What makes products or services commercial for the purposes of government acquisitions?

Generally speaking, they must be similar, but not necessarily identical, to those sold in the commercial market and used by the general public or non-government agencies. Federal Acquisition Regulation (FAR) Part 12 establishes purchasing policies for government agencies that closely resemble those of the public marketplace. In fact, the federal government encourages agencies to take advantage of commercial items. Caution: Real estate and other real property are excluded.

Officially, the regulations require the items to be “of a type customarily used by the general public or by non-governmental entities for purposes other than governmental purposes.” In other words, they can be similar to what is normally sold to people other than employees or other representatives of state, local or federal governments.

Other qualifications include:

  • The item has to have been sold, leased, licensed, offered or otherwise available in time to meet the government’s needs;
  • Some modifications are allowed, depending on who is the ultimate purchaser and the extent of the changes; and
  • Services associated with supporting the items may be commercial if provided by the same staff under the same conditions they are offered to the public.

If the government has not already determined that an item is commercial, the request for proposal (RFP) will usually have to meet a solicitation provision entitled Requirements for Cost or Pricing Data or Information Other Than Cost or Pricing Data. That gives you a chance to convince the government that your goods qualify as commercial.

The provision also allows you to apply for an exception by submitting a written request with such supporting prices as:

  1. Those for which the same or similar items have previously been sold in the marketplace. These prices are the preferred data and must be adequate to evaluate the reasonableness of the price your enterprise is proposing.
  2. Those found in catalogs and on lists, schedules and other sources from manufacturers and sellers. This material must be published or otherwise available for inspection and include current prices or the amounts charged the last time the items were sold to a significant number of public buyers. Submit a copy of — or identify — the source and its date or the pages where the items can be found. Alternatively, indicate in writing that the material is on file at the government buying office. You must also provide a copy or describe current discount policies and price lists (published or unpublished) from wholesalers, manufacturers, resellers and the like. Explain the basis for each price your enterprise is offering and how it relates to recently established prices, including those in quantities similar to those you are proposing.
  3. Those set through free trade. You must be able to substantiate the price through competition or sources independent of your company. If you are offering a market-priced good, provide the source and date or period of the quotation or other basis for price, the base amount, and applicable discounts. In addition, you need to describe the nature of the market.

With this information in hand, the potential purchaser can analyze your firm’s proposed prices and determine if they are fair and reasonable without regard to your costs or profit margin. If the contracting officer remains unconvinced you will likely have to submit cost or pricing data, and be subjected to a full cost analysis or forward pricing cost audit, as well as additional compliance audits.

Services can also be considered commercial if they meet these same requirements and your business provides the same pricing data. Even if your enterprise does not sell substantial amounts of the services, they may qualify if they are sold commercially by other suppliers.

To determine the reasonableness of the price of your services, the contracting officer may ask you to submit examples of prices government and commercial customers pay for the same or similar services. If the contracting officer is still not convinced, you may have to provide costs for labor, materials and overhead. All of this is still preferable to having to send in a full blown cost proposal with cost or pricing data and related cost analysis and audits.

Tip: Many items and services fit into the definition of commercial. Just be sure to providesufficient information to demonstrate that what you are offering is commercial under the government’s definition and that the price is reasonable. Keep in mind that the more accurate the data you provide, the more likely you can avoid a cost analysis and an audit.

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