How Credit Managers Can Reduce Risk in Federal Contracting

By Fox, Douglas; Toomey, Erin | Business Credit, June 2016 | Go to article overview

How Credit Managers Can Reduce Risk in Federal Contracting


Fox, Douglas, Toomey, Erin, Business Credit


Even though the federal government spends approximately $500 billion per year on procuring goods and services, if you are wary of entering into the government contracts marketplace, your concerns are valid. Government-unique auditing and accounting requirements, specifications and standards, and other requirements have dissuaded many commercial contractors from selling their goods and services to the federal government.

What many commercial contractors do not realize, however, is that since federal acquisition reform in the 1990s, the government has been procuring supplies and services from commercial contractors on terms and conditions that are similar to commercial contracts.

Federal Acquisition Regulation (FAR) Part 12 sets forth policies and procedures unique to commercial items, establishes acquisition policies that more closely resemble the commercial marketplace and identifies the laws and regulations from which commercial item contractors are exempt.

Government Contractor Defined

The formation and administration of U.S. Government contracts is governed by FAR and more than 20 agency FAR supplements, including the Department of Defense FAR Supplement, the Department of Energy Acquisition Regulation and the General Service Administration Acquisition Manual (all are available electronically at www.acquisition.gov). Companies that receive a contract directly from the U.S. Government are considered "prime contractors" and companies that provide goods/ services in support of a prime contract are considered "subcontractors."

Becoming a government subcontractor is an easy and effective way to enter the government contracts marketplace. FAR 44.101 defines subcontract as a contract entered into by a subcontractor to furnish supplies or services for performance of a federal government prime contract or subcontract. The term includes, but is not limited to, purchase orders. Government contract laws, rules, regulations and contract clauses apply to subcontracts to the extent they are incorporated into the subcontract. Subcontracts are also governed by commercial law, such as the Uniform Commercial Code, other statutory laws or common law. There are some clauses the prime contractor or higher-tiered subcontractor must flow down to the subcontractor or it will be in breach of its prime contract or higher-tiered contract, but not all provisions have to be (or can be) flowed down.

What Qualifies as a Commercial Item?

Although the definition is lengthy in sum, the FARs definition of a commercial item can be found in FAR 2.101. The definition is different for goods and services. A commercial item good is anything other than real property (land) that is customarily used for nongovernmental purposes and has been sold, leased or licensed to the general public; or offered for sale, lease or license to the general public. (1) A commercial item service is a service "offered and sold competitively in substantial quantities in the commercial marketplace based on established catalog or market prices for specific tasks performed or specific tasks to be achieved and under standard commercial terms and conditions." (2)

Note that for both goods and services to qualify as a commercial item, a contractor needs only to demonstrate that the goods or services it is offering to the government is "of a type" of good or service currently being offered or sold to the general public. This does not require a contractor to show that the same exact item is being offered or sold to the general public or that the contractor itself offers or sells the item to the general public. The FAR does not, however, draw a clear line regarding the point at which the differences between the commercial product and the product offered to the government are too significant to be considered "of a type."

How Commercial Item Contracts Differ from Traditional Government Contracts

Importantly, commercial item contractors are exempt from the main regulatory requirements that increase administrative costs and risks, such as the Truth in Negotiations Act, Cost Accounting Standards and audits related thereto. …

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