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§ 1-3.405–5 Cost-plus-a-fixed-fee con which such fee is applicable is authorized in tract.

contracts for architectural or engineering

services relating to any public works or (a) Description. The cost-plus-a

utility project).” fixed-fee contract is a cost reimbures

(d) Contractors' investment in workment type of contract which provides for the payment of a fixed fee to the contrac

in-process. Contractors having cost-retor. The fixed fee once negotiated does

imbursement type contracts shall be re

quired to maintain a reasonable investnot vary with actual cost, but may be

ment in the property and facilities acadjusted as a result of any subsequent

quired and in the services rendered in changes in the work or services to be

the performance of such contracts. This performed under the contract. Because

investment provides a strong incentive the fixed fee does not vary in relation to

for the contractor to strive for greater the contractor's ability to control costs,

efficiency and economy and better manthe cost-plus-a-fixed fee contract pro agement, with resultant lower costs to vides the contractor with only a mini the Government. mum incentive for effective management (1) In keeping with this policy, costcontrol of costs.

reimbursement type contracts other than (b) Application. The cost-plus those set forth below shall provide for a-fixed-fee contract is suitable for use interim payment of not to exceed 80 when:

percent of the costs incurred by the con(1) A cost-reimbursement type of con

tractor in the performance of the contract is found necessary in accordance

tract. with § 1-3.405-1(b);

(i) Contracts under which the con(2) The parties agree that the con tractors receive no fee or profit. tract should be fee bearing;

(ii) Contracts with educational insti(3) The contract is for the perform

tutions or nonprofit organizations. ance of research, or preliminary ex

(iii) Contracts solely for the operation ploration or study, where the level of ef

of Government-owned plants or vessels. fort required is unknown; or

(iv) Contracts with small business (4) The contract is for development

nent concerns. and tests where the use of a cost-plus-in

(V) Contracts for research and develcentive-fee contract is not practical.

opment which do not provide for quan(c) Limitations. (1) This type of con

tity production. tract normally should not be used in

(vi) Contracts for performance outthe development of major weapons and

side the United States, its possessions, equipment, once preliminary exploration

and Puerto Rico. and studies have indicated a high de

(vii) Contracts having an estimated gree of probability that the development

cost not in excess of $250,000. is feasible and the Government generally

(viii) Contracts for construction and has determined its desired performance

architect-engineer services.

(ix) As determined by the agency head objectives and schedule of completion

concerned, contracts in which the ap(see § 1-3.405-4).

plication of the policy would impose un(2) The fixed fees shall not exceed

due hardship on the contractor or adthose prescribed by agency procedures

versely affect the interests of the within the limitations set forth in the

Government. first sentence of section 304(b) of the (2) An appropriate clause implementAct (41 U.S.C. 254(b)), which sentence ing this policy shall be inserted in all reads in part as follows:

cost-reimbursement type supply con"* • * in the case of a cost-plus-a-fixed

tracts. fee contract the fee shall not exceed 10 per

(3) Application of this policy need centum of the estimated cost of the contract, not affect the method of payment of exclusive of the fee, as determined by the the fee, but the extent of the contractor's agency head at the time of entering into such

capital investment in the performance contract (except that a fee not in excess of 15 per centum of such estimated cost is au

of the contract will be taken into conthorized in any such contract for experi

atract for experi- sideration in fixing the amount of fee mental, developmental. or research work and or profit. that a fee inclusive of the contractor's costs (e) Completion or Term form. The and not in excess of 6 per centum of the

cost-plus-fixed-fee contract can be estimated cost, exclusive of fees, as determined by the agency head at the time of en.

drawn in one of two basic forms, Comtering into the contract, of the project to pletion or Term.

99–187-69- 9

(1) The Completion form is one which describes the scope of work to be done as a clearly-defined task or job with a definite goal or target expressed and with a specific end-product required. This form of contract normally requires the contractor to complete and deliver the specified end-product (in certain instances, a final report of research accomplishing the goal or target) as a condition for payment of the entire fixed-fee established for the work and within the estimated cost if possible; however, in the event the work cannot be completed within the estimated cost, the Government can elect to require more work and effort from the contractor without increase in fee provided it increases the estimated cost.

(2) The Term form is one which describes the scope of work to be done in general terms and which obligates the contractor to devote a specified level of effort for a stated period of time for the conduct of research and development. Under this form, the fixed-fee is payable at the termination of the agreed period of time on certification of the contractor that he has exerted the level of effort specified in the contract in performing the work called for, and such performance is considered satisfactory by the Government. Renewals for further periods of performance are new procurement and involve new fee and cost arrangements.

(3) The Completion form of contract, because of differences in obligation assumed by the contractor, is to be preferred over the Term form whenever the work itself or specific milestones can be defined with sufficient precision to permit the development of estimates within which prospective contractors can reasonably be expected to complete the work, as is usually the case in advanced development and engineering development. A milestone is a definable point in a program when certain objectives can be said to have been accomplished.

(4) In the case of research and exploratory development work, it is rarely possible to define the scope of work with the degree of precision necessary for contracting on a Completion basis because of the nature of the work to be performed. Hence in such cases, the Term form of contract may be considered preferable in that it provides more flexibility for effective conduct of the research effort.

(5) In no event should the Term form

of contract be used unless the contractor is obligated by the contract to provide a specific level-of-effort within a definite period of time. § 1–3.406 Other types of contracts. $ 1–3.406–1 Time and materials con.

tract. (a) Description. The time and materials type of contract provides for the procurement of property or services on the basis of (1) direct labor hours at specified fixed hourly rates (which rates include direct and indirect labor, overhead, and profit) and (2) material at cost. Material handling costs may be included in the charge for "material at cost,” to the extent they are clearly excluded from any factor of the charge computed against direct labor hours. This type of contract does not afford the contractor with any positive profit incentive to control the cost of materials or to manage his labor force effectively.

(b) Application. The time and materials contract is used only where it is not possible at the time of placing the contract to estimate the extent or duration of the work or to anticipate costs with any reasonable degree of confidence. Particular care should be exercised in the use of this type of contract since its nature does not encourage effective management control. Thus it is essential that this type of contract be used only where provision is made for adequate controls, including appropriate surveillance by Government personnel during performance, to give reasonable assurance that inefficient or wasteful methods are not being used. This type of contract may be used in the procurement of (1) engineering and design services in connection with the production of supplies; (2) the engineering, design and manufacture of dies, jigs, fixtures, gauges, and special machine tools; (3) repair, maintenance, or overhaul work; and (4) work to be performed in emergency situations.

(c) Limitation. Because this type of contract does not encourage effective cost control and requires almost constant Government surveillance, it may be used only after determination that no other type of contract will suitably serve. This type of contract shall establish a ceiling price which the contractor exceeds at his own risk. The contracting officer shall document the contract file to show valid reasons for any change in the

ceiling and to support the amount of such by providing for increases in the fee or change.

profit to the extent that such targets (d) Optional method of pricing ma are surpassed and for decreases to the terial. When the nature of the work to extent that such targets are not met. be performed requires the contractor to Salient features and considerations in furnish material which is regularly sold the use of this type of contract are as to the general public in the normal course follows: of business by the contractor, the con (1) "Performance”, as used in this tract may provide for charging material § 1-3.407–2, refers not only to the peron a basis other than at cost if:

formance of the article being procured, (1) The total estimated contract price but to the performance of the contractor does not exceed $25,000 or the estimated as well. Performance which is the miniprice of material so charged does not mum which the Government will accept exceed twenty percent of the estimated shall be mandatory under the terms of contract price.

the Completion form contract and shall (2) The material to be so charged is warrant only the minimum profit or fee identified in the contract;

related thereto. Performance which (3) No element of profit on material meets the stated targets will warrant the so charged is included in the profit in "target" profit or fee. Performance the fixed hourly labor rates; and

which surpasses these targets will be re(4) The contract provides that the warded by additional profit or fee. The price to be paid for such material shall incentive feature (providing for increases be on the basis of an established catalog or decreases, as appropriate) is applied or list price, in effect when material is to performance targets rather than perfurnished, less all applicable discounts formance requirements. to the Government, but in no event shall (2) The incentive, when applied to the such price be in excess of the contractor's product, should relate to specific persales price to his most favored customer formance characteristics, such as range for the same item in like quantity, or the of a missile, speed of an aircraft or ship, current market price, whichever is lower. thrust of an engine, maneuverability of

a vehicle, and fuel economy. However, § 1-3.406-2 Labor-hour contract.

high overall performance of the end item (a) Description. The labor-hour type is the primary objective of such conof contract is a variant of the time and tracts. Accordingly, the incentive feamaterials type contract differing only in ture should reflect a balancing of the that materials are not supplied by the various characteristics which together contractor.

account for overall performance, so that (b) Application. See § 1-3.406-1(b). no one characteristic will be exaggerated

(c) Limitations. See § 1-3.406–1(c). to the detriment of the end item as a $ 1–3.407 Additional incentives.

whole. When applied to the perform

ance of the contractor, the incentive 8 1-3.407–1 General.

should relate to specific performance In addition to the profit incentives to areas or milestones, such as delivery or control costs, inherent in many of the test schedules, quality controls, maintecontract types, and combinations there nance requirements, and reliability of, described in $$ 1-3.404 through standards. 1-3.406, there are other means of pro (3) Since performance tests generally viding profit incentives to contractors, are essential in order to determine the which are described in this § 1-3.407, to degree of attainment of performance obtain extra management attention and

targets, the contract must be as specific effort. Increases in profits or fees re- as possible in establishing test criteria. sulting from the use of incentive pro

such as conditions of testing, precision visions are made only because cost, per of instrumentation, and interpretation formance or other contractual goals or of test data. standards have been surpassed.

(4) It is essential that there be explicit 8 1–3.407—2 Contracts with performance agreement between the Government and incentives.

the contractor as to the effect on per(a) Description. A contract with a formance of contract changes (e.g., purperformance incentive is one which in- suant to the Changes clause). corporates an incentive to the contractor (5) Care must be exercised, in estabto surpass stated performance targets lishing performance criteria, to give

recognition to the fact that the con- mum fee shall be subject to the limitatractor should not be rewarded or pe tions stated in g 1-3.405–5(c) (2). nalized for attainments of Governmentfurnished components.

§ 1-3.408 Letter contract. (6) In establishing incentives in con (a) Definition. A letter contract is nection with delivery schedules, it is a written preliminary contractual inimportant to determine the Govern- strument which authorizes immediate ment's primary objectives in a given con- commencement of manufacture of proptract. In some instances, earliest erty, or performance of services, includpossible delivery is of paramount impor ing, but not limited to, preproduction tance. In others, early quantity produc planning, and the procurement of nection is essential. On the other hand, it essary materials. may be that maintaining an established (b) Application. A letter contract delivery schedule is all that is desired, may be entered into when (1) the inand that a bettering of such schedule terests of the Government demand that may distrupt continuity of production or the contractor be given a binding comrun counter to funding limitations.

mitment so that work can be commenced (b) Application. Contracts with per immediately, and (2) negotiation of a formance incentives are suitable for use

definitive contract in sufficient time to in procurements where it is desired to

meet the procurement need is not posprovide the contractor with an incentive

sible, as, for example, when the nature in the form of financial reward for sur

of the work involved prevents the preppassing stated performance targets,

aration of definitive requirements, speccounterbalance by a penalty in the form

ifications, or cost data.

incations, oro of decreased profit or fee for failure to

(c) Limitations. (1) A letter contract achieve such targets. Performance in shall be used only after a determination centives are particularly appropriate for in accordance with agency procedures inclusion in contracts for major weapons that no other type of contract is suitable. and equipment, both in development

(2) A letter contract shall not be

entered into without competition when are known and the fabrication of proto competition is practicable. Where a types for test and evaluation is required. letter contract award is based on price and in production where there is poten

competition, an overall price ceiling shall tial for improved performance that would

be included in the letter contract.

be included be highly desirable to the Government.

(3) A letter contract shall be superEffort always should be made in these seded by a definitive contract at the procurement situations to include a per earliest practicable date. Executive formance incentive in the contract. agencies shall prescribe the limitations Performance incentives present complex as to the period of effectiveness of letter problems in contract administration and contracts. should be negotiated and administered

(4) The maximum liability of the by contracting officers with the full co

Government stated in the letter contract operation of Government engineering generally shall not exceed fifty percent and pricing specialists.

of the total estimated cost of the pro(c) Limitations. (1) Performance in

curement, but this liability may be incentives, when related to the perform creased in accordance with agency proance of the product, may result in cedures. increased costs and shall always be (d) Content. Letter contracts shall coupled with a balancing of range of be specifically negotiated and, as a fee or profit on the cost and performance minimum, shall include agreement as aspects, negotiated so as to give appro- to the following: priate weight to basic procurement ob (1) The immediate commencement of jectives. Where incentives relating to performance of the contract by the conthe performance of the product are tractor, including procurement of necesincluded in a contract, and earliest pos sary materials: sible delivery is of considerable impor (2) The extent and method of paytance to the Government, the contract ments in the event of termination either normally should include a performance for the convenience of the Government incentive relating to time of performance or for default; or for expedited delivery schedules.

(3) That the contractor is not au(2) In the case of cost-reimbursement thorized to expend moneys or incur obtype contracts involving a fee, the maxi- ligations in excess of the maximum

liability of the Government as stated in should be used in writing and adminthe letter contract;

istering this type of contract to avoid (4) The type of definitive contract imposition of an impossible burden on anticipated;

the contractor. Therefore, the con(5) As many definitive contract pro tract shall state, where feasible, the visions as possible;

maximum limit of the contractor's obli(6) The contractor's obligation to pro gation to deliver and, in such event, shall vide such price and cost information as also contain appropriate provision limmay reasonably be required by the con iting the Government's obligation to tracting officer; and

order. When large individual orders or (7) The prompt entry into good faith orders from more than one activity are negotiations by the contractor and the anticipated, the contract may specify Government to reach agreement upon the maximum quantities which may be and execute a definitive contract.

ordered under each individual order or

during a specified period of time. Sim§ 1-3.409 Indefinite delivery type con

ilarly, when small orders are anticipated, tracts.

the contract may specify the minimum One of the following indefinite de

quantities to be ordered. livery type contracts may be used for

(2) Application. A requirements conprocurements where the exact time of tract may be used for procurements delivery is not known at time of con where it is impossible to determine in tracting.

advance the precise quantities of the (a) Definite quantity contract-(1)

property or services that will be needed Description. This type of contract pro by designated activities during a definite vides for a definite quantity of specified period of time. Advantages of this type property or for the performance of of contract are: specified services for a fixed period, with (i) Flexibility with respect to both deliveries or performance at designated quantities and delivery scheduling; locations upon order. Depending on the (ii) Supplies or services need be orsituation, the contract may provide for dered only after actual needs have man (i) firm fixed-prices, (ii) price escala- terialized; tion, or (iii) price redetermination.

(iii) Where production lead time is (2) Application. This type of con- involved, deliveries may be made more tract is particularly suitable for use promptly because the contractor is where it is known in advance that a usually willing to maintain limited stocks definite quantity of property or services in view of the Government's commitwill be required during a specific period ment; and are regularly available or will be (iv) Price advantages or savings may available after a short lead time. Ad be realized through combining several vantages of this type of contract are anticipated requirements into one quanthat it permits stocks in storage depots tity procurement; and to be maintained at minimum levels and (v) It permits stocks to be mainpermits direct shipment to the user.

tained at minimum levels and allows (b) Requirements contract(1) De

direct shipment to the user. scription. This type of contract provides for filling all actual purchase Generally, the requirements contract is requirements of specific property or serv appropriate for use when the item or ices of designated activities during a service is commercial or modified comspecified contract period with deliveries mercial in type and when a recurring to be scheduled by the timely placement

need is anticipated. of orders upon the contractor by ac

(c) Indefinite quantity contract-(1) tivities designated either specifically or

Description. This type of contract proby class. Depending on the situation, the contract may provide for (i) firm fixed

vides for the furnishing of an indefinite prices, (ii) price escalation, or (iii) price

quantity, within stated limits, of specific redetermination. An estimated total

property or services, during a specified quantity is stated for the information of contract period, with deliveries to be prospective contractors, which estimate scheduled by the timely placement of should be as realistic as possible. The orders upon the contractor by activities estimate may be obtained from the rec designated either specifically or by class. ords of previous requirements and con- Depending on the situation, the contract sumption, or by other means. Care may provide for (i) firm fixed-prices, (ii)

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