Department of Defense (DoD) stopped selling to the DoD. [EN-2] This occurred despite the largest post war military expansion in history.
The reduction in the government’s supplier base is more serious than one might imagine. A 1990 study by the Center for Strategic and International Studies of 20 defense contractors found that their military applications were actually spin-offs of commercial products. Thus, the government no longer leads in many areas of the technological world. In fact, many American homes and businesses have more advanced technology than many of the Pentagon’s most advanced weapon systems.
Perhaps what is even more disturbing is that in some cases the Pentagon’s procurement machinery cannot satisfy the military’s requirements. For example, during the Persian Gulf war the regulatory infestation required coalition countries to supply technology bought from American firms that would not sell directly to the Pentagon using the bureaucratic procedures it demanded.[EN-3]
Clearly, the dream of increasing the government’s buying power by aggressively wielding its purse has turned into a creep show filled with legions of auditors, inspectors, lawyers, consultants and other non-value added extras keeping watch over a run-down railroad subsidized by taxpayer dollars. This fact, apparently, has again come to the attention of policy makers in Washington as evidenced by the new rules on commercial items, which are designed to kill the regulatory weed, modernize the technology base and open the market place to hordes of vendors who previously were not inclined to shop their wares at the world’s largest bizarre..
This article, therefore, examines the expanded frontier for commercial products in government contracting. It explains how the new rules work and explains who will be the real winners and losers.
Although the use of commercial products is now a desperate move in federal procurement, this is not the first time that the use of commercial products have been advocated or tried. Indeed, in recent memory the goal of increasing the government’s usage of commercial products has been considered and tried several times since the early 1970s.
In 1972, the Commission on Government procurement concluded that the Government should take greater advantage of the commercial marketplace. Twelve years later the Congress passed the Competition in Contracting Act which expressly stated the policy of Congress that federal agencies would “promote the use of commercial products whenever practicable.” [EN-4] Since that time it has become the policy of the government to, generally, rely on the private sector for commercial services.[EN-5] Furthermore, these same ideas have appeared repetitively in other statutes, regulations, and internal agency directives and policy statements.[EN-6]
Despite the above initiatives, little was actually accomplished. Consequently, the call for commercialization appeared again in 1986 when the President’s Blue Ribbon Commission on Defense Management (Packard Commission) recommended that the government expand its use of commercial products and services. As a result, the preference for commercial items again appeared in the National Defense Authorization Act for Fiscal Year 1987 when Congress expressed a preference for DoD to satisfy its requirements with commercial items.
Although DoD claimed considerable success at implementing the initiative, Congress believed otherwise and the Senate Government Affairs Committee’s Subcommittee on Oversight of Government Management issued a report titled, “DoD’s Inadequate Use of Off-the-Shelf Items” after holding hearings on the issue. As a result of these finding Congress again expressed its desire for DoD to satisfy its requirements with commercial items when it drafted the National Defense Authorization Act for FY 1990 and 1991. Ultimately, DoD failed in executing these directives, as well.
In 1993 a six month review, titled the “National Performance Review”, was conducted. As in times past, it, too, made recommendations regarding the need by the federal government to rely more on commercial products and practices. As a result of the National Performance Review, Congress again drafted legislation in 1994 known as the Federal Acquisition Streamlining Act (FASA) in order to get federal procurement to benefit from commercial practices and products. This time, however, the Act did more than merely express a preference. It drastically changed the statutory framework for Federal procurement. With respect to commercial items in particular the FASA revised four areas of the law to make contracting for commercial items more practical. These areas are an expressed preference for commercial products, an expansion of pricing exemptions to the Truth in Negotiations Act, Revisions to contract Financing and an additional exemption to the Cost Accounting Standards.
More recently, the Congress has further expanded its work in FASA with the Federal Acquisition Reform Act (FARA), which was signed into law February 10, 1996. This expansion still further broadens the ability to use commercial products by expanding the commercial item exemption for TINA, increasing the threshold for simplified acquisition procedures to $5 million when acquiring commercial items, and restating the exemption to CAS for commercial items.
Since prior efforts have failed and generally are no longer applicable, the current authority for use of commercial items in Federal procurement is the FASA, which established that commercial items will be used to the maximum extent practicable.[EN-7] The specific procedures for implementing the objective of FASA were published in final form with FAC 90-32 dated September 18, 1995. The rules became effective on October 1, 1995.
The implementation of commercial items required complete rewrites of FAR parts 10, 11 and 12. Other changes were also made in numerous parts of the FAR such as 13, 15, 32 and 44 just for the benefit of commercial items.
The problems for using commercial items in Federal Procurement have been many. A primary obstacle has been defining exactly what constitutes a commercial item. Prior definitions were doomed when the requirements included percentage-based volume sales tests. After all, how could the government benefit from the latest technological improvements if to qualify as a commercial item the product or service had to meet percentage-based volume sales tests? Also, what commercially based company would want to continue selling its products to the government when obsolescence of the product had impaired its ability to pass the percentage-based volume sales tests?
For this primary reason, as recognized by the National Performance Review, FASA sought to eliminate the percentage-based volume sales test as part of the definition for commerciality. The regulatory writers were slow to catch on to the importance of this change to the definition. In fact their reluctance almost doomed the FASA changes to the same trash heaps where prior reform efforts reside. Ultimately the regulatory writers caught on and were able to evade prior causes for failure and expand the applicability of commercial items by configuring eight broad categorical definitions to describe commercial items.
The basic definition of a commercial item is one other than real property that is customarily used for non-governmental purposes and that:
There are four interesting elements to this definition. First, commercial items can now include leases. Second, there is no aspect of the definition that is quantity based. Third is the definition of the general public which includes all buyers other than the U.S. Government or its instrumentalities but excludes sales to affiliates of the offeror or purchases by the U.S. Government in behalf of foreign governments. Fourth, the item need not have even been sold to the general public but rather only offered for sale to the general public. Thus, a commercial item can retain its identity as a commercial item even if the only buyer turns out to be the U.S. Government.
Commercial items can also include items that are not yet available in the marketplace. This exception is limited, however, to items not available because they are advances in technology to items that have previously been available. Furthermore, for items to benefit from this exemption they must be available in time to meet the delivery requirements of the government’s solicitation.
Commercial items can also include items that would normally be commercial items under the above definitions but require modification. To qualify for this exemption, however, the required modifications must be of a type customarily available in the commercial marketplace or represent minor 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.
To assist in the determination of whether or not a modification is minor one is advised to consider the value and size of the modification and the comparative value and size of the final product.
Services provided in support of commercial products such as installation services, maintenance services, repair services, training services, etc. can also qualify as commercial items, if the services:
IAny combination items described above can be sold separately or bundled together and still satisfy the commercial item definition so long as the bundling of the products and/or services are customarily sold to the general public.
General services can also qualify as a commercial item if they are sold in substantial quantities in the commercial marketplace based on established catalog or market prices for the specific tasks to be performed. This definition for services is significantly different than for products, since for services to qualify as commercial items they must be sold in substantial quantities.
For service contractors all this would seem to mean is that contractors need to precisely define their market so that they can satisfy the volume based sales requirement. However, there are some significant definitional obstacles.
First, the fact that the price is based on catalogue or market prices means that the specific services to be performed must be identifiable as catalogue or market prices. Therefore, a general hourly rate for performing all types of services does not fit the definition. In order to qualify as a catalogue or market price, it must be specific.[EN-8]
Second, the term “based on” even has significance. It means that commerciality cannot be determined based on sales by others.[EN-9] Thus for a service to be based on a catalogue or market price, it must be offered directly by the contractor.
In determining whether an item or combination of items qualify as a commercial item, transfers between affiliates are excluded.
Nondevelopmental items can also qualify as commercial items, if the procuring agency determines that the item was developed exclusively at private expense and sold in substantial quantities, on a competitive basis, to multiple state and local governments. Nondevelopmental items include:
As part of the streamlining process, commercial items have been made exempt from certain statutory requirements. The laws exempted for prime contracts are:
Commercial item subcontracts have been exempted from an even longer list of laws. That list includes:
Finally, commercial item contracts have been exempted from certain certifications. It should be noted that the laws still apply. So all that this exemption really provides is relief from prosecution under the False Statements Act.
To a great extent the federal acquisition process has not changed. Competition, best value and fair and reasonable prices are still the ultimate goals. So all that has changed is how those goals will be achieved. Thus, the processes for accomplishing those goals have been restated to require:
The acquisition process for commercial items begins with performing market research to determine whether the needs of the government can be satisfied with commercial products. The process that the government will employ for performing market research and describing its needs is described in the revised FAR Parts 10 and 11.
Performing market research begins with preparing a description of the government’s needs stated in terms sufficient to allow an evaluation whether commercial or nondevelopmental items are available to meet the government’s needs. This determination is not limited to only an assessment of what items are available to meet the government’s needs but also determining the customary practices associated with the item such as modification, tailoring, warranty, financing, discounts, laws unique to the item, distribution and support of vendors, etc. Furthermore, if the research determines that commercial items are not available to satisfy the government’s needs for the end item, then it should be used to determine to what extent commercial items can be used at the component level to satisfy the government’s needs.
There is no restriction on the methods that could be used to perform market research but they could include;
The only restriction to the performance of market research is that agency’s shall not request potential sources to submit more than the minimum information necessary.[EN-12]
If, as a result of market research, commercial items are determined to exist then part 12 will be used. Otherwise, the solicitation notice should contain a notice that the government does not intend to use Part 12 for the acquisition and the other contracting methods will be used instead.[EN-13]
Thus, clearly with respect to commercial items there is a fork in the road. If they exist then commercial item practices are used. If they do not exist then noncommercial item practices are used.
The types of contract vehicles that may be used to acquire commercial products and services is limited. FAR 12.207 requires that for the acquisition of commercial products firm-fixed-price contracts or fixed-price contracts with economic price adjustments must be used. Indefinite delivery contracts, as described in FAR Subpart 16.5 which includes indefinite delivery, indefinite quantity and task order contracts, can also be used if the prices are established based on a firm-fixed-price or fixed-price with economic price adjustments. All other contract types are prohibited for the acquisition of commercial products and services.
Once market research has determined that the government’s needs can be met with commercial items then the FAR part 12 procedures will be used for developing the contract vehicle. To facilitate this process FAR Part 12 has devised a new form as well as a streamlined set of contract clauses.
For the acquisition of commercial products and services a new form has been added to the inventory of standard forms. Standard Form 1449, Solicitation/Contract/Order for Commercial Items is to be used when issuing written solicitations, awarding contracts and placing orders for commercial items. In addition, the form may also be used for documenting receipt, inspection and acceptance of commercial items. All other forms are prohibited for the solicitation or award of contracts or orders for commercial items.[EN-14]
The new form identifies by reference the required and optional standard commercial item clauses, whether they are attached and whether there are any addenda(e).
Contracting for commercial items has been significantly simplified, since the multitude of other FAR clauses that are commonplace with other government procurements have been replaced with only five clauses. These clauses are:
Clause 2 is optional and may be used when the use of evaluation factors in awarding a contract are appropriate. The remaining clauses are required.
Clause 5, which is required, may not be tailored for the acquisition. Clause 3 may be tailored but only if the procedures of FAR 1.4 for obtaining a deviation from the FAR are followed. The remaining clauses may be tailored to provide more instructions about the solicitation, describe the evaluation factors to be used for source selection or to reflect the commercial practices customarily used for acquiring the commercial item such as acceptance, financing, etc. However, certain portions of clause 4 may not be tailored. Those portions are those relating to (b) assignments, (d) disputes, (I) payment, (g) invoice, (q) other compliances and (r) compliance with laws unique to government contracts, specifically;
While the above procedures drastically streamline the procedures for commercial items, the regulations still invite the regulatory weed by way of addenda to the contract. There are a multitude of additional clauses that can be added as an addenda to the solicitation and contract such as:
Many of these are discussed in other sections of this article.
To a great extent the improvements to commercial item contracting have come from streamlined operations that forego overly burdensome requirements. In some situations, however, the changes have come about by totally revising existing requirements as they pertain to commercial items. Some of the more interesting revisions should be the requirements for changes, terminations, warranties and technical data.
To a great extent the acceptance paragraph of the standard terms and conditions relies on the contractors quality assurance program. Other acceptance procedures could be more appropriate for complex or critical applications of commercial items. In such cases, the Contracting Officer shall include an addenda to the standard acceptance procedures.
There is also the capability for the government to accept delivery of commercial items on an ‘as is’ basis. In that case, appropriate modification to the standard acceptance procedures is also warranted.
The changes provision of the standard terms and conditions for commercial items is drastically different from what has otherwise appeared in government contracts. For commercial item contracts, the government is unable to issue unilateral changes to the contract. Rather, in this case, any changes to the contract can be made only by written bilateral agreement.
While the intention for commercial items is to only make changes bilaterally, the absence of a provision in the changes clause for the government to order changes unilaterally is actually of little comfort. After all, the commercial item clause does contain a disputes clause and that clause incorporates by reference the standard FAR Disputes clause from 52.233-1. Both the standard Disputes clause and the actual disputes provision in the commercial item terms requires the contractor to proceed with the work and argue about any difference later. Thus, while the commercial item changes clause does not contemplate unilateral changes, the result would be the same if they do happen--the contract is to proceed with the ordered work and argue about it later.
Modifications that retain the commercial nature of the item retain the characteristic of a commercial item contract. Modifications that depart from the commercial nature of the item will introduce the noncommercial item elements of government contracting into the acquisition. This aspect to commercial item acquisition is quite significant.
Essentially, if a change is made to the contract then pricing of the change can continue as a commercial item as long as the changed item itself is a commercial item. If not one can expect that the pricing procedures for the changed item will be under the standard negotiation procedures under FAR 15, including the FAR 31 Cost Principles and Procedures as well as Cost or Pricing data should none of the exemptions apply.
Taking this prospect further, if the initial contract award is for a commercial item, even though the item may not actually meet the definition of a commercial item, then again the contractor can easily find itself subject to the FAR Part 15 acquisition procedures along with the FAR Part 31 Cost Principles and Procedures along with Cost or Pricing data if none of the exemptions apply. (for more information on contract changes see, Managing Contract Changes in Federal Government Contracts)
For commercial products the government retains its rights to terminate the contract for cause or for convenience. The principles governing such actions for commercial products are substantially different than those described in FAR Part 49.
For default terminations it is expected that Contracting Officers will not need to issue show cause notices since the contractor is responsible for informing the government regarding excusable delays. The Contracting Officer is still required to issue a cure notice prior to terminating a contract for default.
If a contract is terminated for default the government’s preferred method of recourse is to obtain the goods or services elsewhere and then charge the defaulted contractor for any increase in price. It is not expected that the government provide any compensation for costs incurred for any benefit that the government will receive from the contractor. After all, the contract in this case is for commercial products and not developmental items.
In the case of terminations for convenience there are also significant departures for commercial item contracts from all other government contracts. First, settlement can be made by simply paying the contractor the percentage of the contract price equal to the percentage of completion. In addition, the contractor can also be paid any additional reasonable charges that the contractor can demonstrate to the satisfaction of the Government using its standard record keeping system. Second, the standard terms and conditions for commercial items, as well as, the regulatory instruction itself make it clear that the CAS and the FAR Part 31 cost principles and procedures are not applicable.
Both of these aspects seem to provide a mechanism for simplification. Actually, however, these requirements might not be too different from the status quo. First, if the issues that bring complexity to terminations could be broadly categorized they would be either the costs of unsettled changes or unamortized costs. Neither of these conditions are eliminated by the commercial item termination procedures. In fact, with the reference to other reasonable charges that the contractor can demonstrate, these conditions are expressly recognized.
Second, the inapplicability of the CAS and the cost principles also has minimal effect on streamlining the procedure. Since the CAS are concerned with cost allocation in like circumstance and similar purpose and terminations have always been seen as unusual circumstance and dissimilar purpose, contractors were permitted to deviate from their normal cost accounting practices anyway. So, in a broad sense contractors never had to comply with the CAS for terminated contracts. With regards to the cost principles, they too have never been required to be followed in the case of terminations to the exclusion of all reason.[EN-16] Particularly, when they involved issues of allocation.
So, if there is a major departure for commercial item terminations as compared to all other government contract terminations it is limited to cost allowability. Under standard government contract terminations cost allowability is determined based on the five tests at FAR 31.201-2, which included 52 specific cost elements that are entirely or conditionally unallowable. For commercial item terminations, cost allowability will turn solely on “the reasonableness of the charges that the contractor can demonstrate to the satisfaction of the Government using its standard record keeping system.” Thus, charges such as interest on working capital would conceivably be allowable.
If there has been trouble for the termination of commercial item contracts since the adoption commercial item acquisition, it has been the calculation of the percentage of completion that is used for determining the termination amount. In early case decisions, this percentage was determined based on the ratio of the number of items delivered versus the number of items ordered. This often worked against the contractor since such a simple ratio had not accounted for any startup costs or other unamortized costs.
More recent cases have considered other methods of calculating the percentage of competion and allowed the contractor to fare better. (for more information on contract terminations see, Terminations for Convenience of Federal Government Contracts)
The warranty provisions for commercial items are in addition to the government’s rights for inspection and acceptance. Under the new regulations for commercial items, Contracting Officers are required to take advantage of expressed commercial warranties.
Unlike other forms of government contracts where the items have been produced to government specifications, commercial items can also come with implied warranties of merchantability and fitness for particular purpose unless otherwise limited by the provisions of the express warranties. The implied warranty of merchantability provides that an item is reasonably fit for the ordinary purposes for which such items are used. The implied warranty of fitness for a particular purpose provides that an item is fit for use for the particular purpose for which the Government will use the items.
The Government can rely upon an implied warranty of fitness for particular purpose when:
126.96.36.199 Technical Data
FASA established a presumption that technical data for commercial items were developed totally at private expense. For that reason there is no standard data rights clause in any of the commercial item contract clauses. Instead, under Part 12 of the FAR, the government will take only the rights in technical data that the commercial vendor normally provides its customers.[EN-17] However, individual agencies, under agency specific statutes may impose different data requirements. Not surprisingly, the DoD has prepared its own rights in technical data clause for commercial items.
Under the DoD clause, 252.227-7015 Technical Data--Commercial Items, the Government grants itself an unrestricted right to use, modify, reproduce, release, perform, display, or disclose technical data, and to permit others to do so provided such rights:
The above definition apparently applies only to hardware items, since computer software are expressly excluded from the definition of a commercial item under the DOD technical data clause. Also, the above rights apply to use only within the government. The government shall not provide the data outside the government or use the data to manufacture additional quantities of the item without the contractor’s written permission unless necessary for emergency repair or overhaul.[EN-18]
Finally, the government is released from liability for any disclosure that it makes when the contractor’s data is not marked.[EN-19]
The commercial item terms and conditions include a disputes provision, which incorporates by reference the standard FAR Disputes clause from 52.233-1. Thus, in the event of any dispute involving the contract the contractor is required to perform the work as directed and essentially argue about it later.
The revised FAR Part 12 prescribes the policies and procedures unique to the acquisition of commercial items.[EN-20] This does not mean that Part 12 has devised new methods for contracting. Rather, it simply means that the procedures of Part 12 will be used in conjunction with the policies and procedures for solicitation, evaluation, and award in Part 13, 14 and 15.[EN-21]
Simplified Acquisition Procedures (SAPs) refer to purchases made either through a Blanket Purchase Agreement[EN-22], Imprest Fund[EN-23], Purchase Order[EN-24] or Micro Purchase[EN-25]. Historically, the use of these methods have applied to items below the small purchase threshold. The FASA set this threshold at $100,000, if the activity making the purchase is certified for interim FACNET; otherwise the threshold would be $50,000. This is the same conditions that were adopted in FAC 90-32 when the FAR provisions of Part 13 were revised.
With the FARA, however, the SAPs threshold has been raised to $100,000 without regard to the FACNET capability of the procuring activity.[EN-26] In addition, FARA raised the threshold even higher for commercial items. FARA directs that special SAPs will be promulgated with which commercial products of up to $5 million can be procured.[EN-27] FARA imposes a 3 year sunset provision for the increased threshold, however.[EN-28]
The SAP threshold has since been increased to $150,000, although there are even higher thresholds in a few very limited cases like the support or recovery from nuclear, biological, chemical, or radiological attack. In those situations the thresholds are $750,000 for inside the United States and $1.5 million when outside the United States.
With regard to utilizing the SAPs for the procurement of commercial items, the procedures of part 12 do not apply to the acquisition of commercial items:
When contracting by negotiation the policies and procedures of Part 15 are to be used to establish the reasonableness of prices.[EN-29] The procedures of Part 12 do not include clauses required to be used by Part 15 because it is assumed that such acquisitions will not be subject to the Truth-in-Negotiations Act. If, however, the exemption is based on the commercial price exemption then the Contracting Officer is to include the clauses prescribed in FAR 15.804-8 and 15.106 as an addendum to the contract.
As indicated above, the commercial item procedures have not altered the requirement that prices should be fair and reasonable. Consequently, there is still a requirement that buyers perform the procedures customarily required by the contracting method being utilized to determine that prices are fair and reasonable. In performing this task, however, commercial items will have two exemptions that will make the task easier.
The FASA revised the OFPP Act to provide an exemption from CAS for commercial items.[EN-30] However, the CAS Board ignored this statutory requirement and failed to revise its rules or the CAS clause to reflect the statutory changes made by FASA. Consequently, the best that could happen for commercial product or service providers was that they were small business or that they provided no cost information and could avoid CAS under either of those exemptions.
By the end of 1995, the CAS Board was awakened when the Congress amended the OFPP Act again under FARA in order to make commercial item contracts exempt from CAS coverage.[EN-31] As a result, in December 1995 the CASB issued a general waiver that permitted agencies to waive CAS requirements for commercial products.
This was a temporary measure until the CAS Board issued regulations implementing the statutory changes, which they subsequently did. Currently, fixed priced commercial item contracts are exempt from CAS coverage unless they contain an economic price adjustment provision where the adjustment is based on cost.
The Truth in Negotiation Act (TINA), (10 USC, §2306a, P.L. 87-653), was first enacted in 1962 as a means to legislatively curb excess profiteering by government contractors. Since its passage, it has been shrouded in a cloud of confusion concerning its meaning and implementation. Moreover, it has been a major reason many companies have chosen to stop doing business with the U.S. government.
The Federal Acquisition Streamlining Act (FASA), that was signed into law in October 1994 and then implemented with revised regulations effective October 1, 1995, tried to eliminate the gridlock and increased costs brought by TINA. Specifically, the FASA raised the threshold for TINA applicability, broadened the exemptions and made the requirements for civilian agencies consistent with those of the military agencies. In 2018 the TINA threshold was raised to two million dollars. (See the article on Cost on Pricing Data)
The TINA requires contractors to submit cost or pricing data and certify that the data is current, accurate and complete whenever the following conditions exist:
Although TINA generally limits the need for cost or pricing data to instances when the dollars at risk will exceed $500,000, the statute also empowers the Agency head to require the submission of cost or pricing data whenever such data is necessary for the evaluation of a contractor's proposal. This authority is not delegable, however.[EN-33]
There are three exemptions for submitting cost or pricing data. Cost or pricing data are not required whenever the contractor's price is based on:
In exceptional cases the Agency head may waive the requirements for cost or pricing data submission by issuing a written determination justifying his reasons.[EN-35]
188.8.131.52 Adequate Price Competition
The existence of adequate price competition is a determination made by the contracting officer and consequently is not an exception on which contractors can easily rely. Adequate price competition, exists if;
Adequate price competition can also be deemed to exist when only one offer is received if;
184.108.40.206 Catalogue or Market Price
Just as with the exemption for adequate price competition, the FASA made extensive changes to the catalogue or market price exemption. These changes take two forms.
First, when FASA expanded the definition of commercial items to its present form it likewise expanded the number of items that could qualify for the exemption. Previously, commercial items were limited to items actually sold and not those just offered for sale.
Second, the FASA expressly prohibited the use of a volume percentage-based sales test.[EN-39] As indicated earlier this opened the door to allowing updated or obsolescent items to benefit from this exemption. Unfortunately, FASA, and therefore the FAR, retained the requirement that commercial items had to be sold in significant quantities to the general public. This fact will tend to restrict the application of the exemption to commercial items, since the definition of commercial products lacks a similar requirement. It should be noted that this problem has been entirely eliminated by FARA, which replaced the catalogue or market exemption with a commercial item exemption.[EN-40]
The changes by FARA aside, an established catalog or market price under the current rules is one recorded in a catalog, price list, schedule, or other verifiable and established record that are regularly maintained by the vendor or are published or otherwise available for customer inspection.[EN-41] An established market price is a price that is established in the course of ordinary and usual trade between buyers and sellers free to bargain and that can be substantiated by data from sources independent of the offeror.[EN-42] If the item itself does not have a catalogue or market price it can be “based on” an established catalogue or market price of another item if the item is sufficiently similar to the market priced commercial item to ensure that any difference in prices can be identified and justified without resorting to cost analysis.[EN-43] An item is sold in sufficient quantity if there are sales of more than a nominal quantity based on the norm of the industry segment.[EN-44] When determining whether there are sufficient sales to qualify as a substantial quantity the sales of other vendors and sales to affiliates can be used. This is surprisingly different from the definition for commercial services which excludes sales by affiliates and would ignore sales by others.
As with other government procurements, there are essentially three types of payments.[EN-45] There are advance payments that are made before any work is performed. There are interim payments that are made as work is in progress. And, there are delivery payments that are made for accepted supplies and services including partial deliveries.
Generally, it is the responsibility of the contractor to provide all resources necessary for the performance of the contract. With regard to commercial items this fundamental policy is unchanged. [EN-46] In some situations, however, it may be customary for the buyer to provide some financing. For this reason, the Contracting Officer is permitted to include financing terms in the contract that are appropriate for the items being procured.
Whether or not the government will offer financing depends on whether:
If the Contracting Officer decides that providing contract financing is warranted then the Contracting officer can either specify the financing terms in the solicitation or permit each offeror to propose its own customary financing terms. The significant difference between the two involves the evaluation of offers.
Under CO specified financing it is assumed that the consequence of the government’s decision to provide financing is already reflected in the offeror’s price. Consequently, there is no need to make an adjustment to the offeror’s price. Even if the offeror declines the government financing arrangement the offered prices are not to be adjusted. Furthermore, in the event of a contract award to such an offeror, the contract provisions for contract financing should be removed.
Under offeror specified financing the financing terms may vary between offerors. Consequently, to properly evaluate the government’s ultimate cost each offer must be adjusted to include the consequence of the government’s decision to provide financing. Thus, the imputed cost of the government’s borrowing will be added to the offeror’s price.
In such cases the solicitation should include the delivery payment dates and the interest rate that will be used for evaluating the financing proposals. [EN-48] The interest rate that should be used for performing this calculation is the Nominal Discount Rate specified in Appendix C of OMB Circular A-94 that is appropriate to the period of contract financing.
Advance payments can be made to contractors if the market research reveals that such arrangements are customary in the commercial marketplace. The revised FAR regulations provide no guidance on the subject other than that the aggregate of the advance payments cannot exceed 15% of the contract price. In addition, as described in subsequent sections, the government must require security adequate to cover the amount of any advance payment(s).
Installment payments are the form of interim payment financing used for commercial items. They are governed by the clause at 52.232-30 Installment Payments for Commercial Items.
Installment payments are fixed in amount and dependent solely on the passage of time. Generally, a contractor is entitled to an installment payment each month of contract performance. The amount of each installment is calculated as 70 percent of the item price divided by the number of months of contract performance.
Liquidation of the payments is handled in a manner similar to other progress payment procedures for noncommercial item contracts.
Whether advance or interim payment financing is used the government will require the contractor to provide adequate security. [EN-49] The value of the security must be equal to the maximum unliquidated amount of contract financing payments to be made to the contractor. [EN-50]
The adequate security can take various forms such as an unencumbered lien(s) against the contractor’s property, plant or equipment. [EN-51] It can also include irrevocable letters of credit from federally insured financial institutions, a bond, a guarantee of repayment from a person or corporation of demonstrated liquid net worth that is connected by a significant ownership to the contractor, or title to identified contractor assets. [EN-52]
If at any time the Contracting Officer determines that the security provided by the contractor is insufficient then the contractor is to promptly provide additional security. If the contractor is unable to provide the additional security or fails to provide the required additional security then the Contracting Officer can collect or liquidate the security that has been provided and suspend further payments to the contractor and the contractor is to repay any unliquidated financing payments the Contracting Officer deems repayable.[EN-53]
When commercial items are acquired the government’s interest in subcontracts is minimal, since only four clauses are required to be passed down to subcontractors. These clauses are:
When commercial items are not acquired, the government’s interest with respect to commercial items still follows a similar tack. A new clause has been created, 52.244-6 Subcontracts for Commercial Items and Commercial Components, that is required for any contract of supplies or services that is not for commercial items. This clause essentially requires the contractor and its subcontractors at any tier to utilize to the maximum extent practical commercial items. It also, requires that for subcontracts of commercial items contractors need only pass down the above listed four clauses.
Despite that the regulations require contractors to flow down only the above four clauses, contractors may still want to flow down other standard government contract clauses in order to protect themselves. The most obvious example would be the provisions of the commercial items terms and conditions dealing with terminations. This clause could be essential not only to protect the buying contractor in the case that its contract is terminated but also if its contract is changed to such an extent that the purchased item is no longer needed.
Fundamentally, not much has changed on the federal procurement frontier. There is a preference for commercial items so that their benefits can be realized; however, the ultimate goal is still best value at fair and reasonable prices. So, what has changed? Perhaps everything. Perhaps nothing!
The advent of the streamlined acquisition procedures introduced by FASA and still further expanded by FARA were intended to provide the federal government with access to hordes of new contractors and the ability to enjoy benefits of the commercial marketplace. As a result, many captains of commerce envisioned expanding their markets to include the largest single buyer of goods and services in the world. However, even with the regulatory weed seemingly under control, one must question when and if this garden will bear fruit.
First, for commercial products and services to take root there must be a parallel commercial market from which they can be harvested. When procuring goods and services necessary for the performance of its daily activities, the government can likely find commercial market substitutes for all kinds of items. However, for war materials such as munitions, fighter planes, surface combatants and nuclear submarines such counterparts might only exist on the international market. So, if one were to look for benefits of the commercial item policies, one might have to look more at the component level than at the prime item level to find where major benefits of commercial item policies can accrue.
Second, government downsizing and the desire for turnkey contracts will make it even more difficult for commercial items to take hold at the prime contract level. As all of the government’s requirements are bundled into larger procurements the chances diminish that commercial item requirements can be satisfied. Therefore, once again one will probably have to look to the component levels in order to find situations where the benefits of commercial item policies can accrue.
Third, if the commercial item policies are to work then the government must be willing to satisfy its appetite with store bought goods. An insincere attempt at performing the market research that is so critical for determining whether to proceed with a commercial item procurement will only maintain the status quo. Thus, the burden for implementing the commercial item policies is squarely on the shoulders of the government.
As an example of the counter culture that must be eliminated if commercial item policies are to succeed, one need only look to the DoD. No where are the obstacles to commercial items more obvious than in the DoD. The plethora of government unique specifications threaten the commercial items harvest. After all, how can government unique needs described by government unique specifications ever provide fertile soil for a crop of commercial items?
In order to prepare its soil for commercial items, the DoD is reducing its requirements of unique specifications and has eliminated 2,600 of the 36,000 military specifications and standards that existed prior to June 1994. Furthermore, it is permitting block changes to contracts as a means to break the log jam and introduce commercial practices. All of this will take time, however. In fact, it may take DoD at least another two years to eliminate its dependency on government unique specifications. Which judging the performance so far only raises concern for whether success will come at all. For example, 1,000 of the 2,600 standards eliminated by DoD had become de facto commercial standards. Trade groups are now scurrying to establish commercial standards to replace those deleted by DoD. The question, therefore, is whether DoD will use this incident to slow its elimination of unique military standards or even justification for maintaining its unique standards.
Fourth, currently the fundamental procurement question is commercial or not commercial. If the market research data indicates that the government’s needs can be met with commercial items then the directive is to use commercial items to satisfy that need. One might ask, therefore, how will such a fixated policy square with CICA or even other prudent measures?
Imagine a situation where the government’s needs can be met with commercial items. Will that preclude consideration of a noncommercial item even if it costs less and provides greater value? Consider, for example, an accounting system. Perhaps the government’s needs could be met with a qualifying commercial system. Perhaps, also the government’s needs could be met with a noncommercial system but one already provided by a vendor to another Federal Agency. Would this vendor be precluded from consideration, since its contract would be required to contain different terms and conditions than one for commercial items?
Currently, the procedures are designed such that the procurement must be either for commercial or noncommercial items. The determination is made during market research and there is no provision for crossover further down the road. Consequently, providers of noncommercial items can be precluded from participating in the procurement process, since they will not qualify for the streamlined contracting vehicle designed for commercial items. Similarly, if the government’s market research is unable to identify commercial items capable of satisfying its needs then the procurement follows traditional procedures and incorporates requirements and clauses that are repulsive to commercial vendors. Without procedures permitting “crossover” would a commercial vendor be constructively precluded from the procurement because of the unsavory terms and conditions?
In essence, the changes that have been made regarding commercial items constitute a significant change and an earnest attempt to make things better. But even though the doorways have been opened there remains many factors that also must be brought into play before widespread success with commercial items can be enjoyed. Procedural glitches must be debugged and entire counter cultures must be eliminated. In addition, legions of workers must be re-educated and redirected toward the government’s new goals. Obviously all of this will take years to mature. In the meantime, can the momentum continue or will the Washington mentality turn this effort into just another bump in the road?
If there is a business bonanza for commercial items one must question whether or not it will come to foreign competitors. There is no definition of non-government purposes or even government in the FAR. Clearly, the plain meaning of these words would encompass any kind of government activity. However, one cannot be sure of its meaning here, since the exact utilization of the word in the FAR is inconsistent. For example, in the definition of the General Public the phrase “Government end use” is employed. In that case, the term government is apparently meant to refer to the U.S. Government, since it would be contradictory to interpret the term in a broader sense after the general public is defined to mean all but the U.S. Government or its instrumentalities.
Looking elsewhere, FAR Subpart 28.8 “prescribes policies and procedures pertaining to nondiscrimination in employment by Government contractors and subcontractors.” Again as used here government refers to U.S. Government. No other meaning would make sense.
On the other hand, one can look back to the explanation of prices set by law or regulation, FAR 15.804-1(b)(3), that follows the definition of General Public. In that case, the term “governmental” is used broadly to refer to any governmental body.
So the question arises, what is a nongovernmental purpose as used in the definition of commercial items? If it refers only to the U.S. Government then foreign competitors for all kinds of military hardware, for example, can qualify as commercial item vendors, since their products would not customarily be used by the U.S. Government.
The correct answer for this dilemma is perhaps tied to the question whether there is a real need to interpret the requirement otherwise? It would seem logical that the only purpose for designating items commercial or noncommercial is to distinguish between custom items provided to fit the unique requirements of the U.S. Government and those provided to fit the needs of some other customer. After all, the definition for commercial products is insensitive to the quantity of customers for a particular item. It instead focuses on the idea that the item is at least developed with the intent of offering it to some other customer, unless of course, the term customarily is meant to refer to broad acceptance rather than the product’s particular application.
Furthermore, such an interpretation would not be counter to other regulatory provisions such as the Buy American Act. Even under that Act products from “qualifying”countries are treated the same as domestic products. Also, such an interpretation is consistent with policies for agencies like DoD who has stated it plans to shop the world market.
So, the bottom line is there is no preference in the definition of commercial items for domestic suppliers. In fact, the whole focus of the policies is to improve acquisition by offering streamlined procedures in cases where price reasonableness has been determined by market forces as compared to regulatory dicta.
Of course what this could cause is the continued decline of domestic sources and a windfall for foreign competitors. Not only because of the preference for commercial items, which domestic sources of war material might not qualify, and the lack of crossover that could preclude domestic vendors but also because of the unfair advantage that commercial item vendors could have over noncommercial vendors saddled with the regulatory weed.
In summary, prior procurement practices of the federal government reflect its intoxication with protecting the public fisc. Cost based pricing, excessive management interference, and malicious prosecution are all examples of the tools that it created to discharge its duties. In the end, however, all that occurred was that it ended up squandering precious resources.
As a cure for this ailment, regulatory provisions have been considerably revised to streamline the procurement process so that the government can escape the consequences of its own vanity and benefit from commercial items and practices in prescribed situations. While this offers great prospects, the government nonetheless retains many of its elitist philosophies, since cost based pricing, excessive management interference, and malicious prosecution remain the status quo unless the commercial item practices are adopted for the procurement.
Since dual allegiance seldom succeeds, it remains to be seen whether this bifurcated approach to running a railroad can actually succeed. The next several years should provide a valuable lesson.
If things go well, the lesson will be that market forces provide better protections than any regulatory entanglement. In such a case, we all win and people will ask how can market forces be used throughout all of federal procurement so that these benefits can be realized everywhere.
On the other hand if things go poorly, the ultimate lesson will be that the real deterrent to procurement reform is the belief that the government is special and until that cancer is cut completely from the regulatory body good health is unattainable. In such a case, we all lose and people will simply restate the old adage, “the more things change the more they stay the same.”
EN-3 Global Positioning System receivers were donated by Japan after an American company refused to sell its products to the U.S. Government under FAR rules. As it turned out these units were 25% of the weight, 3.5% of the cost, and could be fielded nearly a year-and-a-half earlier than what was available from the U.S. Government’s supplier base.
EN-6. Defense Procurement Reform Act of 9184, P.L. 98-525, §1202, 98 Stat. 2588, 2588-89. (Secretary of Defense should direct that standard commercial or commercial parts be used “whenever such use is technically acceptable and cost effective”); FAR 11.002 (Agencies shall acquire commercial products whenever these products . . . . adequately satisfy the Government’s needs.”)
EN-8. Westinghouse Electric Corp., ASBCA 11932, 67-1 BCA 6361, “We do not believe that a door insert which has never been manufactured by the X Company can be said to be an item ‘normally produced by and available from’ X Company ‘in the open market in significant quantity’ merely because X Company has the capacity to make such a door insert.”
EN-16. R.G. Robbins & Co. Inc., ASBCA 27516, 83-1 BCA ¶16420, “Therefore, the practical effect of a convenience termination, in large measure is to convert the terminated portion of the contract into a cost reimbursement type contract and to permit recovery in the settlement in accordance with the standards of reasonableness, allocability, and not otherwise limited or excluded by the cost principles set forth in DAR Section 15, Part 2.”
EN-22 Blanket purchase agreements can be used when any of three conditions exist. First, there are a wide variety of items in a broad class of goods will be purchase but the exact items, quantities, and delivery requirements are not known in advance and may vary considerably. Second, there is a need to provide commercial sources of supply for one or more offices or projects in a given area that do not have or need authority to purchase otherwise. Third, in any situation when the writing of numerous purchase orders can be avoided.
EN-24 Purchase orders may be priced or unpriced. Unlike other contracting methods they represent an offer by the government to purchase the stated goods or services. The government’s offer is accepted when the contractor actually performs the work or when written acceptance is provided if requested by the government.