Earlier this month, the FAR Council issued a proposed rule to expand the definition of “commercial item” under the Federal Acquisition Regulation (FAR) to include certain items sold in substantial quantities to foreign governments. This new rule implements section 847 of the National Defense Authorization Act (NDAA) for FY 2018 (Pub. L. 115-91), and has the potential to extend commercial item status to defense articles that have been sold to foreign militaries, including sales under the Foreign Military Financing program.
Ensuring the commercial item status of products and services has long been a key point of federal contracting compliance for many businesses, as commercial item contracts typically avoid many of the more burdensome provisions imposed by the FAR. While the term “commercial item” is often generalized to refer to items offered for sale to the general public for non-governmental purposes, the definition of “commercial item” under FAR 2.101 includes certain items used for governmental purposes and sold in substantial quantities to multiple state and local governments. See FAR 2.101. This provision permitted products like protective equipment used by police and fire departments to be deemed commercial items.
Specifically, the FAR provides that a “nondevelopmental item” can qualify for commercial item status “if the procuring agency determines the item was developed exclusively at private expense and sold in substantial quantities, on a competitive basis, to multiple State and local governments.” See FAR 2.101. While the foregoing provision is limited to sales to state and local governments, the FAR separately defines “nondevelopmental item” as “[a]ny previously developed item of supply 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 cooperation agreement.” (emphasis added) So while the FAR defines “nondevelopment item” to include products sold to foreign governments, the commercial item definition only extends to products sold to state and local governments.
The proposed rule expands the commercial item definition to include nondevelopmental items sold in substantial quantities to foreign governments. While this change results in adding only four words to the FAR, it represents a potentially significant expansion to the concept of commerciality in federal contracting, as items used exclusively for defense applications would potentially be deemed commercial items under the proposed rule. The notice of proposed rulemaking is clear that intent of the rule is to include defense articles previously developed at private expense for U.S. allies under the definition of commercial item.
Comments on the proposed rule are due by July 9, 2019, but given that this rule change is conforming the regulatory language to the statutory change reflected in the NDAA, this proposed rule is likely to go into effect without substantial further delay. We will continue to monitor this proposed rule and when it will go into effect, as well as any guidance offered by the FAR Council and procuring agencies on how commerciality will be interpreted for defense articles that qualify under this expanded definition.