Taking Advantage of Far Part 12

September 2006

 

The most significant development in federal acquisition reform in the 1990's remains greatly underutilized. It is the expanded definition of a commercial item and the streamlining of typical government restrictions, certifications, FAR clauses, and flow-down requirements, when a government contract or subcontract calls for the acquisition of commercial supplies or services. Understanding and taking advantage of this aspect of procurement reform will reduce risk and save you money whether you are a prime contractor or a subcontractor.

The FAR’s definition of a commercial item is found at FAR 2.101. While the definition is lengthy, key points include:

• A commercial item is anything other than real property (land) that is of a type customarily used for nongovernmental purposes, and

• Has been sold, leased or licensed to the general public; or,

• Offered for sale, lease or license to the general public.

While the definition has other elements that further elaborate on and expand the above definition, what is outlined above is revolutionary in that you only need show the good you are selling has been sold or offered for sale (or lease or license) to the general public. Further, even if this good has not been sold, if it is of a type of item customarily sold or offered to the general public, it qualifies. The definition of commercial services is not as broad, but is still much broader than what was used prior to acquisition reform.

The FAR now requires the government to conduct market research and buy commercial items whenever possible. If you are considering responding to a government solicitation for a product that you believe is a commercial item but is not being solicited as such, you should consider informally (and formally if necessary) challenging the government’s failure to follow the FAR’s preference for commercial items.

Note, too, that even if the subject matter of the prime contract is not a commercial item, a subcontract for supplies, services or components may qualify for commercial item treatment, thereby greatly streamlining the required FAR flow-down requirements, which should result in a less expensive acquisition at the subcontract level. As of June 2006, the only required FAR clauses in a subcontract for a commercial item are the Equal Opportunity (FAR 52.222-26); Equal Opportunity for Special Disabled Veterans, Veterans of the Vietnam Era and other Eligible Veterans (FAR 52.222-35); Affirmative Action for Workers with Disabilities (FAR 52.222-36); Utilization of Small Business Concerns (FAR 52.219-8); Notification of Employee Rights Concerning Payment of Union Due or Fees (FAR 52.222-39); Service Contract Act of 1965 (FAR 52.222-41); and the Preference for Privately Owned U.S.-Flag Commercial Vessels (FAR 52.247-64). All other clauses are "negotiable".

Studies in the late 1980's revealed that on average, the government paid an extra 20 percent for its excessive regulation and bureaucratic red tape. The commercial item revisions codified at FAR Part 12 were intended to provide relief, but they only work when the government and higher tier contractors use them. It is a great way for you to save money, reduce risk and improve your competitive position by reducing costs.

Taking advantage of FAR Part 12 makes sense for both prime contractors and subcontractors. Prime contractors will have a larger pool of suppliers willing to accept government subcontracts if they are more like commercial sales, and with fewer requirements, the cost should be lower. Subcontractors benefit by having less onerous government clauses and the ability to contract on normal commercial terms. Both prime contractors and subcontractors benefit in that there are fewer compliance related requirements – so there are fewer chances of post-performance surprises in audits, investigations, etc.

Finally, the FAR greatly reduces the intellectual property rights the government obtains from a commercial item contract or subcontract, allowing the contractor to more easily retain all rights.

If you buy or sell commercial items, you need to know and take advantage of FAR Part 12.

George W. Ash is a member of the law firm of Foley & Lardner LLP in Detroit, where he specializes in government procurement issues. He may be reached at 313-234-7147.

Note: This update provides information of general interest presented in summary form, and does not constitute individual legal advice.