(Editor’s Note. As we have frequently reported, recent changes to the Federal Acquisition Regulation have greatly expanded the opportunities to use commercial prices on government contracts e.g. see our article on Commercial Items in the GCA DIGEST, Vol. 1, No. 3). We are often asked by both manufacturing companies offering various services and service firms from research and development, engineering, ground maintenance and laundry services whether they may offer the government its commercial rates or are they limited to cost build up rates. Since many of our clients seek ways to increase the rates charged, we have followed this issue with great interest. The best comments we have found are from articles written by Professors Nash and Cibinic in their Nash and Cibinic Report (e.g. Vol. 11, No 7; Vol. 10, No 4).

The first cut at a definition, cited in Far 2.101(e), distinguishes between services that are and are not in support of commercial supply items. The services in support of commercial supply items enjoy all the freedoms of commercial items and hence allow firms to charge their market prices. It includes installation, maintenance, repair, training and other “other services” that support Commercial supplies. While producers of commercial supplies often provide these services it is not limited to them. Neither catalog pricing, market prices nor evidence of substantial sales to the general public are required to use commercial prices only that they are offered for sale to the public. Since they need only be offered, the Government may be the first purchaser allowing providers of support services to be startups. Pricing can be based on either units of output (prices for specific tasks or units of input (hourly rates). The ability to charge market prices if services are not
in support of commercial supplies, which represents the largest percentage of services purchased by the government, is more restrictive and not entirely clear. FAR 2.101(f) defines commercial services as a type of service “offered and sold in the commercial marketplace based on established catalog or market prices for specific tasks performed under standard commercial terms and conditions.” A curious sentence is added: “This does not included services that are sold based on hourly rates without an established catalog or market price for a specific service performed.”
Lets look at the elements of this definition a little closer:

Competitively sold in substantial quantities in the commercial marketplace. This is often referenced as constituting the condition for commercial services. “Competitively” is clear – it can’t be sole source contracts. “Substantial quantities” is met when the services are sold reasonably regularly. The commercial marketplace should really include buyers other than the federal government – the marketplace should include the state and local governments as well.

Established catalog or market prices for specific tasks. A catalog is pretty simple – find a catalog referencing tasks and see if there is a price next to it. As for established market prices – though some have argued “established really means “preestablished” – the professors maintain that market prices may also be established at the time of competition for or award of the contract as in the case where prices are established through the bidding process (most contracting and R&D projects fall under this category).

Hourly Rates. Some commentators originally indicated that the last sentence prevents all contracts based on the purchase of hourly rates to be commercial. The professors maintain it is not so simple. They point out that many of the types of services purchased by the government are on the basis of hourly rates commonly in the form of either time and material or labor hour contracts. They argue that such rates are also routinely bought and sold in the commercial marketplace and hence they are really “established” market prices. Also, catalog prices frequently exist for many of them. In addition, since these types of noncommercial contracts are usually based on price competition, then the condition of “adequate price competition” is sufficiently present to meet the condition to consider these commercial items. Thus in spite of the last sentence in the FAR reference, which even government representatives consider garbled, it seems most commentators conclude that as long as adequate price competition exists and these services are of the type sold in the commercial marketplace, then they should be considered commercial services even when the contract is based on hourly rates. The sometime exclusion of hourly rates, by the way, should not affect the commercial status of bids based on lump sum or unit prices for specific work such as dollars per square foot of floor refinishing or dollar per cubic yard of excavation. 

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