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exceed tlOO.OOO or to the pricing of any subcontract change or other modification for which the price adjustment Is expected to exceed tlOO.OOO, where the price or price adjustment la not 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.

(b) The Contractor shall require subcontractors to certify. In substantially the same form as that used In the certificate by the Prime Contractor to the Government, that, to the beat of their knowledge and belief, the cost and pricing data submitted under (a) above are accurate, complete, and current as of the date of the execution, which date shall be as close as possible to the date of agreement on the negotiated price of the subcontract or subcontract change or modification.

(c) The Contractor shall Insert the substance of this clause, Including this paragraph (c), In each subcontract hereunder which exceeds $100,000 unless the price thereof Is 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. In each such excepted subcontract hereunder which exceeds $100,000, the Contractor shall Insert the substance of the following clause:

SUBCONTRACTOR COST AND PRICING DATA PRICE

ADJUSTMENTS

(a) Paragraphs (b) and (c) of this clause shall become operative only with respect to any change or other modification made pursuant to one or more provisions of this contract which Involves a price adjustment in excess of $100,000. The requirements of this clause shall be limited to such price adjustment*.

(b) The Contractor shall require subcontractors hereunder to submit cost or pricing data under the following circumstances:

(1) Prior to award of any cost-reimbursement type. Incentive, or price redetermlnable subcontract, the price of which is expected to exceed $100,000: and

(2) Prior to award of any other subcontract, the price of which Is expected to exceed •100,000. or to the pricing of any subcontract change or other modification for which the price adjustment is expected to exceed •100.000, where the price or price adjustment 1> not based on adequate price competition, established catalog or market prices of commercial items sold in substantial quantities to the general public, or prices «et by law or regulation.

(c) The C-.ntractor shall require subcontractors to certify, in substantially the same form as that used in the Certificate by the Prime Contractor to the Government, that, to

the best of their knowledge and belief, the cost and pricing data submitted under (b) above are accurate, complete, and current as of the date of the execution, which date shall be as close as possible to the date of agreement on the negotiated price of the contract modifications.

(d) The Contractor shall Insert the substance of this clause including this paragraph (d) In each subcontract hereunder which exceeds $100,000.

(b) Where, in accordance with § 13.814-1 (b), the clause therein is included in any formally advertised or negotiated contract in excess of $100,000, the clause in this § 1-3.814-3(b) also shall be included in the contract. This clause, with appropriate reduction in the dollar amounts included therein, may be included in contracts not exceeding $100,000 which contain the clause in § 1-3.814-1 (b).

SUBCONTRACTOR COST AND PRICING DATA PRICE

ADJUSTMENTS

(a) Paragraphs (b) and (c) of this clause shall become operative only with respect to any change or other modification made pursuant to one or more provisions of this contract which Involves a price adjustment In excess of $100,000. The requirements of this clause shall be limited to such price adjustments.

(b) The Contractor shall require subcontractors hereunder to submit in writing cost or pricing data under the following circumstances:

(1) Prior to award of any cost-reimbursement type, Incentive, or price redeterminable subcontract, the price of which is expected to exceed $100,000; and

(2) Prior to award of any other subcontract, the price of which Is expected to exceed $100,000, or to the pricing of any subcontract change or other modification for which the price adjustment is expected to exceed $100,000, where the price or price adjustment Is not based on adequate price competition, established catalog or market prices of commercial items sold in substantial quantities to the general public, or rates or prices set by law or regulation.

(c) The Contractor shall require subcontractors to certify that to the best of their knowledge and belief the cost and pricing data submitted under (b) above are accurate, complete, and current as of the date of the execution, which date shall be as close as possible to the date of agreement on the negotiated price of the contract modification.

(d) The Contractor shall Insert the substance of this clause Including this paragraph (d) in each subcontract hereunder which exceeds $100,000.

erroneous or Incomplete cost or pricing data, it is not a fair price and the resultant profits are not earned profits. Where negotiations are to be conducted on the basis of full disclosure, failure of one party to proceed on that basis results in something less than full mutual assent to the price negotiated so that, In this sense, the price is not fully agreed to, and fairness warrants its adjustment. The clauses set forth in § 1-3.814-1 are designed to give the Government in such a case an enforceable contract right to a price adjustment, that is, to a reduction in the price to what it demonstrably would have been if the contractor had not failed to disclose significant and reasonably available data or had not furnished Inaccurate data.

(b) Under the "Price Reduction for Defective Cost or Pricing Data" clauses in { 1-3.814-1, the Government's right to reduce the prime contract price extends to cases where the prime contract price was increased by any significant sums because a subcontractor furnished defective cost or pricing data in connection with a subcontract where a certificate of cost or pricing data was or should have been furnished. These clauses also provide that the prime contractor and higher tier subcontractors shall include similar clauses in certain of their subcontracts to provide them with comparable rights to price reductions. In order to secure price reductions based on defective cost or pricing data furnished by a subcontractor, however, the Government, the prime contractor, or higher tier subcontractor must be able to show that cost or pricing data furnished by subcontractors was, in fact defective. In some cases, as where the defective nature of a subcontractor's data is only disclosed by Government audit, the information necessary to support a reduction In prime contract and subcontractor prices may be available only from the Government. To the extent necessary to secure a prime contract price reduction, the contracting officer should make such necessary information available upon request to the prime contractor or higher tier subcontractors; however, if the release of such information would compromise Government security or disclose trade secrets or other confidential business information. It shall be made available only under conditions that will fully protect It from improper disclosure. Information

made available pursuant to this paragraph shall be limited to that used as the basis for the prime contract price reduction.

(c) Inasmuch as price reductions under the Price Reduction for Defective Cost or Pricing Data clauses may involve flrs.t- and lower-tier subcontractors as well as the prime contractor, the contracting officer should give the prime contractor reasonable advance notice before making a determination to reduce the contract price under such clauses, in order to afford the prime contractor an opportunity to take any action deemed advisable by him, particularly in connection with any subcontracts that may be involved.

§ 1—3.807-6 Refusal to provide cost or pricing data.

If cost or pricing data from the contractor (or offerer) are required to permit adequate analysis of the contractor's proposal in accordance with § 1-3.807-3 and the contractor has refused to provide such data, the contracting officer shall try to persuade the contractor to furnish such data. If the contractor persists in his refusal to provide necessary data, the contracting officer shall withhold making the award or price adjustment and refer the case to higher authority within the agency. Such referral shall include a complete statement of the attempts made to resolve the matter, Including (a) steps taken to secure essential cost data, (b) efforts to secure the contractor's cooperation in the establishment of a satisfactory business relationship, (c) any assurances offered, such as agreements to adequately safeguard information furnished, and (d) a statement concerning the practicability of obtaining the supplies or services from another source of supply.

§ 1-3.807-7 Unacceptable substitutes for pricing negotiations.

A certificate of cost or pricing data (see § 1-3.807-4) shall not be considered a substitute for examination and analysis of the contractor's proposal. ContractIng officers shall not rely on profit limiting statutes as remedies for ineffective pricing.

§ 1-3.807-8 Evaluation and pricing of individual contracts.

Each contract shall be priced separately and independently, and no conMderation shall be given to losses or profits realized or anticipated in the performance of other contracts. This prohibition neither prevents the negotiation of fixed overhead and other rates applicable to several contracts during annual or other specific periods nor prohibits forward pricing agreements applicable to several contracts. A proposed price reduction under another contract or other contracts shall not be used as an evaluation factor.

§ 1-3.807-9 Specified contingencies.

When a contract is to include a provision for an upward adjustment of price upon the happening of a specified contingency (e.g., escalation clauses, Government-furnished property clauses, tax clauses), the contract price should not Include any amount in anticipation of such contingency.

§ 1-3.807-10 Subcontracting considerations in cost analysis.

(a) The amount and quality of subcontracting may be a major factor influencing price. Since a large portion of the procurement dollar is spent by prime contractors in subcontracting for work, raw materials, parts, and components, efficient purchasing practices by a contractor will contribute heavily toward efficient and economical production. While basic responsibility rests with the prime contractor for decisions to make or buy. for selection of subcontractors, and for subcontract prices and subcontract performance, the contracting officer must have adequate knowledge of those elements and their effect on prime contract prices. Therefore, contractors' "znake-or-buy" programs and proposed subcontracts should be reviewed in accordance with Subpart 1-3.9 and the information from such review should be used in negotiating prime contract prices. Even though not specifically required by Subpart 1-3.9, the contracting officer should, where appropriate, elicit from the offerer or contractor Information concerning:

(1) His purchasing practices;

(2) The principal components to be subcontracted and the contemplated subcontractors, including (l) the degree of competition obtained, (ii) cost or price analyses or price comparisons accomplished, including accurate, complete, and current cost or pricing data, and

(ill) the extent of subcontract supervision;

(3) The types of subcontracts; I.e., firm fixed-price or other (see § 1-3.401); and

(4) 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 § l-3.807-2(b)) in all significant subcontract transactions, and to undertake cost analysis (see § 1-3.8072(c)) if competition is not available or does not yield reasonable subcontract prices. Where the contracting officer's consent to subcontract is required (see § 1-3.903), price or cost analysis shall be required as a condition to such consent.

(c) Where subcontracts are placed on a price redetermination or fixed-price 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 that 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:

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.

[List subcontracts]

(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 the limits prescribed by agency procedures in accordance with § 1-3.405-5(0 (2). These limits should not be inserted in the prime contract because such action might tend to inflate fees customarily negotiated at lower rates.

§ 1-3.807-11 Overhead rate considerations.

(a) Indirect costs commonly known as overhead are defined and described in ! 1-15.203. Criteria for treatment and application of indirect costs to contracts are also set forth in § 1-15.203.

(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 audit services of the agency In consonance with i 1-3.809.

§ 1-3.807-12 Sole source items.

When purchases of standard commercial or modified standard commercial items are to be made from sole source suppliers, use of the techniques of price and cost analysis may not always be possible. In such instances and consistent with the volume of procurement normally consummated with the contractor, the contractor's price lists and discount or rebate arrangement should be examined and negotiations conducted on the basis of the "best user," "most favored customer," or similar practice customarily followed'by the contractor. Such price negotiations should consider the volume of business anticipated for a fixed period, such as a fiscal year, rather than the size of the individual procurement being negotiated.

§ 1-3.808 Profit or fee. § 1-3.808-1 General.

A fair and reasonable provision for profit or fee cannot be made by simply applying a certain predetermined percentage to the cost estimate or selling price of a product. Rather, the profit or fee should be first established as a dollar amount, after considering the factors set forth in this § 1-3.808. Therefore, where a fee is Involved and it is necessary to determine the percentage relationship between the fee and the estimated cost of the contract in order to comply with administrative and statutory limitations on fees for cost-reimbursement type contracts (see § 1-3.405-5 (c) (2), the percentage shall be determined only after the dollar amount of the fee has been established for negotiation purposes.

§ 1-3.808-2 Factors for determining fee or profit.

The factors set forth In this §1-3.808-2 should be considered In determining profit or fee in all contracts, whether for supplies or services; for construction work; or for experimental, developmental, or research work; and whether of the fixed-price type or of the costreimbursement type unless otherwise specified in the particular factor. All of the factors should be evaluated in the light of the basic policy set forth in $ 1-3.801 (a) which provides that supplies and services shall be procured from responsible sources at fair and reasonable prices calculated to result In the lowest overall cost to the Government.

(a) Effect of competition. When competition is effective and proposals are on a firm fixed-price basis, the contracting officer normally need not consider In detail the amount of estimated profit Included In a price. When effec-" tive competition is lacking, and in all cases where cost analysis is performed in accordance with § 1-3.807-2 (c) the estimate for profit, target profit or fee, or the proposed fixed fee should be analyzed in the same manner as all other elements of price, evaluating the factors set forth in this ! 1-3.808.

(b) Degree of risk. The degree of risk assumed by the contractor should influence the amount of profit or fee'a contractor is entitled to anticipate. For example, where a portion of the risk has been shifted to the Government through cost-reimbursement or price redetermination provisions, unusual contingency provisions, or other risk-reducing measures, the amount of profit or fee should be less than where the contractor assumes all risk.

(c) Nature of work to be performed. A major consideration in the determination of the amount of'profit or fee, particularly in connection with experimental, developmental, or research work, is the difficulty or complexity of the work to be performed_and any unusual demands of the contract, such as whether the project involves a new approach unrelated to existing equipment or only refinements on existing equipment, whether the caliber or class of engineer involved is _that of an "idea-man," 'or whether the" contractor is to be required by the contract to assign to the work unusually skilled talent.

(d) Extent of Government assistance. The Government encourages its contractors to perform their contracts with the minimum of financial, facilities, or other assistance from the Government. Where extraordinary financial, facilities. or other assistance must be furnished to a contractor by the Government, such extraordinary assistance should have a modifying effect in determining what constitutes a fair and reasonable profit or fee.

(e) Extent of the contractor's investment. The extent of a contractor's total investment (i.e., both equity and borrowed capital) In the performance of

the contract will betaken into consideration hi determining the amount of the fee or profits

(f) Character of contractor's business. Recognition must be given to the type of business normally carried on by the contractor, the complexity of manufacturing techniques, the rate of capital turnover, and the effect of each Individual procurement upon such business. For example, where a contractor is engaged hi an industry where the turnover of working capital is low, generally the profit objective on individual contracts is higher than in those industries where the turnover is more rapid.

(g) Contractor's performance. In addition to the factors set forth in 11-3.102, the contractor's past and present performance should be evaluated in such areas as quality of product, quality control, scrap and spoilage, efficiency in cost control (including need for and reasonableness of cost incurred), meeting delivery schedules, timely compliance with contractual provisions, creative ability in product development (giving consideration to commercial potential of product), engineering (including inventive, design simplification, and development contributions), management of subcontract programs, management of Government property, and any unusual services furnished by the contractor. Where a contractor has consistently achieved excellent results hi the foregoing areas in comparison with other contractors in similar circumstances, such performance merits a proportionately greater opportunity for profit or fee. Conversely, a poor record hi this regard should be reflected in determining what constitutes a fair and reasonable profit or fee.

(h) Subcontracting. (1) In negotiating the profit or fee, subcontracting as a factor shall be segregated for separate evaluation, particularly as It bears on the contractor's technical supervision and management responsibility, financial Investment, and degree of risk, as outlined above In this § 1-3.808-2. The de'gree and nature of subcontract programs vary on a broad spectrum. While it is not possible to define the exact profit or fee treatment to be accorded each situation, the general guidelines which follow shall be taken into consideration.

(2) The evaluation of a contractor's subcontracting program should not

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