A little-heralded change to the statutory definition of “commercial item” has now made its way to a proposed FAR rule, which will open up regulatory relief to a whole new class of government contractors – companies, both domestic and foreign, that regularly sell products developed at private expense to friendly foreign governments. With the December 12, 2017, passage of Section 847 of the National Defense Authorization Act of 2018, Pub. L. 115-91 (“2018 NDAA”), the statutory set of definitions for the term “commercial items” was amended. See 41 U.S.C. § 103. More specifically, Section 103(8), addressing “nondevelopmental items,” was broadened as follows:

(8) a nondevelopmental item if the procuring agency determines, in accordance with conditions in the Federal Acquisition Regulation, that the item was developed exclusively at private expense and has been sold in substantial quantities, on a competitive basis, to multiple State and local governments or to multiple foreign governments.

(Emphasis reflects new language). On May 10, 2019, the FAR Council promulgated a Proposed Rule amending and broadening the definition of “commercial item” in FAR 2.101 to include the statutory language.

A “nondevelopmental item” (“NDI”) is separately defined by FAR 2.101 as, in pertinent part:

(1) an already developed product “used exclusively for governmental purposes by a Federal agency, a State or local government, or a foreign government with which the United States has a mutual defense agreement”; (2) a product which meets the definition in (1) that requires minor modifications or modifications “of a type customarily available in the commercial marketplace;” or (3) a product which does not meet the definition in either (1) or (2) “solely because the item is not yet in use.”

The FAR also encourages agencies to solicit NDIs when routine commercial items are not readily available in order to streamline the acquisition process. See, e.g., FAR 7.102(a)(1) and 7.103(b).

With this Proposed Rule, suppliers of NDIs to foreign governments now can get the benefits of commercial items status as long as the products being offered have been

(A) developed at private expense;

(B) sold in substantial quantities to multiple foreign governments; and

(C) acquired by those governments through competitive procedures.

And what are those benefits? According to the Section 809 Panel, cited in the Comments to the Proposed Rule, commercial item acquisitions are subject to up to 138 contract clauses, while acquisitions of NDIs that do not meet the definition are subject to more than three times that number, including, as an example, clauses implementing the Truth in Negotiations Act. Moreover, Part 12 of the FAR permits commercial item suppliers to sell their products using terms and conditions somewhat more akin to the commercial marketplace, allowing flexibility in the use of their standard terms governing inspection and acceptance, changes (requiring mutual agreement), patent indemnity, risk of loss, terminations, warranties and limitations of liability.

One of the conditions to commercial item status for NDIs is that the NDI be “developed exclusively at private expense.” The FAR is bereft of a definition of this term but the reader will find one in the DFARS clauses addressing rights in noncommercial technical data and computer software (252.227-7013 and -7014). In those clauses, the term is defined as development that “was accomplished entirely with costs charged to indirect cost pools, costs not allocated to a government contract, or any combination thereof.” The Preamble to the Proposed Rule suggests implicitly that, even if this definition were applicable to the new Section 8, it would not deny commercial item status to products that were developed with money supplied by a foreign government. In particular, the Preamble includes the following commercial items under the expanded definition: “Defense products previously developed by defense agencies of U.S. allies . . . .” and “[a] mechanical dereefer . . . used with the U.S. Army’s cargo parachute that was developed for and first used by the Canadian Army.” (Emphasis added.)

The Preamble to the Proposed Rule also emphasizes that the “commercial market is global,” and “commercial items are not limited to the domestic commercial market.” This means that foreign suppliers of commercial items that meet any one of the eight FAR 2.101 definitions of “commercial item” are not restricted in taking advantage of the status of a commercial item supplier to the U.S. Government. By relaxing the record-keeping, reporting and compliance obligations of foreign (and domestic) companies whose trade is to regularly supply friendly foreign governments, the Government hopes to increase competition and further streamline the acquisition process by including these suppliers in the global marketplace.

Comments are due on or before July 9, 2019. A final rule will presumably follow in the coming months.

Practical Guidance

Any contractor asked to certify or represent that a product is a commercial item should always seek counsel before making such certifications. All eight of the commercial item definitions are deceptively simple but fraught with landmines. Careful consideration and planning are necessary preconditions to a declaration that a product qualifies as a commercial item. Further, remember that selling anything to the government requires a vendor to be prepared for a litany of regulations, terms and conditions (cybersecurity, domestic preference provisions, etc.) that will require some proper prior planning.

Stay tuned to this blog as more commercial item reforms enacted in the National Defense Authorization Acts of 2018 and 2019 make their way through the regulatory process. These include (1) allowing commercial off-the-shelf (“COTS”) product purchases through e-commerce portal providers, (2) establishing commercial item status in new acquisitions based on prior agency determinations, (3) reduction of FAR and DFARS clauses applicable to commercial items, (4) eliminating flow-down provisions and clauses applicable to acquisitions of commercial items by subcontract, and (5) distinguishing and refining the definition of “commercial item” by eliminating the term in favor of the terms “commercial products” and “commercial services.”