On October 15, the FAR Council issued a Proposed Rule implementing amendments to the current FAR definition of “commercial item.” As explained below, the Proposed Rule will eliminate the current FAR definition of “commercial item” and replace it with separate definitions for “commercial products” and “commercial services” to benefit both contractors and the acquisition workforce by simplifying the application and providing greater clarity on the scope of each term. Comments on the Proposed Rule must be submitted no later than December 14, 2020.

As a matter of background, the Proposed Rule implements both Section 836 of the National Defense Authorization Act for Fiscal Year 2019 (“NDAA FY 2019”) and a recommendation from the Section 809 Panel. In line with the proposed rule’s FAR revisions, Section 836 of the NDAA FY 2019 removes the definition of “commercial item” at 41 U.S.C. § 103 and replaces it with separate definitions of “commercial product” and “commercial service” at 41 U.S.C. §§ 103 and 103a, respectively. The Section 809 Panel (“Panel”)—created by Section 809 of the NDAA FY 2016—was tasked with reviewing current acquisition regulations and making recommendations for streamlining and improving the efficiency and effectiveness of the defense acquisition process. Among other general findings, the Panel determined that the FAR’s commercial acquisition terms “are confusing, poorly defined, or undefined altogether,” and, in particular, noted that “[t]he definition of a commercial item encompasses both commercial products and commercial services. Defining an item as meaning either a product or service is confusing.” Report of the Advisory Panel on Streamlining and Codifying Acquisition Regulations, Vol. 1 of 3 (Jan. 2018) at 18-19. In its recommendations, the Panel called for, inter alia, the FAR Council to amend FAR Subpart 2.101 in line with the NDAA FY 2019 changes to 41 U.S.C. §§ 103 and 103a (i.e., removing the current definition of “commercial item” and inserting new definitions of “commercial product” and “commercial service”) to better “reflect the significant roles services and commercial services play today in the DoD procurement budget.” Id. at 20, 31.

With this foundation in mind, the Proposed Rule’s definitions of “commercial product” and “commercial service”—as proposed for inclusion in FAR Subpart 2.101—are as follows:

Commercial product means—

(1) 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, and—

(i) Has been sold, leased, or licensed to the general public; or

(ii) Has been offered for sale, lease, or license to the general public;

(2) A product that evolved from a product described in paragraph (1) of this definition through advances in technology or performance and that is not yet available in the commercial marketplace, but will be available in the commercial marketplace in time to satisfy the delivery requirements under a Government solicitation;

(3) A product that would satisfy a criterion expressed in paragraphs (1) or (2) of this definition, except for—

(i) Modifications of a type customarily available in the commercial marketplace; or

(ii) Minor modifications of a type not customarily available in the commercial marketplace made to meet Federal Government requirements. “Minor modifications” means modifications that do not significantly alter the nongovernmental function or essential physical characteristics of an item or component, or change the purpose of a process. Factors to be considered in determining whether a modification is minor include the value and size of the modification and the comparative value and size of the final product. Dollar values and percentages may be used as guideposts, but are not conclusive evidence that a modification is minor;

(4) Any combination of products meeting the requirements of paragraphs (1), (2), or (3) of this definition that are of a type customarily combined and sold in combination to the general public;

(5) A product, or combination of products, referred to in paragraphs (1) through (4) of this definition, even though the product, or combination of products, is transferred between or among separate divisions, subsidiaries, or affiliates of a contractor; or

(6) A nondevelopmental item, if the procuring agency determines the product was developed exclusively at private expense and sold in substantial quantities, on a competitive basis, to multiple State and local governments or to multiple foreign governments.

. . . .

Commercial service means—

(1) Installation services, maintenance services, repair services, training services, and other services if—

(i) Such services are procured for support of a commercial product as defined in this section, regardless of whether such services are provided by the same source or at the same time as the commercial product; and

(ii) The source of such services provides similar services contemporaneously to the general public under terms and conditions similar to those offered to the Federal Government;

(2) Services 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. For purposes of these services—

(i) Catalog price means a price included in a catalog, price list, schedule, or other form that is regularly maintained by the manufacturer or vendor, is either published or otherwise available for inspection by customers, and states prices at which sales are currently, or were last, made to a significant number of buyers constituting the general public; and

(ii) Market prices means current prices that are established in the course of ordinary trade between buyers and sellers free to bargain and that can be substantiated through competition or from sources independent of the offerors;

(3) A service referred to in paragraphs (1) or (2) of this definition, even though the service is transferred between or among separate divisions, subsidiaries, or affiliates of a contractor.

85 Fed. Reg. at 65,612. Any revision that provides greater clarity to procurement regulations is―of course―always welcomed by contractors. The Proposed Rule’s primary benefit is to reduce the confusion experienced by both contractors and the Government with respect to the identification of commercial products and services. For example, under the current definition, a service can be a commercial item offered in support of a product that is also a commercial item. Furthermore, a commercial-off-the-shelf (“COTS”) item is a subset of a commercial item, but the definition of a COTS item only includes products and not services. This convoluted framework produces inconsistent commercial item determinations, and results in some contractors not being able to take advantage of the commercially friendly FAR Part 12 terms and conditions when providing their commercial products or services to the Government.

In addition to the clarity given to the commercial item definition, key elements of the FAR’s commercial acquisition process remain the same. Indeed, contractors will be relieved to learn that elements of the new “commercial product” and “commercial service” definitions are largely consistent with the current FAR 2.101 definition. For example, a “commercial product” will constitute a product that is of a type customarily used by the general public or nongovernmental entities for nongovernmental purposes and either (1) has been sold, leased, licensed or offered to the general public, in its original or slightly modified state, or (2) is not yet available but will be in time to satisfy the Government’s requirements. Similarly, the definition of “commercial services” tracks the “services” elements of the current “commercial item” definition, to include services provided to the public, sold competitively in substantial quantities in the commercial marketplace, and procured by the federal Government for support of commercial products. Further, the Proposed Rule counsels that the revisions to the FAR will neither “expand [n]or shrink the universe of products or services that the Government may procure using FAR part 12, nor does it change the terms and conditions vendors must comply with.” That said, contractors should note that one area of federal acquisition to monitor is whether the new definitions affect (if at all) the current commercial item determinations (“CIDs”) in the Defense Contract Management Agency’s CID database or its CID analysis for new products or services.

In sum, the Proposed Rule is a welcome attempt to clarify one of the most-cited misnomers in federal acquisition with minimal disruption to the commercial acquisition process. With the ever-increasing role of commercial products and services in federal procurement, clarifying and streamlining the acquisition process will only benefit current contractors by reducing compliance burdens and barriers to entry.