Historically, the Truth in Negotiations Act (TINA) generally required contractors doing business with the Government to submit certified cost or pricing data prior to award of a negotiated prime contract, subcontract at any tier, or modification of a prime contract or subcontract expected to exceed certain dollar thresholds ($500,000 for most of this decade). To ensure compliance with TINA, companies are required to submit to pre- and post-award audits of the "cost and pricing data" relating to the items being acquired and to certify to the currency, accuracy and completeness of that data. Deficiencies in the data can result in dollar-for-dollar reductions in contract price and potentially, allegations the seller violated civil and criminal False Claims Acts. Companies have had to implement elaborate and comprehensive systems to ensure accuracy of cost and pricing data to ensure compliance with Federal Acquisition Regulations and some if not all Cost Accounting Standards. The effort and cost of compliance along with potential liabilities discouraged many commercial suppliers from doing business with the Government.

TINA recognized three general exceptions from its data requirements: (1) if contract prices were based on adequate price competition (2) catalog or market prices of commercial items sold in substantial quantities to the general public or (3) prices set by law or regulation. The regulations imposed excessive documentation to prove a catalog or commercial item exemption applied and most contracting officers were generally reluctant to act on exemptions, often requiring cost and pricing data when they were not required.

To broaden the commercial marketplace and lessen the burden of doing business with the government the Federal Acquisition Streamlining Act of 1994 was passed to, in part, expand the exemptions to TINA. Along with clarifying "adequate price competition" and "prices set by law or regulation" ("catalog pricing" exemption was dropped) regulations were passed to provide for an expanded role for "commercial items". FASA established the policies which were latter modified by the Clinger-Cohen Act in 1996 and further changed by the Federal Acquisition Regulation Part 15 rewrite in 1997. We will describe the current state of commercial item pricing.

FAR 2.101 provides the basic definition of "commercial item" that includes "any item, other than real property, that is of a type customarily used for non-government purposes and that (1) has been sold, leased or licensed to the general public; or (2) has been offered for sales, lease or license to the general public". Thus an item need not be actually sold to the general public but only been offered for sale. An item not yet available commercially may also qualify as a commercial item if it has evolved from an existing commercial item through advances in technology or performance and will be available in the commercial marketplace in time to satisfy delivery requirements under a Government solicitation.

If a commercial item has been modified, it still constitutes a commercial item if the modification is of a type "customarily available in the commercial marketplace". For example, modifications to strengthen floor and body supports to enable a military radar system to be mounted on a commercial aircraft would meet the criteria because commercial passenger aircraft commonly undergo structural modifications for commercial freighter aircraft.

In addition, an item’s identification as a commercial item will not be lost through minor modifications of a type not customarily available in the commercial marketplace if they are needed to meet government requirements. A modification is "minor" if it does not significantly alter the non-governmental function or essential physical characteristics of an item or change the purpose of a process.

Types of services clearly included as commercial items are those in support of a commercial item such as installation, maintenance, repair and training. To qualify as a commercial item, these services (1) must be offered to the general public and to the Government at the same time and under the same terms and conditions and (2) offer to use the same work force to provide the services to the general public and Government.

"Stand-alone" services – not those in support of a commercial item – is still somewhat murky and will require court clarification. These services qualify as commercial items if they are 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 under standard commercial terms and conditions". Though the regulations do not define "market prices" a recent GAO decision (Aalco Forwarding, Inc. Comp. Gen. Dec. B-2777241.8) defined it as "current prices that are established in the course of ordinary trade between buyers and sellers free to bargain and that can be substantiated from sources independent of the offeror".

The FAR distinguishes between services sold at task prices (e.g. engineering task to test impurities at a specific location) and services sold at hourly rates. FAR specifically excludes from the definition of "commercial item" those services that are based "solely on hourly rates without an established catalog or market price for a specific service performed". At this point there are varying views on the meaning of this. On the one hand, this provision has been interpreted to exclude from the commercial item definition all hourly rate services for which there is no fixed price for a task such as labor-hour or time-and-material contracts. On the other hand, the provision has been interpreted to exclude only hourly-rate services when the specific service to be performed for the Government is not the same as the services for which there are established catalog or market prices. Further guidance and Board/Court decisions will have to resolve this critical issue.

A "nondevelopmental item" is any previously developed item of supply that is used exclusively for governmental purposes by a federal agency, a state or local government or a foreign government with which the U.S. has a mutual defense cooperation agreement. Such an item may quality as a commercial item if the procuring agency determines that the item (a) was developed exclusively at private expense and (b) has been sold in substanital quanitities, on a competitive basis, to multiple state and local governments.

In the current environment, COs are tasked to determine whether one of the TINA exceptions apply to a proposed price and whether the price is reasonable and the cost is realistic. Because COs are no longer permitted to obtain cost or pricing data for acquisition of commercial items, they must rely on price analysis to meet their obligation to ensure prices paid are fair and reasonable. Price analysis is the process of examining and evaluating a proposed price without evaluating separate cost elements. To aid the CO, recent regulations have authorized a new type of data – "information other than cost or pricing data" – to help the CO determine whether a TINA exemption applies and whether the proposed price is reasonable and is cost realistic. FAR 14-403 covers Information other than cost or pricing data which defines it as any type of information that is not required to be certified and is necessary to determine price reasonableness and cost realism. Examples of this information are pricing, sales, or cost information as well as traditional cost or pricing data for which certification is inapplicable.

When the exceptions for commercial items or prices set by law or regulation are anticipated and it is fairly certain that information other than cost or pricing data will be required to either justify an exemption or price analysis is needed, the CO will include the FAR clauses "Requirements for Cost or Pricing Data or Information Other Than Cost or Pricing Data" (FAR 52.215-20) and "Requirements for Cost or Pricing Data or Information Other Than Cost or Pricing Data – Modifications" (FAR 52.215-21) in their solicitation. The clauses describe in detail the types of data the CO may need. While it may be necessary to obtain other information identified in the clauses any additional information must be limited to that necessary to determine whether an exception applies or the price is fair and reasonable

To establish whether an exemption for prices set by law or regulation applies, an offeror need only submit a copy of the "controlling document". Offerors claiming a "commercial item" exception must submit, at a minimum, information on prices at which the same or similar items have been previously sold in the commercial market that permits the CO to determine price reasonableness. The type of information an offeror may be required to submit depends on how the items offered to the Government are priced in the commercial marketplace.

The clauses mentioned above permit the CO to obtain information to ascertain the reasonableness of the proposed prices or to establish realism. The CO is limited to not obtaining more information than is reasonably necessary. While the CO needs to ensure the currency of its information, requests for updates must be limited to information affecting the adequacy of the proposal for negotiations (e.g. changes in price lists). COs are also not permitted to require offerors to certify the accuracy, currency or completeness of information other than cost or pricing data.

If additional information is required, the CO must, to the maximum extent practicable, obtain it from sources other than the offeror. The CO is authorized to request information to determine the cost realism of competing offers or to evaluate competing approaches.

For "commercial item" exception, the CO is limited to obtaining information on sales of the same or similar items during a relevant time period. In addition, the CO must make every effort to limit the scope of their request to information in the form regularly maintained by the offeror in its commercial operations. The Government may also not disclose any information exempt from disclosure under the Freedom of Information Act.

Information other than cost or pricing data used to be submitted on Standard Form 1448 but the recent rewrite to FAR 15 has eliminated this form. Now, an offeror can submit this information in its own format unless the CO prescribes a specific format.

Before FASA, all business segments were held to the same requirements as the segment contracting with the government or subcontracting with others. This created problems when, for example, a commercial division was unable to or unwilling to supply cost and pricing data for the products or services it provided the prime or upper-tier contracting segment. This problem has been alleviated by a new definition of "subcontractor" that has been expanded to include a transfer of a commercial items between divisions, subsidiaries or affiliates of the contractor or subcontractor. Because intersegment transfers now qualify as subcontracts, the pricing clause applicable to an intersegment transfer from a commercial division will not have to mirror those in the prime contract. Rather, as long as the item or service meets the definition of "commercial item" the flow-down clauses can be limited to those four clauses required in a commercial subcontract that are depicted in the article on subcontract flow-downs.

Before FASA, the "material costs" cost principle (FAR 31.205-26) required transfers between any divisions, subsidiaries or affiliates of a contractor to be at cost unless (a) the price was based on an established catalog or market price or resulted from adequate price competition, (b) was the consistent practice of the transferring unit to transfer at other than cost and (c) the transfer price did not exceed that paid by the transferring units’ most-favored customer. Though the transferring organization must still demonstrate and "established practice" of pricing interorganizational transfer at other than cost for commercial work, the FASA changes have eased the requirements for price-based intersegment transfers. Now, any TINA exception, including "commercial items", can be transferred at price. In addition, the transfer price need not be the offeror’s most-favored-customer price but only requires a price the CO has not found to be unreasonable.

The Cost Accounting Standards generally govern estimating, accumulating and reporting of costs under negotiated contracts and subcontracts in excess of $500,000. Since this requirement created problems for commercial item vendors whose accounting systems are usually non-compliant with CAS, FASA and subsequent regulations expanded a CAS exemption for commercial item prime contracts and subcontracts. While the regulations clearly exempt fixed price contracts and subcontracts of commercial items, the current rules leave open the possibility that flexibly-price contracts for commercial items may still be vulnerable to TINA.

The right of a buyer to audit their suppliers’ records is usually unheard of and the Government’s desire to get closer to commercial practices has led to a narrowing of the Government’s audit rights under commercial item contracts.

Now, the only preaward audit rights applicable to offers for commercial rights pertain to "information other than cost or pricing data" clauses we discussed above. Under these clauses, which the CO has the discretion to request if they think the relevant information will be needed to either justify an exception or determine price reasonableness, the CO (or authorized representative such as auditors) has the right to examine books, records, documents or other pertinent records to determine TINA exception and price reasonableness. These rights are limited, however. For items priced using catalog prices or market prices or based on law or regulation, the Government’s access to records does not extend to cost or profit information or other data relevant solely to the offeror’s determination of the prices to be offered in its catalog or marketplace (FAR 52.215-20).

FASA and subsequent regulation changes have attempted to eliminate many of the barriers to participation by commercial vendors. The most significant pricing and accounting changes brought by these statutes include (a) establishing a broad definition of "commercial item" (b) exempt all commercial items from TINA’s requirements to submit cost or pricing data and (c) expand the definition of "subcontract" to include intersegment transfers of commercial items. As of yet, revisions to commercial item pricing procedures have been slow to be implemented by government procuring agencies as well as prime contractors and upper-tier subcontractors. The success of this revolutionary change will depend on its implementation by the buying community.

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