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Commercial v. Noncommercial Items

PCI WebinarJune 16, 2015

Jason N. Workmaster & Phillip R. Seckman  

•  A detailed breakdown of the FAR commercial item definition. •  The difference in applying the definition from the buyer v. seller's

perspective. •  The FAR Part 12 Contracting Method, when it can be used and

its significance. •  The documentation considerations that are an important

component of proper commercial item determinations. •  Potential consequences of misclassification as a commercial

item. •  The compliance issues that may be triggered when the

conclusion is reached that a particular product or service does not qualify as a commercial item.

Today’s  Agenda  

2

Overview  

3

Commercial Item (CI) Determination - Process Diagram

Step 1. Acquisition for Items or Services?

Items

Services

Prior determination that the item is a CI by the Gov. or Contractor?

Review prior determination and be consistent absent clear reasons to the contrary.

Yes

Step A:Is the item that is being acquired:

• Commonly used by the gen. public; or• "Of a type" commonly used by the gen. public?

NoStep B1:Has the item been:

• Sold, leased or licensed; or

• Offered for sale, lease or license

to the gen. public?

Note - the phrase "of a type" broadens the CI definition. An item need not be identical to one available in the comm. marketplace to qualify as CI.

Step 2. Based on Market Research

Step B2:

Is the item an evolution from a Step A item but is not yet available in the marketplace, but will be in time to satisfy the Gov. need?

Step C:

An item that would meet Steps A & B, but for:

• Mods commonly available in the marketplace; or

• Minor mods needed to meet Gov. reqs. that do not sig. alter the non-Gov. function

Or

Prior determination that the item is a CI by the Gov. or Contractor?

Review prior determination and be consistent absent clear reasons to the contrary.

Yes

No

Any service "of a type" offered and sold competitively based on established catalog or market prices for specific tasks performed or specific outcomes to be achieved and under standard comm. Ts &Cs

Note - the term "catalog price" means a published price list reflecting recent prices for sales to gen. public.

Note - the term "market price" means current or recent actual sales prices that Gov. can use to verify the offered price is fair and reasonable

Installation, maintenance, repair, training, and other services if:1. Purchased to support an item that meets Steps A, B,

or C; and2. The provider does the same work for gen. public

under similar Ts&Cs

Services Combinations:Any combination of the items in Steps A, B, C, or qualifying services if:

• "Of a type" commonly combined and sold to the gen public

COTSAny item that is a CI:

• Sold in substantial quantities in the comm. marketplace and

• Offered w/out modification

Meet these criteria?

Not a CIUse other contracting procedures for non-commercial acquisition

Item is a CI

Ensure that documentation reflecting your analysis of Steps A, B, C, or qualifying services assessment is retained in applicable contract or subcontract file.

Step 3. Documentation

No

Yes

Step  1  –  A  Threshold  Ques?on  

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Step 1.

For$Either$Items$or$Services$

Be#sure#to#review#the#prior#determina2on#and#be#consistent#absent#clear#reasons#to#the#contrary.

Yes

Is#there#a#prior#determina2on#that#the#item#is#a#commercial#item#by#the#Government#or#Contractor?

Acquisi2on#for#Items#or#Services?

No

Step  2  –  Market  Research  

5

Step%A:

Is%the%item%that%is%being%acquired:

• Commonly%used%by%the%general%public;%or

• "Of%a%type"%commonly%used%by%the%general%

public?

Step%B1:

Has%the%item%been:

•Sold,%leased%or%

licensed;%or

•Offered%for%sale,%

lease%or%license

to%the%gen.%public?

Step%B2:

Is%the%item%an%evoluHon%

from%a%Step%A%item%but%is%

not%yet%available%in%the%

marketplace,%but%will%be%

in%Hme%to%saHsfy%the%

Gov.%need?

Step%C:

An%item%that%would%

meet%Steps%A%&%B,%but%

for:

•Mods%commonly%

available%in%the%

marketplace;%or

•Minor%mods%needed%

to%meet%

Government%

requirements%that%

do%not%significantly%

alter%the%nonO

Governmental%

funcHon.

Or

Step 2. Based on Market Research

Items

Note - Real property (i.e. land and interests in landis excluded from this definition).

Step  2  –  Market  Research  (Con$nued)  

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Any$service$"of$a$type"$offered$and$sold$compe22vely$based$on$established$catalog$or$market$prices$for$specific$tasks$performed$or$specific$outcomes$to$be$achieved$and$under$standard$commercial$terms$and$condi2ons.$

Installa2on,$maintenance,$repair,$training,$and$other$services$if:

1.$Purchased$to$support$an$item$that$meets$Steps$A,$B,$or$C;$and

2.$The$provider$does$the$same$work$for$the$general$public$under$similar$terms$and$condi2ons.

Services

Note - The term "catalog price" means a published price list reflecting recent prices for sales to general public.

Note - The term "market price" means currentor recent actual sales prices that Government canuse to verify the offered price is fair and reasonable.

Step 2. Based on Market Research (Continued)

Some  Notes  on  Key  Terms  

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Of#a#Type:

• The%phrase%broadens%the%Commercial%Item%defini6on.%

• An%item%need%not%be%iden6cal%to%one%available%in%the%commercial%marketplace%to%qualify%as%a%Commercial%Item.

Commercial#Off#The#Shelf#(COTS)

Any%item%that%is%a%Commercial%Item:

• Sold%in%substan6al%quan66es%in%the%commercial%marketplace;%and

• Offered%w/out%modifica6on.%

Combinations:

Any combination of the items in Steps A, B, C, or qualifying services if:

• "Of a type" commonly combined and sold to the general public

Step  2:  Market  Research  (Con$nued)  

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(1)$Any$previously$developed$item$of$supply$used$exclusively!for$governmental$purposes$by$a$Federal$agency,$a$State$or$local$government,$or$a$foreign$government$with$which$the$United$States$has$a$mutual$defense$coopera?on$agreement.

Commercial*Nondevelopmental*Items

Step 2. Based on Market Research (Continued)

(2)$Minor$modifica?ons$of*a*type$customarily$available$in$the$commercial$marketplace$in$order$to$meet$the$requirements$of$the$procuring$department$or$agency

3)$$Any$item$of$supply$being$produced$that$does$not$meet$(1)$or$(2)$solely$because$the$item$is$not$yet$in$use.

Commercial$only$if:

• Developed$exclusively$at$private$expense;$and

• Sold$in$substan?al$quan??es$on$a$compe??ve$basis$to$State,$local$or$certain$foreign$governments.

Nondevelopmental*Items

Guidance  Updates  

•  2013 NDAA, Section 831, directs the OUSD(AT&L) to issue guidance on DOD pricing policy regarding evaluating price reasonableness for commercial items

•  DFARS Case No. 2013-D034 — DARC has discussed a draft DFARS rule with revised report due June 3, 2015

•  The Director of Defense Pricing, Shay Assad, recently quoted in National Defense Magazine •  Contention that the DOD push on commercial item

classification and price analysis is “not a massive [industry-wide] issue”

•  Existence of prior sales to the government, based on commerciality and even with a prior determination of price fair and reasonableness, now insufficient

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Guidance  Updates  

•  February 4 2015 – DPAP Memorandum –  Responds to Section 831 of the FY 2013 NDAA, which requires

DOD to issue guidance regarding commercial item procurements and determining price reasonableness for commercial items

–  Emphasizes that the concept behind the commercial items TINA exception is that price is fair and reasonable as a result of demand in a commercial market

–  Recognizes that •  “of a type” determinations have been difficult for COs •  COs should make CIDs within 10 business days •  Regardless of CID determination, the key consideration is “Am I

paying a fair and reasonable price?” •  Market research is complicated when there is little or no actual sales

history for an item 10

2016  NDAA  Commercial  Item  Updates  

•  HR 1735 – Section 804 –  Would require that DOD establish and maintain centralized capability to

oversee CIDs for DOD procurements

–  Provide public access to CIDs

–  Permit COs to presume that prior CIDs are sufficient for subsequent procurements

•  Senate version of the 2016 NDAA is presently being considered and contains a number of sections relating to commercial items –  Section 861 – Inapplicability of Certain Laws

–  Section 862 – Market Research Preference

–  Section 863 – Continuing Validity of CIDs 11

Step  3  –  Documenta?on  

12

Based&on&Market&Research,&can&you&meet&these&criteria?

Not a Commercial ItemUse other contracting procedures for non-commercial acquisition

Commercial Item or Service

Ensure that documentation reflecting your analysis of Steps A, B, C, or qualifying services assessment is retained in the applicable contract or subcontract file.

Step 3. Documentation

NoYes

The  Buyer’s  v.  Seller’s  Perspec?ve  on  Commercial  Items  

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•  Buyer –  Streamlined procedures (FAR subpart 12.6) –  Minimizes administrative costs –  Limits the requirement to obtain certified cost or pricing data –  Government increasingly has a narrow reading of “of a type” –  Not all services are commercial

•  Seller –  Not subject to CAS, TINA, or business systems rule –  Allows companies access to the federal marketplace that would

not otherwise be able to participate in procurement process –  Tend to advocate a broader reading of “of a type” –  All services are commercial

Documenta?on  –  Buyer’s  Perspec?ve  

•  Commercial item determination rationale •  Market research

–  Primary means of determining the availability and suitability of commercial items

–  Conducted before developing new specifications and before soliciting bids or proposals

–  Used to determine price is fair and reasonable –  Extent of market research required can be impacted by:

•  Urgency •  Estimated dollar value

•  Complexity

•  Past experience 14

Documenta?on  –  Buyer’s  Perspec?ve  (Con$nued)  

•  Market research topics –  Sources –  Supplies and services –  Industry practices and trends

•  Market research techniques –  Contacting knowledgeable individuals regarding market

capabilities –  Reviewing results of recent market research reports –  Publishing formal RFIs –  Internet research –  Gathering market pricing information –  Review industry catalogs and product literature –  Attend trade shows 15

Documenta?on  –  Seller’s  Perspec?ve  

•  Commercial items offers must show:

–  A technical description of the items being offered in sufficient detail to evaluate compliance with the requirements in the solicitation;

–  Terms of any express warranty;

–  Price and any discount terms;

–  A completed copy of the representations and certifications at FAR § 52.212-3; and

–  Past performance information, when included as an evaluation factor.

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Commercial  Item  Subcontracts  

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•  FAR Subpart 44.4 –  Commerciality determinations for subcontracts are prime

contractor’s responsibility –  Note the limitations on the applicability of certain laws to the

acquisition of commercial items at the subcontractor level: •  FAR § 52.212-5, Contract Terms and Conditions Required to

Implement Statutes or Executive Orders •  FAR § 52.244-6, Subcontracts for Commercial Items and

Commercial Components

•  DFARS §244.303 –  As part of CPSR, auditor will review the adequacy of rationale

documenting commercial item determinations –  This ties to the documentation considerations

Implica?ons  of  Misclassifica?on:  Fraud  

•  False Claims Act

–  FCA, 31 U.S.C. § 3729, imposes liability on anyone who:

•  Knowingly submits, or causes another to submit, a false claim for payment to the Government

•  Knowingly makes a false statement in support of a false claim

•  Knowingly avoids or decreases an obligation to pay the Government, or retains an overpayment

–  Can be brought by Government or “qui tam relator”

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Implica?ons  of  Misclassifica?on  (Con$nued)  

•  Elements of Cause of Action

–  Claim

–  Falsity

–  Knowledge (that claim is false)

–  Materiality

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FCA  Treble  Damages  &  Penal?es  

•  Treble Damages: Government recovers treble damages that it sustained due to false claim(s)

•  Double Damages: In voluntary disclosure cases, Government may reduce damages to double the damages sustained by Government

•  Civil penalties assessed on any person who violates Section 3729(a)(1) of the FCA –  Minimum of $5,500 –  Maximum: $11,000

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FAR  Part  12  

•  Prescribes policies and procedures unique to the acquisition of commercial items as defined in FAR § 2.101

–  Implements the Federal Government’s preference for the acquisition of commercial items contained in Title VIII of the Federal Acquisition Streamlining Act of 1994

–  Requires agencies to:

•  Conduct market research to determine whether commercial items are available to meet agency needs;

•  Acquire commercial items when they are available; and

•  Require contractors to incorporate, to the maximum extent practicable, commercial items as components of items.

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FAR  Part  12  (Con$nued)  

•  In the 1990s there were 17 requirements, now over 50 requirements –  Contract type –  Quality assurance –  Technical data –  Etc.

•  FAR Part 12 may only be used for construction contracts in limited circumstances: –  Routine alteration and repair services –  Commercial construction materials –  Associated ancillary services

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Proposed  Transac?onal  Data  Rule  Under  GSA  Schedule  Program  

•  Would require monthly reports detailing transaction-level data on sales to the Government of items on Schedule — replacing “tracking customer” obligation of existing Price Reductions Clause

•  Would expand, rather than eliminate, Commercial Sales Practices disclosure requirement

•  Does not address: –  “Apples v. oranges” problem of comparing transaction-level sales

data to pricing of items on Schedule; or –  Specialized terms and conditions of individual sales

•  Grossly underestimates time/cost of implementing and administering system to track and report transactional data

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Compliance  Issues  –  Noncommercial  Items  

•  TINA

•  CAS

•  Business Systems Rule

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TINA  

•  Place government on equal footing in price negotiations with contractors

•  Requires disclosure of data; not a particular pricing method •  Core requirement of TINA (10 U.S.C. § 2306a; 41 U.S.C.

§ 3501; FAR § 15.403-4) –  Contractors must submit cost or pricing data before the date of

price agreement for “covered” negotiated contracts. –  Data must be

•  Current, •  Accurate, and •  Complete

•  All facts that “prudent buyers and sellers would reasonably expect to affect price negotiations significantly” 25

TINA  (Con$nued)  

•  Covered contracts are negotiated contracts expected to exceed $700K if one of the following exceptions does not apply –  Contract awarded after adequate price competition

–  Price set by law or regulation

–  Commercial item contract (or modification to contract for commercial item)

–  TINA waiver (rare cases)

•  Government prohibited from obtaining pricing data if contract is below simplified acquisition threshold

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CAS  

•  Full vs. modified coverage –  Full

•  Single CAS-covered contract $50M or more; or

•  Business unit received $50M or more in CAS-covered prime and subcontract awards during prior period

•  Comply with all 19 CAS

•  Disclosure Statement requirement

–  Modified •  CAS-covered contract greater than $7.5M but less than $50M

•  Business unit received less than $50M in CAS-covered awards during preceding period

•  Comply with CAS 401, 402, 405 and 406 27

Business  Systems  Rule  

•  Applicable May 2011 (proposed rule updating the business systems rule promulgated on July 15, 2014 — closed without reissuance)

•  Requires existence of six approved systems –  Accounting –  Purchasing –  Estimating –  Government Property –  Earned Value Management –  Materials Management and Accounting

•  Approval by ACO/DACO/CACO based upon DCAA opinion 28

Business  Systems  Rule  (Con$nued)  

•  Withholds

–  Contracts subject to withholds are all contracts over $50M that contain DFARS § 252.242-7005 and the applicable system clause

–  Amount

•  5% for one disapproved system or up to 10% for two or more disapproved systems, of all billings under covered contracts

•  Pre-existing withholds should preclude or reduce further withholds for system disapproval

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Presenters  

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Jason N. Workmaster (202) 662-5412 jworkmaster@cov.com

Phillip R. Seckman (303) 634-4338 pseckman@mckennalong.com