Page images
PDF
EPUB

which no part of the net earnings inure to the benefit of any private shareholder or individual, of which no substantial part of the activities is attempting to influence legislation or participating in any political campaign on behalf of any candidate for public office, and which are exempt from Federal income taxation under section 501 of the Internal Revenue Code.

(b) In computing the amount of profit or fee to be paid, the DOE negotiating official shall take into account the tax benefits received by a nonprofit organization. While it is difficult to establish the degree to which a remuneration under any given contract contributes to an organization's overall net profit, the DOE negotiating official should assume that there is an element of profit in any amount to be paid.

(c) In order to assure consideration of the tax posture of nonprofit organizations during a profit or fee negotiation, the DOE negotiating official shall calculate the fee as for a contract with a commercial concern and then reduce it at least 25 percent. However, depending on the circumstances, the contracting officer may pay profit or fees somewhere between this amount and the appropriate profit or fee as if it were a commercial concern. When this is the case, the contract file shall be documented to specifically state the reason or reasons.

(d) Where a contract with a nonprofit organization is for the operation of Government-owned facilities, the fee should be calculated using the procedures and schedules applicable to operating contracts as set forth in Part 970.

915.970–7 Alternative techniques.

(a) Profit or fees to be paid on constructior: contracts and construction management contracts shall be determined in accordance with the applicable profit/fee technique for such contracts set forth in 915.971.

(b) Profit and fee to be paid on contracts under $500,000, not using the weighted guidelines, shall be judgmentally developed by the contracting officer by assigning individual dollar amounts to the factors appropriate to DOE profit considerations discussed in 915.970-2(d).

(c) Cor.tracts which require only delivery or furnishing of goods or services supplied by subcontractors shall include a fee or profit which, in the best judgment of the contracting officer, is appropriate. It would be expected that there would be a declining relationship of profit/fee dollars in relation to total costs. The higher the cost of subcontracts, for example, the lower the profit/fee ratio to these costs.

(d) Profit/Fee considerations in termination settlements are often a question of equity. They are a matter of negotiation. They should not, however, exceed what would have otherwise been payable under weighted guidelines had the termination not oCcurred.

915.970–6 Contracts with educational in

stitutions. In certain situations the DOE may contract with a university to manage or operate Government-owned laboratories. These efforts are generally apart from, and not in conjunction with, their other activities, and the complexity and magriitude of the work are not normally found in standard university research or study contracts. Such operating contracts are subject to the applicable provisions set forth in Part 970.

915.970–8 Weighted guidelines application

considerations. (a) General. (1) 915.970-2(d) lists those DOE factors which are given consideration for profit/fee determination in all cases in which profit is to be specifically negotiated. This section discusses these factors and provides guidance on how they should be evaluated.

(2) The profit/fee elements (factors or subfactors) relating to Contractor Effort, as shown 915.970-2(d), item I, are similar to those cost elements contained in most contract pricing proposals. Often, individual proposals will be in a different format, but, since these factors and subfactors are broad and basic, they provide sufficient guidance to evaluate all items of cost generally found in proposals.

a

(3) In making a judgment of the value of each factor, the contracting officer should recognize the definition, description, and purpose of the factors, together with consideration for evaluating them as set forth herein.

(4) The effect of the Facilities Capital Cost of Money cost principle (FAR 31.205-10) has been recognized in the weights assigned for arriving at profit and fee objectives; consequently, no offset is necessary or will be made to the prenegotiation profit objectives for cost of money recognized as a cost.

(b) Contractor effort. (1) This factor is a measure of how much the contractor is expected to contribute to the overall effort necessary to meet the contract performance requirements in an efficient manner. This factor, which is apart from the contractor's basic responsibility for contract performance, takes into account what resources are necessary, and what the contractor must do, to accomplish a in the contract. This factor recognizes that, within given performance output or within a given sales dollar figure, necessary efforts on the part of individual contractors can vary widely in both value and quantity, and, that the profit objective should reflect the extent and nature of the contractor's contribution to total performance. The evaluation of this factor requires an analysis of the cost content of the proposed contract, as discussed in paragraphs (b) (2) through (4) of this section. Not to be included as part of the cost base (for purposes of computing profit) is any amount calculated for the cost of money for facilities capital computed in accordance with Cost Accounting Standard 414.

(2) The following comprise the base elements for measuring contractor effort:

(i) Material acquisition. Analysis of material acquisition cost items shall include an evaluation of the managerial and technical effort necessary to obtain the required purchased parts, subcontracted items or services, and other materials, including consideration of the number of orders and supplies and whether established sources are available or new sources must be developed. In reviewing this element:

(A) The contracting officer shall determine whether the contractor will obtain the material and tooling by routine orders from readily available suppliers (particularly orders of substantial value in relation to the total contract cost) or by subcontracts, and shall consider the extent to which the prime contractor will be required to develop complex specifications involying creative design or close tolerance manufacturing requirements.

(B) Consideration shall be given to the managerial and technical efforts necessary for the prime contractor to administer subcontracts and select subcontractors, including efforts to break out sole source subcontractors through the introduction of competition. These determinations and considerations shall be made for purchases of raw materials or basic commodities, purchases of processed material, including all types of components of standard or near standard characteristics, and purchases of pieces, assemblies, subassemblies, special tooling, and other products special to the end item. In the application of this criterion, it should be recognized that the contribution of the prime contractor to his purchasing program may be substantial. This may apply in the management of subcontracting programs involving many sources, new complex components and instrumentation, incomplete specifications, and close surveillance by the prime contractor's representative.

(C) Recognized costs proposed as direct material costs, or proposed as material overhead costs, such as scrap charges, shall be treated and evaluated as material costs for profit evaluation.

(D) Intracompany transfers which are accepted at price, in accordance with FAR 31.205-2(e), shall be evaluated as material. Other intracompany transfers shall be evaluated by individual components of cost, i.e., material, labor, and overhead.

(ii) Labor (technical and managerial, manufacturing, and support services). Analyses of the labor cost content of the contract shall include evaluation of the comparative quality and level of the talents, skills, and experience of those personnel to be em

a

ployed for contract performance. In reviewing this element:

(A) Technical and managerial labor shall be evaluated, for the purpose of assigning profit dollars, by giving consideration to the amount of notable scientific, unusual or scarce engineering, and top management talent needed in contrast to journeyman engineering effort, professional staff, or closely related supporting personnel. The diversity, or lack thereof, of scientific, engineering and managerial specialties required for contract performance and the corresponding need for related supervision and coordination shall be evaluated. By way of definition, project management and administration labor falling within this category includes senior project management personnel who oversee and direct the work, and usually consist of the project managers, project engineers, and comparable management personnel who form the project management team that plans, directs, and takes responsibility for the execution of the program or project assignment. The cost element for project management and administration labor usually applies to architect-engineer (A-E) contracts. The weight assigned will take into consideration the dollar amount of the project supervised.

(B) Manufacturing labor shall be evaluated by giving consideration to the variety and range of required manufacturing labor skills (i.e., department heads, supervisors, skilled and unskilled labor) and the contractor's manpower resources for meeting these requirements.

(C) Support services labor shall be evaluated in a manner similar to the above by assigning higher weights to professional-type skills and

lower weights to semi-professional or other type skills required for contract performance. Support services labor represents those classifications of direct labor whose efforts are not identifiable with the descriptions of labor in paragraph (b)(2)(ii)(A) and (b)(2)(ii)(B) of this subsection and may include labor classifications assigned exclusively for contract performance, such as on-site A-E firm employees performing project activities related to accounting, contract admin

istration (including reporting), cost en. gineering, secretarial, clerical and the like. Care should be taken that direct charges of this nature are appropriately classified as direct rather than indi. rect, and that like activities are not al. located indirectly either to this contract or to the contractor's other work assignments. A weighting in excess of 9 percent for support service contract labor normally will be justified only when the quality, skill, and experience of the support labor warrants weighting corresponding to category (A), above.

(iii) General management (overhead and general and administrative (G&A) but exclusive of IR&D costs). In reviewing this element:

(A) Analysis of overhead and G&A expenses includes evaluation of the makeup of these expenses and how much they contribute to contract performance. This analysis shall include a determination of the amount of labor within the expense pools and how this labor would be treated if it were considered as direct labor under the contract. The allocable labor elements shall be given the same profit consideration that they would receive if they were treated as direct labor. The other elements of these expense pools shall be evaluated to determine whether they are routine expenses (such as utilities, supplies, and maintenance) and hence given lesser profit consideration, or whether they contribute sig. nificantly to contract performance. Depreciation expenses on facilities capital will be excluded from consideration since the profit reward for facilities capital investment is separately weighted as discussed in 915.970-8(d). The composite of the individual determinations in relation to the elements of the expense pools will be the profit consideration given the pools as whole. The procedure for assigning relative values to such expenses differs from the method used in assigning values for the direct labor. The upper and lower limits assignable to the direct labor are absolute. In the case of overhead expenses, individual expenses may be assigned values outside the range as long as the composite ratio is within the range.

a

(B) It is not necessary that the contractor's accounting system break down the overhead expenses within the classification of technical and managerial (or engineering) overhead, manufacturing overhead, and general and administrative expenses, unless dictated otherwise by Cost Accounting Standards (CAS). The contractor whose accounting system only reflects one overhead rate on all direct labor need not make changes to reflect more detail data (if CAS exempt) to correspond with the above classifications. In evaluating such a contractor's overhead rate, the negotiating official can break out the applicable sections of the composite rate which can be classified as technical, managerial, or engineering overhead, manufacturing overhead, and general and administrative expenses and follow the appropriate evaluation technique.

(C) There is a critical factor to consider in the determination of profit in this area. Management problems surface in various degrees and the management expertise exercised to solve them shall be considered as an element of profit. For example, a new program for an item that is on the cutting edge of the state of the art will cause more problems and require more managerial time and abilities of a higher order than a follow-on contract. If new contracts create more problems and require a higher profit consideration, follow-ons shall be adjusted downward as many of the problems may have been solved. In any event, an evaluation shall be made of the underlying managerial effort involved on a case-by-case basis.

(D) It may not be necessary for the negotiating official to make a separate profit evaluation of overhead expenses with each acquisition of substantially the same circumstance or service with the same contractor. Where an analysis of the profit weight to be assigned to the overhead pool has been made, the weight to be assigned may be used for future contracts with the same contractor until there is a change in the cost composition of the overhead pool or the contract circumstances, or until the factors discussed in paragraph (C) above are relevant.

(iv) Other direct costs (exclusive of CAS 414, Facilities Capital Cost of Money). In evaluating this element, it should be remembered:

(A) Proposals, particularly for research and development, often list as direct costs the kinds of expenses usually treated as indirect for other contracts. Examples are travel and subsistence, consultants, telephone, computer costs and reports reproduction. The accounting treatment of a cost category does not change the weight appropriate to the cost being evaluated.

(B) The weight ranges in the format cover the broad categories of direct material, labor, and G&A expenses. Although cost submissions may vary from the way shown in the format, all cost categories contained in submissions will fall under one of the broad groupings shown in the format. Because other direct costs are not direct material or direct labor, it follows that they will be considered as indirect costs for weighting purposes.

(C) Contract risk. (1) This factor reflects the policy of the Department of Energy that contractors bear an equitable share of cost risk, and to compensate them for the assumption of that risk. A contractor's risk associated with costs to perform under a Government contract is usually minimal under cost-reimbursement-type contracts. In developing a prenegotiation profit or fee objective, the negotiating official will need to consider the type of contract to be negotiated and the anticipated contractor cost risk. This consideration is one of the most important factors in arriving at a prenegotiation profit or fee objective.

(2) Profit/Fee allowances for contractor assumption of cost risk require a determination of the degree of cosi responsibility the contractor assumes, and the reliability of the cost estimates in relation to the task assumed. This factor is specifically limited to the risk of costs of contract performance, including unallowable cost elements. Thus, such risks on the part of the contractor as reputation, losing a commercial market, losing potential profits in other fields, or any risk on the part of the contracting activity, such as the risk of not acquiring an ef(ii) Type of contract and percentage ranges for profit objectives developed for research and development contracts:

a

fective product or service, are not within the scope of this factor.

(3) The first and basic determination of the degree of cost responsibility assumed by the contractor is related to the sharing of total risk of performance cost by the Government and the contractor through the selection of contract type. The extremes are cost-plus-fixed-fee contract, requiring only that the contractor use his best efforts to perform a task, and a firmfixed-price contract. A cost-plus-fixedfee contract reflects a minimum assumption of cost responsibility, whereas a firm-fixed-price contract reflects a complete assumption of cost responsibility.

(4) The second determination is that of the reliability of the cost estimates. Sound price negotiation requires welldefined contract objectives and reliable cost estimates which, among other things, take the difficulty of the task into consideration. Prior production experience assists the contractor in preparing reliable cost estimates on new contracts for similar items.

(5) Contractors are likely to assume greater cost risk when confident that contracting officers analyze the risk incident to proposed contracts and show they are willing to compensate contractors for it. Generally, a costplus-fixed-fee contract will not justify a reward for risk in excess of 0.5 percent, nor will a firm-fixed-price contract justify a reward of less than the minimum on the following weighted guidelines. Where proper contracttype selection has been made, the reward for risk, by contract type, will usually fall into the following percentage ranges which are applied to total recognized contract costs, exclusive of facilities capital cost of money:

(i) Type of contract and percentage ranges for profit objectives developed for equipment and supply contracts: Cost-Plus-Fixe Fee-0 to 0.5% Cost-Plus-Incentive-Fee:

With Cost Incentives Only-1 to 2%

With Multiple Incentives—1.5 to 3% Fixed-Price-Incentive:

With Cost Incentives Only-3 to 5%

With Multiple Incentives—4 to 6% Prospective-Price-Redeterminable-4 to 6% Firm-Fixed-Price–6 to 8%

Cost-Plus-Fixed-Fee-0 to 0.5%
Cost-Plus-Incentive-Fee:

With Cost Incentives Only-1 to 2%

With Multiple Incentives—1.5 to 3% Fixed-Price-Incentive:

With Cost Incentives Only-2 to 4%

With Multiple Incentives—3 to 5% Prospective-Price-Redeterminable—3 to 5% Firm-Fixed-Price—5 to 7%

(iii) Type of contract and percentage ranges for profit objectives developed for contracts for services. Cost-Plus-Fixed-Fee-0 to 0.5% Cost-Plus-Incentive-Fee-1 to 2% Fixed-Price-Incentive-2 to 3% Firm-Fixed-Price-3 to 4%

(6) In assessing the selection and application of a weighting factor, the DOE negotiating official should remember:

(i) These ranges may not be appropriate for all acquisitions. For instance, a fixed-price-incentive contract that is closely priced with a low ceiling price and high incentive share may be tantamount to a firm fixed price contract. In this situation, the contracting officer may determine that a basis exists for high confidence in the reasonableness of the estimate and that little opportunity exists for cost reduction without extraordinary efforts. On the other hand, a contract with a high ceiling and low incentive formula can be considered to contain cost-plus-incentive-fee contract features. In this situation, the contracting officer may determine that the Government is retaining much of the contract responsibility and that the risk assumed by the contractor is minimal. Similarly, if a cost-plus-incentive-fee contract includes an unlimited downward (negative) fee adjustment on cost control, it could be comparable to a fixed-priceincentive-contract. In such a pricing environment, the negotiating official may determine that the Government has transferred a greater amount of cost responsibility to the contractor than is typical under a normal costplus-incentive-fee contract.

(ii) The acquisition may not obviously fit a specific category shown. For

« PreviousContinue »