Commerciality: Establishing pricing to the federal government

By Skyler Handl, Corporate Counsel, Public Sector

Selling to public sector customers is different from selling to the commercial market. For example, how much do you know about the government acquisition concept of “commerciality”? To preserve margins in government sales, you need to know how to comply with this concept.

Public sector customers typically require vendors to disclose cost data and then negotiate a profit, or “fee.” This flows through the entire government acquisition supply chain.

Commerciality was introduced as an exception to the general rule of cost disclosure to streamline government acquisition of commercial technology through requirements aligned to commercial market practices. Commercial technology is vetted by the open market, which mitigates risk, and reduces the expense of government acquisitions as development costs are spread across the commercial market. You wouldn’t expect to pay a one-time non-recurring engineering fee for the latest cellphone; it is baked into the price.

Today, government policy is to have agencies acquire Commercial Products and Services, whenever these offerings meet their needs. The government established broad definitions of Commercial Products in FAR 2.101, including services, which allows contractors to assert that their offered technology is the same, similar to, or “of a type” in terms of form, fit and functionality. They also defined “commercial off the shelf” (COTS) products which require even fewer government compliance requirements.

An award for Commercial Products or Services is made after a contracting officer issues a Commercial Item Determination, upon review of the contractor’s Commercial Item Assertion and Price Reasonableness Justification. This award is issued on SF-1449, commonly called a “FAR 12” contract, and clearly states that it is an award for Commercial Products or Services in the header and includes FAR 52.212-4 or FAR 52.212-5.

As suggested earlier, the greatest advantage to selling technology as a Commercial Product is that you do not have to disclose your cost and negotiate a fee. Pricing of Commercial Products and Services is based on market pricing. Common market pricing techniques include prices established by:

• Competition, or
• Published catalog, or
• Historical sales

Having a tight pricing strategy in support of your commerciality argument is crucial to your success in avoiding cost disclosure and expanding your margin. For public sector customers, pricing strategies with multiple price lists (depending upon whether the end user is government or commercial) suggests there’s a difference in technology offerings; it often makes these customers question the commercial nature of the technology.

Leveraging non-government end-use pricing and historical sales is required to establish a commercial market for the technology. The pricing strategy for your public sector customers should be the same as it is for your non-government end-use customers for products or services containing the same commercial technology.

Without an aligned strategy, you may undermine your argument that the technology is commercial in nature, thus opening your business up to up to additional compliance requirements, cost disclosures, and increased government oversight.

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This blog was adapted from a commentary that originally appeared in Washington Technology. For the full commentary, click here.