Buy Lines: Broad definition of commercial items hurts government, industry

Steve Charles

Ten years ago, Congress changed the acquisition systems to make it a priority to buy commercial-off-the-shelf items.

Implementing regulations broadened the definition of a COTS item to include anything "sold, or offered for sale" that is "of a type" sold to non-federal entities. Since then, it seems an ever-increasing number of non-commercial products and services are being characterized as COTs.

I fear that this abuse ultimately will hurt those it was intended to help.

Because COTS items are exempt from many procurement laws and regulations, it is understandably tempting for sellers to define each and every product or service they offer as commercial, even when the federal government or its prime contractors are the only buyers of such items.

I believe an overly broad definition of COTS raises three major concerns.

First, in some cases, the government is not getting the benefit of truly commercial technology. The FBI's Virtual Case File program built by Science Applications International Corp. is a perfect example. Far superior standard commercial technology exists, but the system was built under a government contract not using technology employed by global corporations to manage even more complex networks of relationships.

Second, the government can't tell when the "commercial" labor rates are a good deal because they are not based on cost-accounting standards, nor are they based on actual prices charged to commercial (non-federal) customers.

As a result, the basis for labor rates on most "commercial" contracts awarded by the government today is legally hazy.

This is an underlying concern of the rulemakers charged with implementing the provisions of the provisions of the Services Acquisition Reform Act allowing time and material and labor hour contract types for commercial services.

They ask, what exactly is a commercial service? How do we conduct a fair and reasonable price determination? And most important, what, exactly, is not a commercial service?

Third, commercial item exemptions for the most commercial of commercial companies are at risk of not being granted -- specifically, the proposed Buy America and Trade Agreement Act exemptions for certain product categories that are routinely assembled in low-cost operations in countries such as Taiwan, Malaysia and Thailand.

It appears that most of the companies opposed to this exemption are those whose primary customer is the federal government. These companies would not have anything to worry about if they refrained from labeling their government-unique items as COTS, as non-COTS items would continue to be protected from the free markets of the global economy.

Today, with auditors reviewing every disclosure and transaction for compliance with all the rules, the first question asked is: Which rules apply in this situation? Because different rules apply for commercial items, and because practically everything has been categorized commercial, it is just a matter of time before auditors identify perceived abuses in this area. When they do, we will face the risk of losing the commercial item exemptions we have all worked so hard to get.

The need for clarity is even greater now because risks of non-compliance carry potential liability that cannot be ignored.

I support the recommendation of the American Bar Association's Section of Public Contract Law for a return to a precise definition of COTS. Wouldn't it be great to hear someone in authority (other than an auditor) clearly articulate exactly what a COTS item is by providing specific examples of what it is not?

The overly-broad definition of commercial items is hurting truly commercial companies.

Steve Charles is cofounder of immixGroup, a government business-consulting company in McLean, Va. He welcomes your comments at Steve_Charles@immixgroup.com.

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