CHAPTER 3 COMMERCIAL ITEM CONTRACTING
Over the years, the government has gradually shifted from military specifications and standards to commercial item acquisitions. Commercial item acquisitions help reduce government operating expenses and enable more contractors to enter government contracting. Through the use of General Services Administration (GSA) Schedule contracts, any government agency receives similar prices, terms, and conditions from a whole host of federal contractors.
What is the historical perspective to commercial item contracting?
In the beginning of recent procurement history, from about 1940 to 1980, the government worked with relatively few suppliers for the products and services it needed. Why? Because the government set stringent requirements for many of the products and services it needed and few companies were interested in redesigning their products, retooling their machines, or taking the time to understand the federal procurement process. In addition, the government’s extensive requirements raised the price of the products.
The cost of getting into the market was high, and few companies could afford the risk. The companies already conducting business with the government at that time did quite well—with only limited competition, these companies could charge whatever price they wanted. The government entered into “sole source” relationships with these companies because they were the “only game in town” and no one else could provide the products and services needed by the contracting agency. Requirements were written with an eye on what the company could actually do because the government knew so much about each company with which it worked. The companies, therefore, had no incentive to try innovative approaches or to reduce costs. Because the relationship between the agency and the few contractors supporting it was extremely close, it was difficult for new companies to break into the government market.
Granted, not all items that the government procured during this period were government-unique items, but the regulations were applied to all purchases of products and services. Thus, there were instances of hammers that cost $50 and toilet seats that cost $200. The government had detailed specifications and rigorous procurement regulations for everything, and frustrated contractors responded with higher prices to cover the costs of conducting business with the government.
To sum up this period in procurement history,
• There was a close relationship between the government agency and the contractor. The contractor could provide the exact products and services required because they worked so closely together.
• The procurement process was simple. The government wrote the requirements, and a few terms and conditions, and the contract was signed. Negotiations were minor.
• A one-to-one relationship existed. There was typically one government program to one contractor, so it tended to be easy to manage.
• This limited supplier base resulted in high prices for the government.
• There was little incentive for existing contractors to innovate or to reduce prices.
• There were high barriers to entry for all other companies, so competition was not maximized.
• The government was committed to using one company. If that company went out of business, the government was at risk.
• Many companies refused to get into the government marketplace because it was so complex and tightly regulated.
What did the Competition in Contracting Act do for federal procurement?
The Competition in Contracting Act (CICA) of 1984 came about to change the existing system. Basically, the government was being overcharged by the few contractors that were doing federal business; new contractors who could not get a “piece of the pie” leveled accusations about the exorbitant prices of the favored contractors. Since taxpayers, too, were upset about the rising costs to government agencies as they procured these expensive goods and services, the federal government decided to do something about the problems.
CICA encouraged all contractors to pursue federal government business and leveled as many barriers as it could so that companies would enter the federal market. It forced agencies to develop new contracting sources. CICA had significant ramifications for government procurement, including:
• The contracting method was changed to encourage full and open competition and not sole source.
• Sources had to be actively sought out so the government could learn new ways that might be used to solve its problems. In addition, the government needed to teach these new contractors the complex world of federal procurement and military specifications.
• Requests for proposals now had to be distributed to a wider audience. Frequently the contractors would question the way things were handled and suggest new and, sometimes, improved ways. The government then had to build in time to answer the contractors’ questions as part of the procurement cycle.
• Source selection procedures had to be developed to help the government select who the winner would be. This wasn’t as important before when there was just one company that could do the work, one company bidding, and that same company selected. Now the government was getting proposals from many large and medium-sized companies.
• The SBA was formed and the government began receiving proposals from small companies as well.
• Protests showered the government. With the additional contractors now interested in procurements, many contractors became upset because of the time and resources they spent fruitlessly pursuing government business. Protesting was a way to question the government’s source selection process in the hopes of overturning the award decision and making it more favorable to the protester. These protests took a lot of time and effort for the government to resolve, causing procedures to be created to handle this inundation of protest activity.
While the concept of increasing competition was excellent, the approach still contained flaws that bogged down the federal procurement process. For example, if there is only one supplier of a widget, the government basically buys what the company has to offer as long as it meets the minimum criteria for widgets. As more and more widget suppliers get interested in the government’s requirements for widgets, the government now has to set up detailed specifications and source selection plans to determine how it will select the widget contract winner. Furthermore, it has to set up laboratories and procedures to test the widgets to ensure that they are meeting the appropriate standards. In addition, the government needs a whole host of acceptance, quality, and inspection terms and conditions established in the contract, as well as people on both the government and contractor sides to ensure that the widgets remain at the same standards. And of course, because there are now so many contractors interested in selling widgets to the government and only a few of them will actually win the contracts to do so, there are more protests. All these extra government efforts drive up the price of a widget from the price it would command in the commercial marketplace.
To sum up the period of our procurement history from the 1980s until 1994,
• More companies than ever were interested in and pursuing government business.
• The government was able to take advantage of the new ideas, innovations, and lower prices that competition affords.
• The government now had multiple sources it could use to meet requirements so its risk was reduced.
• Many people outside the procurement were now able to see into the federal procurement process. The government had to do everything fairly and above reproach using the new competition procedures.
• Detailed specifications had to be written for everything. In addition, with so many companies, detailed testing procedures had to be established to ensure that products and services were provided or performed as required.
• Contractors now had the “protest tool” if they didn’t like the way the government handled a source selection. This process became expensive and timely for the government.
What did the Federal Acquisition Streamlining Act do for commercial item contracting?
There have been, and still are, many movements afoot within the government to contract out as much as possible. Les Davison, a procurement analyst in the Office of Acquisition Policy of GSA, stated the following in his article, “A GSA Primer for Commercial Items,” published in the October 1996 Contract Management:
With the passage of the Federal Acquisition Streamlining Act (FASA) in 1994, Congress signaled a dramatic shift in the course of procurement policy for the federal government. Arguably, FASA is the most far-reaching procurement reform in the last 50 years. Central to the FASA reforms are the mandates to maximize the use of acquisition of commercial items and to acquire those items in a manner similar to that used by the commercial sector.
This sums up much of what the procurement environment dealt with and is continuing to deal with in the federal marketplace. David Barram, when he was the director of GSA, joked in his speeches that “this isn’t your father’s GSA” to signal how drastically GSA has had to adapt to the changing procurement environment. Now, virtually all items procured by GSA are commercial items. FASA fundamentally changed the way the government does business. How much of an impact did FASA make in the procurement world? FASA alone altered around 250 previous procurement laws and regulations.
There was so much change because the government wanted to maximize the use of commercial items. It’s always been understood that the federal government is unique because of the types and quantities of items it buys. While the quantity is still unique, now the types of things that the government buys are just like those that average consumers buy.
Furthermore, the government wants to buy these commercial items just like commercial companies do. In doing so, it is getting rid of the “comfort blanket” of its tried-and-true government procurement practices and moving to commercial procurement practices. So, after much thought and deliberation from both the government and industry, Federal Acquisition Circular 90-32 implemented the new commercial items rules in Federal Acquisition Regulation (FAR) Part 12 in 1995.
What makes something a “commercial item”?
A commercial item can be defined as an item that saves the government and the vendor the time and expense of designing and making the first item.
During the procurement reform of the 1990s, Congress wanted to make it easier for the government to buy the same items that a consumer could easily buy. For example, when consumers go to a hardware store to buy a hammer, they don’t give the hardware store a multipage specification describing the hammer. They simply look at the hammers that are available and buy the one they need. The hammer is an example of a commercial item. So Congress made it easy for the government to buy anything that qualifies as a commercial item. It defined a commercial item broadly: “Any item other than real property that is of a type customarily used by the general public or by nongovernmental entities for purposes other than governmental purposes and one has been sold to the general public or has been offered for sale to the general public.” How eager Congress was for the government to use commercial items can be seen in the second part of the definition: In effect, something is a commercial item as long as it had been offered for sale even though nobody bought it.
As one court said:
“One of the purposes of a solicitation requirement for a commercial product is to avoid the design and engineering risks associated with new equipment by procuring a commercially proven item. New equipment like [a protester’s] proposed test station, which may only become commercially available as a result of the instant procurement, clearly does not satisfy the RFP requirement for commercial off-the-shelf (existing) equipment” (Chant Engineering Co. v. United States, the Court of Federal Claims No. 06-282C, January 10, 2007).
How did FAR Part 12 change commercial item acquisitions?
When FAR Part 12 was initially revised in late 1995, it primarily focused on products with very few services. The changes in FAR Part 12 focused on two main aspects:
• Increased discretion for the contracting officer (CO) in buying commercial items
• Increased use of market research in buying commercial items.
Increased Discretion for the CO
FAR Part 12 allowed COs a great deal of flexibility in buying commercial items. For commercial item acquisitions to be successful, COs had to be able to purchase in a manner similar to a commercial company. The regulation-laden approach that the FAR had prescribed for all those years did not work with this new type of acquisition process. In addition, COs were told to be creative and innovative in their contracting approaches when procuring commercial items. The FAR was still around for guidance, but the overriding theme was to apply the best commercial practices to obtain optimum products and services at the lowest overall price.
Although the government has the ability to use discretion in implementing commercial item acquisitions, one thing has not changed: the government employees’ responsibility to the taxpayer to ensure that goods and services are purchased at the best value to the government customer to save the taxpayer money. COs are expected to request volume discounts and to leverage other industry best practices to ensure they get the best price from the contractor.
When a solicitation involves commercial items, the CO is required to use the procedures and policies stated in FAR Part 12. In addition, the CO may use the simplified acquisition procedures in FAR Part 13, the sealed bidding procedures in FAR Part 14, or the negotiation procedures in FAR Part 15. The decision as to which contracting procedure should be used—simplified acquisition, sealed bidding, or negotiated procurement—still resides with the CO. If there is any discrepancy between FAR Part 12 and any other parts of the FAR used in the procurement, FAR Part 12 takes precedence.
Increased Use of Market Research
A practice that has been used by commercial business for years is to develop subject matter experts responsible for buying similar products and services. For example, having one person buy all computers for the company allows that person to focus on the computer industry and understand its trends—and thus make better buying decisions. Since the government cannot have one person buy all the computers for the government, it has instituted the next best thing, which is market research.
The government CO responsible for buying computers for his or her organization is required to conduct market research so that he or she can make more informed buying decisions. The government has a whole host of websites that are available to its employees who are conducting market research so that much of the leg work can be done once and used across the entire government. Market research is just one more way the government is trying to leverage industry’s best practices for its commercial item acquisitions.
What does the government look for in market research?
Market research is designed to key in on specifications and terms and conditions.
Specifications
The government conducts market research early in the procurement to determine if any commercially available items will meet the government’s specifications. By determining this up front in the procurement, the government can minimize its dependence on government-unique items to meet its requirements. For some agencies, like GSA, most of the items procured are commercially available. Other agencies, such as DoD or NASA, still need many government-unique items.
Terms and Conditions
The government must also use market research to determine which terms and conditions should be used to procure the necessary goods and services. The general rule of thumb is that agencies should use the terms and conditions that are typically used in commercial contracting for a particular product or service. In addition, they should add only those terms and conditions necessary to meet provisions of law or executive orders. In fact, FAR 12.302(c) prohibits the CO from adding terms and conditions that would violate commercial practice:
The contracting officer shall not tailor any clause or otherwise include any additional terms or conditions in a solicitation or contract for commercial items in a manner that is inconsistent with customary commercial practice for the item being acquired unless a waiver is approved in accordance with agency procedures.
Does the uniform contract format still apply?
While the uniform contract format is still used for other types of acquisitions, it does not work for commercial item acquisitions. The uniform contract format has standard sections A through M, which contain specific types of information in each section (for example, Section C: Statement of Work, Section L: Proposal Preparation Instructions, and Section M: Evaluation Criteria). It does not work with SF1449, which is used to establish a contract between the government and the contractor. The theory is that commercial item acquisitions can have much shorter contracts and you don’t need all the parts of the uniform contract format as you did in the past.
Can the contractor negotiate terms and conditions once they are established in the RFP?
Yes. The fact that a particular term or condition is an industry customary practice does not mean that every company within that industry uses the practice. Therefore, the government could easily fashion a solicitation that included terms and conditions that were unacceptable to a particular company. To level the playing field, the government may decide to designate which terms and conditions are nonnegotiable and which ones may be subject to negotiation.
Can the government still use best value techniques in a commercial item acquisition?
Yes, of course. Say, for example, the government issues an RFP for a product and two companies submit bids. One offers a higher price with a longer warranty, and one a lower price with a shorter warranty. Even in a commercial item acquisition, the government may still get two different bids that must be carefully evaluated against its source selection plan to determine the company that represents the best overall value to the government. Commercial item acquisition does not change that.
Can the government unilaterally change the terms of a commercial item contract?
No. The government cannot unilaterally change the terms of a commercial item contract since the contract requires that modifications be agreed to mutually.
In noncommercial contracts, the government puts the usual changes clause into its contracts, which lets the government unilaterally change the contract. But because the government tries to adopt business rules when it enters into a commercial item contract, it adopts the “deal is a deal” concept of business. If the government wants to change the terms of a commercial item contract, it must get the contractor’s approval.