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For a small woman owned business (OEM manufacturer), what is the true advantage for insisting on selling its product solely as commercial items? 

If selling as non-commercial items, CAS does not apply as company is a small business. Technical Data Rights clauses do apply but with careful planning, company's technical data can remain its own. It seems that most FAR and DFARS clauses of import would revolve around providing of certified cost and pricing data (FAR 52.215-10 thru 14) and (FAR 52.215-20 and 21), and Audit rights (FAR 52.215-2). 

It seems to me that the government and primes have a hard time or are unwilling to evaluate "commercial item" justifications. Occasionally, even if the prime has accepted the commerciality assertion, DCMA will do their audit or engage a third party (like the Navy Price Fighters), who reject the CID. All this results in solicitations being issued as FAR Part 15.

To state the question above differently: What is the true danger in selling as non-commercial items? 

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The federal government tries to "step into the shoes of private industry" as much as possible when procuring commercial items. Whether or not they do a good job of that is a separate question.

Commercial contracts and solicitations should contain the FAR 52.212-X family of clauses. FAR 52.212-4(c) states that changes to the contract must be bilateral ("only by written agreement by the parties"). In contrast, non-commercial contracts will usually have some form of the infamous Changes clause, which allows the contracting officer to issue unilateral modifications within certain parameters, depending on the specific Changes clause. That's a big deal: Commercial contracts are generally not subject to the Changes clause.

As you noted, commercial contracts should be* exempt from certification of cost and pricing data under the Truth In Negotiations Act (TINA). (They renamed the statute, but old frogs will always call her TINA, that devilish women!) See FAR 15.403-1(b)(3) and 15.403-1(c)(3).

*Never underestimate the ability of the government to bully you into doing something.

Just remember: When you ask about "selling" as non-commercial...it's really the federal government that decides to acquire or procure the item as commercial or non-commercial. It's also the contracting officer who will make the commercial item determination.

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19 hours ago, natavas said:

For a small woman owned business (OEM manufacturer), what is the true advantage for insisting on selling its product solely as commercial items? 

To state the question above differently: What is the true danger in selling as non-commercial items? 

An item or service either should or should not meet the definition of commercial item (with the exception that the item in question has never been sold before and a company is making the initial decision as to whether or not to offer the item solely to the Government or to the public).  I understand that there can be disagreement over whether or not an item is commercial and that there have been reversals of commercial item determinations, but I think that is a separate issue and conversation from what seems to be the position that companies have the luxury/ability to merely say a product is commercial or non-commercial when offering it for sale (a company can certainly make the claim, but I would expect it to be supported based on evidence relating to the definition of commercial item under FAR 2.101):

Quote

“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 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;

(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.

Additionally, while PepeTheFrog is right that the contracting officer ultimately makes the commercial item determination, a company can still ultimately choose whether or not to do business with the Government.  Basically, if the concern is that an agency is improperly making a determination that an item is non-commercial just to apply terms and conditions that would otherwise not be applicable, the easiest way one can avoid those burdens is to refuse to contract with that agency.  There may be other avenues a company can explore to adjudicate the issue, but I only have thoughts on that issue so I'll leave that discussion to any of the industry professionals whom frequent these forums to discuss how they might address the situation.

19 hours ago, natavas said:

It seems to me that the government and primes have a hard time or are unwilling to evaluate "commercial item" justifications. Occasionally, even if the prime has accepted the commerciality assertion, DCMA will do their audit or engage a third party (like the Navy Price Fighters), who reject the CID. All this results in solicitations being issued as FAR Part 15.

FAR Part 15 is not unique to non-commercial items...commercial items can also be procured under FAR Part 15 procedures (when combined with FAR Part 12).  Finally, there are a myriad of reasons why the Government and the prime may disagree on whether or not an item is commercial (by the way, it can go both ways i.e. a prime may argue that an item is non-commercial while the Government determines the item is commercial) - my only advice is to provide the proper support and a clear justification/argument based on the FAR definition and hopefully both parties will arrive at the same conclusion.

Edited by Matthew Fleharty
Corrected Formatting of Commercial Item Definition

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5 hours ago, natavas said:

What is the true danger in selling as non-commercial items? 

natavas - I have a feeling you have looked at these before but if you have not you might want to consider a read of FAR part 10, short and easy read as the FAR goes, and FAR part 12 and as you do consider the preference placed on the Federal government, its prime contractors and subcontractors for buying commercial items.

Couple the read of these two FAR parts with the following -

http://www.wifcon.com/pd12_102.htm

http://www.wifcon.com/pd12_101.htm

Repeating what has already been said  it would seem that the danger is in the eyes of the beholder as there may be some, on both the Federal and industry side that feel non-commercial items to be a better route than commercial items and vis a versa.  No matter the approach those that do not adequately support their decision either way is where the danger lies and the above references will help demonstrate this.

 

 

  

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7 hours ago, natavas said:

To state the question above differently: What is the true danger in selling as non-commercial items? 

The danger is, if the government buys the item commercially because that is how the rest of that particular industry sells it, then you are going to miss out on a lot of business opportunities. Your market could have 0 customers.

(My answer assumes that you are arbitrarily choosing to classify your item as non-commercial, from how I read your initial statement.)

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7 hours ago, natavas said:

For a small woman owned business (OEM manufacturer), what is the true advantage for insisting on selling its product solely as commercial items?

To state the question above differently: What is the true danger in selling as non-commercial items? 

@natavas:

There are no across-the-board answers to your questions. The answers depend on the nature of your business and on the details of particular sales.

As has been already pointed out, in theory an item is commercial or it's not; it's not supposed to be a matter of choice. In practice, however, agencies vary in how they interpret and apply the definition, so one agency might buy your product as commercial and another might insist that it's not commercial. Some agencies want to declare items to be noncommercial so that they can demand more pricing information or impose noncommercial terms that give them more power over the seller. See the paragraph after next. For instance, in recent years DOD has butted heads with some of its suppliers over commercial item declarations with respect to  purchase of certain parts, components, and subsystems for some military systems. DOD wants to be able to get more pricing information from the suppliers and the suppliers don't want to provide it.

As a practical matter, selling under commercial item policy and procedures should mean that boilerplate contract terms and contract formation and administration processes will be less onerous than they would be under noncommercial policy and procedures. But implementation of commercial item policy can vary greatly from one contracting office to another, and from one sale to another, so it's hard to say just what the specific advantages of selling a commercial item would be for a particular company making a particular sale to a particular agency.

However, it's safe to say that it would always be better to sell under commercial items policy than noncommercial items policy. For example, a company making a noncompetitive noncommercial sale valued at more than $750,000 would have to provide certified cost or pricing data to the government, which would expose the company to the possibility of being accused of "defective pricing" and even of making false claims. A company making a noncompetitive commercial item sale would not be exposed to that risk. For another example, the government generally gets much more intrusive product inspection rights under noncommercial item contracts.

It's too much to ask that anyone give you a catalog of advantages and disadvantages. You must do that for yourself or hire an attorney or consultant to provide that information in light of the facts of your business. But I feel safe in telling you that if you can make a sale under commercial item policy and procedure you should do it unless you have identified a specific issue that would make it disadvantageous in some way.

 

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35 minutes ago, Vern Edwards said:

In practice, however, agencies vary in how they interpret the definition, so one agency might buy your product as commercial and another might insist that it's not commercial.

The perfect example of this is how the DOD buys knowledge based services.

In fact, I've seen a Navy agency, for a single requirement, switch from SeaPort-e (non-commercial) to GSA FSS (commercial) and then back to SeaPort-e with no understanding of the commercial item determination, nor its impact on the contemplated business arrangement.

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11 hours ago, Vern Edwards said:

For example, a company making a noncompetitive noncommercial sale valued at more than $750,000 would have to provide certified cost or pricing data to the government, which would expose the company to the possibility of being accused of "defective pricing" and even of making false claims. A company making a noncompetitive commercial item sale would not be exposed to that risk.

Thank you all for your answers. This is exactly what I am talking about. Exposure in selling as non-commercial items is quite significant. For my business, 3rd tier component manufacturer for aircraft and navy ships, the risks are compounded by the unilateral Changes clauses coupled with the technical data rights clauses.  

But because as a sole source supplier we are facing much resistance from the COs to our commerciality assertions (they want more information on pricing), I am trying to evaluate what the dangers are in selling non-commercially.  

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1 minute ago, natavas said:

I am trying to evaluate what the dangers are in selling non-commercially.  

Don't do that yourself unless you are deeply knowledgeable. Hire an attorney or a consultant.

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10 minutes ago, natavas said:

 

But because as a sole source supplier we are facing much resistance from the COs to our commerciality assertions (they want more information on pricing), I am trying to evaluate what the dangers are in selling non-commercially.  

Just wondering--what's the harm in giving the COs the pricing information they want?

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23 minutes ago, natavas said:

Anyone you may recommend on the East Coast?

Sorry. I don't have any recommendations. Take a look at one of the small business bloggers on the home page.

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Giving pricing is not an issue but they always want unredacted invoices showing the customer and the end use, which is confidential information of our commercial customer. 

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33 minutes ago, natavas said:

Giving pricing is not an issue but they always want unredacted invoices showing the customer and the end use, which is confidential information of our commercial customer. 

Are you familiar with 18 USC 1905 regarding disclosure of confidential information? https://www.law.cornell.edu/uscode/text/18/1905

The Government is asking for the customer information to make sure they are either the general public or a non-Governmental entity and the end use to make sure that the purpose is "for other than governmental" - those two criteria are straight from the FAR definition of commercial item...without that information how else would you expect someone to make an adequate determination that is grounded in facts?  I'd love to hear an alternative, but unfortunately it seems you're asking the agency to hit the "trust me" button...

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I apologize for not being clear. Government employees are certainly subject to a number of statutory and regulatory prohibitions related to the handling of confidential commercial and proprietary data and disclosure of such information outside of the Government.

I was talking about CID evaluations by prime contractors.  The concern is providing confidential pricing information of other customers, who may be the prime's competitors.   

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39 minutes ago, natavas said:

I apologize for not being clear. Government employees are certainly subject to a number of statutory and regulatory prohibitions related to the handling of confidential commercial and proprietary data and disclosure of such information outside of the Government.

I was talking about CID evaluations by prime contractors.  The concern is providing confidential pricing information of other customers, who may be the prime's competitors.   

Well that doesn't answer Don's question and it certainly ignores the situation at hand, namely the prime does not make the commercial item determination, the Contracting Officer does.  So if you're satisfied with the prohibitions in place for Government employees who handle confidential information (which applies to COs), it certainly begs Don's question: "What's the harm in giving the COs the pricing information they want?"

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7 hours ago, Don Mansfield said:

Just wondering--what's the harm in giving the COs the pricing information they want?

It's not a matter of what's the harm. There might not be any harm. On the other hand, that CO might turn out to be one of those crooked government employes we read about on the Wifcon home page nearly every day, who don't give a damn about 18 USC § 1905, the Procurement Integrity Act, or other laws.

It's a matter of it's none of the Government's business. They want to buy something. I offer it at a price. My price is my price. I might bargain, but I'm not going to assemble and give you a lot of "backup."

COs want all kinds of info so they can second guess and challenge my pricing decision. Well, my price is my price, take it or leave it. What's this business of: What's your overhead rate? What's your G&A rate? What do you pay your workers? How many hours does it take to make it? How much profit are you making? Who do you sell it to? And on and on and on. All so you can convince yourself and your boss that you won't be a fool to pay what I ask on commercial terms. All because you don't know anything about the market. Well, all those fancy pricing and accounting rules and procedures didn't prevent you from paying too much for that silly gas-guzzling underperforming F-35 and that pathetic Littoral Combat Vessel. It didn't prevent that silly DISA CO in the Level 3 case from deciding to pay $36 million too much because he didn't want to seek clarification or conduct discussions. Sad. Thank goodness Judge Braden kicked his butt. Think how many potholes we can fix with $36 million. Why, I bet we can buy an eighth of a mile of our big new wall with that kind of money. 

As for commerciality, you don't need to know the names of my customers. Look at the thing I'm offering to sell you and ask yourself if it seems like something for sale in the commercial marketplace. Is it really that hard to determine Mr. Bean Counter? I'm not selling F-35s or spares for F-15 engines on a sole source basis and arguing that an F-15 engine is the same type of thing as a 747 engine and that it's thus a commercial item. But you want to know my sales and how much of it came from the private sector and the names of my customers. 

Get lost.

Now, if I want the sale badly enough I might decide to sacrifice my privacy for profit. That's my call.

Have a nice day.

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3 minutes ago, Vern Edwards said:

As for commerciality, you don't need to know the names of my customers. Look at the thing I'm offering to sell you and ask yourself if it seems like something for sale in the commercial marketplace. Is it really that hard to determine Mr. Bean Counter? I'm not selling F-35s or spares for F-15 engines on a sole source basis and arguing that an F-15 engine is the same type of thing as a 747 engine and that it's thus a commercial item. But you want to know my sales and how much of it came from the private sector and the names of my customers. 

Where is the criterion for "if it seems like something for sale in the commercial marketplace" in the FAR definition for commercial item?  The criteria I read in the FAR are all factually based.

I don't think that a CO should use the need to determine whether or not an item is commercial as a façade to request other than cost or pricing data (shame on those COs who do)...but a request for a non-redacted invoice to substantiate that the customer is either the general public or a non-governmental entity using the item in question for other than governmental purposes isn't unreasonable or an especially high hurdle to clear.

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I say it is unreasonable. My invoices to my commercial customers are none of the CO's business.

If the item is commercial, then the CO should be able to verify through market research that it's been sold or offered for sale to the general public. Google the company name and the product description.

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I would agree, in part, that invoices (or additional information) should not be requested for items that could simply be verified via a Google search of the company name and product description, but then again, there are cases where a "commercial item" claim is made and the company does not readily advertise the item (i.e. a Google search of the company name and product description will not return adequate results).  In those cases, I believe a company should provide just enough information (no more, no less) to substantiate their claim that the item meets the criteria for "commercial item" in the FAR.  I don't believe that is an unreasonable request.

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I don't think you mean commercial item "claim." I think you mean commercial item assertion.

Most of the problems with commercial item assertions have arisen in connection with DOD purchases of spare parts. DOD has traditionally used a cost-based approach to pricing parts. But suppliers have asserted that the item is "of a type" that is commercial and sought to charge market-based prices, which are generally higher. The main difficulty is COs who feel they must apply a "beyond a reasonable doubt" standard when making their commerciality determinations in order to avoid criticism.

This is yet another reason why DOD needs its own acquisition regulation, if for no other reason than to free everybody else from the insanity of its processes.

I'm curious. What about just asking the contractor for a letter saying that they've sold the thing to the public, offered it for sale, or plan to offer it for sale? Where do the statutes or the FAR say that you need more than that? Where do they say you need even that much (That's a serious question. I don't know the answers.)

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Vern,

Appreciate the correction, I shouldn't use the word "claim" since it means something quite specific in the context of contracting (it's a bad habit left over from my debate years where we discussed argument structure in terms of "claim, warrant, impact").

That's an interesting solution, let me give some more thought to it, though I currently don't think the "plan to offer it for sale" portion would meet any of the commercial item definition's criteria (the other two would).

I went back and searched the Federal Register for the origins of the DFARS requirement for commercial item determinations on acquisitions over $1M and found the following (https://www.federalregister.gov/documents/2008/01/24/E8-1121/defense-federal-acquisition-regulation-supplement-commercial-item-determinations-dfars-case):

Quote

This rule will not have a significant cost or administrative impact on contractors or offerors, or a significant effect beyond the internal operating procedures of DoD. Therefore, publication for public comment under 41 U.S.C. 418b is not required. However, DoD will consider comments from small entities concerning the affected DFARS subparts in accordance with 5 U.S.C. 610. Such comments should cite DFARS Case 2007-D005

 

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13 minutes ago, Matthew Fleharty said:

I currently don't think the "plan to offer it for sale" portion would meet any of the commercial item definition's criteria (the other two would).

What about this:

On 3/8/2017 at 3:30 PM, Matthew Fleharty said:

(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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