15 November 1963, Rev. 3 360.1 PRICE NEGOTIATION POLICIES AND TECHNIQUES contracting officer must have adequate knowledge of these elements and their effect on prime contract prices. Therefore, contractors' "make-or-buy" programs and proposed subcontracts should be reviewed in accordance with Part 9 of this Section III and the information from such review should be used in negotiating prime contract prices. Even though not specifically required by Part 9, the contracting officer should, where appropriate, elicit from the offeror or contractor information concerning: (i) the purchasing practices of the prime contractor; (ii) the principal components to be subcontracted and the contemplated subcontractors, including (A) the degree of competition obtained, (B) cost or price analyses or price comparisons accomplished, including accurate, complete, and current cost or pricing data, and (C) the extent of subcontract supervision; (iii) the types of subcontracts; i.e., firm fixed-price or other (see 3-401); and (iv) the estimated total extent of subcontracting, including procurement of purchased parts and materials. (b) In the review of subcontracting there should be assurance that the contractors obtain competition, if available, from qualified sources in their award of subcontracts to the extent consistent with the procurement of the required services or supplies. Contractors shall be required to undertake appropriate price analysis (see 3-807.2(b)) in all significant subcontract transactions, and to undertake cost analysis (see 3–807.2(c)) if competition is not available or does not yield reasonable subcontract prices. Where the contracting officer's consent to subcontract is required (see 3-903), price or cost analysis shall be required as a condition to such consent. (c) Where subcontracts are placed on a price redetermination or fixedprice incentive basis, it is particularly important in negotiating revisions of prime contract prices that there be substantial assurance that there was initial close pricing of subcontracts. Also, contracting officers should be alert to the risk of establishing firm redetermined prime contract prices while a major subcontract is still subject to price redetermination and may eventually be redetermined at a price far lower than that ascribed to it in redetermining the prime contract price, with consequent profits to the contractor far in excess of those contemplated in the prime contract price negotiation. However, in some cases, it may be appropriate to negotiate firm contract prices even though the contractor has not yet established final subcontract prices, if the contracting officer can justify as reasonable the amount included for subcontracting, e.g., where fairly definite cost data on subcontract prices are available. In other cases, where certain subcontracts are subject to redetermination and available cost data on these subcontracts are highly indefinite but other circumstances require prompt negotiation of revised prime contract prices the contract modification which evidences the revised contract prices should provide for adjustment of the total amount paid or to be paid under the contract on account of subsequent redetermination of the specified subcontracts. This may be done by including in the contract modification a provision substantially as follows: ARMED SERVICES PROCUREMENT REGULATION 3-807.10 360.2 15 November 1963, Rev. 3 PROCUREMENT BY NEGOTIATION Promptly upon the establishment of firm prices for each of the subcontracts listed below, the Contractor shall submit, in such form and detail as the Contracting Officer may reasonably require, a statement of costs incurred in the performance of such subcontract and the firm price established therefor. Thereupon, notwithstanding any other provisions of this contract as amended by this modification, the Contractor and the Contracting Officer shall negotiate an equitable adjustment in the total amount paid or to be paid under this contract to reflect such subcontract price revision. The equitable adjustment shall be evidenced by a modification to this contract, signed by the Contractor and the Contracting Officer. (d) In considering cost-plus-fee subcontracts while negotiating prime contracts where cost analysis is performed, the contracting officer shall make every effort to insure (but in consenting to cost-plus-fee subcontracts, the contracting officer shall insure) that fees under such subcontracts never exceed(i) fifteen percent (15%) of the estimated cost, exclusive of fee, in the case of any subcontract for experimental, developmental, or research work; or (ii) ten percent (10%) of the estimated cost, exclusive of fee, in the case of any other subcontract, except as provided in (iii) below; or (iii) six percent (6%) of the estimated cost of a public work or utility, exclusive of fees, in the case of a subcontract for architectural or engineering services for such work or utility project. These limits should not be inserted in the prime contract because such action might tend to inflate fees customarily negotiated at lower rates. 3-807.11 Overhead Rate Considerations. (a) Indirect costs commonly known as overhead are defined and described in 15-203. Criteria for treatment and application of indirect costs to contracts are also set forth in 15-203. (b) In order to assure a reasonable approximation and allocation of indirect costs on an equitable basis to individual contracts, negotiators shall utilize audited overhead data or negotiated overhead rates, where available, in connection with negotiation of contracts and shall not, unless authorized by the head of a procuring activity, seek preferential overhead rates. (c) If there is any question with respect to audited overhead data or negotiated overhead rates, or if such are not available, the negotiator should normally avail himself of the advisory services of the cognizant Department of Defense auditor in consonance with 3-809. [The next page is 360.3] 13-807. 11 ARMED SERVICES PROCUREMENT REGULATION 29 January 1965, Rev. 9 PRICE NEGOTIATION POLICIES AND TECHNIQUES 360.3 3-808 Profit, Including Fees Under Cost-Reimbursement Type Contracts. 3-808.1 Policy. (a) General. It is the policy of the Department of Defense to utilize profit to stimulate efficient contract performance. Profit generally is the basic motive of business enterprise. The Government and defense contractors should be concerned with harnessing this motive to work for more effective and economical contract performance. Negotiation of very low profits, the use of historical averages, or the automatic application of a predetermined percentage to the total estimated cost of a product, does not provide the motivation to accomplish such performance. Furthermore, low average profit rates on defense contracts overall are detrimental to the public interest. Effective national defense in a free enterprise economy requires that the best industrial capabilities be attracted to defense contracts. These capabilities will be driven away from the defense market if defense contracts are characterized by low profit opportunities. Consequently, negotiations aimed merely at reducing prices by reducing profits, with no realization of the function of profit cannot be condoned. For each contract in which profit is negotiated as a separate element of the contract price, the aim of negotiation should be to employ the profit motive so as to impel effective contract performance by which overall costs are economically controlled. To this end, the profit objective must be fitted to the circumstances of the particular procurement, giving due weight to each of the performance, risk, and other factors set forth in this 3-808. This will result in a wider range of profits which, in many cases, will be significantly higher than previous norms. (b) Contracts Priced on the Basis of Cost Analysis. When cost analysis is performed pursuant to 3-807.2, profit considerations shall be in accordance with the objectives set forth below. As an inducement for broad reduction in defense costs, the Government should establish a profit objective for contract negotiations which will: (i) reward the contractor who undertakes more difficult work requiring higher skills; (ii) allow the contractor an opportunity to earn profits commensurate with the extent of the cost risk he is willing to assume the greater the risk assumption, the greater the profit objective established; (iii) reward those contractors who have an excellent record of past performance and conversely penalize those contractors whose performance has been poor; and (iv) reward contractors who provide their own facilities and financing or who have established their competence through prior development work undertaken at their own risk. The weighted guidelines method set forth in 3-808.2 below for establishing profit objectives is designed to provide reasonably precise guidance in applying these principles. This method, properly applied, will tailor profits to the circumstances of each contract in such a way that long range cost reduction objectives will be fostered, and a wider spread of profits will be achieved. ARMED SERVICES PROCUREMENT REGULATION ¶ 3-808.1 360.4 29 January 1965, Rev. 9 PROCUREMENT BY NEGOTIATION (c) Contracts Priced Without Cost Analysis. On many contracts and subcontracts, good pricing does not require an examination into costs and profits. Where adequate price competition exists and in other situations where cost analysis is not required (see 3-807), fixed-price type contracts will be awarded to the lowest responsible offerors without regard to the amount of their profits. Under these circumstances, the profit which is anticipated, or in fact earned, should not be of concern to the Government. In such cases, if a low offeror earns a large profit, it should be considered the normal reward of efficiency in a competitive system and efforts should not be made to reduce such profits. 3-808.2 Weighted Guidelines Method. (1) The weighted guidelines method provides contracting officers with (i) a technique that will insure consideration of the relative value of the appropriate profit factors described in 3-808.4 in the establishment of a profit objective and the conduct of negotiations; and (ii) a basis for documentation of this objective, including an explanation of any significant departure from this objective in reaching a final agreement. The contracting officer's analysis of these profit factors is based on information available to him prior to negotiations. Such information is furnished in proposals, audit data, performance reports, pre-award surveys and the like. No more data on or analysis of costs should be required in the establishment of a profit objective than is required to determine if costs are reasonable. The weighted guidelines method shall be used in all contracts where cost analysis is performed except as set forth in (b) below. (2) The contractor's proposal will include cost information for evaluation and a total profit figure. Contractors shall not be required to submit the details of their profit objectives but they shall not be prohibited from doing so if they desire. Elaborate and voluminous presentations are neither required nor desired and may indicate a low index of cost effectiveness, which fact itself should be taken into consideration by the contracting officer in the appropriate section of the weighted guidelines. (3) The negotiation process does not contemplate or require agreement on either estimated cost elements or profit elements, although the details of analysis and evaluation may be discussed in the fact-finding phase of the negotiation. If the difference between the contractor's profit objective and the contracting officer's profit objective is relatively small, no discussion of individual factors may be necessary. If the negotiating parties' objectives are relatively far apart, a disclosure of weightings and rationale by both parties may be made concerning the total assigned to Input to Total Performance, Assumption of Cost Risk, Performance, Selected Factors and Special Profit Consideration. By thus developing a mutual understanding of the logic of the respective positions, an orderly progression to final agreement should result. Simultaneous, not sequential, agreement will be reached on cost, any incentive profit-sharing formulas, or limitation on profits, and price. The profit objective is a part of an overall negotiation objective which, as a going-in objective, bears a distinct relationship to the target cost objective → and any proposed sharing arrangement. Since the profit is merely one of [The next page is 361] ¶ 3-808.2 ARMED SERVICES PROCUREMENT REGULATION 29 January 1965, Rev. 9 PRICE NEGOTIATION POLICIES AND TECHNIQUES 361 several interrelated variables, the Government negotiator shall not complete the profit negotiation without simultaneously agreeing on the other variables. Specific agreement on the exact weights or values of the individual factors is not required and should not be attempted. (b) Exceptions. (1) Under the following circumstances, other methods for establishing profit objectives may be used. Generally, it is expected that such methods will accomplish the two features of the weighted guidelines methods set forth in (a) (1) above. These circumstances are: (i) architect-engineering contracts; (ii) personal or professional service contracts; (iii) management contracts, e.g., for maintenance or operation of (iv) contracts with non-profit organizations where fees are involved; (vii) cost-reimbursement construction contracts. (2) Other exceptions may be made in the negotiation of contracts presenting unusual pricing situations when specifically authorized by the Head of a Procuring Activity. Such exceptions shall be justified in writing and authorized only in situations where the weighted guidelines method is determined to be unsuitable. (c) Limitation. In the event this or any other method would result in establishing a fee objective in violation of limitations established by statute or this regulation, the maximum fee objective shall be the percentage allowed pursuant to such limitations. (See 3-405.) No local administrative ceilings on profit shall be permitted. 3-808.3 Profit Objective. (a) A profit objective is that part of the estimated contract price objective or value which, in the judgment of the contracting officer, is appropriate for the procurement being considered, covering the profit or fee element of the price objective. This objective should realistically reflect the total overall task to be performed and the requirements placed on the contractor. Prior to the negotiation of a contract, change order, or contract modification, where cost analysis is undertaken, the negotiator shall develop a profit objective. The weighted guidelines method, if applicable, shall be used for developing this profit objective. If a change or modification is of a relatively small dollar amount and is basically the same type of work as required in the basic contract, the application of the weighted guidelines method will generally result in a profit objective similar to the profit objective in the basic contract, and therefore this basic rate may be applied to the contract change or modification. However, in cases where the change or modification calls for substantially different work, then the basic contract profit ARMED SERVICES PROCUREMENT REGULATION 13-808.3 |