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Commercial contracting in the federal acquisition environment.

It was not that long ago that terms, such as "commercial item" and "federal acquisition," seemed like antonyms, and were almost mutually exclusive terms. In recent years, however, the U.S. government has advocated and encouraged procurement of commercial items-it even has authorized the use of commercial contracting terms to acquire such items.

Such a relatively rapid change in direction has understandably found many procurement and contracting professionals lacking experience with the commercial acquisition environment in which they must now function. This article intends to help facilitate the transition from the structured, formal world of FAR acquisition to the rather informal commercial acquisition environment.

To accomplish this task, the best place to start would be to review the definition of "commercial item" contained in FAR 2.101. In the interest of space, the following is an extract of relevant portions:

"Commercial item" (FAR 2.101)

(a) Any item, other than real property, that is of a type customarily used for non-governmental purposes, and that

(1) has been sold, leased, or licensed to the general public; or,

(2) has been offered for sale, lease, or license to the general public;

(b) any item that evolved from an item described in paragraph (a) of this definition and.. .will be available in the commercial marketplace;

(c) any item that would satisfy the criterion in (a) or (b), but for.. .modifications;

(d) any combination of items meeting requirements of (a), (b), or (c);

(e) installation, maintenance or training services.. .procured for support of items in paragraphs (a), (b), (c), or (d).

As may be concluded, this definition is quite broad and could include almost any commercial product, evolution from, modification of, or service to, such a product which is sold or offered for sale to the public.

What is particularly relevant to the procurement and contracting professional is the significant deviation from traditional federal government policies and regulations that is authorized or mandated when acquiring "commercial items" under FAR Part 12.

Let's highlight some of the more substantive deviations of Part 12:

(1) Contracts for "commercial items" shall include only clauses:

(a) "Determined to be consistent with customary commercial practice; or

(b) Required to implement provisions of law applicable to acquisition of commercial items."

(2) Terms and conditions prescribed by Part 12 shall "seek to balance interests of both buyer and seller," and shall not be tailored inconsistent with customary commercial practices;"

(3) Contracts for commercial items "shall rely on contractor's existing commercial quality assurance system;"

(4) USG shall acquire "only technical data and data rights customarily provided to the public with commercial item(s);"

(5) Requirements of FAR Part 49 (termination) "do not apply when terminating contracts for commercial items;" and

(6) FAR cost and pricing data is not to be obtained for commercial items.

As may be concluded, the acquisition of commercial items will necessarily require familiarization with commercial practices and commercial contract law. This application of commercial law is not completely new to federal contracting. The landmark case of Prudential Insurance v. United States established the precedent to utilize the Uniform Commercial Code (UCC) in federal courts to interpret federal contracts. However, the utilization of UCC for Part 12 acquisitions is much more broad than was anticipated prior to establishment of Part 12.

There is some parallel between the deviation from traditional FAR requirements as contained in Part 12 for commercial item acquisition, and those contained in Subpart 13.5 for simplified acquisition procedures (SAP). This does result in some confusion between these two similar, but different FAR sections. Therefore, let's review some relevant portions of Subpart 13.5, to ensure an understanding of the substantive differences.

* Subpart 13.5 provides simplified procedures for acquisition of supplies and services greater than the simplified acquisition threshold (SAT) of $100,000, but not exceeding S5 million.

* The purpose of Subpart 13.5 is to vest contracting officers with "procedural discretion and flexibility" in order to reduce administrative costs, improve SDB opportunities, promote efficiency and economy, and avoid unnecessary burdens for agencies and contractors.

* Simplified acquisition procedures are not limited to acquisition of commercial items, although they could tend to favor commercial item acquisition.

* When acquiring commercial items under 13.5, compliance with FAR Part 12 also is required.

* The authority for simplified acquisition procedures expires December 2002 and is reviewed annually.

As may be noted, there is similarity between Part 12 and Part 13.5 procedures; however, they were established for different purposes and do not necessarily both apply under the same circumstances.

The interesting and challenging aspect of commercial item acquisition in the federal acquisition environment is that the contracting and procurement professional must understand and apply both Federal Acquisition Regulations and commercial contracting principles, including the Uniform Commercial Code (UCC). Therefore, it is appropriate to compare and contrast the contracting principles of these two disparate bodies of law/regulation. It should be noted that any reference to the UCC essentially refers to state commercial code versions of UCC, since every state in the U.S. has enacted the UCC in some form.

Figure 1 (see left) provides a comparison of substantive portions of both the FAR and UCC. This comparison illustrates the significant differences which exist between these two sets of regulation and guideline codes. These differences are important for the contracting and procurement professional to understand in view of cases such as Prudential Insurance v. US. Figure 2 (see p. 19) provides a comparison of FAR Part 12 to the general FAR principles cited in Figure 1. As may be noted, there is more parallel between Part 12 and UCC; however, there are also still substantive differences.

Both of these comparisons clearly reflect that FAR is much more structured and formal than UCC. They also reflect that Part 12 is less formal and incorporates many UCC principles for commercial item acquisitions-- although Part 12 is still substantially different than UCC.

As may be concluded, contracting for acquisition of commercial items under FAR Part 12 is significantly different than procurement under other provisions of the FAR. These differences will necessitate the training of government and contractor personnel in commercial law and commercial contracting practices. It also may require cultural changes to accommodate utilization of less structured commercial acquisition procedures and practices in the federal acquisition environment.

It is appropriate, therefore, for contracting and procurement professionals to seek training that will enable them to successfully transition into the commercial environment. This can be an exciting and enlightening time for those professionals who embrace the changes necessary to excel in the changing federal acquisition environment. CM
Figure 1

Comparison of FAR and UCC

FAR/Government                       UCC/Commercial

* Actual contracting authority       * Apparent authority is
  required                             sufficient

* Formal T&C and mandated            * Informal and many implied

* "Offer" and "acceptance"           * Equivocal and/or contrary
  unequivocal                          terms

* Specific ethics/standards          * Good faith/company policy
  of conduct                           only

* Warranties only as expressed.      * Implied and express warranties

* Specific inspection/acceptance     * Implied and statutory terms for
  criteria                             inspection/acceptance/rejection

* Damages for contractor default     * UCC provides for excess costs,
  limited                              plus incidental and
                                       consequential damages

* Unilateral convenience             * No collateral rights
  termination right

* Unilateral changes clause          * No unilateral rights

* Cost data required over $          * No cost/pricing data rights

* Disputes resolution procedure/     * Numerous alternatives
  limits                               available

* Formal competition required        * No such requirement

* Authority to audit seller's books  * Not generally available
Figure 2

Comparison of FAR Part 12 to general FAR principles

FAR (Generally)                 FAR (Part 12)

* Actual contracting authority  * Unchanged (understandably)

* Formal T&C and mandated       * Formality remains; however,
  clauses                         commercial clauses and practices
                                  generally utilized

* "Offer" and "acceptance"      * Unchanged in Part 12

* Specific ethics/standards     * Unchanged; Procurement Integrity
  of conduct                      Act not cited, but also not

* Warranties only as required   * 52.212-4 provides UCC-type
  and expressed                   language for warranties of
                                  merchantability and fitness for
                                  particular purpose

* Specific inspection/          * 52.212-4 parallels UCC provisions,
  acceptance criteria             including limitations on right to
                                  reject "within a reasonable time"

* Damages for contractor        * Excludes consequential damages,
  default limited                 but is silent on incidental
                                  damages (available under UCC?)

* Unilateral convenience        * 52.212-4 provides abbreviated
  termination right               version of T for C clause--
                                  limited language included on
                                  price paid to contractor

* Changes clause (unilateral)   * No more unilateral rights under
                                  Part 12--requires "written
                                  agreement of parties"

* Cost data required over $     * CAS not applicable; no indication
  threshold                       of when cost/pricing data required

* Disputes resolution           * CDA encourages ADR; CO "decision"
  procedures/limits               still required, however

* Formal competition required   * Defers to Part 13 requirements,
                                  which provides exclusions for
                                  "simplified acquisitions" under

* Authority to audit seller's   * 52.212.5 provides audit rights
  books                           if over SAP limits and other
                                  than a sealed bid procurement

About the Author

ERNEST G. GABBARD, JD, CPCM, CPM, is director of corporate procurement and contracting for Allegheny Technologies, Inc. He is an NCMA Fellow and a member of the Greater Pittsburgh Chapter of NCMA, Send comments on this article to
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Author:Gabbard, Ernest G.
Publication:Contract Management
Article Type:Brief Article
Geographic Code:1USA
Date:Sep 1, 2002
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