Procurement Technical Assistance Center

Sweeping Changes Proposed for Commercial Item Acquisition

Jeffrey S. Robinette


June 2007

Editor’s Note: The following article analyzes and discusses portions of the Section 1423 Federal Acquisition Advisory Panel final draft recommendations. NCMA recognizes that there are divergent views on this subject matter. This article, by this author, represents only one such viewpoint. NCMA welcomes additional submissions on this and all other aspects of the Section 1423 recommendations for consideration for future publication.

The Section 1423 Acquisition Advisory Panel (the “panel”) issued a 400+ page draft final report (the “report”) in December 2006. The panel was chartered pursuant to Section 1423 of the Services Acquisition Reform Act of 2003 to review and recommend changes to acquisition law and regulation to improve commercial item acquisition and performance based contracting. A final report is expected to be issued soon, and it is not expected to diverge materially from the final draft. The panel’s report provides a detailed description of the historical evolution of the federal procurement system, and identifies many areas for improvement. Many of its recommendations are noteworthy, and may influence important statutory and regulatory changes in government procurement in the near future. This article focuses solely on the first of the seven chapters of the report, and only on the most significant proposed regulatory changes likely to impact commercial item1 contractors, particularly contractors that conduct business under the General Services Administration’s (GSA) Federal Supply Schedule (FSS) program. If these recommendations are implemented by regulators, contractors may experience considerable change in the cost of pursuing business and performing contracts in the federal market. GSA contractors, and other commercial item contractors, should contemplate the report carefully, and be ready to respond to proposed statutory and regulatory changes.

Disclosure of Previous Sales and Other Information Supporting Prices for Commercial Items

Perhaps most notable, Recommendation 82 of the report suggests making regulatory changes to allow the government to request previous sales and other information, including cost information, for commercial items if the contracting officer (CO) deems it necessary to make a determination as to price reasonableness.3 The panel suggests moving away from the distinctions and preferences currently in place under FAR Part 15 regarding cost and pricing information and data, and instead allowing COs to determine what sales and other pricing information should be required. Such requests would include: …sales data relating to commercial, items during a relevant time period [and] information regarding price or cost that may support the price offered, such as wages, subcontracts, or material costs.4 The panel’s proposed regulatory changes include a loose order of preference favoring sales data over other price and cost information, and limiting the scope of such requests to records maintained by the contractor to support its commercial business. The panel also proposes to preclude the CO from requesting that such information be certified “current, accurate, and complete,” and proposes to ensure that such information is subject to the nondisclosure protections afforded vendor proprietary information under the Freedom of Information Act (FOIA).

If the panel’s proposal is adopted by regulators, the changes could result in significantly more burdensome disclosure standards for commercial item procurements than are currently envisioned under the FAR for commercial or noncommercial item procurements. Inexplicably, such changes would result in more CO discretion for the pricing information that could be requested for commercial items than for Under current regulation, COs must exhaust other information resources before seeking other than cost or pricing data from contractors for commercial or non-commercial items, and COs are not permitted to seek cost or pricing data for commercial items.6Current regulation also creates a presumption that no cost or pricing information should be obtained if competition is sought, even when multiple offers are not received.7However, under the panel’s prescription, the CO would be permitted to ask for previous sales and other information deemed relevant for acquisitions of commercial items without regard to the current regulatory protocols. The proposed changes could open up an entire universe of proprietary company records limited only in scope to those records maintained by the contractor in the course of its commercial business and disregarding the current requirement that the CO first exhaust other sources of information. While the new disclosures would not be subject to an express written certification, similar standards would undoubtedly arise under defective pricing and fraud claims under the False Claims Act when contractors intentionally or unintentionally provide other than the most current, accurate, and complete information. Finally, while the information likely would be protected from release under FOIA, the government would be free to use it for virtually any purpose. The panel asserts that its proposed Recommendation 8 seeks only to conform to commercial processes. However, the recommendation hardly reflects any of the principles of arms length negotiation that are most commonly associated with commercial deal-making. Instead, the recommendation reflects the “open your kimono” approach to pricing currently used by GSA to negotiate FSS contracts. In practice, the recommendation could be far more onerous than GSA’s disclosure requirements for FSS proposals, because each contract or order—including even simplified acquisitions under FAR Part 13—could be subjected to CO requests for various types of sales and other information deemed relevant at the time.

FAR Part 15 already contemplates an appropriate process for disclosure of other than cost or pricing information under appropriate circumstances for commercial and noncommercial items. The proposed changes would result in a significant burden for companies providing commercial items by not requiring the government to conduct market research to appropriately price such items when that information is available from other sources. Moreover, it is unexplainable why commercial items should be subjected to potentially more onerous and random disclosure requirements than noncommercial items.

A New GSA Schedule for Competed Orders of Professional IT Services

Recommendation 49 of the report proposes to create a new GSA FSS contract for professional information technology services. Each order would be competed based on a defined statement of work, and pricing would be based on head-to-head competition rather than on previously negotiated and published rates. The report does not state if the panel recommendation is meant to supplant SIN 132-51 of GSA’s Schedule 70 altogether. However, the rationale provided by the report, including cost savings derived by dismantling the significant infrastructure currently supporting the acquisition of professional services by GSA, tends to indicate such intent.10The report recommends making the Price Reductions clause11 inapplicable to this new FSS contract, but permitting post-performance auditing against contract requirements and terms and conditions other than price. The report further recommends that the competition requirements of Section 803 of the Defense Authorization Act of 200212 be applied to all GSA-based acquisitions of professional information technology services. The Section 803 requirements, which already apply to acquisitions for DOD that exceed the simplified acquisition threshold of $100,000, essentially require COs to ensure receipt of at least three quotes or alternatively notify all eligible sources of the requirement and afford them an opportunity to participate in the procurement. Presumably, the effect of such a change would be that virtually all GSA-based orders for professional information technology services would be competed head-to-head. Today, the FSS program is based on the premise that published prices create competition, and the Price Reductions clause ensures that fair prices are maintained marketplace for similar items during the life of each contract. The report indicates the panel’s skepticism that the competitive forces at work in the commercial marketplace for labor descriptions and rates results in competitive pricing at time of order placement. Instead, the report asserts that “the pricing for services is requirement specific,” and should not be based solely on published rates.13 This criticism is not without merit; today, under GSA Schedules with published hourly rates, a services engagement can be inflated by a contractor who pads the number of hours required to perform the engagement even though the rates have already been determined fair and reasonable. Only head-to-head competition, in addition to hourly rate publication, ensures lower prices for a particular requirement by ensuring competition of both the hours and the rates. For this reason, FAR 8.405-2 requires COs to develop a statement of work and seek quotes from at least three vendors “when ordering services priced at hourly rates” under the GSA Schedules, including professional information technology services under SIN 132-51 of Schedule 70. For orders exceeding the maximum order threshold (e.g., $500,000 for professional information technology services), COs must seek more than three quotes and reductions in the published hourly rates. The primary difference between the current regulatory regime and the one being proposed is the elimination of the Price Reductions clause and extension of the Section 803 competition requirements to all GSA-based acquisitions for professional information technology services in excess of $100,000. In net, these changes, and particularly the elimination of the ambiguous and troublesome Price Reductions clause, would serve the interests of many. However, some contractors have already figured out how to manage the Price Reductions clause and may be troubled by the additional pursuit costs associated with additional competition requirements for the civilian orders they receive between $100,000 and $500,000.

Three questions arise from a careful reading of Recommendation 4.


  1. What, if any, post-award auditing function for performance is being recommended by the panel? The government’s acceptance of professional services pursuant to the clauses currently prescribed by regulation establish the rights and remedies of the parties and set forth the timeframes for determination of acceptance and correction of services. If the panel is suggesting additional post-acceptance remedies—which is not clear—such a proposal would create a significant hurdle for commercial item companies, particularly public companies that operate under strict revenue recognition accounting standards for services.
  2. Why is the recommendation limited to professional information technology services when other professional and nonprofessional services are procured under the GSA Schedules based on labor rates as well?
  3. Finally, why is a new GSA Schedule needed at all? The panel could simply revise FAR 8.405-2 to be in accord with Section 803, or similar requirements14, and revise the Price Reductions clause to rescind its applicability for all services based on published labor rates which are ordered with head-to-head competition.

Extension of Section 803 to All Agencies, and Products, and Services

In Recommendation 3 of chapter one, the report proposes to apply the Section 803 competition requirements that currently apply for DOD to all executive agency procurements of products and services exceeding $100,000, including all purchases under the GSA Schedules. The panel persuasively points out that there is no logical basis for having different regimes for DOD and civilian agencies and further that most orders are in support of DOD anyway.15Above $5 million, the report also proposes additional requirements for services acquisitions containing a statement of work. While the criticism in Recommendation 4, discussed previously, is understandable for GSA-based orders of services requiring a statement of work, no similar logic applies for GSA-based orders of products or services that are pre-defined (e.g., based on a commercial catalog). Instead, for these clearly commercial products and services, the pricing is and should be presumed competed as it is openly published, has been determined fair and reasonable for orders under the maximum order threshold, and remains subject to the price maintenance obligations of the Price Reductions clause. Rather than applying the Section 803 requirements across the board to all GSA-based orders for products and services exceeding the simplified acquisition threshold of $100,000, perhaps these or similar requirements, should only be applied to GSA-based orders that exceed the maximum order threshold (e.g., $500,000 for information technology products under Schedule 70), for both DOD and civilian agencies. This could be accomplished by simply bolstering the ordering procedures under FAR 8.405-1(d) and 8.405-2(c)(3), and rescinding the applicability of DFARS 208.405-70 to GSA-based orders.16

Re-Defining Commercial Services

The panel also proposes to change under Recommendation 117 the current regulatory definition for “commercial item” to limit the services procured under the commercial item acquisition procedures and terms under FAR Part 12.18 The report points out that the current scope of services included within the definition of commercial item in the FAR includes the phrase “of a type,” which is broader than the definition for commercial item services in the underlying statute. Specifically, paragraph six of the definition of “commercial item” under FAR 2.101 states: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. This does not include services that are sold based on hourly rates without an established catalog or market price for a specific service performed or a specific outcome to be achieved. 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.19 The report proposes that the additional phrase “of a type” is not necessary, does not comport with commercial practice, and is subject to misinterpretation and misuse by government procurement officials. The report mentions that the drafters included the phrase to “allow the acquisition of commercial services when catalog prices did not exist,” but the report does not explore this rationale fully.20Instead, the report concludes that continued inclusion of the phrase may allow the government to use FAR Part 12 to procure services that are not sold in substantial quantities in the marketplace. The report is not clear what ill the panel wishes to cure with the recommendation.

The report’s analysis of this issue seems to entirely miss the benefit of the additional language, while alluding to the rationale for it by referencing the regulatory drafters’ intent behind it. The current definition, which includes the “of a type” phrase, permits a CO to first determine whether a service is a commercial item by inquiring whether it is generally offered by companies in the industry as reflected by commercial price lists or market prices. If so, then the CO can conduct an acquisition leveraging commercial item acquisition procedures and commercial terms pursuant to FAR Part 12. This permits a two-step process, which is important because a responsible contractor may be considered for participation in the acquisition even if that specific contractor does not have a previously established commercial price list or substantial quantities of commercial sales. Once the CO determines that the services are commercial items, and sufficient pricing information is available from the marketplace to ensure fair pricing, the acquisition is open to market entrants, such as small businesses, which facilitates competition. The panel’s recommendation could limit competition and preclude new market entrants including small businesses. Removing the language could in effect limit competition to only established businesses with commercial catalogs and substantial sales in the commercial market place. Other responsible and capable companies might be excluded even if they provide favorable pricing or meet other important goals (e.g., small business goals). It may be the case that including the phrase “of a type” creates some loophole which can be exploited by an unscrupulous CO—although the report does not establish how—the panel’s recommendation may cause more harm than good if COs do not continue to reasonably deduce that the definition necessarily attaches to an assessment of the industry rather than to each potential contractor.

Conclusion

The report proposes significant changes for commercial item acquisition. The panel appears to have concluded that both the FSS program and commercial item acquisition regulations have resulted in practices which are not representative of commercial procurement practices and do not serve public acquisition policy well. The panel challenges the presumption underlying the FSS program that publication of pricing is sufficient to create competition while ensuring administrative efficiency for relatively small procurements. The report also challenges the conclusion reached by previous acquisition reformers that encouraging commercial companies to enter the federal market place by eliminating onerous disclosure requirements facilitates competition and benefits the federal acquisition system overall. It is fair to conclude that the regulatory changes proposed by the panel in the first chapter of the report will increase head-to-head competition. However, it is also fair to conclude that the proposed changes will increase the cost of administering the procurement process, increase the cost and risk of selling commercial items to the federal government, and discourage vendor participation. CM.

Endnotes

  1. Commercial item acquisition is addressed in 48 CFR (FAR ) Part 12.
  2. See Report at 1-77 and Appendix D.
  3. Recommendation 8 of the Report purports to address only those cases where no or limited competition exists. See Report at 1-77. However, the proposed regulatory changes to FAR 12.209 in Appendix D are in no way limited to such circumstances and instead make the proposed regulatory changes applicable any time the contracting officer is unable to make a price reasonableness determination for any commercial item. Limited competition, as might occur when “no offers are solicited,” is merely mentioned as an example of when the contracting officer may be unable to make a price reasonableness determination.
  4. See Appendix D at D-1. FAR 12.209(b)(1) & (2) proposed under Appendix D of the Report.
  5. See Appendix D-1. The proposed FAR 12.209 (the pricing policy for commercial items) lacks the limitations and hierarchy imposed by the proposed and current versions of FAR 15.402. The Panel proposes to “de-link,” or make inapplicable 15.402, and instead use the proposed revised FAR 12.209 for pricing commercial items. See Report at 1-77.
  6. See FAR 15.402, 15.403-1(b)(3) & (c)(3), and 15.403-3.
  7. See FAR 15.403-1 (including its well established presumption that the market has spoken when competition is sought but offers are not received).
  8. See Report Appendix D at D-2. Under the proposed re-write to FAR 12.209, the Panel suggests the following paragraph (d) be added: “The government must not disclose outside the government any information obtained relating to commercial items that is exempt from disclosure under 24.202(a) or the Freedom of Information Act (5 U.S.C. 552(b)). 10 U.S.C. 2306a(d)(2) and 41 U.S.C. 254b(d).” The paragraph does not address or limit a government agency’s disclosure within the government or the government’s use of the information. See also Recommendation 9 (promoting creation of a centralized market research function at GSA ).
  9. See Report at 1-71.
  10. The idea of cost savings is dubious since the alternative being proposed will undoubtedly cost government contracting officers and contractors significantly more time and resources to implement (i.e., requesting and preparing proposals and pricing for each order).
  11. GSAR 552.238-75
  12. See P.L. 107-107.
  13. See Report at 1-71.
  14. The administrative efficiency of the Section 803 competition requirements under DFARS 208.405-70, which essentially require the CO to obtain three quotes or alternatively notify all eligible contractors and provide them an opportunity to participate in the procurement, is questionable. CO s can not always control the number of quotes received, nor reasonably notify and coordinate responses from all eligible contractors, particularly for smaller procurements.
  15. Although not required by Section 803, DFARS 208.405-70 applies to products as well.
  16. See supra footnote 14 (questioning whether Section 803 is administratively efficient for smaller procurements). The current requirements under FAR 8.405-1 and 8.405-2 are clearer and administratively efficient, and may be more appropriate for GSA -based orders under the maximum order threshold.
  17. See Report at 1-67.
  18. The recommendation addresses the services defined under paragraph (6) of the definition of “commercial items” under FAR 2.101, and does not address installation, training, repair or maintenance services relating to commercial items under paragraph (5) of the definition.
  19. See Report at Appendix A (delineating the evolution of the definition of “commercial item”).
  20. See Report at 1-68.

    JEFFREY S. ROBINETTE is an attorney and managing principal of the Robinette Group, PLC, a firm located in Tysons Corner, Virginia, which provides legal and consulting services to government contractors. Robinette may be contacted at robinette@govconadvisor.com.

    Reprinted with permission from the National Contract Management Association, Contract Management, March 2007.