Though there has been much ado about converting the acquisition process from cost-based pricing to “commercial practices”, we are still seeing a great deal of contract pricing being based on cost data at both the prime and subcontract level. The regulations and subsequent court decisions have definitely expanded opportunities of commercial pricing which are generally more advantageous to contractors (e.g. higher prices, less audit scrutiny, streamlined administration). Though you may not be able to control initial attempts to base prices on cost buildup requests, a good understanding of the rules allowing exemptions from such pricing will provide a basis to challenge such efforts from the government and prime contractors and a good factual base for subcontracting to other firms.
The Federal Acquisition Streamlining Act of 1994 (FASA) changed both the traditional exemptions from requirements of submitting cost or pricing data found in FAR 15.403-1 and added two new commercial item exemptions. The Clinger-Cohen Act of 1996 further changed the exemption by combining the catalog or market price exceptions with the commercial item exception. In the past, exceptions were discretionary where now they are mandatory – cost or pricing data will not be obtained if one of the exceptions applies. Exceptions from cost based pricing include:
Adequate Price Competition (FAR 15-403-1(b)(1). Price competition is adequate if at least two responsible offerors, competing independently, submit priced bids that satisfy the government’s expressed needs and if (1) the award will be made to the offeror whose proposals represents the best value where price is a substantial factor and (2) there is no finding that the price of the otherwise successful offeror is unreasonable.
Price competition will be considered adequate if only one offer has been received when it could be reasonable to conclude there was the expectation of competition. For example, if the offeror believed at least one other bidder was capable of submitting a meaningful offer and the offeror had no reason to believe other bidders did not intend to submit one.
Price competition will also be considered if price analysis clearly demonstrates the proposed price is reasonable in comparison with current or recent prices for the same or similar items, adjusted to reflect changes in the market, economic conditions, quantities or terms and conditions under contracts that resulted from adequate competition.
Price set by law or regulation FAR 15.403-1(b)(2). This includes pronouncements in the form of periodic rulings, review or similar actions of a government body or that are embodied in laws that are sufficient to set a price.
Commercial Items. The definition is at FAR 2.101 and covered by FAR Part 12. Commercial items used to be considered supplies or services regularly used for other than government purposes and sold or traded to the general public in the course of normal business. Now, the commercial item exception includes catalog or market priced items and has been significantly expanded by both FASA, Clinger-Cohen and evolving board and court decisions. Now a commercial items means any item other than real property that is a type customarily used for non-government purposes and that:
has been sold, leased or licensed to the general public;
has been offered for sale, lease or license to the general public;
has evolved from a commercial item that is sold or offered for sale as a result of technological advancement (even if it is not yet available);
requires either modifications of a type that is customarily available in the commercial marketplace or minor modifications for unique government purposes;
or any combination of the above.
The definition has evolved in the last few years to now include items with the potential to be offered for sale to the public (e.g. an item in the development stage) if the item evolved from a commercial item and if it will be available in the commercial marketplace in time to satisfy government delivery needs. The definition now also encompasses modifications if they are minor or customary in the marketplace and ancillary services, like installation training or technical support and updates. Services that are sold based on hourly rates without an established catalog or market price for specific services are not considered commercial items but contracts depending on employee hours that do not specify hours are. The item may also meet the definition of a commercial item if a modification that is unique to the government is made to a commercial item, if the modification is minor. Also non-developmental items developed exclusively at contractor’s expense and sold competitively to multiple state and local governments also qualify for commercial item status. In general, both industry groups and respected scholars in the field have been strongly advocating that agencies adopt more flexible definitions of what a commercial item is and many articles we encounter recite instances of CO’s decisions that definitely “stretch” the definition in order to give the government access to companies that otherwise would not compete for work in the government sector.
Modification of contracts for commercial items (FAR 15.403-1(b)(5). This applies when a noncommercial item contract is modified for commercial items. The standards discussed above for determining a commercial item apply for modifications.
Waivers (FAR 15.403-1(b)(4). This is a catchall that authorizes a waiver if another exception does not apply but the CO can determine the price is fair and reasonable. Only the head of a contracting activity may grant a waiver. An example of when a waiver may apply is when a previous production buy included cost or pricing data and the CO considers it is sufficient when combined with updated information. We have also seen the government use this provision when a commercial contractor refuses to provide cost and pricing data and the government needs their product or service. For purposes of subcontract pricing, when a prime contractor or upper tier subcontractor was granted a waiver, it will be considered as requiring to make available cost or pricing data. So, award of any lower tier subcontract expected to exceed the cost or pricing data threshold will be required to submit cost or pricing data unless the exception granted the prime contracts explicitly applies to the subcontract.
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To discuss your needs, contact Bill Lennett, Principal, at 1-925-362-0712 or email him at
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