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Recommendation 1: Revise definitions related to commercial buying to simplify 

their application and eliminate inconsistency.

Problem

The FAR’s commercial buying terms are confusing, poorly defined, or undefined altogether. The term 

commercial item is overly broad, encompassing both commercial products and commercial services. The 

terms commercial item and commercially available off-the-shelf item appear in the U.S. Code in numerous 

sections, but do not incorporate the same universal definition; in some instances, the terms are defined 

differently, and in other instances they lack any definition at all. Subcontracting, which is subject to

dozens of unique definitions for the terms subcontract and subcontractor, reflects similar disharmony. 

The inconsistency among commercial definitions generates confusion and creates risk that contracting 

officers may fail to apply commercial practices uniformly. 

Background

Commercial buying represents an important component of the DoD acquisition process. For more than 

2 decades, Congress and DoD have sought to encourage use of commercial buying by easing the 

statutory, regulatory, and procedural framework for buying commercial goods and services, as well as 

broadening the scope of goods and services that are eligible for revised commercial buying policies. 

The Section 800 Panel recognized the potential of commercial buying and recommended a number of 

changes in law to facilitate its acceptance. Included within its preference for buying commercial items, 

the Section 800 Panel recommended a definition for commercial item.

1 The Section 800 Panel’s efforts 

contributed to passage of the 1994 FASA in which Congress took a number of important steps to 

enhance the federal government’s access to the broader commercial market. These steps included 

exempting qualifying items procured at the prime or subcontract level from various statutes, policies, 

and contracting requirements unique to the federal procurement process. For this reason, the matter of 

the definitions that serve as the criteria for determining if an item qualifies is critically important. Two 

years after FASA was signed into law, Congress passed the 1996 FARA, which furthered the preference 

for buying commercial items by creating a definition for COTS items.

2

Notwithstanding these efforts to promulgate a wide-ranging commercial buying policy, DoD’s 

acquisition workforce has struggled to consistently interpret and apply the policy.3 Confusion over 

how to identify eligible commercial products and services has subjected DoD contracting officers to 

increased criticism and oversight.4 It has also sparked frequent legislative and regulatory revisions in 

an effort to improve the policies and tools available to buy commercially.5

 

1 Acquisition Law Advisory Panel to the United States Congress, Streamlining Defense Acquisition Laws, accessed June 6, 2017, 

http://www.dtic.mil/docs/citations/ADA262699. 2 FY 1996 NDAA, Pub. L. No. 104–106, 110 Stat. 186 (1996). 3 USD(AT&L), Guidance on Commercial Item Determinations and the Determination of Price Reasonableness for Commercial Items, 

accessed June 6, 2017, http://www.acq.osd.mil/dpap/policy/policyvault/USA003554-16-DPAP.pdf. 4 DoDIG, Procuring Noncompetitive Spare Parts Through an Exclusive Distributor, June 6, 2017, 

http://www.dodig.mil/audit/reports/fy08/08-048.pdf. GAO, Contract Management: DOD Vulnerabilities to Contracting Fraud, Waste, and 

Abuse, accessed June 6, 2017, http://www.gao.gov/new.items/d06838r.pdf. 5 USD(AT&L), Guidance on Commercial Item Determinations and the Determination of Price Reasonableness for Commercial Items, June 6, 

2017, http://www.acq.osd.mil/dpap/policy/policyvault/USA003554-16-DPAP.pdf.
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Findings

The Section 809 Panel identified a number of problems regarding definitions used in the procurement 

of commercial items.

Definition of Commercial Item 

Congress gave DoD the widest possible access to the commercial marketplace by including in the 

definition the phrase of a type, which provides DoD the flexibility needed to take full advantage of the 

vibrant and constantly changing commercial marketplace. Many challenges have been raised regarding 

portions of the definition intended to allow the federal government to acquire items that are of a type

sold in the commercial marketplace or that have minor modifications to satisfy a government-unique 

requirement. The same is true for items that are newly offered for sale, allowing the government the 

opportunity to be among the first to procure these state-of-the-art products. Both government and 

industry have, in recent years, established a better understanding of the application of the definition.

Issues typically arise regarding facts of a particular acquisition, not as a result of a serious deficiency in 

the statutory definitions. Tinkering with the definition to address unique, fact-specific examples would 

not give DoD the broadest reasonable definition for accessing the commercial marketplace.

The definition of a commercial item encompasses both commercial products and commercial services.

Defining an item as meaning either a product or service is confusing. The term item is not generally 

thought to include a service. For example, a standard dictionary definition for item is individual article 

or unit; 41 U.S.C. § 108, Item and Item of Supply, defines an item as “an individual part, component, 

subassembly, or subsystem integral to a major system;” and FAR 2.101, Definitions, defines a common 

item as a “material that is common to the applicable government contract and the contractor’s other 

work.”6 To illustrate the confusion caused by the existing definition, a service can be a commercial item 

offered in support of a product that is also a commercial item. Furthermore, a COTS item is a subset of 

a commercial item, but the definition of a COTS item only includes products and does not include 

services.7

Commercial Services

Commercial services have become substantially more important in the 24 years since their inclusion in 

FASA. DoD obligated more than $23 billion for commercial services in FY 2017, which was 18 percent 

of all service obligations.8 The important statutory language addressing commercial services lies buried 

within several subparagraphs of the definition of a commercial item. This aspect of the definition may 

lead to confusion over the distinction between services offered directly in support of a commercial 

item, and services unrelated to a specific commercial item, but of a type offered in the commercial 

marketplace. 

Defining a commercial item in a way that includes both commercial products and commercial services 

does not reflect the significant roles services and commercial services play today in the DoD 

 

6 Item and Item of Supply, 41 U.S.C. §108. Definitions, FAR 2.101. 7 Commercially Available Off-the-Shelf Item, 41 U.S.C. §104. 8 FPDS Data, accessed January 7, 2017.
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procurement budget. Carefully bifurcating the existing definition into commercial products and 

commercial services would better serve DoD.

Addressing Commercial Processes

The existing definition of a commercial item does not properly consider the output of commercial 

processes because it fails to encompass products that are manufactured to federal government 

specifications or drawings by manufacturers that customarily manufacture to customer specifications 

and drawings (such as paint, castings, mounting components on circuit cards using their standard 

commercial processes). 

The Section 800 Panel originally made the recommendation with the intention of providing the federal 

government access to this important element of the commercial marketplace.9 The Section 800 Panel 

recommendation to allow DoD to access commercial processes, in addition to commercial products and 

services, continues to make sense and would benefit DoD today. For DoD to have broader access to the 

commercial marketplace and further the objective of greater integration of the commercial and defense

industrial bases, it is important to expand the definition of a commercial item to include not only 

commercial products but also certain commercial processes.

Unintended Consequences of the Definition of COTS

In 1996, with the definition of commercial item less than 2 years old, Congress created a new definition 

for COTS item.

10 COTS items are a much narrower subset of the broader universe of commercial 

products.

11 The intent was to provide additional opportunities for the government to buy from the 

commercial market by providing for additional statutory exemptions for commercial items that 

satisfied the much narrower COTS definition. FAR 12.505, Applicability of Certain Laws for the 

Acquisition of COTS Items, and DFARS 212.570, Applicability of Certain Laws to Contracts and 

Subcontracts for the Acquisition of Commercially-Available Off-the-Shelf Items, were established to 

identify statutes that were inapplicable or modified in some fashion to further simplify the acquisition 

of COTS.

The definition of COTS has provided little additional opportunity for procuring commercial products, 

and may have unintended consequences of limiting the acceptance of the broader definition of 

commercial products.

Commercial products are defined, generally, as items of a type that have been sold, leased, or 

licensed—or offered for sale, lease, or license— to the general public. An item that is not yet available in 

the market, but evolved from one that is, may also be procured as a commercial item. By contrast, a 

COTS item must be sold in substantial quantities in the marketplace, a throwback to the pre-FASA 

days of the substantial sales-based commercial item TINA exception.

A product may be considered commercial if it includes a customary modification or a unique 

modification specifically to meet a federal government requirement, as long as that unique 

 

9 Section 800 Panel Report, section 8.3.1.6. 10 Clinger-Cohen Act of 1996, section 4203 (FY 1996 NDAA, Pub. L. No. 104-106). 11 Commercially Available Off-the-Shelf Item, 41 U.S.C. §104. The term COTS does not apply to commercial services.
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modification is minor. By contrast, a COTS item must be procured by the government without 

modification and in the same form as is sold in the commercial marketplace.

The combination of the requirement for COTS products to have sales in substantial quantities and be 

without modification substantially limits DoD’s ability to leverage the commercial market, especially 

for new or state-of-the-art products. For example, if a commercial company offered for sale a new, 

substantially improved version of an existing server, DoD would need to wait until the server was sold 

in substantial quantities to be able to procure the product using the additional COTS exemption.

As of January 2018, there are 18 statutes and associated FAR or DFARS clauses that are either exempt 

or modified with regard to their applicability to COTS products (see Appendix F, Table F-1). Of those 

18, five exemptions/modifications are established in statute, 11 result from a determination by the FAR 

Council or Office of Federal Procurement Policy (OFPP), and two result from a determination by DoD. 

Only six of these 18 exemptions/modifications are identified in FAR 12.503 or DFARS 212.570. 

Although these additional COTS exemptions appear helpful on the surface, they may, in fact have 

created two distinct classes of commercial products: the broad, inclusive commercial product, and the 

very narrow COTS product.

The effect of creating these two classes is that much of the streamlining Congress intended for 

commercial products is being more narrowly applied to COTS items. For example, FAR 52.222-50, 

Combating Trafficking in Persons, paragraph (h), requires contractors that offer supplies other than 

COTS to prepare and maintain a compliance plan. It is unclear why a contractor selling supplies that 

meet the narrow definition of a COTS product should be exempt from the requirement to prepare and 

maintain a compliance plan, yet a contractor selling similar supplies that differ only in that they are not 

sold in substantial quantities, should not also be exempt. 

Granting relief to contractors selling COTS items, but not those selling the broader commercial 

products and commercial services, serves as an obstacle to the government’s stated goal of attracting 

the best and the brightest to the government marketplace to solve its most difficult problems. If DoD is 

seeking a high-tech, cutting-edge solution, that solution will likely not satisfy the sold in substantial 

quantities and without modification criteria of the COTS definition. Rather, it is more likely to be new 

and innovative and, therefore, sold in less-than-substantial quantities; offered, but not yet sold; or entirely 

new technologies that evolved from existing products, all of which fall under the definition of 

commercial products.

It is time for Congress and DoD to fully accept and embrace the commercial product and commercial 

services definitions and use them with all the flexibility FASA intended. DoD needs greater access to 

the full breadth of the commercial market place, and especially the cutting edge of that marketplace. 

Relieving the burden of government-unique requirements is an important step DoD must take to make 

that happen, but relieving the burden on only the vary narrow universe of COTS products will not 

produce the desired result. Progress will only be made when real relief exists across the full spectrum 

of commercial products and commercial services.
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Unique Statutory Definitions of Commercial Items

Congress codified the definition of a commercial item at 41 U.S.C § 103. This definition is used when 

determining whether an item qualifies for certain exemptions provided by Congress. To achieve the 

maximum benefit and avoid confusion, it is essential that the definitions be clear, well understood, and 

consistent. The Section 809 Panel analysis of 10 U.S.C. and 41 U.S.C. identified 40 distinct definitions of 

commercial item. Although the majority of these references point to the primary definitions at 41 U.S.C.

§ 103, many others do not, providing their own unique definitions, or none at all.

The definition from 41 U.S.C. § 103 is used for 34 of the 40 distinct citations for commercial items. Six

terms in Title 10 do not incorporate the primary definitions by reference, whether due to the use of 

alternative definitions or through the absence of definitions entirely. Six instances of the term 

commercial item lacked a definition in accord with Title 41(see Appendix F, Table F-2). Four of the 

terms lacked any definition; a fifth term referred to a definition of commercial items later in its own 

section; and a sixth term referred only to the commercial acquisition procedures of FAR Part 12. 

There does not appear to be any stated rationale for the differing definitions in the case of these six

citations. The Section 809 Panel reviewed the legislative histories of each provision, but found no

justification for omitting the primary definitions of Title 41.12 The underlying statutes themselves also 

did not explain the lack of definitions, or the existence of separate definitions.

Harmonizing the Use of Terms in Statute

Commercial buying processes would benefit from harmonizing all U.S.C. references to commercial 

products and commercial services—including 41 U.S.C., 10 U.S.C., and other miscellaneous uses of the 

terms in other titles of the U.S.C.—with the primary definitions of those terms in Title 41. The

Section 809 Panel identified more than 75 uses of the term commercial item in statute. Every use of the 

terms commercial product and commercial service in the U.S.C. should incorporate, by reference, the 

primary definitions of those terms at 41 U.S.C. §§ 103, 103a and 104, respectively.

An exception to this general perspective that requires further elaboration is the commercial item 

definition at Core Logistics Capabilities, 10 U.S.C. § 2464(a)(3). This unique definition of commercial 

item was crafted in 1998.

10 U.S.C. §2464 (a)(5), Core Logistics Support states,

(5) The commercial items covered by paragraph (3) are commercial items that have been sold or leased in 

substantial quantities to the general public and are purchased without modification in the same form that 

they are sold in the commercial marketplace, or with minor modifications to meet Federal Government 

requirements.

It consists of portions of the definitions of a COTS item (41 U.S.C. § 104) and a commercial item

(41 U.S.C. § 103). This unique definition likely represented the early thinking and concerns about how 

 

12 Based on Section 809 Panel analysis.
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the relatively new definition (1995) of commercial item at 41 U.S.C. § 103 might be implemented and 

the effect it may have on weapon systems, subsystems, and components. 

The definition states that the covered items addressed in 10 U.S.C. § 2464 are commercial items (a term 

that is defined in 10 U.S.C. § 2302 and 41 U.S.C. § 103), but then continues by carving out portions of 

the commercial item definition as well as portions of the definition of a COTS item (also defined at 

10 U.S.C. 2302 and 41 U.S.C. § 104). The 10 U.S.C. § 2464 definition of commercial item does not include 

items of a type, items offered for sale, items that evolved from commercial items, and items that are not yet 

available in the commercial marketplace but will be available in time to meet the federal government 

delivery requirement. These are all important elements of the commercial item definition Congress 

created to give the federal government the opportunity to procure items that are state-of-the-art but 

may not otherwise be available to them under a COTS sold in substantial quantities criteria. The 

10 U.S.C. § 2464 definition allows for minor modifications unique to the federal government, but does 

not include modifications to commercial items that are customarily available in the commercial marketplace. 

The 10 U.S.C. § 2464 definition appears to reflect the early concerns that contracting officers would take 

a very liberal approach to the definition, procuring many items as commercial, to the point that it 

would potentially undermine the depot role in weapon system readiness by tying support of such 

items to industry. 

The potential concerns expressed above were prevalent in the late 1990s, but over time, they have 

generally proven unfounded. The distinction between commercial and noncommercial items has 

remained firm, particularly in regard to the kinds of items that would likely be maintained in a depot. 

Contracting officers have been careful to understand the commercial marketplace for an item and the 

extent of minor modifications necessary to meet the federal government requirements before making a 

determination that an item is a commercial item. Contracting officers have also been careful to consider 

the realities of the commercial marketplace (most notably concerning technical data) and to address the 

data already available to other customers in the commercial marketplace, as well as data necessary for 

the minor modifications.

The unique definition of a commercial item at 10 U.S.C. § 2464 presents a potential practical problem 

for the DoD acquisition and logistics support workforce. As noted above, at the time an item is being 

considered for procurement as a commercial item, the contracting officer considers all the available 

information and, based on the definition at 41 U.S.C. § 103 (commercial item) or § 104 (COTS item), 

determines if the item satisfies the appropriate definition and may be procured using the unique FAR 

policies and procedures for commercial items and COTS items. Later, when that same item is being 

considered for logistics support, the logistics community makes another determination of the item’s 

commerciality using the unique definition at 10 U.S.C. § 2464.

These two separate determinations, using two distinct definitions of commercial item, create 

considerable conflict, and ignore the reality that the decisions made at the time of initial procurement, 

including decisions with regard to the procurement of technical data, make later decisions using 

different criteria difficult, if not impractical. This situation is especially relevant when an item 

originally procured and planned for support as a commercial product or COTS product under 

41 U.S.C. §§ 103 or 104, later is determined by the logistics support team not to meet the 10 U.S.C.

§ 2464 definition, but lacks the data necessary for depot-based support. The logistics support 
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community should participate at the time the initial determination of commerciality is made by the 

contracting officer using the definition at 41 U.S.C. §§ 103 or 104, and then carry forward that 

determination into the logistics support phase. Making a separate determination, using a different 

definition at a later point in time, leads to confusion and inconsistency in the determination. Congress 

has recently taken steps at 10 U.S.C. § 2306a(b)(2) to avoid similar inconsistencies in how the initial 

commercial item determinations are handled by DoD.

The past 22 years have established a firm foundation for the application of the 41 U.S.C. § 103 

commercial item definition and its impact on the depot logistics support, and no longer represents a 

compelling argument in favor of a unique definition of commercial item. For these reasons, 10 U.S.C.

§ 2464 should not retain its own unique definition. The citation should be conformed to the primary 

definition at 41 U.S.C. § 103 (commercial item). 

Another exception that requires further elaboration is the commercial item definition at 10 U.S.C.

§ 2321, Validation of Proprietary Data Restrictions. This section addresses the contractor justifications 

for data use or release restrictions and DoD review and challenge of these restrictions. Paragraph (f) of 

this section addresses the special rules “with respect to technical data of a contractor or subcontractor 

under a contract for commercial items.” Subsection (f)(1) provides, generally, that “the contracting 

officer shall presume the contractor or subcontractor has justified the restriction on the basis that the 

item was developed at private expense.” This presumption applies, according to (f)(2)(A):

with regard to a commercial subsystem or component of a major system, if the major system was acquired 

as a commercial item in accordance with section 2379(a) of this title;

with regard to a component of a subsystem, if the subsystem was acquired as a

commercial item in accordance with section 2379(b) of this title; and

with regard to any other component, if the component is a commercially available

off-the-shelf item or a commercially available off-the-shelf item with modifications of a type customarily 

available in the commercial marketplace or minor modifications made to meet Federal Government

requirements

Paragraph (i) provides that a commercial subsystem or component of a major system qualifies for the special 

presumption because it was acquired as a commercial item. In this paragraph (i), the term commercial item

has the meaning in 10 U.S.C. § 2302, Definitions, subsection which refers back to the definition at 

41 U.S.C. § 103. The same analysis is true in paragraph (ii) for components of a subsystem, if the 

subsystem was acquired as a commercial item.

Subsection (f)(2)(A)(iii) provides that a component that is not part of a major system or subsystem 

would only qualify for the presumption of being developed at private expense if it is a COTS item or a 

COTS item with modifications of a type customarily available in the marketplace or minor 

modifications made to meet federal government requirements.13 This later portion of subparagraph (iii) 

is actually a blending of the existing COTS definition at 41 U.S.C. § 104 and the commercial item 

 

13 Validation of Proprietary Data Restrictions, 10 U.S.C. § 2321 (f)(2)(A)(iii).
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definition at 41 U.S.C. § 103, with several key elements of the commercial item definition left out. The 

legislative history provides no rationale for this unique definition.

This unique definition sets up a number of conflicts and adds confusion over the critical issue of 

proprietary data restrictions for products procured in the commercial marketplace. The following are 

examples:

§ By virtue of being in Chapter 137, 10 U.S.C. § 2321 is tied to the definition of commercial item

and COTS item at 41 U.S.C. § 103 and § 104, respectively. The text of 10 U.S.C. § 2321 includes 

its own twist on these two established definitions, introducing unnecessary confusion and 

potential conflict.

§ The blended language raises questions with regard to the criteria for items with minor 

modifications. For example, if an item is a “commercially available off-the shelf item with 

...minor modifications made to meet Federal Government requirements,”14 it is unclear if that 

means it must meet the sold in substantial quantities criteria in the COTS definition to qualify 

for the presumption. It is also unclear if an item with minor modifications incorporated to meet 

unique federal government requirements is likely to be sold in substantial quantities to the 

general public.

The language of § 2321 (f)(2) is intended to define when a component is a commercial component, yet

41 U.S.C. § 102 already defines a commercial component as a “component that is a ‘commercial 

item.’”15

When procuring a component found in the commercial marketplace, the contracting officer will 

evaluate the item against the criteria for a commercial item in Definitions, FAR 2.101. The language of 

2.101 is the same definition found in Definitions, 41 U.S.C. § 103. When evaluating the contractor or 

offeror assertion that a component was developed at private expense, the contracting officer must use 

the unique definition in 10 U.S.C. § 2321 to establish if the component meets the criteria for the special 

presumption. The possibility exists that the contracting officer could determine a component meets the 

definition of a commercial item but does not meet the criteria for the presumption of being developed 

at private expense. This ambiguity unnecessarily complicates the contracting officer’s already difficult 

task.

Because the standard 41 U.S.C. § 103 definition of a commercial item is not used in § 2321(f)(A), certain 

components would not qualify, such as those that are of a type customarily used by the general public

or items sold, leased, or licensed to the general public at less than the substantial quantities criteria 

found in the COTS definition; or “any item that evolved...through advances in technology or 

performance and that is not yet available in the commercial marketplace.”16 These items are exactly the 

types of state of-the-art technologies DoD is pursuing. This type of confusion can lead to frustration 

 

14 Ibid.

15 Commercial Component, 41 U.S.C. § 102. 16 Commercial Item, 41 U.S.C. § 103 and Commercially Available Off-the-Shelf Item, 41 U.S.C. § 104.
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and unnecessary issues over protection of proprietary data for these types of item, making it more 

difficult to do business in the high-tech marketplace. 

It is problematic to have a unique definition of commercial product solely for the purpose of protecting 

proprietary data that is inconsistent with the standard definition of the term used throughout the 

U.S.C. and the FAR. This inconsistency can only lead to further confusion and complexity, and 

potentially serve to discourage high technologies firms in the commercial marketplace from offering 

their best to DoD.

Definitions of Subcontract and Subcontractor

In today’s defense marketplace, prime contractors typically subcontract more than 60 percent of their 

work to other firms through numerous tiers of commercial and noncommercial subcontracts. Even for 

the most complex, government-unique items, the further down the supply chain one looks, the more 

likely one is to find commercial suppliers with commercial items. Through the flow down process, the 

commercial item policies, procedures, and government-unique terms also generally apply to these 

subcontracts, regardless of tier, which complicates the process for procuring commercial items and 

commercial services at the subcontract level. 

The FAR currently defines the term contract, an important term used widely throughout the FAR and 

DFARS. However, neither the FAR nor DFARS defines the term subcontract, another term used 

throughout the FAR and DFARS. The FAR would benefit from a definition for the terms subcontract

and subcontractor, both of which today have numerous definitions in the FAR and DFARS.

A search of the FAR and DFARS produced 27 distinct definitions of the term subcontract. Seventeen of 

these definitions were essentially the same with only minor differences. The other 10 were unique in 

one way or another, but shared many of the same common elements. 41 U.S.C. § 87, the Anti-Kickback 

Act, implemented at FAR 3.5 was the only definition based in statute (see Appendix F, Table F-3).

The FAR and DFARS search also produced 21 distinct definitions of subcontractor. Most of those 

definitions shared common elements that could be conducive to drafting a single, common definition. 

Several had a unique element that would require accommodation (see Appendix F, Table F-4).

Subcontracts for Commercial Items for Inventory or Multiple Contracts

The Section 809 Panel heard from many companies regarding the cost and significant administrative 

effort required to flow down terms and conditions to their subcontracts. Of particular interest to the 

Panel were the issues associated with the flow down of government-unique terms and conditions to 

commercial suppliers, and where the contractor procured items and components from its 

subcontractors for multiple contracts or for their inventory and not for a specific contract.

The requirement to flow down a clause to subcontractors may be mandatory or subject to certain 

criteria contained within the clause. A relative few clauses limit the flow down to prime contractors’

first tier of subcontractors, yet other clauses flow down to subcontractors at all tiers that meet the 

specified criteria contained in the clause.

The mechanics of flowing down such clauses is often administratively complex, costly, and time 

consuming for prime contractors, and potential subcontractors at each successive tier. Before accepting 
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these terms and conditions, proposed subcontractors must evaluate each of the clauses, assess the 

effects of the requirements of the clause on their businesses and confirm their ability to comply with 

each of the individual requirements. In the government business environment, there is an expectation 

of strict literal compliance with these requirements, and there is considerable oversight to ensure such 

compliance.17 A subcontractor would be taking a substantial business risk to shortcut this important 

process.

For those firms that regularly participate in the federal government procurement process at the prime 

contractor or subcontracting tier, the flow down of terms and conditions is difficult, complex, and 

carries potentially great business risk, yet it is a process that has become one of the costs of doing business

with the federal government. For a prime or subcontractor that sells in both commercial and 

government markets, or one that sells only in the commercial market, it is more than just a cost of 

doing business. 

Federal government contracting regulations generally assume that procurements are fulfilled on a joborder basis, for which each contract stands alone and subsystems and components are only procured 

subsequent to, and in direct response to, the award of the higher-tier contract. Commercial business is

most often based on forecasts of future sales and anticipated demand, for which contractors’ order 

materials and subcomponents from their suppliers to satisfy current production and inventory for 

meeting future market demands. 

The dichotomy between government and commercial markets presents a number of practical and 

compliance risks. For example, a contractor in the commercial market, manufacturing a commercial 

product, will typically procure commercial components for inventory without knowing, at the time the 

orders are placed, who the customers will be for the yet-to-be-manufactured end items. If the 

government subsequently procures even one of those commercial end items, the prime contractor must 

accept the government-unique terms, including the requirement for mandatory flow down to lowertier suppliers. The prime contractor is then faced with the dilemma of asserting that its suppliers have 

been given the mandatory terms even though it has already procured the components, and the 

components currently reside in its inventory. 

To address this risk, commercial manufacturers may choose to flow down government-unique terms to 

all of their subcontractors (some of which may not accept them) on the chance the government might at 

some point procure one of its end items. A commercial contractor that has little or no expectation of 

selling to the government would have no reason to take such an inclusive approach to flow down at the 

time it procures its components. If the government wanted to procure a commercial item from such a 

company, the contractor might be faced with the risk of accepting the terms without the ability to flow 

the terms down because the product or components are already on the shelf. The FAR makes no 

provisions for situations in which a commercial product is manufactured with components that were 

 

17 “Men must turn square corners when they deal with the government,” Supreme Court Justice Oliver Wendell Holmes, Jr. Rock Island 

C.R.R. v. United States, 254 U.S. 141, 143 (22 November 1920). In today’s federal market, oversight includes formal oversight from DCMA, 

DCAA, DOD/IG, GAO, and Congress, and informal oversight by public watch-dog groups, whistle blowers, and False Claims Act relators.
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procured for general inventory and already in the prime contractor’s inventory before contracting with 

the government.

One commercial contractor that spoke to the Section 809 Panel cited a specific example of an increased 

subcontractor workload resulting from flow-down requirements. This commercial contractor sells the 

same or similar items in both government and commercial markets but procures its common 

components from its suppliers by administratively issuing two separate purchase orders for the same 

part number—one with the mandatory government flow-down terms to satisfy anticipated 

government demand and another without the flow down to satisfy anticipated demand from its 

commercial customers. This idea of segregating the procurement of the identical parts simply to satisfy 

flow down requirements raises the question of whether the contractor also needs to segregate the parts 

in the warehouse. Situations such as this one represent an unreasonable burden on contractors and 

their commercial suppliers, and likely serve as a deterrent to firms contemplating entering the 

government marketplace.

Congress recently noted this burden and took several steps to address it in two similar sections of the 

FY 2017 NDAA. Section 877, Treatment of Commingled Items Purchased by Contractors as 

Commercial Items, (codified at 10 U.S.C. § 2380B) addresses the burden associated with the flow down 

of mandatory, government-unique terms and conditions on relatively low-value items (less than 

$10,000). Section 874, Inapplicability of Certain Laws and Regulations to the Acquisition of Commercial 

Items and Commercially Available Off-The-Shelf Items, (codified at 10 U.S.C. § 2375 (c)(3)) addresses 

the issue in a different manner by excluding procurement of certain items from treatment as a 

subcontract, and thus the requirement for flow down of government-unique terms. Below is a summary 

comparison of the two provisions.

10 U.S.C § 2380B

§ Applies to items (presumably both commercial and noncommercial) with a value of less than 

$10,000.

§ For use in performance of multiple contracts with the department of defense and other parties.

§ Not identifiable to any particular contract.

§ Must be treated as a commercial item (and still receive terms to be flowed down, but presumably 

only terms and conditions associated with commercial products).

10 U.S.C § 2375(c)(3)

§ Applies to agreements for commodities (the term commodities is undefined).

§ Is intended for use in performance of multiple contracts with DoD and other parties.

§ Is not identifiable to any particular contract.
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§ Agreement must not be considered a subcontract for a commercial item (and, therefore, is not

subject to flow down of any government-unique terms and conditions).

§ Is limited in its application to “this subsection.”

Section 874 uses the term commodities. This term is undefined, and the Section 809 Panel was unable to 

identify an established DoD definition of the term but did identify the DoD standard definition of the 

term commodity loading, an indication of how the term might be defined:

commodity loading — A method of loading in which various types of cargoes are loaded together, such as 

ammunition, rations, or boxed vehicles, in order that each commodity can be discharged without 

disturbing the others.18

A standard dictionary definition provides an alternative, narrower approach, defining a commodity as

“a mass-produced unspecialized product: commodity chemicals, commodity memory chips.”19

10 U.S.C. § 2380B and 10 U.S.C. § 2375(c)(3) are positive steps, but procurement of common commercial 

items and commercial services can be further simplified. The most practical approach would be to 

exclude from the scope of the term subcontract the procurement of commodities as well as commercial 

products and commercial services that are intended for use in multiple current or future contracts. 

Commercial products are, by their very nature, fungible and likely to be procured from suppliers not 

generally engaged in business with the federal government and consequently not subject to the 

burdens and risks discussed above. Likewise, commercial services are often procured to meet 

specialized needs that cross many products, product lines, and contracts. Exempting commercial 

products and common commercial services from flow down of government-unique terms makes clear 

to both government and industry that Congress is serious about simplifying the procurement process, 

especially for items that are clearly available on the commercial market, for which the burden would be 

the greatest. 

Conclusions

The following actions would enhance the federal government’s preference for acquiring commercial 

items:

§ Bifurcate the definition of commercial items into commercial products and commercial services, 

creating two separate definitions. 

§ Incorporate in the definition of a commercial product a provision for a product that the 

commercial marketplace manufactures from a customer’s drawings or specifications using its 

commercial processes.

§ Remove the definitions of COTS from 41 U.S.C. § 104. Congress and DoD have avoided 

granting the relief from government-unique requirements needed to access the full breadth of 

 

18 DoD Dictionary of Military and Associated Terms, August 2017. 19 Merriam Webster Dictionary.
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the commercial marketplace, and the COTS item definition has had an unintended consequence 

of contributing to this problem.

§ Align the definitions of commercial products and commercial services. In most instances, the 

variation in definitions for commercial items represent an oversight or drafting error, rather 

than a deliberate policy decision. This lack of definitional unity can carry real consequences, 

potentially generating confusion and risking disputes among stakeholders applying differing 

interpretations of commercial products and commercial services to the procurement process. 

§ Harmonize the use of terms in statute. Commercial buying processes would benefit from 

harmonizing all U.S. Code references to commercial products and commercial services—

including 41 U.S.C., 10 U.S.C., and other miscellaneous uses of the terms in other titles of the 

U.S. Code—with the primary definitions of those terms in 41 U.S.C. Every use of the terms 

commercial item in the U.S. Code should incorporate, by reference, the primary definitions of 

those terms at 41 U.S.C. §§ 103, 103a, and 104, respectively. This recommendation should be 

implemented in accordance with the previous recommendation to split the term commercial 

item into commercial product and commercial service in 41 U.S.C. §§ 103 and 103a. 

§ Establish a uniform definition of subcontract in the U.S. Code and the FAR. The dozens of 

distinct definitions of the term subcontract are unnecessary. The difference between the 

definition of subcontract at 41 U.S.C. § 87 and the recommended U.S. Code definition is 

inconsequential, and using a single definition will simplify the procurement process. A few 

instances exist for which it is appropriate to supplement the general definition of subcontract to 

accommodate a unique component of the definition. 

§ Establish a uniform FAR definition of subcontractor. It is unnecessary to have 21 distinct 

definitions of the term subcontractor when the differences among them are inconsequential. 

§ Exclude from the definition of subcontract procurements of commodities, commercial products,

and commercial services to be used on multiple contracts. The flow down of governmentunique terms and conditions represents a costly and administratively complex demand on 

contractors engaged in the sale of commercial products to the federal government. The federal 

government cannot, however, expect to successfully pursue a preference for commercial 

products at all tiers of the supply chain and attract new, innovative commercial supplies, while 

still imposing a burden and risk on the procurement of commercial components. Congress 

should take bold steps beyond the current language of Sections 877 and 874 of the FY 2017 

NDAA by adding a new definition of subcontract to 41 U.S.C. and 10 U.S.C. § 2302. The 

definition would exempt purchases of commodities, commercial products, and commercial 

services that are being procured for multiple contracts from the flow down of governmentunique terms.
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Implementation

Legislative Branch

§ Delete the definition of Commercial Item at 41 U.S.C. § 103.

§ Establish the definition of Commercial Product at 41 U.S.C. § 103, and add language to address 

commercial process in the definition.

§ Establish the definition of Commercial Service at 41 U.S.C. § 103a.

§ Delete the definition of Commercially Available Off-the-Shelf Item at 41 U.S.C. § 104.

§ Revise all references in U.S. Code to the above terms.

§ Revise U.S. Code to align all definitions of the above terms with the definitions at 41 U.S.C.

Chapter 1.

§ Revise the definition of Commercial Component at 41 U.S.C. § 102.

§ Revise the definition of Non-developmental item at 41 U.S.C. § 110.

§ Establish a definition of Subcontract at 41 U.S.C. § 115.

§ Revise the references to the above terms at 10 U.S.C. § 2302.

Executive Branch

The FAR Council should do the following:

§ Amend FAR 2.101, Definitions of Words and Terms, to align with the changes to U.S. Code 

described under Legislative Branch above.

§ Modify FAR and DFARS references to align with the changes to U.S. Code described under 

Legislative Branch above.

§ Establish the definition of subcontractor in FAR 2.101, Definitions of Words and Terms.

§ Modify FAR and DFARS to align with the new definitions of subcontractor.

Implications for Other Agencies

§ FASA, Title VIII, placed the commercial item and COTS definitions in the OFPP Act (41 U.S.C.

§ 103), making the definitions applicable to all federal government agencies that are subject to 

the FAR. Changes to the definitions of subcontract and subcontractor would be made in the 

FAR and would be applied to most federal agencies.