The Federal Acquisition Regulation (FAR) Council issued a final rule last week, effective December 6, 2021, which replaces the current FAR definition of "commercial item" – which includes commercial services – with separate definitions for the terms "commercial product" and "commercial service." The rule represents a common-sense change and hopefully signals an end to some of the historical confusion caused by the inclusion of commercial services within the definition of commercial items.

Background

The final rule, which follows the proposed rule published on October 15, 2020, implements both a recommendation from the Section 809 panel and Section 836 of the National Defense Authorization Act (NDAA) for fiscal year 2019. The Section 809 panel, created pursuant to Section 809 of the FY16 NDAA, was charged with recommending improvements to the acquisition system. In its Volume 1 report, the panel concluded that the definition of "commercial item" was "overly broad" and that "defining an item as meaning either a product or a service is confusing." Furthermore, the panel found that defining a commercial item in such a way as to encompass both products and services did not reflect the significant role that commercial services play in federal procurement, noting that the Department of Defense (DoD) acquired more than $23 billion in commercial services in FY17 – 18 percent of all service obligations. Therefore, the panel recommended the FAR council bifurcate the definition of commercial item into one for commercial products and one for commercial services. 

The New FAR Rule

The rule removes the definition of "commercial item" and incorporates the following definitions into FAR Subpart 2.101:

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

The New FAR Rule's Impact and Takeaways 

The FAR Council commented that the amendment to separate the "commercial item" definition "does not expand or shrink the universe of products or services the Government may procure using FAR Part 12" and does not have effect terms and conditions of FAR Part 12 procurements. Nonetheless, the final rule should allow the acquisition workforce and government contractors to avoid imprecise conversations around commercial item contracting. As the Section 809 panel pointed to as an example of confusion under the old framework, a service could be a commercial item offered in support of a product that is also a commercial item. The final rule should eliminate any such confusion as to what constitutes a commercial service and a commercial product and may even allow for "greater engagement in the commercial marketplace" moving forward.  

For more information on commercial products or services, please contact one of the Miller & Chevalier attorneys listed below.

Alex Sarria, asarria@milchev.com, 202-626-5822

Jason Workmaster, jworkmaster@milchev.com, 202-656-5893

Connor Farrell, a law clerk in the government contracts group, contributed to this client alert.

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