Under the Truth in Negotiations Act (TINA), the US government requires contractors to certify their cost and pricing data for FAR Part 15 contracts above $750,000. This is an attempt to ensure that the contractors are not inflating their prices unnecessarily, and provides a basis for the Contracting Officer to determine the negotiated price as fair and reasonable. However, like most rules, there are exceptions. One major exception to TINA requirements comes in the form of “commercial items.” Essentially, for items that are deemed commercial in nature, the TINA requirement for certified cost and pricing (CCP) data is waived. Obviously, this is a powerful incentive for contractors to assert that the items proposed under the contract are commercial, and thereby avoid the cost and hassle of providing CCP data. In case you don’t know, a contractor that provides CCP data which later turns out to be incorrect can be found guilty of defective pricing, and stiff penalties may ensue.
The FAR definition of commercial item contains eight subparagraphs (the FAR 2.101 definition is excerpted at the end of this article); the basic gist is that to be considered commercial, a product or service must be of a type of item customarily used by the public, and must have been sold, or offered for sale, to non-governmental buyers for purposes other than governmental purposes. There are other considerations, of course, dealing with the myriad of exceptions and special circumstances involved with government procurement. But the idea is that if an item is pretty similar to items used by the general public, then it can be deemed commercial, and is not subject to the TINA requirement for CCP data.
Where this gets interesting is that the government, especially the Department of Defense, is pushing the maximum use of commerciality in procurements. Obviously, missiles and fighter jets and tanks are not commercial items, and are not sold for non-governmental use. But they are built using parts, components, and assemblies that often resemble or mirror commercial counterparts. The result of all of this is a greater effort by industry to assert and prove commerciality, and a greater effort by DoD and government contracting officers to assess and determine that commerciality. With the Trump administration signaling a serious attitude about acquisition reform designed to streamline and shorten the procurement timeline, commerciality could be a major factor in that process.
We will see how it all turns out, but for now and for the near future, it looks like there will be a growing trend of commerciality in government procurements, and the impact on contracting and contracts could be profound.
From FAR 2.101, “Commercial item” means —
(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 mean 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;
(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.
“Commercially available off-the-shelf (COTS) item–”
(1) Means any item or supply (including construction material) that is—
(i) A commercial item (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, as defined in 46 U.S.C. 40102(4), such as agricultural products and petroleum products.