Commercial item acquisitions 4 16-13

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The Federal Acquisition Streamlining Act (FASA) was passed in 1994, ushering in what promised to be an easier way to do business with the federal government. FASA was the commercial item regime, which encouraged contracting officers to obtain commercial products to meet their needs whenever possible. This session will look back at the much ridiculed specification-driven regime, and the resulting call for reform that led to the passage of FASA. We will also review current regulations governing the acquisition of commercial items, including a detailed but simplified parsing of the complicated FAR definition of "commercial item." Attendees will gain a clear delineation of which contract clauses are – and are not – applicable to "commercial items" and "commercially available off the shelf items." We will also explore other key aspects of commercial item contracting, including the solicitation process, use of past performance information, and subcontracting issues. The most popular form of commercial item acquisitions under FAR part 12, GSA Schedule Contracting, will also be briefly addressed as it relates to the overall commercial item regime. Presenter: Mark J. Blando, Eckland & Blando LLP

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Commercial item acquisitions 4 16-13

  1. 1. Midwestern Values, D.C. Connections EcklandBlando.comCommercial Item Contracting:A Simpler Way to Do Businesswith the Government?Mark J. BlandoEckland & Blando LLP800 Lumber Exchange Building10 South Fifth StreetMinneapolis, Minnesota 55402612-236-0160SADBOC Procurement Fair: April 16, 2013Midwestern Values, D.C. Connections EcklandBlando.com
  2. 2. Midwestern Values, D.C. Connections EcklandBlando.comOverview• History: The Call for Reform• Commercial Item Acquisitions– What is a Commercial Item (CI)?– Solicitation Process– What contract clauses apply?• GSA Schedules– Getting on Schedule– Compliance Issues
  3. 3. Call for Reform• The much ridiculed Mil-Spec for oatmealcookies and chocolate covered brownies(26 pages long) included requirementssuch as:– “Shelled walnut pieces shall be of thesmall piece size classification, shall be ofa light color . . . . A minimum of 90percent, by weight, of the pieces shallpass through a 4/16-inch diameter roundhole screen and not more than 1 percent,by weight, shall pass through a 2/16-inchdiameter round hole screen.”– “The interior of the coated oatmeal cookieshall be crisp and have the characteristicflavor of oatmeal.”– “If necessary, each ingredient shall beexamined organoleptically”• Midwestern Values, D.C. Connections EcklandBlando.com
  4. 4. Midwestern Values, D.C. Connections EcklandBlando.comCall for Reform• Embarrassing storiesrevealed the high price ofordering to spec:– $544.09 spark plugs (thatturned out to be commerciallyavailable for $10.77)– $600 hammer
  5. 5. Midwestern Values, D.C. Connections EcklandBlando.comCall for Reform• Disincentives to doing business with thegovernment:– Government specifications and standards– Government terms and conditions– Audit and accounting requirements– Certifications– Technical data rights
  6. 6. Midwestern Values, D.C. Connections EcklandBlando.com
  7. 7. Midwestern Values, D.C. Connections EcklandBlando.comCall for Reform• Government concerns:– Paying premium to acquire items that meetstated requirements– Missing out on the benefits of the marketplace(pricing, contract terms)– Lack of access to new technologies– Less than “Full and Open Competition”
  8. 8. Midwestern Values, D.C. Connections EcklandBlando.comHistory• Post-Cold War:– Defense procurement budget shrank– Military sought ways to reduce acquisition spending• Late 1980s and early 1990s:– Rapid technological advances– Realization that milspecs could not keep pace withcommercial technological developments• 1991: Congress directs DoD to review its acquisitionmethods and make recommendations for reform.– DoD produces the “Section 800 report” (recommendedincreasing simplified acquisition threshold for smallpurchases and several pilot programs)
  9. 9. Midwestern Values, D.C. Connections EcklandBlando.comHistory• 1993: Al Gore smashes anashtray on late night TV– 10-page spec for “ashreceiver, tobacco, desk type”– “A minimum of four cigaretterests, spaced equidistantaround the periphery"– Testing spec: hit with a steelpunch "point ground to a 60%included angle" and ahammer; "The specimenshould break into a smallnumber of irregularly shapedpieces, no greater than 35.”
  10. 10. Midwestern Values, D.C. Connections EcklandBlando.comHistory• 1994: Federal Acquisition Streamlining Act(FASA)– Implemented recommendations of Section 800Report– Encouraged agencies to buy commercial whenpossible– Streamlined procedures for purchasing CIs• 1996: Federal Acquisition Reform Act (FARA)– Further simplified procurement of CIs and services
  11. 11. Midwestern Values, D.C. Connections EcklandBlando.comCommercial ItemAcquisitions
  12. 12. Midwestern Values, D.C. Connections EcklandBlando.comCurrent Scheme forCommercial Item Acquisition• Federal Acquisition Regulations (FAR)– Part 2: Definitions (2.101)– Part 12: Acquisition of Commercial Items– Part 15: Pricing (15.403)– Part 52: Contract Clauses (52.212)• Department of Defense FAR Supplement(DFARS)
  13. 13. Midwestern Values, D.C. Connections EcklandBlando.comPreference for Commercial Items(FAR 12.101)• Agencies shall:– Conduct market research to determine whether CIs ornondevelopmetal items are available that could meetthe agency’s requirements;– Acquire CIs or nondevelopmental items when theyare available to meet the needs of the agency; and– Require prime contractors and subcontractors at alltiers to incorporate, to the maximum extentpracticable, CIs or nondevelopmental items ascomponents of items supplied to the agency.
  14. 14. Midwestern Values, D.C. Connections EcklandBlando.comOther Commercial Practices• Commercial Financing– Advance payments– Installment payments• “Other than new” items– Previously, contractors not permitted to offerused or reconditioned materials– CO must determine whether “other than new”materials acceptable under circumstances
  15. 15. Midwestern Values, D.C. Connections EcklandBlando.comFAR 2.101, Definitions: “Commercial item”(1) Any item, other than real property, that is of a type customarily used by the general public or bynon-governmental entities for purposes other than governmental purposes, and—(i) Has been sold, leased, or licensed to the general public; or(ii) Has been offered for sale, lease, or license to the general public;(2) Any item that evolved from an item described in paragraph (1) of this definition through advances intechnology or performance and that is not yet available in the commercial marketplace, but will beavailable in the commercial marketplace in time to satisfy the delivery requirements under aGovernment solicitation;(3) Any item that would satisfy a criterion expressed in paragraphs (1) or (2) of this definition, but for—(i) Modifications of a type customarily available in the commercial marketplace; or(ii) Minor modifications of a type not customarily available in the commercial marketplace made tomeet Federal Government requirements. Minor modifications means modifications that do notsignificantly alter the nongovernmental function or essential physical characteristics of an item orcomponent, or change the purpose of a process. Factors to be considered in determining whethera modification is minor include the value and size of the modification and the comparative valueand size of the final product. Dollar values and percentages may be used as guideposts, but arenot conclusive evidence that a modification is minor;(4) Any combination of items meeting the requirements of paragraphs (1), (2), (3), or (5) of thisdefinition that are of a type customarily combined and sold in combination to the general public;
  16. 16. Midwestern Values, D.C. Connections EcklandBlando.comFAR 2.101, Definitions: “Commercial item”(5) Installation services, maintenance services, repair services, training services, and other services if—(i) Such services are procured for support of an item referred to in paragraph (1), (2), (3), or (4) ofthis definition, regardless of whether such services are provided by the same source or at the sametime as the item; and(ii) The source of such services provides similar services contemporaneously to the general publicunder terms and conditions similar to those offered to the Federal Government;(6) Services of a type offered and sold competitively in substantial quantities in the commercialmarketplace based on established catalog or market prices for specific tasks performed or specificoutcomes to be achieved and under standard commercial terms and conditions. For purposes ofthese services—(i) “Catalog price” means a price included in a catalog, price list, schedule, or other form that isregularly maintained by the manufacturer or vendor, is either published or otherwise available forinspection by customers, and states prices at which sales are currently, or were last, made to asignificant number of buyers constituting the general public; and(ii) “Market prices” means current prices that are established in the course of ordinary tradebetween buyers and sellers free to bargain and that can be substantiated through competition orfrom sources independent of the offerors.(7) Any item, combination of items, or service referred to in paragraphs (1) through (6) of this definition,notwithstanding the fact that the item, combination of items, or service is transferred between oramong separate divisions, subsidiaries, or affiliates of a contractor; or(8) A nondevelopmental item, if the procuring agency determines the item was developed exclusively atprivate expense and sold in substantial quantities, on a competitive basis, to multiple State andlocal governments.
  17. 17. Midwestern Values, D.C. Connections EcklandBlando.com“Commercial Item”• “Item … of a type” (subpart 1)– customarily used by the general public or by non-governmental entities,– for purposes other than governmental purposes, and– has been sold or offered for sale to the general public• Item “Evolved” from an “Item” (subpart 2)– through advances in technology or performance butnot yet available in the commercial marketplace– will be available in commercial marketplace by timefor delivery under a government solicitation
  18. 18. Midwestern Values, D.C. Connections EcklandBlando.com“Commercial Item”• “Modified” Item or Evolved Item (subpart 3)– An item or evolved item with modification• of a type customarily available in the commercialmarketplace; or• minor modifications not customary in the commercialmarketplace to meet government requirements– Minor modifications• do not significantly alter the nongovernmentalfunction• consider value and size of the modification and thecomparative value and size of the final product• dollar values and percentages are instructive butnot conclusive evidence of a minor modification
  19. 19. Midwestern Values, D.C. Connections EcklandBlando.com“Commercial Item”• Services (Subparts 5 and 6)– Procured in support of a CI and provided to the general public, or– Sold in substantial quantities in commercial marketplace at establishedcatalogue or market prices for specific tasks• Examples– Janitorial - Construction -Aircraft Maintenance– Storage - Distribution• Not:– Professional Services– Radioactive waste disposal is not a CI:• There is no established market or catalogue price• There is no competitive market- Envirocare of Utah, Inc. v. U.S., 44 Fed.Cl. 474,484 (1999)
  20. 20. Midwestern Values, D.C. Connections EcklandBlando.com“Commercial Item”• Intra-company transfers and item part of acombination of items (subpart 7)– Sufficient to show commerciality• Non Developmental Items (NDIs) (subpart 8)– Privately funded– Sold to federal / state / local governments– Preference for NDIs where CIs not available– Examples:• Radar Systems• Apache helicopter components
  21. 21. Midwestern Values, D.C. Connections EcklandBlando.com“Commercial Item”Precision Lift v. US(GAO June 2008; CFC Sept. 2008)• Actual sale of an item to the general public is not required.• An item is a CI if it is in common use, even if the contractoroffering the item has not made that type of item before.• “The definition [of CI] is broad, unclear, and will be interpretedas setting the ‘commercial item’ standard very low.”• Discretion given to CO in determining whether item is CI.See also Matter of: Freedom Scientific, Inc., B-401173.3, 2010CPD ¶111 (Comp. Gen. 2010)
  22. 22. Midwestern Values, D.C. Connections EcklandBlando.comSolicitation Process• FARA streamlined process for solicitation,evaluation, and award• Shorter time frames– Less than 30 days from receipt of offers• Use Standard Form 1449:– “Solicitation / Contract / Order for CIs”– Can combine synopsis and solicitation
  23. 23. Midwestern Values, D.C. Connections EcklandBlando.comEvaluation & Award• Usually based on three factors:(1) Technical capability (2) Price(3) Past performance• “Should be an important element of every evaluation and awardfor CIs”• COs to consider data from wide variety of sources• Contract Types:– Fixed Price– Fixed Price with Economic Price Adjustment– Indefinite-delivery: where prices are based on firm fixed priced– All other contract types generally prohibited
  24. 24. Midwestern Values, D.C. Connections EcklandBlando.comPricing Commercial Items• CO must determine Price ReasonablenessFAR 12.209 (ref. 13.106-3, 14.408-2 & 15.4)• Reasonableness can be determined by– Adequate Price Competition– Established catalogue or market prices• Reasonableness cannot be determined by:– Cost Accounting Standards (CAS)– Truth in Negotiations Act (TINA)
  25. 25. Midwestern Values, D.C. Connections EcklandBlando.comCommercial Item Contract Terms –FAR 52.212– FAR 52.212-3, Offeror Representations andCertifications—Commercial Items;– FAR 52.212-4, Contract Terms andConditions—Commercial Items; and– FAR 52.212-5, Contract Terms andConditions Required to Implement Statutes orExecutive orders—Commercial Items
  26. 26. Midwestern Values, D.C. Connections EcklandBlando.comContract Terms Required: 52.212-3Certifications as Applicable:– Certify to business size and status and other criteria asappropriate– Certification Regarding Payments to Influence FederalTransactions– Certification Regarding Responsibility Matters (EO 12689)– Certification Regarding Knowledge of Child Labor for Listed EndProducts (EO 13126)– Business / Contracting Prohibitions Relating to Sudan and IranEcklandBlando.com
  27. 27. Midwestern Values, D.C. Connections EcklandBlando.comContract Terms Required: 52.212-412.302 prohibits tailoring of the following clauses (i.e., non-negotiable):• Assignments ● Invoice• Disputes ● Other compliances• Payment (except as provided in Subpart 32.11)• Compliance with laws unique to Government contracts– Limitations on use of appropriated funds to influence certain federalcontracts (31 U.S.C. 1352)– Officials not to benefit (18 U.S.C. 431)– Work Hours and Safety Standards Act (40 U.S.C 3701 et seq.)– Anti-Kickback Act (41 U.S.C. 51-58)– Whistleblower protections (41 U.S.C. 265 and 10 U.S.C. 2409)– Fly American (49 U.S.C. 40118)– Procurement Integrity (41 U.S.C. 423)
  28. 28. Midwestern Values, D.C. Connections EcklandBlando.comContract Terms Required: 52.212-412.302 does not prohibit tailoring of the following clauses:• Warranty items are merchantable and fit for particular purpose• Government right to inspect or test for acceptance• Changes• Definitions• Excusable Delays• Patent Indemnity• Risk of Loss• Termination for Government’s convenience / cause• Title• Limitation of Liability• Order of precedence
  29. 29. Midwestern Values, D.C. Connections EcklandBlando.comContract Terms Required: 52.212-5• Contract terms and conditions required to implementstatutes or Executive Orders:– Combatting trafficking in persons (52.222-50)– Protest after award (52.233-3)– Applicable law for breach of contract claim (52.233-4)EcklandBlando.com
  30. 30. Midwestern Values, D.C. Connections EcklandBlando.comTerms That May Be Required: 52.212-5• Further terms and conditions that may be required by CO:– Contractor Code of Business Ethics and Conduct– Whistleblower Protections under the American Recovery andReinvestment Act– Reporting Executive Compensation and First-Tier SubcontractAwards– American Recovery and Reinvestment Act—ReportingRequirements– Protecting the Government’s Interest When Subcontracting withContractors Debarred, Suspended, or Proposed for Debarment– Prohibition on Contracting with Inverted Domestic Corporations– Use of Small Business Concerns– Equal Employment Opportunity / Affirmative Action (EO 11246)EcklandBlando.com
  31. 31. Midwestern Values, D.C. Connections EcklandBlando.comTerms That May Be Required: 52.212-5– Child Labor-Cooperation with Authorities and Remedies– Convict Labor– Subcontracting limitations– Small business subcontracting plans– Country of Origin (Buy American Act / Trade Agreements Act)– Notification of Employee Rights Under the National LaborRelations Act– Encouraging Contractor Policies to Ban Text Messaging WhileDriving– Service Contract Act– Nondisplacement of Qualified Workers (E.O.13495)– Promoting Excess Food Donation to Nonprofit Organizations– Restrictions on Certain Foreign PurchasesEcklandBlando.com
  32. 32. Midwestern Values, D.C. Connections EcklandBlando.comContract Terms Not Applicable to CommercialItem Contracts (FAR 12.503)• Walsh-Healey Act• Contingent fees• Drug-Free Workplace Act• Audit rights (52.214-26 and 52.215-2)• Minimum response time for offers under Office of Federal ProcurementPolicy Act• Limitation on use of appropriated funds for contracts with entities notmeeting veterans employment reporting requirements• Payment protections for subcontractors and suppliers• Contract Work Hours and Safety Standards Act• Anti-Kickback Act of 1986• Fly American provisions• Prohibition on limiting subcontractor direct sales to the United States• TINA and CAS
  33. 33. Midwestern Values, D.C. Connections EcklandBlando.comCommercially Available Off The Shelf(COTS) (FAR 2.101)• Subgroup of CIs• Definition:– (1) Means any item of supply(including construction material) that is—• (i) A CI(as defined in paragraph (1) of the definition in thissection);• (ii) Sold in substantial quantities in the commercialmarketplace; and• (iii) Offered to the Government, under a contract orsubcontract at any tier, without modification, in the same formin which it is sold in the commercial marketplace; and– (2) Does not include bulk cargo, such as agriculturalproducts and petroleum products.
  34. 34. Midwestern Values, D.C. Connections EcklandBlando.comCommercially Available Off TheShelf (COTS)• FAR 12.5: Laws not applicable to COTS:– Same laws inapplicable to CIs. FAR 12.503 and 12.504– Also, under FAR 12.505, the following laws do not apply toCOTS:• Partial exemption from Buy American Act requirements.41 U.S.C. 10a & 10b (i.e. COTS to be treated as adomestic end product if it is manufactured in the U.S.,without tracking the origin of the item’s components)• Certification and Estimate of Percentage of RecoveredMaterial 42 U.S.C. 6962(c)(3)(A)
  35. 35. Midwestern Values, D.C. Connections EcklandBlando.comSubcontracts for Commercial Items• Policy, FAR 52.244-6(b):“To the maximum extent practicable, theContractor shall incorporate, and require itssubcontractors at all tiers to incorporate,commercial items or nondevelopmental itemsas components of items to be supplied underthis contract.”
  36. 36. Midwestern Values, D.C. Connections EcklandBlando.comSubcontracts for Commercial Items• Mandatory Clauses, FAR 52.244-6(c)(1):– Contractor Code of Business Ethics and Conduct (52.203-13)– Whistleblower Protections Under the American Recovery andReinvestment Act of 2009 (52.203-15)– Utilization of Small Business Concerns (52.219-8)– Equal Opportunity (52.222-26)– Equal Opportunity for Veterans (52.222-35)– Affirmative Action for Workers with Disabilities (52.222-36)– Notification of Employee Rights Under the National labor RelationsAct (52.222-40)– Combating Trafficking in Persons (52.222-50)– Preference for Privately-Owned US-Flag Commercial Vessels(52.247-64)• See also 52.212-5(e)(1)
  37. 37. Midwestern Values, D.C. Connections EcklandBlando.comGSA Schedule Contracting
  38. 38. Midwestern Values, D.C. Connections EcklandBlando.comGSA Schedule Contracting• General Services AdministrationSchedule Contracts– Often referred to as Federal Supply ScheduleContracts (FSS) or Multiple Awards Schedule (MAS)– Allows government buyers to purchase commercialitems at a pre-negotiated price– Agencies can make purchases directly from ScheduleVendors or online at gsaadvantage.gov– Streamlines government’s ordering processes andsaves government money
  39. 39. Midwestern Values, D.C. Connections EcklandBlando.comGetting on Schedule• Respond to a GSA Schedule solicitation– Find the right schedule– Standard Form 1449: Offeror to identify price,quantity, and discount terms– Review contract clauses (e.g. disputes, invoicerequirements, etc.) and representations andcertifications in 52.212-3– Submit acceptable Subcontracting Plan if required
  40. 40. Midwestern Values, D.C. Connections EcklandBlando.comGetting on Schedule• Establish GSA Pricing:– Provide Commercial Sales Practices (CSP) form– Identify “basis of award” (BOA) customer or group– Certify current, accurate & complete data– Negotiate Best Customer Price (“Most FavoredCustomer Pricing”)• Contract: Five-year term with options to extend foradditional five-year terms• Marketing!
  41. 41. Midwestern Values, D.C. Connections EcklandBlando.comPricing Requirements• Price Adjustment Clause —Failure to ProvideAccurate Information (GSAM 552.215-72)– Provide current, accurate & complete CSPinformation– Disclose changes to CSP during negotiations– Refund “overpayments” by government customers,plus interest
  42. 42. Midwestern Values, D.C. Connections EcklandBlando.comPricing Requirements• Price Reductions Clause (GSAM 552.238-75):(a) Before award of a contract, the Contracting Officer and theOfferor will agree upon (1) the customer (or category ofcustomers) which will be the basis of award, and (2) theGovernments price or discount relationship to the identifiedcustomer (or category of customers). This relationship shallbe maintained throughout the contract period. Any change inthe Contractors commercial pricing or discount arrangementapplicable to the identified customer (or category ofcustomers) which disturbs this relationship shall constitute aprice reduction.
  43. 43. Midwestern Values, D.C. Connections EcklandBlando.comPricing Requirements• Price Reductions Clause (GSAM 552.238-75)– Maintain GSA price relationship to BOAcustomer or group– Report discounts & price changes provided toBOA customer or group– Must have a system for tracking sales of allproducts on schedule
  44. 44. Midwestern Values, D.C. Connections EcklandBlando.comPricing Requirements• Price Reductions Clause (GSAM 552.238-75):There shall be no price reduction for sales—(1) To commercial customers under firm, fixed-price definite quantitycontracts with specified delivery in excess of the maximum orderthreshold specified in this contract;(2) To Federal agencies;(3) Made to State and local government entities when the order isplaced under this contract (and the State and local governmententity is the agreed upon customer or category of customer that isthe basis of award); or(4) Caused by an error in quotation or billing, provided adequatedocumentation is furnished by the Contractor to the ContractingOfficer.
  45. 45. Midwestern Values, D.C. Connections EcklandBlando.comCompliance• Pay .75% Industrial Funding Fee– Built into contract price; cost borne by purchaser– Cover’s GSA’s cost to operate the MAS progra• Contractor Assistance Visits– All sales records must be made available– Results in a report card (26 evaluation areas)– Used by COs to evaluate past performance• Audits by GSA OIG– Rare but permitted– Usually where problems identified in report cards
  46. 46. Midwestern Values, D.C. Connections EcklandBlando.comFalse Claims Act• Potential liability under False Claims Act– Qui tam actions may be brought– Risk of significant monetary damages (e.g., in2000 Gateway paid $9 million to settle claimsof overcharging under Schedule contract)• Failure to comply may result in contractcancellation or civil and criminal charges
  47. 47. Midwestern Values, D.C. Connections EcklandBlando.comBenefits of Commercial Practices• Allows contractors to meet government’sactual needs• Attracts commercial sellers• Widens supplier base to further promotecompetition• Reduces “cycle time” between solicitationand award• Grants government the benefits ofparticipating in the marketplace
  48. 48. Midwestern Values, D.C. Connections EcklandBlando.comRemaining Problems and Pitfalls• Failure to implement requirements• Remaining compliance obligations andaudit and investigation rights• Contracting officer discretion• Is it saving money?
  49. 49. Midwestern Values, D.C. Connections EcklandBlando.comAny Questions?Mark J. BlandoEckland & Blando LLP800 Lumber Exchange Building10 South Fifth StreetMinneapolis, Minnesota 55402612-236-0160

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