Tom Reid, JD, CPCM, Fellow

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FAR Part 12 The Government Goes Commercial
Tom Reid, JD, CPCM, Fellow Chief Problem
Solver Certified Contracting Solutions, LLC
Thursday July, 27, 2006 145 to 245 PM
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What is Commercial Contracting?

• Commercial Contracting might include
• Sales to Civilian Agencies
• Sales to State and Local Governments
• Sales to Commercial Companies
• Sales to Ultimate Consumers
• Federal Government Purchases of items considered
  commercial goods and services

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What we will NOT be covering

• A-76
• FAIR Act
• TINA
• A discussion on inherently governmental
  functions

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How Long Have Commercial Items Been an Issue?

• The recommendations in this part provide the
  means for implementing the policy of basing
  decisions on a consideration of total economic
  cost. They include
• Establishing criteria for development of Federal
  specifications to achieve greater consideration
  of cost-benefit analysis, including
  state-of-the-art, in commercial product
  development.

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Where Did This Come From?

• Report of the Commission on Government
  Procurement Volume 3
• December 1972

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Should The Government Buy Commercial Products?

• Studies and Legislation have long encouraged the
  acquisition of Commercial Products
• Competition in Contracting Act (1984)
• Packard Commission (1986)
• Defense Science Board (1989)
• Section 800 Panel (1992)
• Et al

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Then There was FASA

• The Federal Acquisition Streamlining Act (FASA)
  (1994) (P.L. 103-355)
• Forced agencies to use electronic commerce
• Created a simplified acquisition threshold
• All purchases from 2,500 to 100,000 were for
  small businesses only
• Emphasized the purchase of commercial items
• Changed over 225 other laws to reach its
  objectives

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Anyone Remember FACNET?

• Never really took hold
• Required use of an intermediary (Value Added
  Network or VAN)
• Requirement to use was removed for DOD in 1998
• Morphed into Fed Biz Ops using standard
  commercial on-line commerce

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Commercial Acquisitions

• Rely on the Commercial Marketplace for Solutions
• Emphasize performance-based requirements
• Includes provision enabling commercial practices
• Excludes provision inconsistent with commercial
  practices
• Encourage participation of commercial entities

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Key Point

• FAR Part 12 is NOT an acquisition method
• FAR Parts 13 (Simplified Acquisitions), 14
  (Sealed Bidding), and 15 (Negotiation) are
  acquisition methods
• Part 12 authorizes modification of the procedures
  defined in the other parts

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What Do Current Regulations Say?

• 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

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Commercial Item Defined (cont)

• (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 means
  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

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Commercial Item Defined (cont)

• (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

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Commercial Item Defined (cont)

• (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.

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Commercial Item Defined (cont)

• (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.

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What Drives Commercial Pricing?

• Speed of delivery distribution channels
• Length and extent of warranty
• Limitations of sellers liability
• Quantities economic production runs
• Length of performance period
• Specific performance requirements
• Technology advances RD spending

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What is Commercial Price Reasonableness?

• The CO must establish price reasonableness in
  accordance with FAR Part 13, 14, or 15, as
  applicable.
• The CO must be aware of customary commercial
  terms and conditions when pricing commercial
  items
• The CO must ensure that contract terms,
  conditions, and prices are commensurate with the
  governments needs

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Other than Cost or Pricing Data

• Information other than cost or pricing data
  means any type of information that is not
  required to be certified in accordance with
  15.406-2 and is necessary to determine price
  reasonableness or cost realism. For example, such
  information may include pricing, sales, or cost
  information, and includes cost or pricing data
  for which certification is determined
  inapplicable after submission.

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Nondevelopmental Items

• Nondevelopmental item means
• (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 cooperation agreement
• (2) Any item described in paragraph (1) of this
  definition that requires only minor modification
  or modifications of a type customarily available
  in the commercial marketplace in order to meet
  the requirements of the procuring department or
  agency or
• (3) Any item of supply being produced that does
  not meet the requirements of paragraphs (1) or
  (2) solely because the item is not yet in use.

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Benefits

• Not optional for commercial items
• Greatly simplified RFQ/RFP
• Simplifies vendor response (cheaper to them)
• Government market is opened to more suppliers
• Commercial innovations are leveraged for use by
  the government

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Benefits

• Lower total ownership costs
• Design Engineering, developmental testing, and
  production line set-up are already completed
• Products are already proven in service before
  program receives them bad products and
  suppliers are already weeded out

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Downsides

• Not appropriate when extensive tailoring is
  required
• Less ability to demand needed changes
• Less oversight of contractor
• Less insight into product
• Advanced payments are a SCP in some industries

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Critical Steps in the Process

• Market Research
• Using other than cost or pricing data
• Recognizing that FAR part 12 does NOT require
  strict adherence to FAR Part 15 practices.
• Price is not a factor in determining status as a
  commercial item

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All Other Rules Apply

• See, e.g. Orion Technology, ASBCA No. 54608,
  March 28, 2006, 2006 WESTLAW 1064133, (Mistake in
  Bid)
• Bona Fide Needs
• Minimum Needs
• Procurement Integrity
• Et al

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MMODS Program

• Government estimate per MILSPECS 900,000 per
  unit
• Actual cost 55,000 per unit
• Much faster delivery

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Army/Navy High-Speed Vessel

• Speed, payload, length, and range were only truly
  critical specs
• High-speed ferries used extensively around world,
  but not in US
• Leasing is standard practice in commercial market
• Delivered in 75 days
• Introduced Australian shipyards to US government
  procurements

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Navy Recruiting Advertising

• Transformed traditional prescriptive CPFF
  contract to FFP, performance-based contract with
  incentives for achieving specific recruiting
  goals
• Transferred more cost and performance risk to
  contractor, while encouraging more competition
• Reduced SOW from 40 pages to 3

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USS Cole

• PLT was 4 days from attack
• Contract awarded 2 days after RFP approved
• Ship lifted onto transport 18 days after attack
• Ship arrived CONUS 44 days later

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J85 Engine Modification

• FFP/ IDIQ
• Sole Source to GE Electric Aircraft Engines
• 601 million, 10-year contract

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Summary

• FAR Part 12 is NOT an acquisition method
• The government benefits tremendously when it can
  use commercial practices and purchase commercial
  items or services
• The FAR and the UCC will never be the same

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Resources

• DOD Commercial Item Handbook (2001)
• http//www.acq.osd.mil/dpap/Docs/cihandbook.pdf

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Questions?

• Tom Reid
• Chief Problem Solver
• Certified Contracting Solutions, LLC
• Denver, Colorado
• 303-726-8740
• www.certifiedKsolutions.com