Report of the Advisory Panel on Streamlining and Codifying Acquisition Regulations

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Simplifying Procurement and Contracting Volume 3

Recommendation 80: Preserve the preference for procuring commercial 

products and services when considering small business set-asides.

Problem

When the government’s needs may be met by products or services available in the commercial 

marketplace and contracting officers are considering a small business set-aside, they may face a 

dilemma if the small-business solution does not satisfy the definition of commercial product or commercial 

service. Neither statute nor regulation provides an order of precedence between the statute’s preference 

for acquiring commercial products or services and the requirement to procure certain products or 

services from small businesses.

Background

Preference for Commercial Products and Services

One of the most pivotal parts of FASA was the establishment of a preference for the government to 

procure commercial products and commercial services rather than government-unique products and 

services. This preference is codified in 41 U.S.C. § 3307, Preference for Commercial Items: 

(b) PREFERENCE. — The head of each executive agency shall ensure that, to the maximum extent

practicable—

(1) requirements of the executive agency with respect to a procurement of supplies or services are 

stated in terms of—

(A) functions to be performed;

(B) performance required; or

(C) essential physical characteristics;

(2) those requirements are defined so that commercial items or, to the extent that commercial items 

suitable to meet the executive agency's needs are not available, nondevelopmental items other than 

commercial items may be procured to fulfill those requirements; and

(3) offerors of commercial items and nondevelopmental items other than commercial items are

provided an opportunity to compete in any procurement to fill those requirements.

The preference is also codified in 10 U.S.C. § 2377, Preference for Acquisition of Commercial Items:

(a) PREFERENCE .— The head of an agency shall ensure that, to the maximum extent practicable—

(1) requirements of the agency with respect to a procurement of supplies or services are stated in 

terms of—

(A) functions to be performed;

(B) performance required; or

(C) essential physical characteristics;
Report of the Advisory Panel on Streamlining and Codifying Acquisition Regulations

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Simplifying Procurement and Contracting Volume 3

(2) such requirements are defined so that commercial items or, to the extent that commercial items 

suitable to meet the agency's needs are not available, nondevelopmental items other than commercial 

items, may be procured to fulfill such requirements; and

(3) offerors of commercial items and nondevelopmental items other than commercial items are

provided an opportunity to compete in any procurement to fill such requirements.

This preference is implemented in FAR Part 10, Market Research, Subpart 10.002, Procedures and 

Part 12, Acquisition of Commercial Items, Subpart 12.101, Policy:

(d) (1) If market research establishes that the Government’s need may be met by a type of item or service 

customarily available in the commercial marketplace that would meet the definition of a commercial item 

at Subpart 2.1, the contracting officer shall solicit and award any resultant contract using the policies 

and procedures in Part 12.

Agencies shall --

(a) Conduct market research to determine whether commercial items or nondevelopmental items are 

available that could meet the agency’s requirements;

(b) Acquire commercial items or nondevelopmental items when they are available to meet the needs of the 

agency; and

(c) Require prime contractors and subcontractors at all tiers to incorporate, to the maximum extent 

practicable, commercial items or nondevelopmental items as components of items supplied to the agency.

Small Business Set-Aside

The government’s overarching small business policy is contained in 15 U.S.C. § 644(a), Commerce and 

Trade, Awards and Contracts: 

(a) Determination

To effectuate the purposes of this chapter, small-business concerns within the meaning of this chapter 

shall receive any award or contract or any part thereof, and be awarded any contract for the sale of 

Government property, as to which it is determined by the Administration and the contracting 

procurement or disposal agency (1) to be in the interest of maintaining or mobilizing the Nation's full 

productive capacity, (2) to be in the interest of war or national defense programs, (3) to be in the interest 

of assuring that a fair proportion of the total purchases and contracts for property and services for the 

Government in each industry category are placed with small-business concerns, or (4) to be in the 

interest of assuring that a fair proportion of the total sales of Government property be made to smallbusiness concerns

In particular, Paragraph (a)(4) is permissive and leaves to the contracting officer’s judgment the extent 

to which small business “shall receive any award or contract...as to which it is determined...(4) to be in 

the interests of assuring that a fair proportion...be made to small business concerns.”
Report of the Advisory Panel on Streamlining and Codifying Acquisition Regulations

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In 15 U.S.C. § 644 (j), the statute specifically reserves procurements greater than the micro-purchase 

threshold (MPT) (currently $10,000) and less than the SAT (currently $250,000):

(j) Small business reservation

(1) Each contract for the purchase of goods and services that has an anticipated value greater than the 

micro-purchase threshold, but not greater than the simplified acquisition threshold shall be reserved 

exclusively for small business concerns unless the contracting officer is unable to obtain offers from two 

or more small business concerns that are competitive with market prices and are competitive with regard 

to the quality and delivery of the goods or services being purchased.

15 U.S.C. § 644 (j) is implemented in regulation in FAR Part 19, Small Business Programs, 

Subpart 19.502-2, Total Small Business Set-Asides: 

(a) Before setting aside an acquisition under this paragraph, refer to 19.203(b). Each acquisition of 

supplies or services that has an anticipated dollar value exceeding $3,500 ($20,000 for acquisitions as 

described in 13.201(g)(1)), but not over $150,000, ($750,000 for acquisitions described in paragraph 

(1)(i) of the Simplified Acquisition Threshold definition at 2.101), is automatically reserved exclusively 

for small business concerns and shall be set aside for small business unless the contracting officer 

determines there is not a reasonable expectation of obtaining offers from two or more responsible small 

business concerns that are competitive in terms of market prices, quality, and delivery.

Setting aside the procurement is subject to there being “two or more responsible small business 

concerns that are competitive in terms of market prices, quality and delivery,”1 typically referred to as 

the Rule of Two. 

For procurements greater that the SAT, the statute is silent, but FAR 19.203 (c) asks contracting officers 

to consider using a small business program for such a procurement:

(c) Above the simplified acquisition threshold. For acquisitions of supplies or services that have an 

anticipated dollar value exceeding the simplified acquisition threshold definition at 2.101, the contracting 

officer shall first consider an acquisition for the small business socioeconomic contracting programs

Discussion

Both statute and regulation establish a preference for acquiring commercial products and commercial 

services, when available, to satisfy the government’s need. This clear preference is strongly supported 

by language at FAR 10.001(a)(3), which states if the government cannot find a commercial product or 

commercial service to meet its need, it must consider modifying commercial products and commercial 

services to meet its need, and if that is not sufficient, consider modifying the government’s requirement 

itself before considering procuring a noncommercial product or service.

 

1 Total Small Business Set-Asides, FAR 19.502-2(a).
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Statute is silent on any conflict between the preference for commercial products and services and small 

business set-asides. The statute does not specifically establish a preference for awards to small business, 

but it establishes the overarching policy of assuring a fair proportion of awards are made to small 

business. For awards between the MPT and the SAT, the statue reserves awards for small business 

subject to satisfying the Rule of Two. For awards greater than the SAT, reserving a procurement is left 

to the judgment of the contracting officer, again subject to the Rule of Two.

An important consideration is the logical order in which the commercial determination and Rule of 

Two determination take place in the acquisition process. It is logical to conclude that the contracting 

officer, using market research, would first determine what will be procured (including commercial and 

noncommercial) to satisfy the government’s need. Once what is to be procured is established, it is 

logical to then address the question of how (interagency procurement, existing multiple-award contract, 

solicitation) and from whom (competitive, sole source, small business, large business). Although, the 

plain language of the FAR can reasonably be read to require contracting officers to determine if a 

commercial product or service could satisfy the government’s requirements before deciding whether 

the procurement at issue should be set aside for small businesses, nothing in the FAR expressly states 

that commerciality determinations must come before any set-aside determinations. 

When this issue was recently considered in Analytical Graphics, Inc. v. United States, the Court of 

Federal Claims (COFC) found that “there is not a clear order of precedence in the statutes or 

implementing regulations for how to approach a procurement which potentially involves both a small 

business set-aside analysis and a commercial availability analysis.”2

At a minimum, the current ambiguity in the law will lead to inconsistencies across agencies, and, 

indeed, between individual contracting officers within agencies in terms of how acquisitions are 

planned. In a worst-case scenario, the Court’s holding in Analytical Graphics, Inc. creates a roadmap 

for agencies to circumvent the statutory preference for commercial products and services. Specifically, 

following Analytical Graphics, Inc., contracting officers have no obligation to determine whether the 

government’s requirements can be satisfied by commercial products or services before deciding 

whether to set-aside the procurement for small businesses. 

Practically speaking, if the government has a requirement that can be satisfied by a commercial product 

or service, and the commercial product or service that could satisfy the government’s requirement is 

only available from large businesses, but two or more small businesses are available that could meet 

the government’s requirement with a noncommercial product or service, then the government would 

be permitted to set-aside the procurement for small businesses and conduct the acquisition on a FAR 

Part 15 basis, thereby purchasing a developmental product when a commercial product or service 

already exists that meets the government’s needs. 

Clearly, this outcome is inconsistent with Congress’s goals in FASA. Equally troubling however, absent 

language clarifying the priority of the commercial products and services preference over the Rule of 

Two, the government could avoid purchasing commercial products and services whenever it wants 

 

2 Analytical Graphics, Inc. v. United States, 135 F. Cl. 378, 412 (2017).
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simply by identifying two or more small business offerors that can meet the government’s 

requirements with a developmental solution. 

Because the Rule of Two presupposes agencies have already developed their requirements, and 

because agencies are required by FASA and the FAR to consider the availability of commercial 

products and services at the requirements development stage, it follows that agencies must decide 

whether or not a procurement can be conducted on a FAR Part 12 basis before deciding whether the 

procurement can be set aside for small businesses. Implicit in the language of FAR 19.502-2 is that 

prospective small business offerors will be submitting an offer in response to a defined requirement. 

Without this assumption, the language “offers will be obtained” has no meaning. Agencies should be 

considering the commerciality of their requirement at the outset of the acquisition. Only after such 

requirements are defined can the agency rationally consider a set-aside determination based on 

whether there is a reasonable expectation that “offers will be obtained” from small businesses in 

response to that requirement.

Conclusions

Clarification is needed regarding existing law following the COFC’s determination in Analytical 

Graphics, Inc. v. United States that “there is not a clear order of precedence” between the commercial 

item preference and the Rule of Two. The Court highlighted the need for legislators and regulators to 

address this issue, stating,

[g]iven the ambiguity in the two competing statutory goals and absent regulatory guidance regarding the 

choice as to which has precedence, the choice made by agency generally deserves deference ... The court 

should not be the entity to make that choice, and should intervene only when there is an obvious foul. 

Absent compelling statutory or regulatory guidance, which is missing here, the court generally defers to 

the agency’s choice in a procurement in which the market research was carefully conducted. As the 

statutes and regulations do not point to a clear order for an agency to proceed between the small business 

set-aside determination and a commercial availability decision, the court does not read a requirement into 

the statutes and regulations that requires the agency or this court to first examine either.3

Implementation

Legislative Branch

§ Modify 41 U.S.C. § 3307, Preference for Commercial Products and Services, to establish 

acquisition of commercial products, commercial services, and nondevelopmental items as 

having precedence over small-business set-asides.

§ Modify 10 U.S.C. § 2377, Preference for Acquisition of Commercial Products and Commercial 

Services, to establish acquisition of commercial products, commercial services, and 

nondevelopmental items as having precedence over small-business set-asides.4

 

3 Analytical Graphics, Inc. v. United States, 135 F. Cl. 378, 412 (2017). 4 Note that similar language was proposed in Section 854 of the base version of the Senate FY 2018 NDAA.
Report of the Advisory Panel on Streamlining and Codifying Acquisition Regulations

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Executive Branch

§ Modify FAR 6.203, Set-Asides for Small Business Concerns, to establish acquisition of 

commercial products, commercial services, and nondevelopmental items as having precedence 

over small-business set-asides.

§ Modify FAR 12.102, Applicability, to refer to commercial items as commercial products and 

services and to establish acquisition of commercial products, commercial services, and 

nondevelopmental items as having precedence over small-business set-asides.

Implications for Other Agencies

§ The recommended statutory and FAR revisions will benefit all federal agencies subject to the 

FAR by clarifying the precedence for the preference for acquisitions of commercial products and 

services when considering a small business set-aside.