Government Contacting - FAR Part 11 - Acquisition of Commercial Items

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DLA Piper
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FAR PART 12
Acquisition Of Commercial Items
Link:
https://acquisition.gov/content/part-12-acquisition-commercial-items
March 20, 2020

Agenda
• Commercial Item Acquisition – The Basics
• Commerciality Determinations
• Pricing Terms – The Basics
• Price Reasonableness for Commercial Items

“Commercial Item” Acquisition
• Significant difference between contracting for “Commercial Items” vs. Non-Commercial Items …
critical distinction and strategy issue
• “Commercial Item” Acquisition
• Applies to products and services that are “of a type” customarily sold to commercial customers
• Better for contractors because contracts are streamlined and contain terms that are more commercially
oriented … higher margins are achievable
• Fewer compliance obligations
• Generally limited to fixed-price contracts … and, in some cases, time-and-material and labor-hour contracts
• Some companies restrict their Government business only to “commercial item” contracts
• Non-”Commercial Item” Acquisition
• Applies to products and services that are specially developed for Government … not “commercial items”
• Contracts are more complex with greater compliance obligations … broader audit rights for Government …
special pricing/accounting requirements … lower margins

Features of Commercial-Item Acquisition
• FAR Part 12 governs the acquisition of Cis
• Creates a preference for the acquisition of CIs and Non-Developmental Items (NDIs)
• Agencies shall conduct acquire CI and NDIs when they are available to meet the needs of the agency
• Aligns more closely to commercial practices
 Contractor retains IP rights
 Terms can be tailored consistent with customary commercial practice
 Changes can be made to contract only by mutual agreement
• Exempts contract from key statues and regulations
 TINA – cost transparency in pricing
 Cost Accounting Standards
 Limited audit rights

Preference for CIs Even With Subcontracts
• All requirements should be drafted to require that both the prime contractors and
subcontractors at all levels incorporate CIs, to the maximum extent practicable, as
components of items supplied to the agency
• The prime contractor has authority and responsibility for determining whether an item to be
supplied by a subcontractor is a CI
• The definition of a CI in FAR 2.101 is very broad, and many products and services the
Company acquires fall within the definition

Commercial Items – Tailoring of T&Cs
a) Inspection/Acceptance
b) Assignment
c) Changes
d) Disputes
e) Definitions
f) Excusable Delays
g) Invoice
h) Patent Indemnity
i) Payment
j) Risk of Loss
k) Taxes
l) Termination for the Government’s Convenience
m) Termination for Cause
n) Title
o) Warranty
p) Limitation of Liability
q) Other Compliances
r) Compliance with Laws Unique to Government
Contracts
s) Order of Precedence
t) System for Award Management (SAM)
u) Unauthorized Obligations
v) Incorporation by Reference
* Items in red cannot be tailored

Commercial Item - Definition
• FAR 2.101 sets forth a multi-part definition:
1) Any item that is OF A TYPE customarily used by the general public or by non-
governmental entities for non-governmental purposes, AND
• Sold, leased or licensed to the general public; or
• Has been offered for sale, lease, or license to the general public
2) Any item that evolved from paragraph 1)
• Evolved through advances in technology or performance
• Not yet available in the commercial market
• But will be available in time to satisfy the delivery requirement

Commercial Item – Definition (cont.)
3) Modified Commercial Items
• Any item that would satisfy 1) or 2), but for
• Modifications of a type customarily available in the commercial marketplace; or,
• Minor modifications not customarily available in the commercial marketplace but needed to
meet Government requirements
4) Any combination of 1), 2), 3), or 5) that are of a type customarily combined and sold in
combination to the general public
5) Installation, Maintenance, Repair, Training, and Other Services if:
• Such services are procured for support of an item referred to in 1), 2), 3), or 4); and,
• Similar services are provided to the general public under similar terms and conditions

6) Services OF A TYPE offered and sold in the commercial marketplace:
• Competitively
• In substantial quantities
• Under standard terms and conditions
• For specific tasks performed or specific outcomes achieved
• Based on established catalog or market prices
• Catalog Prices – price included in a catalog, price list, schedule that is published or otherwise
available for inspection by customers
• Market Prices – current prices that are established in the course of ordinary trade between
buyers and sellers and that can be substantiated through competition or from sources
independent of the offerors

• Any item that meets one of the foregoing definitions is a commercial item, notwithstanding the
fact that it is “transferred between or among separate divisions, subsidiaries, or affiliates of a
contractor”
• However, see FAR 31.205-26 (“Material costs”) to determine if such an item can be transferred at
cost or at price
• Finally, a “nondevelopmental item” (as defined in FAR 2.101) is a commercial item if the procuring
agency determines that –
• it was developed exclusively at private expense, and
• it was sold in substantial quantities, on a competitive basis, to multiple State and local
governments

• “Of a Type” – Significance and Interpretation
• “Of a type” language provides broad latitude to Contracting Officers in arriving at commercial-
item determinations
• To qualify as a “commercial item,” the item need not be the exact item sold or offered for sale to
non-Government customers
• Rather, the item can be similar to an item that is available commercially
• For example: jet engine in F-18 aircraft, ruggedized personal computer, consulting services
• Factors to Consider in Assessing Whether Item Is “Of a Type”
• Similar form, fit, and function?
• Similar performance standards?
• Similar production processes and personnel?
• Differences reflect common add-on features or customary modifications?

• “Modifications”
• An item can have two types of “modifications” and still qualify as a commercial item:
(1) modifications that are customarily available in the commercial marketplace
(2) minor modifications made to meet Government requirements
• “Minor” modifications are those that do not (i) significantly alter the nongovernmental
function or essential physical characteristics of an item or component, or (ii) change the
purpose of a process
• Factors to be considered in determining whether a modification is “minor” include:
• value and size of the modification as compared to the value and size of the overall product
• change in essential function or physical characteristics
• Modifications that allow a product to be used in a DoD application do not prevent an item from
being commercial

Commerciality Determinations (cont.)
• Prime Contracts
• CO is responsible for determining whether a product or service qualifies as a “commercial item”
• DFARS 212.102
• “Fully document market research and rationale” supporting CI determination
• Obtain approval at one level above Contracting Officer if CI is based on certain definitions: 1(ii)
(offered for sale), 3 (modifications), 4 (combination of definitions), or 6 (services)
• DFARS PGI 212.102
• Take particular care to document (i) “modifications of a type customarily available in the
marketplace” and (ii) items “offered” for sale but not yet sold
• When these items lack market pricing history, exercise additional diligence to determine that
prices are fair and reasonable
• See DOD Guidebook for Acquiring Commercial Items for detailed guidance on consistency and
timeliness of CI determinations.

• Subcontracts
• FAR – implies prime contractor is responsible
• DFARS 244.402
• Prime contractor shall determine whether a particular subcontracted item meets the CI definition
• Contractors are expected to exercise reasonable business judgment in making determinations,
consistent with FAR Part 10 (Market Research)
• Market Research means “collecting and analyzing capabilities within the market to satisfy agency
needs” (FAR 2.101)
• Consider acquisition history
• Identify and collect other data
• Document sources of published data

• Market Research – Consider acquisition history
• Prior CI determination for same or similar item over
$1 million?
• Last price paid
• Timing of last purchase
• Market inflation and conditions
• Current market price
• Quantity price breaks
• Quantities
• Delivery terms
• Possible substitutes
• Method and terms of the procurement
• Specifications and drawings
• Sources of supplies and services
• Start-up costs

• Market Research – Identify and collect other data
• Competitive conditions
• Overall level of demand
• Trends in supply and demand
• Pattern of demand
• Trends in prices
• Pricing strategies
• Sources
• Product characteristics
• Delivery/performance lead times
• Ownership costs
• Terms and conditions
• Problems

• Market Research – Document sources of published data
• Manufacturer and dealer catalogs
• Product brochures and promotional material
• Trade journals
• Product standard and testing organizations
• Source identification publications
• Federal Supply Schedules (FSS)
• Publicly available contracts
• Government economic data
• Non-government economic data
• Others buyers and analysts
• Suppliers
• Trade and professional associations
• Chamber of Commerce or Better Business
Bureau

• Methodology For CI Determination – Supplies
• Prior CI determination for item over $1 million? If so, provide copy and rely on it
• If not, identify a “base” item – i.e., an item that is offered or sold to the general public
• Demonstrate that the item you are selling is the same as or “of a type” with the base item
• Base items may or may not be sold by the offeror … can refer to other companies’ supplies
• Demonstrate the proposed price is fair and reasonable compared to the price of the base item
• Any technical or functional differences between the base and offered items are minor or
customary in the marketplace
• Any price difference is justified by technical/other differences
• A reasonable business person would conclude that the supporting data are sufficient to
demonstrate that taxpayers are paying a fair and reasonable price for the item

• Methodology For CI Determination – Services
• Prior CI determination for item? If so, provide copy and rely on it
• If not, provide a list of the same or similar (“of a type”) services provided by offeror and/or other
companies in the marketplace
• Offeror is not specifically required to have sold the services in the commercial marketplace – can
be sold by offeror or other companies
• Provide evidence of advertisements and existing contracts for the services
• Provide evidence of catalogs, price lists, and other “market prices” for the services
• Provide evidence that services are sold (i) under standard terms and conditions, and (ii) for specific
tasks performed or specific outcomes achieved

• DFARS subpart 212.70 limits conversion of a procurement from CI procedures
• If an item greater than $1 million has previously been determined to be a CI, defense agencies
cannot convert to non-CI unless Head of Contracting Activity ($1-100 million) or Under Secretary for
AT&L (over $100 million) determines that –
(i) prior determination was erroneous or based on inadequate information, and
(ii) cost savings would be realized by not using CI procedures

• But DoD Guidebook encourages Contracting Officer to ask:
• Is the prior CI Determination (CID) for the same or similar item?
• Was the prior CID complete and prepared by a DoD component?
• Have you analyzed the prior CID to confirm the logic and thoroughness of the thought process and
that it supports the conclusion?
• Did the previous CID identify and appropriately support the paragraph of the FAR definition that
applies to this particular item?
• Did the previous CID state that the CI was sold or offered for sale to the general public or provide
supporting documentation to that effect?
• Did the prior CID provide information regarding prices paid?

• DCMA Commercial Item Group (CIG) was established in June 2016 as a “cadre of experts” in various
commodity groups to help Contracting Officers make CI determinations
• When Contracting Officer requests assistance in making CI determination, DCMA will serve as
determining official
• DCMA determinations are maintained in a database for Contracting Officers to rely on in future
• Currently maintained in Excel format
• Ten-of-thousands of parts – and growing
• Not all-inclusive
• Best Practice: provide well-documented CI determination to Contracting Officer … consider pros/cons
of potential DCMA review

Key Pricing Terms
• Important to understand the terminology and distinguish between:
• “cost” vs. “price”
• Cost is what it actually costs the contractor to deliver the good or services . . . it includes the
contractor’s direct costs (e.g., labor and material) and indirect costs (e.g., overhead rates and G&A
rate)
• Price is what the Government pays for the good or service . . . it is frequently a fixed price that
does not vary up or down based on the contractor’s actual costs
• “cost analysis” vs. “price analysis”
• Cost analysis is the review and evaluation of any separate cost elements and profit or fee in an
offeror’s proposal (FAR 15.404-1(c))
• Price analysis is the process of examining and evaluating a proposed price without evaluating its
separate cost elements and proposed profit

Key Pricing Terms (cont.)
• “cost/price realism” vs. “cost/price reasonableness”
• Cost or price realism is the process of evaluating proposed prices to determine if the price is too
low
• Cost or price reasonableness is the process of evaluating proposed prices to determine if the price
is too high
• “certified cost or pricing data” vs. “data other than certified cost or pricing data”
• Certified cost or pricing data is generally a fully transparent build-up of the contractor’s costs and
proposed profit . . . it is generally required for cost-type contracts and contract modifications over
$750,000 … it is certified by the contractor to be current, accurate, and complete
• Data other than certified cost or pricing data is any non-certified data requested by the CO to
support a determination of fair and reasonable pricing

Key Pricing Terms (cont.)
• When to perform Price Analysis vs. Cost Analysis?
• “Price analysis shall be used when certified cost or pricing data are not required.” FAR 15.404-1(a)(2).
• “Cost analysis shall be used to evaluate the reasonableness of individual cost elements when certified
cost or pricing data are required.” FAR 15.404-1(a)(3).
• So, use Price Analysis in the following situations where certified cost or pricing data are not required
(see FAR 15.403 and 15.403-4):
• when the acquisition value is below the TINA threshold of $750K for civilian acquisitions and $2M for
defense acquisitions (as of April 2018)
• when adequate competition exists – i.e., two or more responsible, responsible offers
• when a commercial item is being acquired
• when price is set by law or regulation
• when a waiver has been issued by the Head of the Contracting Activity

Price Reasonableness for CIs
• Regardless of contract type, CO always must purchase supplies and services at “fair and reasonable”
prices
• For Commercial Items, CO must determine that the price is fair and reasonable
• Must evaluate price, not cost
• Cost plus a certain profit is not the way to look at commercial pricing
• “Certified cost or pricing data” shall not be required for a CI
• CO should consider customary commercial terms and conditions when evaluating price of CIs
• If Government is imposing non-standard terms, higher price may be justified
• CO must act like a prudent business person and understand the competitive market conditions ...
market research is required and preferred for price reasonableness

Price Reasonableness for CIs (cont.)
• FAR 15.404-1(b): Government general may use the following techniques to determine if a price is fair &
reasonable:
• Competition – normally, adequate price competition establishes a fair and reasonable price
• Comparison to historic prices paid, whether by the Government or other than the Government, for
the same or similar items
• Parametric estimating methods (e.g., $ per horsepower)
• Comparison with published catalog or market prices
• Comparison with Government cost estimates
• Comparison with prices obtained through market research
• Value analysis
• “Data other than certified cost or pricing data”

• FAR 15.403-3(c): For CIs, if CO cannot determine that price is fair and reasonable from Government
and other sources, then CO can request “data other than certified cost or pricing data” from contractor
• This must include “appropriate data on the prices at which the same or similar items have previously
been sold”
• This may include:
• History of sales to non-governmental and governmental entities
• Cost data
• Any other information the CO requires to determine price is fair and reasonable
• Requested data must be for a relevant time period and, to the maximum extent practicable, in the
form regularly maintained by contractor

• DFARS 215.404-1 was modified in January 2018, for both CIs and non-CIs, to require:
• Use of “market prices” as the “preferred method” for establishing a fair and reasonable price
• If market prices are not adequate, CO shall consider “recent purchase prices paid by the
Government and commercial customers for the same or similar commercial items under comparable
terms and conditions”
• If contractor does not have such information, or if such information is not deemed adequate, CO
may request “other relevant information, to include cost data”
• However, no cost data may be required if there are “sufficient non-Government sales of the same
item to establish reasonableness of price”
• In evaluating pricing data, CO shall consider materially differing terms and conditions, quantities,
market/economic factors, and data reliability

• Documenting price reasonableness
• Price negotiation must be fully documented … don’t want contractor’s purchasing system to be disapproved, or
supplier’s costs to be disallowed, because documentation does not support the “reasonableness” of supplier’s
pricing
• FAR 15.406-3 lists the specific elements required for documenting price reasonableness
• Key elements include:
• Why certified cost or pricing data was or was not required
• Summary of contractor’s proposal, the Government’s pricing objective, and the negotiated position . . .
including, for price analysis, the source and type of data to support the determination
• Most significant facts or considerations controlling the negotiation objective and the negotiated settlement,
including an explanation of any significant difference between the two
• Documentation of fair and reasonable pricing, including analysis of cost data if applicable

Thank You For Joining Us!
Richard Rector
richard.rector@dlapiper.com
(202) 799-4400

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Government Contacting - FAR Part 11 - Acquisition of Commercial Items

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