Let’s start with the basics. When is a commercial determination required in the Federal Acquisition Regulations (FAR)? The common belief is that only when the award of a subcontract exceeds the cost or pricing data threshold. This common belief is what we refer to as a too-often believed myth. The truth is that FAR 52.244-6, Subcontracts for Commercial Products and Commercial Services, specifically requires that “to the maximum extent practicable, the Contractor shall incorporate, and require its subcontractors at all tiers to incorporate, commercial products, commercial services, or non-developmental items as components of items to be supplied” to the Government. To comply with this requirement, as many as possible of your purchase orders issued under your U.S. Government contracts and subcontracts should have commercial determination regardless of the dollar value.
The Defense FAR Supplement (DFARS) is not much help on this topic either. DFARS 244.402 provides the DOD policy, which states: “Contractors are required to determine whether a particular subcontract item meets the definition of a commercial product or commercial service … [and] are expected to exercise reasonable business judgment in making such determinations, consistent with the guidelines for conducting market research in FAR Part 10.” Still, no threshold is provided.
This particular section of the DFARS also adds some confusion as it allows items valued at less than $10,000 per item purchased for multiple contracts to be treated as commercial products, even though the items may not meet the definition of a “commercial product” at FAR 2.101 and a commercial product determination is not required. To clear up the confusion, this is not saying that all small dollar items are, by default, commercial.
The only threshold mentioned is in DFARS 212.102(a)(iii), which requires the contracting officer to make a commercial determination when the award exceeds the simplified acquisition threshold. However, this is not applicable to contractors as it is not included or referenced in any contract clause.
Why Bother if the Government is Not Looking Below the Threshold?
Well, here are at least a few reasons we believe you should address commerciality regardless of dollar value:
- At some point, a DCMA reviewer or DCAA auditor is going to trip over this overlooked requirement and find it an easy finding to report.
- Do you really want to burden your true commercial suppliers with the numerous FAR requirements that are applied at a dollar value well below the cost or pricing data threshold?
- During initial production/prototyping many suppliers are below the cost or pricing data threshold. However, when production increases, those suppliers are now over the threshold. Convincing the Government that the supplier is now commercial can be very difficult.
- Most of those suppliers have not read or understood the requirements you are passing down to them. All is good until it isn’t. If there is a problem, the Government is going to expect you and your suppliers to fulfill all the FAR requirements – there are no do-overs after the fact.
What You Need to Do
- Educate your suppliers on the benefits of a commercial determination sooner rather than later. Start by having them read our article, “Why Identifying Commercial Items at Your Organization is Key.”
- Have an established process for supporting the commercial determinations to include:
- A form for the supplier to make an assertion as to commerciality and
- Do your market research so you can document commerciality using what you know and what the supplier asserts.
- Develop a database of your determinations.
Your investment in time and resources today will have a significant benefit to you in the future.
Pricing Commercial Products and Services
The fact that you have determined a product or service to be commercial does not, by default, make the price fair and reasonable. You still want to compete as much as possible – remember the requirements of FAR 52.244-5, Competition in Subcontracting. We understand that you cannot simply do an internet search for the price of everything. Most commercial products and services, other than true commercial off-the-shelf (COTS), are going to have limited pricing information available to the general public. This is where your market research is going to come in. Be on the lookout for our upcoming article on market research.
Key Takeaways
- The Government expects commerciality determinations on a part-by-part basis, not by supplier, so once the supplier has done a couple of assertions, the process should get much easier.
- The suppliers will have substantially fewer FAR flowdown clauses to deal with.
- You still need to be able to support a fair and reasonable price for commercial products and services.
You do not have to be in this alone. Let us help build up your buyers’ skill sets in commerciality, pricing, and market research. Redstone GCI can assist your company by reviewing your commercial assertion or determination, conducting price analysis on commercial products and services, drafting written policies and procedures, and providing training on commercial determinations.
