DoD Continues to Interpret "Commercial Item" Broadly, Despite Recent Attempts to Narrow
The Situation: The U.S. Department of Defense has faced criticism from the Office of Inspector General and the Government Accountability Office concerning its handling of commercial item procurements.
The Response: As a result of this criticism, DoD has tried to impose stricter standards for commercial items.
The Outcome: Despite the DoD's efforts, its recent guidance confirms that the standards for qualifying as a commercial item remain as broad as ever.
In recent years, the Department of Defense ("DoD") has attempted to limit the products and services that qualify for commercial item procurements. While DoD has not succeeded, it has shown no sign that it will abandon these efforts. Nonetheless, DoD's January 31, 2018, response to comments on a final rule, originally proposed in August 2016 to address price reasonableness and commercial item determinations and to encourage opportunities for nontraditional defense contractors, acknowledges the low threshold imposed by existing statutes and regulations for satisfying the definition of "commercial item." DoD's response also provides guidance on how products and services can qualify as commercial items when they have only been offered for sale.
Defining "Commercial Item"
Consistent with the Federal Acquisition Streamlining Act, the Federal Acquisition Regulation ("FAR") defines "commercial item" in eight categories. This definition, abbreviated below, applies to both civilian agency and DoD procurements.
- Any item of a type customarily used by the general public or by nongovernmental entities for purposes other than governmental purposes that has been (a) sold, leased, or licensed, or (b) offered for sale, lease, or license to the general public.
- Any item evolved from an item described in (1) that is not yet available in the commercial marketplace but will be in time to satisfy the delivery requirements under a government solicitation.
- Any item that would satisfy (1) or (2) but for (a) modifications of a type customarily available in the commercial marketplace, or (b) minor modifications not of a type customarily available in the commercial marketplace.
- Any combination of items satisfying (1), (2), (3), or (5) that are of a type customarily combined and sold in combination to the general public.
- Installation services, maintenance services, repair services, training services, and other services if (a) such services are procured for support of an item referred to in (1), (2), (3), or (4), and (b) the source of such services provides similar services contemporaneously to the general public under terms similar to those offered to the federal government.
- 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 or specific outcomes to be achieved and under standard commercial terms and conditions.
- Any item, combination of items, or service referred to in (1) through (6) of this definition, notwithstanding the fact that the item, combination of items, or service is transferred between or among separate divisions, subsidiaries, or affiliates of a contractor.
- Nondevelopmental items developed exclusively at private expense and sold in substantial quantities to multiple state and local governments.
Although the government has provided little guidance on how to interpret and apply terms such as "of a type" and "offered for sale," the limited guidance available uniformly acknowledges that the definition of "commercial item" should be interpreted broadly. See, e.g., Precision Lift, Inc. v. United States, 83 Fed. Cl. 661, 665–66 (2008) ("However, this is not to say that the statute is clear. The definition is broad, unclear, and will be interpreted as setting the 'commercial item' standard very low. If the Federal Acquisition Regulations are intended to use the term in a very limiting way, its plain language does not communicate that intent.").
In Precision Lift, the Court of Federal Claims held that a contractor's helicopter platforms satisfied the "commercial item" definition even though the contractor "had not previously produced the platforms called for in the Solicitation." 83 Fed. Cl. at 663. The court reasoned that the platforms were "a standard … design that ha[d] been in service for several years" and that the contractor "certainly offered their platforms for sale to the general public" through "various advertising and marketing efforts," including "standard product brochures." Id. at 665-66.
DoD has lobbied for a more restrictive interpretation of "commercial item" in recent years. For example, in 2012, DoD unsuccessfully urged Congress to remove the statutory "of a type" and "offered for sale" criteria. In DoD's view, this change "would permit the Government to acquire commercial items at better prices by ensuring that such items are only those goods or services that actually have been sold, leased, or licensed in comparable quantities in the commercial marketplace and therefore have prices that clearly are based on competitive market pricing or established catalog prices." Eliminating Requirements Imposed on Industry Where Costs Exceed Benefits, Office of the Under Secretary of Defense, Acquisition, Technology, and Logistics, 2015, p. 22.
Similarly, DoD issued a proposed rule in 2015 that effectively would have altered the commercial item definition and eliminated the "of a type" and "offered for sale" criteria. After drawing heavy criticism from industry, DoD ultimately withdrew the proposed rule.
Taking a different approach with commercial items, DoD proposed another rule change in August of 2016 with the aim of "provid[ing] guidance to contracting officers for making price reasonableness determinations, promot[ing] consistency in making commercial item determinations, and expand[ing] opportunities for nontraditional defense contractors to do business with DoD." 83 Fed. Reg. 4431-03. DoD made the rule final on January 31, 2018.
The final rule adds several new Defense Federal Acquisition Regulation Supplement, or DFARS, provisions—i.e., 252.215-7010 through -7013. Under the new regulations, contractors must submit information adequate for determining price reasonableness at the same time they submit information to support a commercial item determination. Id. The rule also "adds a level of granularity to assist offerors in their proposal preparation with regards to 'other than certified cost or pricing data' and implements a statutory exemption to the requirement for 'certified cost or pricing data' for nontraditional defense contractors." Id. Further, the rule implements a statutory change allowing contracting officers to rely on prior commercial item determinations. Id.
The Final Rule's Limitations
Perhaps more notably is what the rule does not accomplish. Despite its recent efforts to impose stricter standards, DoD expressly rejected a suggestion to narrow commercial item to "mean goods or services that are actually sold to the general public in like quantities," and noted that the rule "does not revise the definition of 'commercial item' in FAR part 2, nor alter the requirements for commercial item determinations for 'of a type' items." Id.
DoD's comments also confirmed that a "'commercial item' does not require that the identical proposed item must be sold or offered for sale to the general public." Though hardly a new concept—see, e.g., Premier Eng'g & Mfg., Inc., B-283028, 99-2 CPD ¶ 65 (Sept. 27, 1999); Coherent, Inc., B-270998, 96-1 CPD ¶ 214 (May 7, 1996)—DoD went a step further in providing guidance on the type of activities that satisfy the "offered for sale" criteria.
In responding to a public comment asking whether a website advertisement would constitute an "offer," DoD stated that "[c]ontracting officers must use business judgement and consider all relevant factors when evaluating evidence of offers for sale, which may include advertisements on websites, sales orders, quotes, or other information that demonstrate that the similar item has been offered for sale in the commercial marketplace." 83 Fed. Reg. 4431-03.
These concrete examples from DoD build on existing case law and provide helpful guidance for contractors. See, e.g., Premier Eng'g & Mfg., Inc., B-283028, 99-2 CPD ¶ 65 (Sept. 27, 1999) (contractor satisfied "offered for sale" where it offered a dual engine design model to a customer, but the customer selected a single-engine design); Precision Lift, Inc., 83 Fed. Cl. at 665–66 (noting that "[t]he intent of the term 'offer' in the 'commercial item' definition can not be a binding contractual 'Offer'" and finding various advertising and marketing efforts, including a standard product brochure satisfied the "offered for sale" criteria). The comments published with the final rule also signal DoD's acknowledgement that the broader definition of "commercial item" is the proper interpretation.
Another January 2018 publication from DoD—the "Guidebook for Acquiring Commercial Items, Part A: Commercial Item Determination"—further bolsters the broad interpretation of commercial item requirements. That publication provides that "[w]hen deciding if a proposed item satisfies the definition to be deemed a commercial item, an evaluation of a similar (i.e., of a type) item is permitted. The definition does not require that the exact proposed item must be sold or offered for sale to non-Government customers.… The definition of a commercial item only requires an item to be offered for sale to the general public; therefore the ratio of Government to non-Government sales is irrelevant when determining commerciality." Guidebook for Acquiring Commercial Items, Part A: Commercial Item Determination, Department of Defense, p. 21 (2018).
Though DoD may continue to look for ways to address perceived vulnerabilities in the commercial item procurement process, it is clear that the scope of those efforts will be limited without Congressional approval. Commercial item contractors should continue to assert that DoD and civilian agencies should broadly interpret commercial item requirements.
Three Key Takeaways
- DoD may attempt to continue its push to impose stricter standards for commercial item procurements, but it has recently conceded that "commercial item" must be interpreted broadly under current statutes and regulations.
- Absent Congressional action, goods and service should continue to qualify as commercial items based on the "of a type" and "offered for sale" criteria.
- Contractors can satisfy the "offered for sale" test of commerciality through website advertisements, sales orders, quotes, or other information.
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