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bidders and other persons when such notice is appropriate;

(10) The file shall be assembled in an orderly manner including an overall index of enclosures which shall indicate the location in the file of each document; and

(11) Name and telephone number of the person in the procurement office who may be contacted for information relevant to the protest.

(b) Protests after award. All formal protests after award will be processed, in duplicate, through procurement channels to the Director, Contracts Management Division, by the most expeditious means and marked "Immediate ActionProtest After Award.” The protest file will include the materials listed in paragraph (a) of this section except for subparagraphs (6), (8), and (9) with following substituted therefor:

(1) Copy of the bid or proposal of the successful offeror to whom award has been made;

(2) Current status of contract, indicating whether performance has commenced, shipment or delivery has been made, or stopwork order has been issued; and

(3) Copy of any mutual agreement with the contractor to suspend performance on a no-cost basis when appropriate.

(c) Protests lodged with General ACcounting Office. Where a protest is lodged with the General Accounting Office (GAO) or where it is determined to request the GAO for advice, the Assistant Administrator for Planning and Management, will sign the letter transmitting the protest file to the GAO. The Director, Contracts Management Division, will effect coordination with the General Counsel. The latter will assist the Director, Contracts Management Division, in identifying the legal issues involved in the protest.

(d) Protests lodged with other authorities. Where a protest is lodged with the Administrator of the Environmental Protection Agency, a Member of Congress, or the Small Business Administration (see § 1-1.703–2 of this title), the protest file will be processed, in duplicate, through procurement channels, to the Director, Contracts Management Division. The latter will direct such coordination and referrals as he deems appropriate. (36 F.R. 19501, Oct. 7, 1971)

PART 15–3-PROCUREMENT BY

NEGOTIATIONS Subpart 15–3.8—Price Negotiation § 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) Erceptions. (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 of ficer 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

ance" 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:

Weight

range Direct Materials:

(percent) Purchases

1 to 4. Subcontracts

1 to 5. Equipment

1 to 2. Engineering labor.-

8 to 15. Engineering overhead.

6 to 9. Manufacturing labor..

5 to 9. Manufacturing overhead.

4 to 7. Consultants

2 to 3. Other direct costs..

1 to 3. General and administrative expenses

5 to 8. Contractor's assumption of contract cost risk..

0 to 6. Record of contractor's performance

-2 to +2.
Cost efficiency.
Management.
Extent of investment.
Reliability of cost estimates.
Inventive and developmental contribu-

tions.
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 Perform

(1) General. In making his judgment components of standard or near-standof the value of each factor, the contract- ard characteristics, and purchases of ing officer should be governed by the pieces, assemblies, subassemblies, special definition, description, and purpose of tooling and other products special to the the factors together with considerations end-item. Ina the application of this for evaluating them as set forth herein. criterion, it should be recognized that

(2) Contractor's input to total per- the contribution of the prime contractor formance. This factor is a measure of to his purchasing program might be subhow much the contractor himself is ex- stantial. This might be applicable in the pected to contribute to the overall effort management of subcontracting programs necessary to meet the contract perform- involving many sources, involving new ance requirements in an efficient manner. complex components and instrumentaThis factor, which is apart from the con- tion, incomplete specifications, and tractor's responsibility for contract per- close surveillance by the prime conformance, takes into account what re- tractor's representative. Recognized costs soures are necessary and what the con- proposed as direct material costs such tractor himself must do to accomplish as scrap charges shall be treated as a conversion of ideas and materials into material for profit evaluation. If intrathe final item called for in the contract. company transfers are accepted at price, This is a recognition that within a given in accordance with § 1-15.205–22(e) of performance output, or within a given this title, they should be excluded from sales dollar figure, necessary efforts on the fee computation. Other intracomthe part of individual contractors can pany transfers shall be evaluated by invary widely in both value and quantity, dividual components of cost, i.e., mateand that the profit objective should re- rial, labor and overhead. Normally, the flect the extent and nature of the con- lowest weight for direct material is 2 tractor's contribution to total perform- percent. A weighting of less than 2 perance. The evaluation of this factor re- cent would be appropriate only in unquires an analysis of the cost content of usual circumstances when there is a the proposed contract as follows:

minimal contribution by the contractor (i) Direct materials (purchased parts, in relation to the total cost of the subcontracted items, and other mate- material. rial). Analysis of these cost items shall (ii) Equipment. It is the policy of the include an evaluation of the managerial Agency to contract with individuals or and technical effort necessary to obtain firms who have special capabilities relathe required purchased parts, subcon- tive to the need of the EPA. These tracted items, and other materials. This capabilities include personnel with parevaluation shall include consideration of ticular skills, or talents, and facilities the number of orders and suppliers, and (plant and equipment) necessary to comwhether established sources are avail- plete the contract objectives. For the able or new sources must be developed. purpose of profit/fee analysis, equipment The contracting officer shall also deter- includes purchased items which are not mine whether the contractor will, for ex- to be an integral part of the final prodample, obtain the materials by routine uct. It would generally consist of producorders or readily available supplies (par- tion or test equipment. Where the EPA ticularly those of substantial value in has to provide equipment to the conrelation to the total contract costs), or tractor either as Government furnished by detailed subcontracts for which the equipment or contractor acquired equipprime contractor will be required to de- ment, appropriate profit/fee adjustvelop complex specifications involving ments are necessary. Generally a low creative design or close tolerance manu- weight range shall be assigned to the facturing requirements. Consideration cost of such equipment (1-2 percent). should be given to the managerial and (iii) Engineering labor and manufactechnical efforts necessary for the prime turing labor. Analysis of the engineering contractor to administer subcontracts, labor and manufacturing labor items of and select subcontractors, including the cost content of the contract should efforts to break out subcontracts from include evaluation of the comparative sole sources, through the introduction of quality and level of the engineering talcompetition. These determinations should ents, manufacturing skills and experience be made for purchases of raw materials to be employed. In evaluating engineeror basic commodities, purchases of ing labor for the purpose of assigning processed material including all types of profit dollars, consideration should be

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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 generally 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. (i) It 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:

Percentage Type of contract:

ranges Cost-plus-fixed-fee

0 to 1. Cost-plus-incentive-fee includ

ing cost incentives only---- 1 to 2. Cost-plus-incentive-fee includ.

ing cost, performance, and
delivery incentives.--

212 to 3. Fixed-price-incentive includ

ing cost incentives only---- 2 to 4. Fixed-price-incentive includ

ing cost, performance, and
delivery incentives.

3 to 5.

Percentage Type of contract-Con.

ranges Prospective price determination

4 to 5. Firm-fixed-price

4 to 6. (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

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