The Crucial Advantage: Why Government Contractors Should Seek Commercial Determinations

The term 'commercial determination' (CD) holds great importance in government contracting. A commercial determination occurs when government authorities classify a product or service as either commercial or non-commercial. This classification can profoundly influence how contractors engage with federal agencies. Let's explore why government contractors should actively pursue commercial determinations and the advantages this classification brings to contractors and the government.

The Essence of Commercial Determinations

A commercial determination is a vital step in the procurement process to determine whether a product or service qualifies as a commercial item. When an item is classified as commercial, it is similar to those in the commercial marketplace. It does not require the government to employ complex federal acquisition rules and procedures to purchase.

This distinction is not merely a matter of categorization; it opens doors to a streamlined, cost-effective, and efficient path to securing government contracts. Here are some compelling reasons why government contractors should actively pursue commercial determinations: 

• Simplified procurement process: One of the most apparent advantages of a commercial determination to the government is the streamlined procurement process. When the government recognizes a product or service as commercial, it can procure it using simplified acquisition procedures. These procedures are less cumbersome, require less documentation, and lead to faster acquisitions.
• Reduced administrative burden: Contracting for non-commercial items can be saddled with intricate compliance requirements, documentation, and regulations. In contrast, commercial items enjoy the benefits of reduced administrative burden, enabling contractors to focus more on delivering value and less on navigating bureaucratic processes. 
• Faster contract award: The streamlined procurement process means quicker contract award times. Government agencies can make quicker decisions, and issue contracts more rapidly when dealing with commercial items. This leads to faster revenue generation for contractors.
• Market-driven pricing: Commercial items are generally subject to market forces and competition. Therefore, contractors can often offer the government competitive pricing and better value. This is especially beneficial for taxpayers and the efficient use of government resources.
• Promotes innovation: The government's preference for commercial items encourages contractors to innovate and align their offerings with industry standards. This benefits the contractor and the government, leading to more efficient and effective solutions.
• Enhances competitive advantage: A commercial item determination can be a significant competitive advantage when bidding for government contracts. It demonstrates that a contractor's offerings align with commercial best practices, and their products or services have a track record in the marketplace.
• Reduces risk: Commercial items typically have a proven utility in the commercial marketplace. This means the government is more likely to receive reliable products and services, reducing the risk of unexpected issues or project delays.
• Market expansion: Once an item receives a commercial determination, it becomes more attractive to government agencies. This expands a contractor's market potential and diversifies their revenue streams, reducing dependency on a single sector.

Challenges and Considerations with Commercial Determinations

While the advantages of commercial determinations are clear, government contractors must understand that not all products or services will automatically qualify. Some considerations and challenges include the following: 

• Meeting the definition: To obtain a commercial determination, contractors must demonstrate that their products or services meet the established definitions of a commercial product or service, which include being similar to those sold in the commercial marketplace and being offered to the public regularly. The definitions of commercial products or services can be found in FAR 2.101. Note that commercial products and commercial services have separate definitions and that pure, unaltered, commercial items would fall under the definition of commercially available off-the-shelf (COTS) items. 
• Documentation and record keeping: Contractors must maintain comprehensive records and documentation to support their claims that their offerings are indeed commercial items. Failure to provide this documentation can lead to disputes or lost opportunities. 
• Market dynamics: Some industries and products may blur the lines between commercial and non-commercial. It can be challenging to navigate the market dynamics and prove that a product is truly commercial. 
• Government oversight: The government retains the right to re-evaluate the commercial determination, which means contractors must stay compliant and maintain their commercial character over time.
• Regulatory changes: The criteria for commercial determinations may change due to evolving regulations or government policies. Contractors must stay informed and adjust their strategies accordingly.

Best Practices for Commercial Determinations

We have heard that about half of all commercial determinations are denied. Not because they are not commercial but because there is not enough support. Some of the best practices to support commercial determinations include describing the important characteristics of the item, comparing the item with items found in the commercial marketplace, demonstrating that the general public uses the commercial item, and verifying that all elements of the commercial definition are covered and provide evidence to substantiate any missing elements. The government also likes to make a determination for commerciality and reasonableness at the same time. So, if you are proposing commercial products or services that are "of a type" and not COTS, then you should also include support for the reasonableness of the price. It's important to note that when providing invoices/purchase orders to support the reasonableness of the price, make sure those invoices and/or purchase orders are not redacted versions. 

To help you navigate your understanding of the commercial definitions, we have the following charts that walk you through the thought process of determining whether or not an item is a commercial item using the FAR 2.101 definitions of commercial products and commercial services.

Commercial determinations will remain a critical aspect of government contracting as government agencies continue to prioritize efficiency, cost-effectiveness, and innovation in their procurement processes. Embracing this classification opens doors to a world of possibilities, where streamlined processes, lower costs, and increased competitiveness await contractors.

About the Authors

Chase Clark, CPA, is a Senior Manager at CohnReznick's Government Contracting Industry Practice, leveraging over 14 years of specialized experience in government contract auditing. With a background as an auditor at the Defense Contract Audit Agency (DCAA), Chase brings exceptional expertise in Federal Acquisition Regulation (FAR) compliance, Cost Accounting Standards (CAS), DCAA audits, and other critical government procurement regulations. Chase's expertise and background provide invaluable insights to clients navigating complex government contracting requirements.

Kelly Casabianca, CPA, is a seasoned Compliance Manager at DCS Corp. With a robust finance and regulatory oversight background, Kelly specializes in leading comprehensive contract audits for government agencies. Her expertise extends to navigating complex regulatory frameworks, including Federal Acquisition Regulation (FAR) compliance, Cost Accounting Standards (CAS), DCAA audits, and a spectrum of government procurement regulations. Kelly's meticulous approach and deep understanding of financial compliance ensure that DCS Corp maintains the highest transparency and regulatory adherence standards in its government contracts and operations.