Commercial Item Acquisitions

Author(s):

Jeffery A. White, C.P.M.
Jeffery A. White, C.P.M., President, J.A. White & Associates, www.jawhite.com, Columbia, SC 29212, 803/407-1399, jawhite@jawhite.com

85th Annual International Conference Proceedings - 2000 

Abstract. With the enactment of acquisition reform within the Government regulations, the Federal Government sent out a clear message: Prime contractors must be efficient in their subcontracting processes by using commercial practices. If we issued our subcontracts in a commercial fashion, we can streamline the acquisition cycle, while potentially reaping tremendous cost savings. This session will involve purchasers in an interactive workshop designed to increase awareness of the commercial acquisition process, while identifying factors that impact successful implementation.

The Opportunity. On October 1, 1995, changes to the Federal Acquisition Regulation (FAR) implemented fully the commercial item emphasis of Federal Acquisition Streamlining Act (FASA). These changes mandate a preference for the acquisition of commercial items. Because of the significance of these changes, many prime contractors have yet to embrace them. Often, changes in regulations needlessly strikes fear in the hearts of even the most seasoned purchasing and subcontracting professional. Commercial item acquisitions must be viewed as opportunities for purchasing and subcontracting departments to clearly meet customer expectations, while satisfying corporate objectives at the same time. But, before we can embrace this concept, we must first develop a clearer understanding of the commercial item acquisition process.

Objectives. The objectives of this session is to involve purchasers in an interactive workshop designed to increase awareness of the commercial acquisition process. At the completion of the workshop, attendees will have increased capability to meet their internal customer's needs by using the commercial marketplace and by using customary market practices in lieu of Government-imposed practices. They will participate in hands-on, facilitated exercises in which they will identify internal and external factors that impact successful process implementation. The exercises will involve the use of 2 specific tools: A commerciality decision matrix and a simplified commercial procurement summary.

The Background. The emphasis on buying commercial is a matter of law, regulation and policy. With FASA and the FAR Re-write, the Federal Government is speaking with one voice on this issue. The message is clear: Until January 1, 2000, we can use the commercial acquisition process authorized by the Clinger-Cohen Act on all commercial item acquisition not exceeding $5,000,000, with options. After January 1, 2000, the $5,000,000 threshold will change to $500,000, unless the program is extended. However, the standard commercial item acquisition process is outlined in FAR Part 12.

The Process. Acquisition streamlining is a way of life in the Federal procurement arena. Our Government customers expect us to establish a subcontracting process that closely resembles standard commercial procurement practices. Specifically, the Government's guidance have been relaxed to provide procedural discretion and flexibility, so that commercial item acquisitions may be solicited, offered, evaluated, and awarded in a simplified manner. Such a manner will maximize efficiency and economy, while minimizing burden and administrative costs for both the Government and industry. As industry representations, we need to take the lead in using commercial item procurement practices. Many major Federal Government prime contractors are not taking advantage of this unique opportunity.

Let's take a closer look at the eight definitions of commercial items as outlined in FAR. Understanding these definitions is crucial to the identification and procurement of commercial items.

The definition of a commercial item begins as follows:

"(a) Any item, other than real property, that is of a type customarily used for nongovernmental purposes and that..." Any item...means just what it says, any item being acquired by the prime contractor under a Government prime contract. Of a type...this is best explained by using an example. The manufacturer of a four-drawer file cabinet makes an "item of a type" which is file drawers. If the Government needs five-drawer file cabinets instead of four, this manufacturer would be a logical source since they make the same type of item-which is file cabinets.

Customarily used...means the use is established by custom, common practice or habit. For nongovernment purposes...means the item is used commercially. It is not unique to the Government. The first part of the commercial item definition also specifies that an item of a type:

"1. Has been sold, leased, or licensed to the general public; or

2. Has been offered for sale, lease, or license to the general public. "

This first part of the eight-part definition of commercial item establishes that the item exists and has been made available to the general public. It also establishes that the general public can acquire the item by at least three different methods.

Even if no sale has been registered, the buyer or subcontract administrator can make a determination that an item qualifies as a commercial item based on the fact that it is currently available and/or has been offered for sale, lease or license to the general public. This point is often overlooked by even seasoned purchasing professionals.

Part two of the definition says:

"(b) any item that evolved from an item described in paragraph (a) of this definition through advances in technology or performance and that is not yet available in the commercial marketplace, but will be available in the commercial marketplace in time to satisfy the delivery requirements under a government solicitation;"

This paragraph allows the prime contractor to take advantage of evolving technology and product improvements in cases where an item is not currently available for use by the general public. The FAR says that as long as the item evolves from something that already meets the test for a commercial item and will be available to the public in time to meet the delivery schedule of the Government, it can be considered a commercial item.

Part three deals with modifications:

"... (c) Any item that would satisfy a criterion expressed in paragraphs (a) or (b) of this definition, but for...

(1) Modification of a type customarily available in the commercial marketplace; or, (2) Minor modifications of a type not customarily available in the commercial market place made to meet Federal Government requirements." This part of the definition says that an existing commercial item can be modified, within limits, to meet a user's performance need as long as the modified item can meet the user's schedule need as well. The modification limits are established as customary or minor. Customary modifications do not pose the challenge to the market viability of the item that minor modifications impose. Therefore, minor modifications are further defined as those that "do not significantly change the nongovernmental function or basic physical characteristics of an item, or the purpose of a process."

Some factors that may be considered in deciding what is "minor" are the value and size of the modification versus the value and size of the final product. Cost and percentages can be used in making the assessment, but are not necessarily proof that a modification is minor. The key to determining what is "minor" is the definition.

The fourth part of the definition is as follows:

A commercial item means:

...(d) "Any combination of items meeting the requirements of paragraphs (a),(b), (c), or (e) of this definition that are of a type customarily combined and sold in combination to the general public;" In other words, when a commercial item and commercial service are mixed and matched, the outcome is a commercial item. For example, you purchase a computer package that includes the computer, software, training and repair and maintenance services. Under the FAR guidance for commercial items, the package becomes a commercial item.

Here is the fifth portion of the definition:

...(e) "Installation services, maintenance services, repair services, training services, and other services if such services are procured for support of an item referred to in paragraphs (a), (b), (c), or (d) of this definition, and if the source of such services-(1) Offers such services to the general public and the Federal Government contemporaneously and under similar terms and conditions; and (2) Offers to use the same work force for providing the Federal Government with such services as the source uses for providing such services to the general public;"

This is a very important point because it is a new concept. Services that are needed to support a commercial item are commercial items themselves if they are offered to both the public and the Government under similar terms and conditions and use the same workforce or employees to perform the services. So, if the Government purchases a computer, for example, the installation, maintenance, repair, etc. would also be commercial items as long as they comply with the qualifiers in paragraphs the above.

Part six of the definition covers:

...(f) "Services of a type offered and sold competitively in substantial quantities in the commercial marketplace based on established catalog or market prices for specific tasks performed under standard commercial terms and conditions. This does not include services that are sold based on hourly rates without an established catalog or market price for a specific service performed;

Services that are independent of and/or unrelated to commercial item hardware and software can be commercial items if they are offered and sold to the general public at a price that is generally accepted as a standard by the industry for specific tasks that are performed under normal commercial terms and conditions. This does not apply to services provided on an hourly basis for which there is no pre-established catalog or market rate.

The seventh part of the definition of a commercial item is:

...(g) "Any item, combination of items, or service referred to in paragraphs (a) through (f), notwithstanding the fact that the item, combination of items or service is transferred between or among separate divisions, subsidiaries, or affiliates of a contractor;" In other words, a commercial item is still a commercial item if it meets all the parameters we've covered, even though it moves from one division of the company to another.

The eighth and final part of the definition of a commercial item deals with nondevelopmental items. It says that a nondevelopmental item can be a commercial item if:

...(h) "the procuring agency determines that the item was developed exclusively at private expense and sold in substantial quantities, on a competitive basis, to multiple state and local governments". Now that we understand the eight parts of the commercial item definition, we will engage in an interactive exercise designed to help us learn how to embrace the streamlined process on a daily basis.

REFERENCES

The Federal Acquisition Streamlining Act (FASA) of 1994

Clinger-Cohen Act.

Federal Acquisition Regulations

Federal Acquisition Institute - Commercial Items Contracting Seminar


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