(8) Preaward notice to unsuccessful offerors and debriefing. In any procurement in excess of $10,000 in which it appears that the period of evaluation of proposals is likely to exceed 30 days or in which a limited number of offerors has been selected for additional negotiation, the contracting officer, upon determination that a proposal is unacceptable, shall provide prompt notice of the fact to the offeror submitting the proposal. Such notice need not be given where disclosure will prejudice the Government's interest. In addition to stating that the proposal has been determined unacceptable, notice to the offeror may indicate, in general terms, the basis for such determination and may advise that, since further negotiation with him concerning this procurement is not contemplated, a revision of his proposal will not be considered. Promptly after award of the contract, notice to all unsuccessful offerors shall be given in accordance with § 15-3.103.

[37 FR 7500, Apr. 15, 1972, as amended at 38 FR 12214, May 10, 1973]

§ 15-3.808-50 Profit or fee guidelines.

(a) (1) General. It is the policy of the Agency to utilize profit to attract contractors who possess talents and skills necessary to the accomplishment of the objectives of the EPA, and to stimulate efficient contract performance. In negotiating profit/fee, it is necessary that all relative factors be considered, and that fair and reasonable amounts be negotiated which give the contractor a profit objective commensurate with the nature of the work to be done, the contractor's input to the total performance, and the risks assumed by the contractor. The profit evaluation criteria which follow were developed for use by the EPA in order (i) to provide a standard method of evaluation, (ii) to insure consideration of all relative factors, (iii) to provide a basis for documentation and explanation of the profit negotiation objective, (iv) to allow contractors to earn profits commensurate with the assumption of risk, (v) to reward contractors who provide their own facilities, financing and personnel, and (vi) to reward contractors who undertake more difficult work requiring higher risks. Except as noted below, use of these guidelines is mandatory for establishing prenegotiation profit/fee objectives for all negotiated contracts where cost analysis is required (see FPR 1-3.807-2).

(2) Exceptions. (i) Under the following circumstances, other methods for establishing profit objectives can be used. Generally, it is expected that such methods will (a) provide the contracting officer with a technique that will insure consideration of the relative value of the appropriate profit factors described under "Profit Factors", and (b) serve as a basis for documentation of the objective. The circumstances are:

(1) Architect-engineering contracts; (2) Personal or professional service contracts;

(3) Management contracts, e.g., for maintenance or operation of Government facilities;

(4) Termination settlements;

(5) Engineering services, labor-hour, time and material contracts which provide for payment on a man-hour, manday or man-month basis, and where the contribution by the contractor constitutes the furnishing of personnel rather than the output of an integrated research, engineering, or manufacturing operation; and

(6) Cost-reimbursement construction contracts; and

(7) Cost-plus-award-fee contracts.

(ii) Under unusual circumstances, the Head of the Procuring Activity may specifically waive the requirement for the use of the guidelines. Such exceptions shall be justified in writing and authorized only in situations where the guidelines method is determined to be unsuitable.

(3) Limitations. In the event that any of the methods used would result in establishing a fee objective in violation of limitations established by statute or the FPR, the maximum fee objective shall be the percentage allowed pursuant to such limitations. No administrative ceilings on profits shall be established at any level below the Head of the Procuring Activity.

(b) (1) Profit factors: The factors set forth below and the weighted ranges listed after each factor shall be used in all instances where the profit is to be specifically negotiated.

CONTRACTOR'S INPUT TO TOTAL PERFORMANCE

Cost efficiency.

Management.

Extent of investment.

Reliability of cost estimates.

Inventive and developmental contributions.

Timely performance.

Small business participation.

Labor surplus area participation.
Extent of Government assistance.
Effect of competition.

(2) Using the above method, the contracting officer shall first measure the "Contractor's Input to Total Performance" by the assignment of a profit percentage within the designated weight ranges to each element of contract cost recognized by the contracting officer. Such costs are multiplied by the specific percentages, to arrive at specific dollar profits.

(3) After the contracting officer has computed a total dollar profit for the Contractor's Input to Total Performance, he shall divide this amount by the total recognized costs to determine the composite profit percentage for this factor. To this composite percentage, he shall then add the specific percentages, assigned for cost risk, and performance, to arrive at a total profit percentage. He shall then multiply the total recognized contract costs by this total profit percentage to determine the profit objective. It should be noted that the specific percentages assigned for cost risk, and performance are applied to total recognized costs in establishing the profit objective. EPA Form 1900-2 is to be used to facilitate the calculation of this profit objective.

(4) The weight factors shown are designed for arriving at profit or fee objectives for other than nonprofit and not-for-profit organizations. Adjustments as explained below are to be made to reflect differences between profit and nonprofit organizations.

(i) For purposes of this subparagraph, nonprofit and not-for-profit organizations are defined as those business entities organized and operated exclusively for charitable, scientific or educational purposes, no part of the net earnings of which inure to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda or otherwise 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.

(ii) For contracts with nonprofit and not-for-profit organizations where fees are involved, the following adjustments are required:

(a) A special factor of -3 percent shall be assigned in all cases.

(b) The weighted ranges from "Record of Contractor's Performance" shall be halved, i.e., -1 percent to +1 percent rather than -2 percent to +2 percent. (c) Assignment of values to specific factors:

(1) General. In making his judgment of the value of each factor, the contracting officer should be governed by the definition, description, and purpose of the factors together with considerations for evaluating them as set forth herein.

(2) Contractor's input to total performance. This factor is a measure of how much the contractor himself 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 responsibility for contract performance, takes into account what resoures are necessary and what the contractor himself must do to accomplish a conversion of ideas and materials into the final item called for in the contract. This is a recognition that within a 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 follows:

(i) Direct materials (purchased parts, subcontracted items, and other material). Analysis of these cost items shall include an evaluation of the managerial

and technical effort necessary to obtain the required purchased parts, subcontracted items, and other materials. This evaluation shall include consideration of the number of orders and suppliers, and whether established sources are available or new sources must be developed. The contracting officer shall also determine whether the contractor will, for example, obtain the materials by routine orders or readily available supplies (particularly those of substantial value in relation to the total contract costs), or by detailed subcontracts for which the prime contractor will be required to develop complex specifications involving creative design or close tolerance manufacturing requirements. Consideration should be given to the managerial and technical efforts necessary for the prime contractor to administer subcontracts, and select subcontractors, including efforts to break out subcontracts from sole sources, through the introduction of competition. These determinations should 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 might be substantial. This might be applicable in the management of subcontracting programs involving many sources, involving new complex components and instrumentation, incomplete specifications, and close surveillance by the prime contractor's representative. Recognized costs proposed as direct material costs such as scrap charges shall be treated as material for profit evaluation. If intracompany transfers are accepted at price, in accordance with § 1-15.205-22(e) of this title, they should be excluded from the fee computation. Other intracompany transfers shall be evaluated by individual components of cost, i.e., material, labor and overhead. Normally, the lowest weight for direct material is 2 percent. A weighting of less than 2 percent would be appropriate only in unusual circumstances when there is a minimal contribution by the contractor in relation to the total cost of the material.

(11) Equipment. It is the policy of the Agency to contract with individuals or

firms who have special capabilities relative to the need of the EPA. These capabilities include personnel with particular skills, or talents, and facilities (plant and equipment) necessary to complete the contract objectives. For the purpose of profit/fee analysis, equipment includes purchased items which are not to be an integral part of the final product. It would generally consist of production or test equipment. Where the EPA has to provide equipment to the contractor either as Government furnished equipment or contractor acquired equipment, appropriate profit/fee adjustments are necessary. Generally a low weight range shall be assigned to the cost of such equipment (1-2 percent).

(iii) Engineering labor and manufacturing labor. Analysis of the engineering labor and manufacturing labor items of the cost content of the contract should include evaluation of the comparative quality and level of the engineering talents, manufacturing skills and experience to be employed. In evaluating engineering labor for the purpose of assigning profit dollars, consideration should be given to the amount of notable scientific talent or unusual or scarce engineering talent needed in contrast to journeyman engineering effort or supporting personnel. The diversity, or lack thereof, of scientific and engineering specialties required for contract performance and the corresponding need for engineering supervision and coordination should be evaluated. Similarly, the variety of manufacturing labor skills required and the contractor's manpower resources for meeting these requirements should be considered. For the purpose of profit/fee computation, manufacturing labor includes all nonprofessional labor, e.g. secretaries, technicians and carpenters, etc.

(iv) Engineering overhead, manufacturing overhead, and general and administrative expenses. (a) Where practicable, analysis of these overhead items of cost should include the evaluation of the make up of the expenses and how much they contribute to contract performance. This analysis should include a determination of the amount of labor within these overhead pools and how this labor would be treated if it were considered as direct labor under the contract. The allocable labor elements should be given the same profit consideration that they would receive if they were treated as direct labor. The other elements of

these overhead pools should be evaluated to determine whether they are routine expenses such as utilities, depreciation, and maintenance, and hence given lesser profit consideration given the pools as a whole.

(b) It is not necessary that the contractor's accounting system break down his overhead expenses within the classification of engineering overhead, manufacturing overhead, and general and administrative expenses. The contractor whose accounting system only reflects one overhead rate on all direct labor need not change his system to correspond with all the above classifications. Where practicable, the contracting officer in his evaluation of such a contractor's overhead rate should break out the applicable sections of the composite rate which could be classified as engineering overhead, manufacturing overhead and general and administrative expenses and follow the appropriate evaluation technique. When it is not practicable to evaluate the elements of the burden pool, the following rates should usually apply:

(c) It is not necessary for the contracting officer to make a separate profit evaluation of overhead expenses in connection with each procurement action for substantially the same product with the same contractor. Once an analysis of the profit weight to be assigned the overhead pool has been made, the weight assigned may be used for future procurements with the same contractor until there is a change in the cost composition of the overhead pool or the contract circumstances.

(v) Consultants. Consultant costs, whether related to an individual consultant or consulting firm should be analyzed from the standpoint of what talents and skills the consultants have and how they will be used on the contract. The analysis should consider if the contractor normally should be expected to have people with comparable expertise employed as full-time staff or if the contract requires skills not normally available on an employer-employee relationship. Where the contractor is using consultants to perform services which could normally be expected to be done inhouse, the rating factor should be gen-` erally below 2-3 percent. Where noted

experts are retained for consultation on the contract, the rating will generally be higher.

(vi) Other direct costs. Items of costs, such as travel, subsistence, printing and computers should generally be assigned a rating of 1 to 3 percent. The analysis of these costs should be similar to the analysis of direct materials.

(3) Contractor's assumption of contract cost risk. (1) It is the policy of the Administration to shift the risk of contract costs to the fullest extent practicable to contractors and to compensate them for the assumption of this risk. Evaluation of this risk requires a determination of (a) the degree of cost responsibility the contractor assumes, (b) the reliability of the cost estimates in relation to the task assumed, and (c) the chance of the contractor's success or failure. This factor is specially limited to the risk of contract costs. Thus, such risks of losing potential profits in other fields, are not within the scope of this factor.

(ii) The first and basic determination of the degree of cost responsibility assumed by the contractor is related to the sharing of total risk of contract cost by the Government and the contractor through the selection of contract type. The extremes are a cost-plus-fixed-fee contract requiring only that the contractor use his best efforts to perform a task, and a firm-fixed-price contract for a complex item. Such cost-plus-fixed-fee contract would reflect a minimum assumption of cost responsibility, whereas such firm-fixed-price contract would reflect a complete assumption of cost responsibility. Therefore, in the first step of determining what value is to be given for the contractor's assumption of contract cost risk, a zero rating shall be given to a proposed cost-plus-fixed-fee best efforts contract, and a higher rating shall be given to a closely priced firm-fixedprice contract for a new, complex item.

(iii) The second determination is that of the reliability of the cost estimates. Sound price negotiation requires welldefined contract objectives and reliable cost estimates. An excessive cost estimate reduces the possibility that the cost of performance will exceed the contract price, thereby reducing the contractor's assumption of contract cost risk.

(iv) The third determination is that of the difficulty of the contractor's task. The contractor's task can be difficult or easy, regardless of the type of contract.

(v) Contractors are likely to assume greater cost risks only if the contracting officers objectively analyze the risk incident to proposed contracts and are willing to compensate contractors for it. Generally, a cost-plus-fixed-fee contract would not justify a reward for risk in excess of 1 percent, nor would a firmfixed-price contract justify a reward of less than 4 percent. Where proper contract type selection has been made, the reward for risk by contract type would usually fall into the following percentage ranges:

(a) These ranges may not be appropriate for all procurement situations. For instance, a fixed-price-incentive contract which is closely priced with a low ceiling price and a high incentive share may be tantamount to a firm-fixed-price contract. In this situation, the contracting officer might 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. The contractor's willingness to accept ceilings on their burden rates should be considered as a risk factor for cost-plusfixed-fee contractors.

(b) In making a contract cost risk evaluation in a procurement action that involves definitization of a letter contract, consideration should be given to the effect on total contract cost risk as a result of having partial performance under a letter contract. Under some circumstances it may be reasoned that the total amount of cost risk has been effectively reduced by the existence of a letter contract. Under other circumstances, it may be apparent that the contractor's cost risk remained substantially as great as though a letter contract had not been used. Where a contractor has begun work under an anticipatory cost letter, the risk assumed is greater than the normal

situation. To be equitable the determination of a profit weight for application to the total of all recognized costs, both those incurred and those yet to be expended, must be made with consideration to all attendant circumstances, not just to the portion of costs incurred or percentage of work completed, prior to definitization.

(4) Record of contract performance. (i) The purpose of this factor is to motivate contractors to improve their performance by rewarding them for excellent past performance and penalizing them for poor performance. Effective use of this factor requires that (a) reports on the various aspects of past performance be obtained and evaluated; and (b) this information be used in such a way as to motivate contractors to improve their performance.

(ii) The evaluation of a particular contractor's past performance and the importance placed upon the various subfactors listed below should be done in such a way as to motivate the contractor to improve his performance. For instance, it might be pointless, in evaluating the performance of an autonomous division of a multidivisional contractor, to place emphasis on the performance of another autonomous division. Under such circumstances, management of the division being evaluated might have no means of controlling the performance of the other division; therefore, emphasis on this performance by assigning a plus or minus rating to this factor might have a negative affect upon motivation to improve.

(iii) The weight to be assigned to this factor is arrived at on a judgment basis rather than an arithmetical averaging of weights assigned to all factors, depending upon the particular procurement situation, and the relative importance of the various factors. For example, an evaluation of a particular contractor may indicate that his performance was satisfactory in most areas, except that he showed a preference for doing all work in-house and a disinclination to support Government small business objectives. In such a case the contracting officer may feel that the importance of these factors might justify the assignment of a lower overall rating for the record of past performance.

(iv) As stated above, the purpose of this factor is to reward a contractor for excellent past performance and penalize