(Editor’s Note. Since passage of the Federal Acquisition Streamlining Act (FASA) of 1994 the government has been emphasizing procuring “commercial items” rather than government-unique supplies and services. Offering the government “commercial items” usually benefits contractors – onerous FAR terms and conditions are eliminated, offering of prices that are not based on costs eliminates the need to demonstrate compliance with strict accounting rules and pricing of such items can be much more flexible. Though there has been a recent increase in rules justifying submission of cost data to demonstrate reasonableness of offered prices, even on commercial items, claiming commercial status of offered items still has enormous advantages. We came across an interesting article in the May 2008 issue of Contract Management written by Doris Holingsworth Gray, who is a contracts manager at Avnet Inc, that helps clarify some of the issues commonly encountered in this still murky area of commercial item acquisitions. We have changed points of emphasis but the following substantially reflects Ms. Gray’s ideas. A more in-depth discussion of what is a commercial item has been addressed in a prior articles (use our Word Search at govcontractassoc.com) and probably will be reflected in future ones but the several fallacies we discuss below does address common misunderstandings we often encounter.)
FAR Part 12, Acquisition of Commercial Items was developed to address acquisition of commercial items and the government and contractors have creatively used the new regulations to acquire commercial supplies and services to meet its needs. Nonetheless there is still widespread misconceptions of commercial items where the following seven common fallacies are among the top.
1. A product must be developed at private expense to be a commercial item. With the exception of non-developmental items (i.e. previously developed items of supply used exclusively for federal, state, local or foreign government purposes), an item does not have to be developed at private expense to be commercial. A commercial market may develop after a product was developed at government expense or conversely, an item developed at private expense may not have a commercial application. The issue of who paid for the item does not determine whether or not the item is commercial.
2. How price is developed will determine whether the items are commercial. The amount of the price or how it was determined has nothing to do with the commerciality of an item. The commerciality of the item is determined before and is separate from how the price was developed and whether or not that price is “reasonable.
3. When modification to an item meets the definition of a commercial item price reasonableness of that modification can be substantiated only if cost or pricing data is provided.
Though requests for cost or pricing data is still common, at both the government and prime contract level, procurement personnel are instructed to first obtain multiple quotes from supplies who can perform. If competition is inadequate, then either price analysis – defined as evaluating price without evaluating separate cost elements – or market research should be conducted.
4. FAR clauses should be flowed down to all subcontractors. FAR 52.212-5, Contract Terms and Conditions, Commercial Items is included in prime contracts which includes terms that are supposed to, to the maximum extent practical, reflect customary commercial practice. However, prime contractors should not automatically flow down these terms to their lower tier subcontractors. The clause was intended to be for the prime contractor and some or all of these terms may be needed to be flowed down depending on the end product and prime contractor’s responsibilities. However, in many instances, FAR 52.244-6, Subcontracts for Commercial Items should be enough.
5. A product being procured to meet unique government requirements or contractor specs is a government-unique item that is a noncommercial item. This is a common fallacy held by otherwise savvy procurement officials in both government and industry. Just because an item is being procured to meet government requirements does not automatically make it a government-unique item if it is closely related to items available commercially. The words “of a type” in the commercial item definition was intended to give the government flexibility to purchase custom items from commercial sources. To maintain its commerciality, the government-unique items must be sufficiently like other items it sells or offers for sell to the general public.
6. If a contractor is supplying a noncommercial item (or military end item) then the contractor has to flow down noncommercial terms to its subcontractors. It is very common to find procurement personnel who believe subcontracts must mirror the prime no matter whether the acquisition is for a commercial item. FAR 44.402(a)(2)(i) and (ii) provides that all prime and higher tier subcontractors shall not be required, to the maximum extent possible, to apply to its subcontractors or company affiliates furnishing commercial items any clause except those (a) required to implement provisions of law or executive orders or (b) considered to be customary commercial practices for the item being acquired. FAR 52.244-6 discussed above permits the flow down of a “minimal number of additional clauses necessary to satisfy contractual obligations.” This clause should prevent the opening of unnecessary “floodgates” of clauses that may be in the prime contract.
7. Commercial items should be tested and inspected prior to acceptance. Commercial supplies are commonly requested to conduct the same QA systems applicable to noncommercial items where the additional costs for pre-acceptance testing is not even recovered by the commercial supplier. In spite of specific quality assurance requirements prior to acceptance, contracts for commercial items should rely on a contractor or subcontractor’s existing QA systems in lieu of those applying to the prime unless it is customary market practices to include in-process inspections.
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