Commercial item acquisitions 4 16-13

Midwestern Values, D.C. Connections EcklandBlando.com
Commercial Item Contracting:
A Simpler Way to Do Business
with the Government?
Mark J. Blando
Eckland & Blando LLP
800 Lumber Exchange Building
10 South Fifth Street
Minneapolis, Minnesota 55402
612-236-0160
SADBOC Procurement Fair: April 16, 2013

Overview
• 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

Call for Reform
• The much ridiculed Mil-Spec for oatmeal
cookies and chocolate covered brownies
(26 pages long) included requirements
such as:
– “Shelled walnut pieces shall be of the
small piece size classification, shall be of
a light color . . . . A minimum of 90
percent, by weight, of the pieces shall
pass through a 4/16-inch diameter round
hole screen and not more than 1 percent,
by weight, shall pass through a 2/16-inch
diameter round hole screen.”
– “The interior of the coated oatmeal cookie
shall be crisp and have the characteristic
flavor of oatmeal.”
– “If necessary, each ingredient shall be
examined organoleptically”
• Midwestern Values, D.C. Connections EcklandBlando.com

Call for Reform
• Embarrassing stories
revealed the high price of
ordering to spec:
– $544.09 spark plugs (that
turned out to be commercially
available for $10.77)
– $600 hammer

Call for Reform
• Disincentives to doing business with the
government:
– Government specifications and standards
– Government terms and conditions
– Audit and accounting requirements
– Certifications
– Technical data rights

Call for Reform
• Government concerns:
– Paying premium to acquire items that meet
stated requirements
– Missing out on the benefits of the marketplace
(pricing, contract terms)
– Lack of access to new technologies
– Less than “Full and Open Competition”

History
• 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 with
commercial technological developments
• 1991: Congress directs DoD to review its acquisition
methods and make recommendations for reform.
– DoD produces the “Section 800 report” (recommended
increasing simplified acquisition threshold for small
purchases and several pilot programs)

History
• 1993: Al Gore smashes an
ashtray on late night TV
– 10-page spec for “ash
receiver, tobacco, desk type”
– “A minimum of four cigarette
rests, spaced equidistant
around the periphery"
– Testing spec: hit with a steel
punch "point ground to a 60%
included angle" and a
hammer; "The specimen
should break into a small
number of irregularly shaped
pieces, no greater than 35.”

History
• 1994: Federal Acquisition Streamlining Act
(FASA)
– Implemented recommendations of Section 800
Report
– Encouraged agencies to buy commercial when
possible
– Streamlined procedures for purchasing CIs
• 1996: Federal Acquisition Reform Act (FARA)
– Further simplified procurement of CIs and services

Commercial Item
Acquisitions

Current Scheme for
Commercial 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)

Preference for Commercial Items
(FAR 12.101)
• Agencies shall:
– Conduct market research to determine whether CIs or
nondevelopmetal items are available that could meet
the agency’s requirements;
– Acquire CIs or nondevelopmental items when they
are available to meet the needs of the agency; and
– Require prime contractors and subcontractors at all
tiers to incorporate, to the maximum extent
practicable, CIs or nondevelopmental items as
components of items supplied to the agency.

Other Commercial Practices
• Commercial Financing
– Advance payments
– Installment payments
• “Other than new” items
– Previously, contractors not permitted to offer
used or reconditioned materials
– CO must determine whether “other than new”
materials acceptable under circumstances

FAR 2.101, Definitions: “Commercial item”
(1) Any item, other than real property, that is of a type customarily used by the general public or by
non-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 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;
(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 to
meet Federal Government requirements. Minor modifications means modifications that do not
significantly alter the nongovernmental function or essential physical characteristics of an item or
component, or change the purpose of a process. Factors to be considered in determining whether
a modification is minor include the value and size of the modification and the comparative value
and size of the final product. Dollar values and percentages may be used as guideposts, but are
not conclusive evidence that a modification is minor;
(4) Any combination of items meeting the requirements of paragraphs (1), (2), (3), or (5) of this
definition that are of a type customarily combined and sold in combination to the general public;

FAR 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) of
this definition, regardless of whether such services are provided by the same source or at the same
time as the item; and
(ii) The source of such services provides similar services contemporaneously to the general public
under 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 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. For purposes of
these services—
(i) “Catalog price” means a price included in a catalog, price list, schedule, or other form that is
regularly maintained by the manufacturer or vendor, is either published or otherwise available for
inspection by customers, and states prices at which sales are currently, or were last, made to a
significant number of buyers constituting the general public; and
(ii) “Market prices” means current prices that are established in the course of ordinary trade
between buyers and sellers free to bargain and that can be substantiated through competition or
from 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 or
among separate divisions, subsidiaries, or affiliates of a contractor; or
(8) A nondevelopmental item, if the procuring agency determines the item was developed exclusively at
private expense and sold in substantial quantities, on a competitive basis, to multiple State and
local governments.

“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 but
not yet available in the commercial marketplace
– will be available in commercial marketplace by time
for delivery under a government solicitation

• “Modified” Item or Evolved Item (subpart 3)
– An item or evolved item with modification
• of a type customarily available in the commercial
marketplace; or
• minor modifications not customary in the commercial
marketplace to meet government requirements
– Minor modifications
• do not significantly alter the nongovernmental
function
• consider value and size of the modification and the
comparative value and size of the final product
• dollar values and percentages are instructive but
not conclusive evidence of a minor modification

• 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 established
catalogue 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)

• Intra-company transfers and item part of a
combination 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

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 contractor
offering the item has not made that type of item before.
• “The definition [of CI] is broad, unclear, and will be interpreted
as 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, 2010
CPD ¶111 (Comp. Gen. 2010)

Solicitation 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

Evaluation & Award
• Usually based on three factors:
(1) Technical capability (2) Price
(3) Past performance
• “Should be an important element of every evaluation and award
for 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

Pricing Commercial Items
• CO must determine Price Reasonableness
FAR 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)

Commercial Item Contract Terms –
FAR 52.212
– FAR 52.212-3, Offeror Representations and
Certifications—Commercial Items;
– FAR 52.212-4, Contract Terms and
Conditions—Commercial Items; and
– FAR 52.212-5, Contract Terms and
Conditions Required to Implement Statutes or
Executive orders—Commercial Items

Contract Terms Required: 52.212-3
Certifications as Applicable:
– Certify to business size and status and other criteria as
appropriate
– Certification Regarding Payments to Influence Federal
Transactions
– Certification Regarding Responsibility Matters (EO 12689)
– Certification Regarding Knowledge of Child Labor for Listed End
Products (EO 13126)
– Business / Contracting Prohibitions Relating to Sudan and Iran
EcklandBlando.com

12.302 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 federal
contracts (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)

12.302 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

• Contract terms and conditions required to implement
statutes 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

Terms 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 and
Reinvestment Act
– Reporting Executive Compensation and First-Tier Subcontract
Awards
– American Recovery and Reinvestment Act—Reporting
Requirements
– Protecting the Government’s Interest When Subcontracting with
Contractors 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

Terms 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 Labor
Relations Act
– Encouraging Contractor Policies to Ban Text Messaging While
Driving
– Service Contract Act
– Nondisplacement of Qualified Workers (E.O.13495)
– Promoting Excess Food Donation to Nonprofit Organizations
– Restrictions on Certain Foreign Purchases
EcklandBlando.com

Contract Terms Not Applicable to Commercial
Item 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 Procurement
Policy Act
• Limitation on use of appropriated funds for contracts with entities not
meeting 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

Commercially 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 this
section);
• (ii) Sold in substantial quantities in the commercial
marketplace; and
• (iii) Offered to the Government, under a contract or
subcontract at any tier, without modification, in the same form
in which it is sold in the commercial marketplace; and
– (2) Does not include bulk cargo, such as agricultural
products and petroleum products.

Commercially Available Off The
Shelf (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 to
COTS:
• Partial exemption from Buy American Act requirements.
41 U.S.C. 10a & 10b (i.e. COTS to be treated as a
domestic 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 Recovered
Material 42 U.S.C. 6962(c)(3)(A)

Subcontracts for Commercial Items
• Policy, FAR 52.244-6(b):
“To the maximum extent practicable, the
Contractor shall incorporate, and require its
subcontractors at all tiers to incorporate,
commercial items or nondevelopmental items
as components of items to be supplied under
this contract.”

Subcontracts 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 and
Reinvestment 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 Relations
Act (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)

GSA Schedule Contracting

GSA Schedule Contracting
• General Services Administration
Schedule Contracts
– Often referred to as Federal Supply Schedule
Contracts (FSS) or Multiple Awards Schedule (MAS)
– Allows government buyers to purchase commercial
items at a pre-negotiated price
– Agencies can make purchases directly from Schedule
Vendors or online at gsaadvantage.gov
– Streamlines government’s ordering processes and
saves government money

Getting 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, invoice
requirements, etc.) and representations and
certifications in 52.212-3
– Submit acceptable Subcontracting Plan if required

Getting 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 Favored
Customer Pricing”)
• Contract: Five-year term with options to extend for
additional five-year terms
• Marketing!

Pricing Requirements
• Price Adjustment Clause —Failure to Provide
Accurate Information (GSAM 552.215-72)
– Provide current, accurate & complete CSP
information
– Disclose changes to CSP during negotiations
– Refund “overpayments” by government customers,
plus interest

• Price Reductions Clause (GSAM 552.238-75):
(a) Before award of a contract, the Contracting Officer and the
Offeror will agree upon (1) the customer (or category of
customers) which will be the basis of award, and (2) the
Government's price or discount relationship to the identified
customer (or category of customers). This relationship shall
be maintained throughout the contract period. Any change in
the Contractor's commercial pricing or discount arrangement
applicable to the identified customer (or category of
customers) which disturbs this relationship shall constitute a
price reduction.

• Price Reductions Clause (GSAM 552.238-75)
– Maintain GSA price relationship to BOA
customer or group
– Report discounts & price changes provided to
BOA customer or group
– Must have a system for tracking sales of all
products on schedule

• Price Reductions Clause (GSAM 552.238-75):
There shall be no price reduction for sales—
(1) To commercial customers under firm, fixed-price definite quantity
contracts with specified delivery in excess of the maximum order
threshold specified in this contract;
(2) To Federal agencies;
(3) Made to State and local government entities when the order is
placed under this contract (and the State and local government
entity is the agreed upon customer or category of customer that is
the basis of award); or
(4) Caused by an error in quotation or billing, provided adequate
documentation is furnished by the Contractor to the Contracting
Officer.

Compliance
• 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

False Claims Act
• Potential liability under False Claims Act
– Qui tam actions may be brought
– Risk of significant monetary damages (e.g., in
2000 Gateway paid $9 million to settle claims
of overcharging under Schedule contract)
• Failure to comply may result in contract
cancellation or civil and criminal charges

Benefits of Commercial Practices
• Allows contractors to meet government’s
actual needs
• Attracts commercial sellers
• Widens supplier base to further promote
competition
• Reduces “cycle time” between solicitation
and award
• Grants government the benefits of
participating in the marketplace

Remaining Problems and Pitfalls
• Failure to implement requirements
• Remaining compliance obligations and
audit and investigation rights
• Contracting officer discretion
• Is it saving money?

Any Questions?
Mark J. Blando
Eckland & Blando LLP
800 Lumber Exchange Building
10 South Fifth Street
Minneapolis, Minnesota 55402
612-236-0160

Commercial item acquisitions 4 16-13

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