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from, and the specific procedure to be followed if the contractor decides to make such an appeal.

(ii) The contract auditor shall be responsible for performing audits of contracts in which pricing or payment is based upon cost or other financial information furnished by the contractor, when such audit is required or considered desirable.

(iii) The contract auditor shall be responsible for making appropriate recommendations to the contracting officer concerning the establishment of overhead rates (billing, provisional, or predetermined), when such rates are provided for in the contract (see Subpart 1-3.7, Negotiated Overhead Rates).

(2) Preaward surveys (see § 1-1.3109) of potential contractor's competence to perform proposed contracts shall be arranged by the contracting officer. Where information is required on the adequacy of the contractor's accounting system or its suitability for administration of the proposed type of contract, such information shall always be obtained by the contracting officer from the auditor (see § 1-3.8013(b)(3)). The contracting officer shall be responsible for compliance with the agency's implementing policies and procedures concerning the contractor's financial competence or credit needs (see also § 1-1.310).

(3)(i) The establishment, maintenance, and consistent use of formal cost estimating systems by contractors is to the mutual benefit of the Government and industry, particularly where a large portion of the contractor's business is Government work and there are a number of significant proposals requiring review. Procuring activities should encourage contractors to formalize and follow good estimating procedures. It is recognized that estimating procedures will vary among contractors, and may vary between plants or divisions of a contractor due to differences in products, size and methods of operations, production vs. research, and other factors. While formal systems do not eliminate the need for judgmental factors to be applied by contractors in developing cost proposals, they do provide a sound foundation for the systematic and or

derly application of these judgment factors to specific proposals. The consistent preparation of proposals in accordance with an acceptable estimating system is of material benefit in ensuring both the contractor and the Government that proposals are realistically and reasonably priced, that the § 1-3.807-3 requirements for utilizing current, accurate, and complete cost and pricing data in developing the proposal are met, and that underestimating and overestimating of contract costs are minimized. Some of the advantages of sound estimating procedures are: a greater degree of confidence can normally be placed in the accuracy and reliability of contractors' individual proposals; it expedites the negotiation process; it reduces the amount of detailed explanation of estimating processes on each individual proposal; and, as in the case of the well established practice regarding acceptable accounting systems, reduces the scope of reviews performed by audit and other technical and procurement personnel.

(ii) When an audit is performed pursuant to § 1-3.809(b)(1), the contract auditor shall determine whether the contractor's estimating systems or methods are acceptable to the Government. Among the matters to be considered in determining the acceptability of the estimating systems or methods are the following:

(A) Responsibilities within the contractor's organization for originating, reviewing, and approving estimates;

(B) Procedures followed in developing estimates for each of the direct and indirect elements of cost;

(C) The source of data used in developing the estimates and in ensuring that such data are current, complete, and accurate;

(D) The documentation developed and maintained by the contractor to support the estimate;

(E) Management support of the program review including approval of the estimate, controls established to ensure consistent compliance with estimating procedures; and personnel training and evaluation programs; and (F) The extent of coordination and communication between the various

elements of the contractor's organization responsible for the estimate.

(iii) If the contractor's estimating systems or methods are not acceptable to the Government, the contracting officer shall determine whether an estimating system survey should be undertaken as a team effort (including the contract auditor and other qualified technical specialists) after consideration of criteria such as:

(A) The significance (including estimated cost or price) of all present and estimated future Government procurements, provided, that if only a onetime procurement is involved, other appropriate methods may be used to establish the reliability and reasonableness of the contractor's cost or pricing data;

(B) The benefits which might accrue to the Government in view of the cost of the survey; and

(C) The findings and corrective actions taken in connection with previous estimating surveys, if any.

(iv) A copy of the survey report, together with a copy of the official notice of corrective action (see § 13.801-3(b)(3)) required, shall be furnished to each agency procuring activity having business with that contractor, and (upon request) to other procurement agencies. Any significant deficiencies in the system not corrected by the contractor shall also be considered in subsequent proposal reviews, and by contracting officers in negotiating with, and in determining the reasonableness of prices proposed by, that contractor. Where these deficiencies continue to exist and where they have adverse effect on prices, the problem should be brought to the attention of procurement officials at a level necessary to bring about corrective action.

(4) In accordance with Subpart 13.12, Cost Accounting Standards, and Part 1-15, Contract Cost Principles and Procedures, the cognizant contract auditor shall be responsible for making recommendations to the contracting officer as to whether:

(i) A contractor's disclosure statement (see § 1-3.1203(a)), submitted as a condition of contracting, adequately describes the actual or proposed cost accounting practices as required by

Public Law 91-379, 50 U.S.C. App 2168, as implemented by the Cost Ac counting Standards Board;

(ii) A contractor's disclosed cost ac counting practices are in complianc with Part 1-15 and applicable Cost Ac counting Standards;

(iii) A contractor's or subcontractor' failure to comply with applicable Cos Accounting Standards or to follow consistently his disclosed cost account ing practices has resulted or may result in any increased cost paid by the Government; and

(iv) A contractor's or subcontractor' proposed price changes, submitted as: result of changes made to previously disclosed or established cost account ing practices, are fair and reasonable. [34 FR 2662, Feb. 27, 1969, as amended at 3' FR 13092, July 1, 1972; 39 FR 43058, Dec 10, 1974; 43 FR 11987, Mar. 23, 1978]

§ 1-3.810 Exchange of information.

In appropriate cases it is desirable to exchange and coordinate specialized information regarding a contractor be tween procurement activities or agen cies, since it will provide uniformity of treatment of major issues (see, for ex ample, §§ 1-3.705 and 1-3.706).

[34 FR 2664, Feb. 27, 1969]

§ 1-3.811 Record of price negotiation.

(a) At the conclusion of each negoti ation of an initial, revised, or final price, the contracting officer shall prepare a memorandum setting forth the principal elements of the price negoti ation, for inclusion in the contract file and for the use of any reviewing authorities. The memorandum shall include the following information, to the extent applicable:

(1) The name, position, and organization of conferees representing the contractor and the Government;

(2) The purpose of the negotiation;

(3) If cost or pricing data was re-i quired to be submitted and certified pursuant to §§ 1-3.807-3 and 1-3.807-4,00 respectively, the memorandum shall reflect the extent to which the cong tracting officer:

(i) Did not rely on the factual cost or pricing data submitted and did not use such data in negotiating the price; and

(ii) Recognized in the negotiation that any cost or pricing data submitted by the contractor was inaccurate, incomplete, or noncurrent; the action taken by the contracting officer and the contractor as a result; and the effect, if any, of such defective data on the price negotiated.

(4) If cost or pricing data was not required in the case of any price negotiation in excess of $100,000, the memorandum shall include a statement of the basis for determining that (i) the price resulted from or was based on adequate price competition, established catalog or market prices of commercial items sold in substantial quantities to the general public, or prices set by law or regulation (see § 1-3.8071), or (ii) information already available is adequate for the proposed procurement (see § 1-3.809(b)(1)(i));

(5) A summary of the contractor's proposal, the pertinent advisory audit report recommendations, and the reasons for variation (if any) from such recommendations;

(6) The most significant facts or considerations controlling the establishment of the initial, revised, or final price; and

(in

(7) Appropriate explanation fixed-price type contracts) where the total price negotiated differs significantly from the total price objective.

(b) Whenever an audit review has been made pursuant to § 1-3.809, the contracting officer shall forward a copy of the record of negotiation to the cognizant contract audit office, for use by that office and the auditor to improve the usefulness of the audit work and related reports to negotiation officials. Where appropriate, the negotiation memorandum should include (or be supplemented by) information on how the contract audit advisory services can be made more effective in future negotiations with this (or other) contractor(s).

[34 FR 2664, Feb. 27, 1969]

1-3.812 Disposition of postaward audits. An auditor's advisory report of postaward reviews of cost or pricing data may result either from a specific request of a contracting officer (see 1-3.807-5(c)) or from audit action initiated independent of a contracting of

ficer's request. The contracting officer shall prepare a memorandum on each audit report indicating (a) whether defective data was submitted and relied upon (see § 1-3.811), and (b) the results of any contract action taken. A copy of the memorandum shall be forwarded to the auditor issuing the report.

[34 FR 2664, Feb. 27, 1969]

§ 1-3.813 Preproduction and startup and other nonrecurring costs.

(a) Estimates of preproduction and startup costs include such costs as preproduction engineering, special tooling, special plant rearrangement, training programs, and such nonrecurring costs as initial rework, initial spoilage, and pilot runs.

(b) Since an offeror may propose a price which does not include all preproduction and startup or other nonrecurring costs for the purpose of obtaining the first production contract and of gaining an advantage over competitors in negotiations for future procurements, it is important to know whether the offeror intends to absorb any portion of these costs or whether he plans to recover them in connection with subsequent pricing actions under the proposed or future contracts. This information is needed in evaluating to competing proposals determine which proposal is most likely to result in the lowest overall cost to the Government, particularly where the successful offeror is likely to become, in effect, a sole source for follow on procurement.

(c) When it is anticipated that such costs will be a significant factor in the evaluation of proposals for the procurement of an item, the request for proposals shall require the offeror to provide the following information:

(1) An estimate of the total of such costs;

(2) The extent to which these costs are included in the proposed price; and

(3) The intent to absorb, or plan for recovery, of any remaining costs. When entering into a contract with an offeror who has indicated that he intends to absorb any portion of these costs, the contract shall expressly provide that such portion will not be charged to the Government in any

future noncompetitive procurement or other pricing action.

§ 1-3.814 Contract clauses.

Where any cost or pricing data is required in accordance with § 1-3.807-3, the applicable clauses in §§ 1-3.814-1, 1-3.814-2, and 1-3.814-3 shall be inIcluded in the solicitation and in any resultant contract (see § 1-3.807-3(i)). [39 FR 1754, Jan. 14, 1974]

§ 1-3.814-1

Price reduction for defective cost or pricing data.

(a) Except as provided in § 1-3.8073(b), the following clause shall be included in (1) all negotiated contracts which when entered into exceed $100,000, (2) other negotiated contracts for which, in connection with the initial pricing of the contract, (i) a certificate of cost or pricing data is required in accordance with § 1-3.8073(c), or (ii) partial cost or pricing data is obtained in accordance with § 13.807-3.

PRICE REDUCTION FOR DEFECTIVE Cost or PRICING DATA

If any price, including profit or fee, negotiated in connection with this contract or any cost reimbursable under this contract was increased by any significant sums be

cause:

(a) The Contractor furnished cost or pricing data which was not accurate, complete and current as certified in the Contractor's Certificate of Current Cost or Pricing Data; (b) A subcontractor, pursuant to the clause of this contract entitled "Subcontractor Cost or Pricing Data" or "Subcontractor Cost or Pricing Data-Price Adjustments" or any subcontract clause therein required, furnished cost or pricing data which was not accurate, complete and current as certified in the subcontractor's Certificate of Current Cost or Pricing Data;

(c) A subcontractor or prospective subcontractor furnished cost or pricing data which was required to be accurate, complete and current and to be submitted to support a subcontract cost estimate furnished by the Contractor but which was not accurate, complete and current as of the date certified in the Contractor's Certificate of Current Cost or Pricing Data; or

(d) The Contractor or a subcontractor or prospective subcontractor furnished any data, not within (a), (b) or (c) above, which was not accurate as submitted; the price or cost shall be reduced accordingly and the contract shall be modified in writing as may

be necessary to reflect such reduction. However, any reduction in the contract price due to defective subcontract data of a prospective subcontractor when the subcontract was not subsequently awarded to such subcontractor, will be limited to the amount (plus applicable overhead and profit markup) by which the actual subcontract, or actual cost to the Contractor if there was no subcontract, was less than the prospective subcontract cost estimate submitted by the Contractor: Provided, The actual subcontract price was not affected by defective cost or pricing data.

(NOTE: Since the contract is subject to reduction under this clause by reason of defective cost or pricing data submitted in connection with certain subcontracts, it is expected that the Contractor may wish to include a clause in each such subcontract requiring the subcontractor to appropriately indemnify the Contractor. It is also expected that any subcontractor subject to such indemnification will generally require substantially similar indemnification for defective cost or pricing data required to be submitted by his lower tier subcontractors.)

(b) The following clause shall be included in all contracts, both formally advertised and negotiated, which when entered into exceed $100,000, other than those described in § 1-3.8141(a)(1) and (2) However, the clause need not be included where, in accordance with § 1-3.807-3(b), the requirement for obtaining cost or pricing data has (1) not been applied to a cost contract of the type specified therein, or (2) been waived by the head of the agency. In addition, the clause, with dollar amounts appropriately reduced, shall be included in contracts of this type which do not exceed $100,000 where any cost or pricing data is required in accordance with § 1-3.807-3 in connection with the pricing of contract modifications.

PRICE REDUCTION FOR DEFECTIVE COST OR

PRICING DATA-PRICE ADJUSTMENTS

(a) This clause shall become operative only with respect to any modification of this contract which involves aggregate increases and/or decreases in costs plus applicable profits in excess of $100,000 unless the modification is priced on the basis of adequate price competition, established catalog or market prices of commercial items sold in substantial quantities to the general public, or prices set by law or regulation. The right to price reduction under this clause is limited to defects in data relating to such modification.

(b) If any price, including profit, or fee, negotiated in connection with any price adjustment under this contract was increased by any significant sums because:

(1) The Contractor furnished cost or pricing data which was not accurate, complete and current as certified in the Contractor's Certificate of Current Cost or Pricing Data; (2) A subcontractor, pursuant to the clause of this contract entitled "Subcontractor Cost or Pricing Data" or "Subcontractor Cost or Pricing Data-Price Adjustments" or any subcontract clause therein required, furnished cost or pricing data which was not accurate, complete and current as certified in the subcontractor's Certificate of Current Cost or Pricing Data;

(3) A subcontractor or prospective subcontractor furnished cost or pricing data which was required to be accurate, complete and current and to be submitted to support a subcontract cost estimate furnished by the Contractor but which was not accurate, complete and current as of the date certified in the Contractor's Certificate of Current Cost or Pricing Data; or

(4) The Contractor or a subcontractor or prospective subcontractor furnished any data, not within (1), (2) or (3) above, which was not accurate, as submitted; the price shall be reduced accordingly and the contract shall be modified in writing as may be necessary to reflect such reduction. However, any reduction in the contract price due to defective subcontract data of a prospective subcontractor, when the subcontract was not subsequently awarded to such subcontractor, will be limited to the amount (plus applicable overhead and profit markup) by which the actual subcontract, or actual cost to the Contractor if there was not subcontract, was less than the prospective subcontract cost estimate submitted by the Contractor: Provided the actual subcontract price was not affected by defective cost or pricing data.

(NOTE: Since the contract is subject to reduction under this clause by reason of defective cost or pricing data submitted in connection with certain subcontracts, it is expected that the Contractor may wish to include a clause in each such subcontract requiring the subcontractor to appropriately indemnify the Contractor. It is also expected that any subcontractor subject to such indemnification will generally require substantially similar indemnification for defective cost or pricing data required to be submitted by his lower tier subcontractors.)

(c) The requirement for inclusion of the clauses in paragraphs (a) and (b) of this § 1-3.814-1 in contracts with foreign governments or agencies thereof may be waived in exceptional cases where the head of the agency or his

designee authorizes such waiver and states in writing his reasons for such determination.

[34 FR 2664, Feb. 27, 1969, as amended at 39 FR 1754, Jan. 14, 1974]

§ 1-3.814-2 Audit and records.

(a) The following clause shall be included in all contracts, both formally advertised and negotiated, which contain the contract clause in either § 13.814-1(a) or (b) and may be used to determine the allowability of costs under cost-reimbursement type contracts.

AUDIT

(a) General. The Contracting Officer or his representatives shall have the audit and inspection rights described in the applicable paragraphs (b), (c) and (d) below.

(b) Examination of costs. If this is a costreimbursement type, incentive, time and materials, labor hour, or price redeterminable contract, or any combination thereof, the Contractor shall maintain, and the Contracting Officer or his representatives shall have the right to examine books, records, documents, and other evidence and accounting procedures and practices, sufficient to reflect properly all direct and indirect costs of whatever nature claimed to have been incurred and anticipated to be incurred for the performance of this contract. Such right of examination shall include inspection at all reasonable times of the Contractor's plants, or such parts thereof, as may be engaged in the performance of this contract.

(c) Cost or pricing data. If the Contractor submitted cost or pricing data in connection with the pricing of this contract or any change or modification thereto, unless such pricing was based on adequate price competition, established catalog or market prices of commercial items sold in substantial quantities to the general public, or prices set by law or regulation, the Contracting Officer or his representatives who are employees of the United States Government shall have the right to examine all books, records, documents and other data of the Contractor related to the negotiation, pricing or performance of such contract, change or modification, for the purpose of evaluating the accuracy, completeness and currency of the cost or pricing data submitted. Additionally, in the case of pricing any change or modification exceeding $100,000 to formally advertised contracts, the Comptroller General of the United States or his representatives who are employees of the United States Government shall have such rights. The right of examination shall extend to all

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