How does the Government define construction? We need to consider some of the definitions in FAR part 2:
- Acquisition means the acquiring by contract with appropriated funds of supplies or services (including construction) by and for the use of the Federal Government through purchase or lease, whether the supplies or services are already in existence or must be created, developed, demonstrated, and evaluated.
- Architect-engineer services, as defined in 40 U.S.C. 1102, means … [p]rofessional services of an architectural or engineering nature performed by contract that are associated with … construction, alteration, or repair of real property …
- Commercially available off-the-shelf (COTS) item … [m]eans any item of supply (including construction material) that is … [a] commercial product …
- Construction means construction, alteration, or repair (including dredging, excavating, and painting) of buildings, structures, or other real property …
- Commercial product means … [a] product, other than real property, that is of a type customarily used by the general public or by nongovernmental entities for purposes other than governmental purposes …b … [s]ervices 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.
Our takeaway from reviewing these definitions related to construction is that:
- Construction materials (e.g., cement, sand-fill, steel, wood, drywall, etc. – anything from a building supply store) can be considered a commercial off the shelf item (COTS).
- Construction is the process of creating real property, it is not the real property itself that is removed from the definition of a commercial product.
- Construction is not a commercial product as the definition does not cover real property.
- Construction is a service involving the professional services of an architectural or engineering and the manual labor to complete the construction of real property using COTS construction materials.
The way we see it, construction is the process (i.e., service) of creating real property (e.g., a building) using mostly commercial off the shelf materials. For example, anyone, including the Government, can go out into the commercial marketplace and hire a general contractor to design a building and manage numerous subcontractors to create concrete structures, install electrical wiring, install heating and cooling (HVAC), install drywall, paint interiors and exteriors, install flooring, etc. So, one would think that construction is a commercial service as the construction of real property is a type of service offered and sold competitively in substantial quantities in the commercial marketplace based on market prices for specific tasks and outcomes under standard commercial terms and conditions.
Let’s see if there are any other parts of the FAR that would change this conclusion.
FAR Part 36, Construction and Architect-Engineer Contracts
This part of the FAR provides the policies and procedures specific to contracting for construction and architect-engineer services. FAR 36.101 provides that construction and architect-engineer contracts are subject to the requirements in other parts of the FAR, which shall be followed when applicable. However, when a requirement in FAR part 36 is inconsistent with a requirement in another part of the FAR, FAR part 36 takes precedence. No where in FAR part 36 is it addressed as to whether construction meets the definition of a commercial service.
FAR 36.214 provides that when negotiating construction contracts the policies and procedures in FAR part 15 will be applied. This section goes on to make it clear the requirements in FAR 15.403-1 will be used to determine whether certified cost or pricing data or data other than certified cost or pricing data shall be required.
FAR 15.403-1 Prohibition on Obtaining Certified Cost or Pricing Data
FAR 15.403-1(b)(3) provides that when the Government is acquiring a commercial service the contracting officer is prohibited from obtaining certified cost or pricing data. FAR 15.403-1(c)(3) goes on to provide that any acquisition of a service determined to meet the commercial service definition in FAR 2.101 is exempt from the requirement for certified cost or pricing data.
Office of Management and Budget (OMB) 2003 Memorandum
On July 3, 2003 OMB issued a memorandum to Senior Procurement Executives titled “Applicability of FAR Part 12 to Construction Acquisitions.” This memorandum addressed periodic questions that had been raised to OMB as to the use of FAR part 12 for the acquisition of construction services. The memorandum makes it clear that for the acquisition of construction services FAR part 36 should be used. The memorandum states: FAR “Part 36 incorporates provisions and clauses that are generally consistent with customary commercial practices in the construction industry.” (Emphasis added) The memorandum goes on to state: “Part 36 applies well-established commercial principles that are designed to result in an equitable distribution of risk between the government and contractors. In doing so, Part 36 enables agencies to gain easy access to marketplace capabilities.” (Emphasis added) Based on the references to commercial practices and marketplace for construction services, it appears clear to us that OMB considers construction services to be commercial in nature, even if FAR part 36, and not FAR part 12, is applied to the acquisition.
For construction, OMB points out the importance of using FAR part 36 and its required clauses, as FAR part 12:
lacks clauses for handling critical circumstances common to construction efforts, especially those involving new construction or non-routine alteration and repair services. Clauses that would typically be expected in these efforts include those addressing differing site conditions, change orders, and suspension of work. The gap in coverage reflects the fact that construction contracting was not generally contemplated when Part 12 was promulgated. New construction projects and complex alteration and repair, in particular, involve a high degree of variability, including innumerable combinations of site requirements, weather and physical conditions, labor availability, and schedules. The current coverage in Part 12 fails to allocate risk in a manner that takes into account the nature of these activities.
OMB goes on to state “[t]his memorandum is not intended to limit the goal of FAR Part 12, which is to ensure agencies are effectively positioned to take full advantage of the commercial marketplace and the value and efficiencies the marketplace generates.” “Simply put, if Part 36 is not used, an agency may be hard pressed to obtain the marketplace competition needed to negotiate fair and reasonable prices on these construction projects. (Emphasis added) We do not believe that OMB ever intended for this memorandum to limit construction from being considered commercial. We believe OMB simply intended for the existing commercial practices already incorporated into FAR part 36 to be utilized.
If Certified Cost or Pricing Data is Prohibited, are Construction Contracts Cost Accounting Standards (CAS) Covered?
To answer this question we have to turn to 9903.201-1, CAS applicability. 9903.201-1(b)(6) provides that all contracts and subcontracts “authorized” by FAR 12.207 for the acquisition of commercial items are exempt from all cost accounting standards (CAS) requirements. FAR 12.207(a) requires the Government to “use firm-fixed-price contracts or fixed-price contracts with economic price adjustment for the acquisition of commercial products or commercial services.” The use of the term “authorized” raises a question as to whether the CAS exemption is limited to contracts using FAR part 12 or any commercial product or service provided a fixed-price contract is awarded. We do not believe that the CAS board intended to limit the commercial item exemption to only contracts using FAR part 12 procedures. Had that been the CAS board’s intent, it would have referenced FAR part 12 in its entirety.
The July 17, 2018 Federal Register issuing the final rule changing the wording in 9903.201-1(b)(6) states:
In its proposed rule, the CAS Board sought to address the inconsistencies between the lists in the (b)(6) exemption and FAR 12.207 by removing reference to specific contract types in the (b)(6) exemption and instead making simple reference to ‘‘contracts and subcontracts for the acquisition of commercial items.’’ The CAS Board explained that this generalized language would ‘‘obviate the continuing need to update and keep current a detailed listing of permissible contract types for the acquisition of commercial items, which continues to evolve with the passage of time.’’ 77 FR 69424. The CAS Board further explained that this language tracks [with] the exemption set forth in its authorizing statute at 41 U.S.C. 1502(b)(1)(C)(i) as well as the language in section 4205 of the Clinger-Cohen Act.
41 U.S.C. 1502(b)(1)(C)(i) simply provides that CAS does not apply to “a contract or subcontract for the acquisition of a commercial product or commercial service” with no requirement for the use of FAR part 12 procedures.
Conclusion
The acquisition of construction services should be considered commercial as the construction of real property is a type of service offered and sold competitively in substantial quantities in the commercial marketplace based on market prices for specific tasks and outcomes under standard commercial terms and conditions. Therefore, per FAR 15.403-1(b)(3) certified cost or pricing data is prohibited. Additionally, provided the FAR part 36 construction contract is one of the contract types allowed by FAR 12.207 (i.e., fixed-priced) then the contract would be exempt from the requirements of CAS based on 9903.201-1(b)(6).
Just to be completely clear – We are not saying construction should be awarded using FAR part 12 procedures. What we are saying, is that a construction contract award under FAR part 36 procedures can still be found to be commercial services based on the FAR part 2 definition and therefore, the commercial exemption to certified cost or pricing data and CAS should apply to the FAR part 36 construction contract.
We understand that many contracting officers and prime contractor procurement representatives may not agree with our conclusion. Additionally, many construction contractors believe that as most government construction projects are awarded on a competitive basis, their risk from certified cost or pricing data (i.e., Truthful Cost or Pricing Data Act) and CAS are limited. While competition does reduce the risk on the initial award, few if any Government projects come to completion without changes or additional work that will need to be priced on a sole source basis. Therefore, we believe it is important to raise commerciality early in the contracting process. Additionally, unless regularly challenged on their position, contracting officers and prime contractor procurement representatives will continue adding unnecessary requirements to construction contracts.
Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s acquisition requirements and developing packages supporting the commerciality of construction services. We would be happy to be part of your team.
