Heads of the Technical Services, for the Army, (ii) Office of Naval Material, for the Navy, and (iii) Headquarters, Air Material Command, for the Air Force.

§ 3.404 Cost-reimbursement type con

tract.

(a) Description. The cost-reimbursement type of contract provides for payment to the contractor of allowable costs incurred in the performance of the contract, to the extent prescribed in the contract. This type of contract establishes an estimate of total cost for the purpose of (i) obligation of funds, and (ii) establishing a ceiling which the contractor may not exceed (except at his own risk) without prior approval or subsequent ratification of the contracting officer. A cost-reimbursement type contract may, to the extent authorized by Subpart G of this part, provide for negotiated fixed overhead rates.

(b) Applicability. The cost-reimbursement type contract is suitable for use when the nature and complexity of the procurement is such that costs of performance cannot be estimated with reasonable accuracy. In addition, it is essential that (1) the contractor's cost accounting system is adequate for the determination of costs applicable to the contract and (2) appropriate surveillance by Government personnel during performance will give reasonable assurance that inefficient or wasteful methods are not being used. While costreimbursement contracts are particularly useful for procurements involving substantial amounts, i. e., estimated cost of $25,000 or more, the Contracting Officer may determine in a given case to utilize this type of contract to cover transactions in which the estimated costs are less than $25,000.

(c) Limitations. The cost-reimbursement type contract may be used only after a determination, in accordance with the requirements of Subpart C of this part, that:

(1) Such method of contracting is likely to be less costly than other methods, or

(2) It is impractical to secure supplies or services of the kind or quality required without the use of such type of contract.

§ 3.404-1 Cost contract.

(a) Description. The cost contract is a cost-reimbursement type contract under which the contractor receives no fee.

(b) Applicability. The following are illustrative situations in which the use of this type of contract may be appropriate.

(1) Research and development work particularly with nonprofit educational institutions or other nonprofit organizations.

(2) Facilities contracts.

(3) Initial small quantity procurements of new items with anticipated subsequent large production runs.

§ 3.404-2 Cost-sharing contract.

(a) Description. A cost-sharing contract is a cost-reimbursement type contract under which the contractor receives no fee but is reimbursed only for an agreed portion of its allowable costs.

(b) Applicability. A cost-sharing contract is suitable for use for those procurements which cover production or research projects which are jointly sponsored by the Government and the contractor with benefit to the contractor in lieu of full monetary reimbursement of costs. In consideration of this benefit, the contractor agrees to absorb a portion of the costs of performance. The following are illustrative situations in which this type of contract is generally desirable.

(1) Jointly sponsored research and development work with nonprofit educational institutions or other nonprofit organizations.

(2) Other research and development work where the results of the contract may have commercial benefit to the contractor.

§ 3.404-3

Cost-plus-a-fixed-fee contract.

(a) Description. The cost-plus-afixed-fee contract is a cost reimbursement type of contract which provides for the payment of a fixed fee to the contractor. The fixed fee once negotiated does not vary with actual cost, but may be adjusted as a result of any subsequent changes in the work or services to be performed under the contract.

(b) Applicability. The cost-plus-afixed-fee contract is suitable for use when a cost-reimbursement type of contract is appropriate, as provided in § 3.404 (b), and when the parties agree that the procurement should be profit bearing in the form of a fixed fee. The following are illustrative situations in which this type of contract may be appropriate:

(1) Research and development work where the scope and nature thereof cannot be definitely specified.

(2) Definite specifications exist but the contractor lacks a valid basis for estimating costs because the supplies called for are not items regularly manufactured, or the services called for have not been previously performed, or partial experience will not reveal a proper pricing level for the remainder of the production.

(3) Production or construction contracts where the specifications are not complete or where major changes substantially affecting the scope of the work are expected.

(4) Work to be performed in a Government-owned plant with the use of Government-owned facilities.

(c) Limitations. 10 U. S. C. 2306 (d) provides that in the case of a cost-plusa-fixed-fee contract the fee shall not exceed 10 per centum of the estimated cost of the contract, exclusive of the fee, as determined by the Secretary of the Department concerned at the time of entering into such contract (except that a fee not in excess of 15 per centum of such estimated cost is authorized in any such contract for experimental, developmental, or research work and that a fee inclusive of the contractor's cost and not in excess of 6 per centum of the estimated cost, exclusive of fees, as determined by the Secretary of the Department concerned at the time of entering into the contract, of the project to which such fee is applicable is authorized in contracts for architectural or engineering services relating to any public works or utility projects). The Head of a procuring activity in the Departments of the Army and Navy and the Director of Procurement and Production of a Major Command in the Department of the Air Force or their duly authorized representatives are authorized to approve fixed fees not in excess of (1) ten per centum (10) of the estimated costs, exclusive of fee, of any contract for experimental, developmental, or research work or (2) seven per centum (7) of the estimated cost, exclusive of fee, of any other contract except that in contracts for architectural or engineering services the fixed fee shall not exceed that authorized by the terms of the law as set forth above. In appropriate cases, fees above the prescribed limits in the authorizations granted herein but within the limitations

61041-61- -10

of the law may be authorized by the Secretary of the Department concerned or his designees.

(d) Contractors' investment in workin-process. (1) It is the policy of the Department of Defense that contractors having cost-reimbursement type contracts should maintain a reasonable investment in the supplies and facilities acquired and in the services rendered in the performance of such contracts. This investment provides a strong incentive for the contractor to strive for greater efficiency and economy and better management, with resultant lower costs to the Government.

(2) In keeping with this policy, costreimbursement type contracts other than those set forth below shall provide for interim payment of not to exceed 80 percent of the costs incurred by the contractor in the performance of the contract:

(i) Contracts under which the contractors receive no fee or profit;

(ii) Contracts with educational institutions or nonprofit organizations;

(iii) Contracts solely for the operation of Government-owned plants or vessels; (iv) Contracts with small business concerns;

(v) Contracts for research and development which do not provide for quantity production;

(vi) Contracts for performance outside the United States, its Territories, its possessions, and Puerto Rico;

(vii) Contracts having an estimated cost not in excess of $250,000;

(viii) Contracts for construction and architect-engineer services;

(ix) Contracts for scientific, technical, or engineering services (including systems design and testing and evaluation services);

(x) Contracts calling for maintenance, repair, and overhaul services in which the normal or anticipated time between the furnishing of items by the Government to the contractors for performance of the services and the delivery of the items to the Government after performance is less than three months; or

(xi) As determined by the Secretary concerned, contracts in which the application of the policy set forth in (1) above would impose undue hardship on the

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(a) Description. The cost-plus-incentive-fee contract is a cost-reimbursement-type contract with provision for a fee which is adjusted by formula in accordance with the relationship which total allowable costs bear to target costs. Under this type of contract, there is negotiated initially a target cost, a target fee, a minimum and maximum fee, and a fee adjustment formula. After performance of the contract, the fee payable to the contractor is determined in accordance with the formula. The formula provides, within limits, for increases in fee above target fee when total allowable costs are less than target costs, and decreases in fee below target fee when total allowable costs exceed target costs. The provision for increase or decrease in the fee is designed as an incentive to the contractor to increase the efficiency of performance.

(b) Applicability. The cost-plus-incentive-fee contract is suitable for use where a cost-reimbursement-type of contract is found necessary and where there is a probability that its use will result in lower costs to the Government than other forms of cost-reimbursement-type contracts through cost reduction incentive to the contractor.

(c) Limitation. The target and the maximum fee shall be subject to the administrative limitations stated in paragraph (c) of § 3.404-3.

(d) Contractors' investment in workin-process. See $3.404-3 (d). § 3.405

Other types of contracts.

§ 3.405-1 Time and materials contract. (a) Description. The time and materials type of contract provides for the procurement of supplies 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 may establish either a price ceiling, or a ceiling amount which the contractor may not exceed (except at his own risk).

(b) Applicability. The time and materials contract is used only in those situations 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 substantial accuracy. Particular care should be exercised in the use of this type of contract since its nature does not encourage efficiency. 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. This type of contract may be used only after determination that no other type of contract will suitably serve.

§ 3.405-2 Labor-hour contract.

(a) Description. The labor-hour type of contract is a variant of the time and materials type contract differing only in that materials are not involved in the contract or are not supplied by the contractor.

(b) Applicability. The labor-hour type of contract is applicable in those procurements described for the time and materials type contract, but in situations in which contractor-furnished materials are not involved.

(c) Limitations. This type of contract may be used only after determination that no other type of contract will suitably serve.

§ 3.405-3 Letter contract.

(a) Description. A letter contract is a written preliminary contractual instrument which authorizes immediate com

mencement of manufacture of supplies, or performance of services, including, but not limited to, preproduction planning and the procurement of necessary materials.

(b) Applicability. A letter contract may be entered into when (1) the interests of national defense demand that the contractor be given a binding commitment so that work can be commenced immediately, and (2) negotiation of a definitive contract in sufficient time to meet the procurement need is not possible, as, for example, when the nature of the work involved prevents the preparation of definitive requirements, specifications, or cost data.

(c) Limitations. (1) A letter contract shall be used only after a determination in accordance with Departmental procedures that no other type of contract is suitable.

(2) A letter contract shall not be entered into without competition when competition is practicable.

(3) A letter contract shall be superseded by a definitive contract at the earliest practicable date. This date shall be prior to:

(i) the expiration of 180 days from the date of the letter contract; or

(ii) 40 percent of the production of the supplies, or the performance of the work, called for under the contract; whichever occurs first. In extreme cases, an additional period may be authorized in accordance with Departmental procedures.

(4) The maximum liability of the Government stated in the letter contract generally shall not exceed 50 percent of the total estimated cost of the procurement, but this liability may be increased in accordance with Departmental procedures.

(d) Content. Letter contracts shall be specifically negotiated and shall, as a minimum requirement, include agreement as to the following:

(1) That the contractor will proceed immediately with performance of the contract, including procurement of necessary materials;

(2) The extent and method of payments in the event of termination either for the convenience of the Government or for default;

(3) That the contractor is not authorized to expend moneys or incur obligations in excess of the maximum liabil

ity of the Government as stated in the letter contract;

(4) The type of definitive contract; (5) As many definitive contract provisions as possible;

(6) That the contractor shall provide such price and cost information as may reasonably be required by the Contracting Officer;

(7) That the contractor and the Government shall promptly enter into negotiations in good faith to reach agreement upon and execute a definitive contract.

§ 3.405-4 Basic agreement.

(a) Description. A basic agreement is a written instrument of understanding executed between a Department or procuring activity and a contractor which sets forth the negotiated contract clauses which shall be applicable to future procurements entered into between the parties during the term of the basic agreement. The use of the basic agreement contemplates the coverage of a particular procurement by the execution of a formal contractual document which will provide for the scope of the work, price, delivery, and additional matters peculiar to the requirements of the specific procurement involved, and shall incorporate by reference or append the contract clauses agreed upon in the basic agreement, as required or applicable.

(b) Applicability. (1) Basic agreements are appropriate for use when (1) past experience and future plans indicate that a substantial number of separate contracts may be entered into with a contractor during the term of the basic agreement, and (ii) substantial recurring negotiating problems exist with a particular contractor.

A

(2) Amendment or supersession. basic agreement shall be amended only by an amendment of the basic agreement itself and shall not be modified or superseded by individual contracts or purchase orders entered into under and subject to the terms of such basic agreement. To minimize amendments, revisions to this subchapter involving changes in authorized contract clauses utilized in basic agreements will provide appropriate direction with respect to any required amendments of basic agreements and to the extent possible, amendments will be required only in matters resulting from changes in statutes, or

executive orders. As a minimum, basic agreements will be reviewed annually on the anniversary of their effective date and revised at that time to conform with the current requirements of this subchapter. Amendments shall not have retroactive effect.

(3) Discontinuance of basic agreement. Basic agreements shall provide for discontinuance of their future application upon 30 days written notice by either party. Discontinuance of basic agreement will not affect any individual contract referencing the basic agreement (or the clauses appended thereto) entered into prior to the effective date of discontinuance.

(c) Limitations. (1) Basic agreements shall neither cite appropriations to be charged nor be used alone for the purpose of obligating funds.

(2) Basic agreements shall not in any manner provide for or imply any agreement on the part of the Government to place future orders or contracts with the contractor involved. Basic agreements shall not be used in any manner to restrict competition.

(3) Basic agreements shall be utilized only in connection with negotiated contracts.

§ 3.405-5 Indefinite delivery type con

tracts.

One of the following indefinite delivery type contracts may be used for procurements where the exact time of delivery is not known at time of contracting.

(a) Definite quantity contracts—(1) Description. This type of contract provides for a definite quantity of specified supplies or for the performance of specified services for a fixed period, with deliveries or performance at designated locations upon order. Depending on the situation, the contract may provide for: (i) Firm fixed-prices, (ii) price escalation, or (iii) price redetermination.

(2) Applicability. This type of contract is particularly suitable for use where it is known in advance that a definite quantity of supplies or services will be required during a specific period and are regularly available or will be available after a short lead time. Advantages of this type of contract are that it permits stocks in storage depots to be maintained at minimum levels and permits direct shipment to the user.

(b) Requirements contract-(1) Description. This type of contract provides for filling all actual purchase requirements of specific supplies or services of designated activities during a specified contract period with deliveries to be scheduled by the timely placement of orders upon the contractor by activities designated either specifically or by class. Depending on the situation, the contract may provide for: (i) Firm fixed-prices, (ii) price escalation, or (iii) price redetermination. An estimated total quantity is stated for the information of prospective contractors, which estimate should be as realistic as possible. The estimate may be obtained from the records of previous requirements and consumption, or by other means. Care should be used in writing and administering this type of contract to avoid imposition of an impossible burden on the contractor. Therefore, the contract shall state, where feasible, the maximum limit of the contractor's obligation to deliver and, in such event, shall also contain appropriate provision limiting the Government's obligation to order. When large individual orders or orders from more than one activity are anticipated, the contract may specify the maximum quantities which may be ordered under each individual order or during a specified period of time. Similarly, when small orders are anticipated, the contract may specify the minimum quantities to be ordered.

(2) Applicability. A requirements contract may be used for procurements where it is impossible to determine in advance the precise quantities of the supplies or services that will be needed by designated activities during a definite period of time. Advantages of this type of contract are:

(i) Flexibility with respect to both quantities and delivery scheduling;

(ii) Supplies or services need be ordered only after actual needs have materialized;

(iii) Where production lead time is involved, deliveries may be made more promptly because the contractor is usually willing to maintain limited stocks in view of the Government's commitment;

(iv) Price advantages or savings may be realized through combining several anticipated requirements into one quantity procurement; and