FAR Council Replaces Commercial Item Definition

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On Nov. 4, the Federal Acquisition Regulatory Council issued a final rule revising the federal acquisition definition of “commercial item,” a move which should aid contractors.

The rule effectively splits the prior definition of “commercial item” into separate definitions for “commercial product” and “commercial service” without making substantive changes to the existing definitions. It also replaces references to “commercial items” throughout the Federal Acquisition Regulation with corresponding references to “commercial products,” “commercial services,” or both, as appropriate.

The changes come after the congressionally chartered Section 809 Panel recommended that separate definitions be adopted to, among other things, reflect the substantial role the services play in the Defense Department’s procurement budget and reduce confusion caused by the reference to “items” which occasionally are thought to include products but not necessarily services. The modifications should reduce such confusion and promote uniformity in the application of commercial procedures.

The additional distinction and uniformity should help defense contractors determine whether an offered product or service is commercial. In the past, these determinations have not been made consistently, even for the same or similar products or services, resulting in much criticism from both industry and government.

While the final rule cautions that the change neither expands the universe of products and services to which the definition applies nor changes the manner in which the federal government procures products and services, the practical effect is that acquisition professionals should reach more consistent determinations regarding commerciality, thus allowing the government to better leverage the flexibilities afforded for such procurements and economic advantages of commercially available offerings. This is good news for entities providing commercial products and services, including those “of a type” offered in the commercial marketplace.

However, the changes do not resolve broader issues that the Section 809 Panel identified with commercial contracting.

For example, the group noted that commercially available off-the-shelf products remain a subset of commercial products, with distinctions continuing to be drawn between requirements applicable to commercial products other than COTS products even when such distinctions can appear to be arbitrary. The panel observed that these distinctions have in some instances hindered the government’s ability to access the full range of commercial offerings available to it.

Similarly, the government imposes a number of government-unique terms and conditions on commercial procurements, notwithstanding that such procurements are intended to be on standard, commercial terms. Unique terms are supposed to apply in only limited circumstances — namely, the statute implemented in the clause provides for civil or criminal penalties, the clause promotes certain domestic sourcing preferences, or the Defense Department has made a written determination that the clause nonetheless must apply to commercial procurements.

Many of the clauses applied to commercial procurements do not actually meet any of these criteria. These additional, and arguably unnecessary, terms often require companies to implement costly compliance measures, which can discourage them from participating in the government marketplace, further impeding the Pentagon’s ability to leverage commercially available products and services, and likely limiting competition. The rulemaking efforts have yet to tackle this criticism.

Additionally, the final rule does not adopt a uniform definition of “subcontract” or “subcontractor,” leaving in place dozens of varying definitions for the terms as well as widespread confusion and burden in determining whether and how to comply with the regulatory requirements that may apply to commercial subcontracts.

A separate rulemaking likely is forthcoming to address the numerous definitions of “subcontract” and “subcontractor,” according to the FAR Council’s latest regulatory agenda.

A proposed rule exempting commercial and COTS contracts from certain laws and regulations is also on the council’s horizon, although the scope of that rule remains to be seen.

The Section 809 Panel provided further recommendations to foster greater participation by commercial firms in Defense Department procurements, including refining termination and data rights policies for commercial items. The group was concerned with providing greater clarity regarding the provision of fair compensation when a commercial contract is terminated for convenience and the use of a cure notice prior to a termination for cause. It also recommended rescinding the portion of the Defense

Federal Acquisition Regulation Supplement addressing technical data in commercial procurements, in favor of negotiating data rights directly with contractors, similar to how such rights are negotiated in the commercial marketplace.

The panel also made more sweeping recommendations, including replacing the existing commercial procurement framework and simplified acquisitions with “readily available” parameters for acquisitions at or below $15 million.

Addressing these recommendations will be significantly more complicated than simply bifurcating a definition, as in the final rule, and certainly will be the subject of much debate among government and industry stakeholders.

Although the final rule is a positive step, it deals only with the proverbial “low hanging fruit.” It remains to be seen whether or how the government will move forward with further streamlining commercial procurement, promoting further clarity for companies offering commercial products and services, and fostering additional participation from firms traditionally reluctant to do business with the government. 

Brooke Stanley is an associate and Scott Freling a partner at Covington & Burling LLP.

Topics: Acquisition, Acquistion Reform