basis for negotiation of target and cost sharing formulas);

(ii) Adequacy and reliability of cost information furnished by contractor;

(iii) Unusual risks assumed by contractor in particular contracts, e.g., close pricing, labor and material cost increases, shortage of materials, inventory spoilage and obsolescence, cutbacks, terminations, and quality or performance guarantees (explain extent to which risks were reduced or minimized by types of contracts used);

(iv) Contingencies included in quoted prices;

(v) Experience as to profits received by contractor in significant contracts, especially incentive contracts, with appraisal as to whether or not profits were earned by contractor's efforts (state whether any important contracts were negotiated with no profit or at less than normal profit);

(vi) Significant refunds and voluntary price reductions, with circumstances of each;

(vii) Evaluation of contractor as a high, average, or low cost producer;

(viii) Reasonableness of contractor's pricing policies;

(ix) Comparison of prices with competitors' prices for same or similar products or services;

(x) Reasons for cost overruns and underruns in cost-reimbursement type contracts;

(10) List of capital funds and facilities employed by contractor, with particular reference to their source, e.g., contractor's equity capital, borrowed or rented, Government-financed, or Gov

ernment-furnished;

(11) Extent to which contractor has complied with Government policies such as the small business program, labor surplus area program, competition in subcontracting, and make or buy program;

(12) Full information as to any terminations for default or for the convenience of the Government to include the status of appeals or claims, if any, and the extent to which payments were made during the period concerned;

(13) Status of price revision actions and the basis for any revision completed in the period concerned;

(14) Such pertinent information on defense subcontracts, as is available;

(15) Appraisal of contractor's contribution to the defense effort, with particular emphasis on work done by him in development of new materiel, inven

tion of new devices, management of large weapon system contracts as prime or associate contractor, effective use of value engineering, and the like;

(16) A current appraisal of contractor's performance and recommendation as to reasonableness of contractor's profits for the period under consideration under the listed contracts; and

(17) Such other information as may be particularly requested by the Renegotiation Board.

While all the contracts concerned will be listed at the beginning of a performance report (see subparagraph (6) of this paragraph), individual contracts need not thereafter be identified except where information as to unusual performance is set forth, especially in cases of incentive contracts.

(e) Departmental distribution of performance reports. A copy of each performance report on a contractor who is on the list of the 100 contractors awarded the largest dollar amount of defense contracts (which list is published annually in a Defense Procurement Circular) shall be sent to the Assistant Secretary of Defense (Installations and Logistics). A copy shall also be sent to the appropriate Departmental Secretary.

(f) Advanced development, engineering development, and operational systems development contracts. The Director of Contractor Performance Evaluation, Office of the Assistant Secretary of Defense (Installations and Logistics) (see § 4.215 of this chapter) shall furnish Contractor Performance Evaluation Reports on advanced development, engineering development, and operational systems development contracts upon the request of the Renegotiation Board.

[29 F.R. 11809, Aug. 19, 1964, as amended at 30 F.R. 11997, Sept. 21, 1965]

§ 1.320 Industrial security.

Certain required procedures designed to safeguard classified defense information are set forth in the Armed Forces Industrial Security Regulation (AR 380130, OPNAV Instruction 5540.8B, AFR 205-4) (hereinafter cited as AFISR), and DD Form 441 "Security Agreement" and its attachment, the Department of Defense Industrial Security Manual, together with supplements thereto. Security requirements governing work to be performed outside the United States, its possessions, and Puerto Rico by United States or foreign nationals, or work to

De performed in the United States by foreign nationals (including companies located in the United States which are owned, controlled, or influenced by nacionals of a foreign country), are subject to security agreements which the United States maintains with a number of foreign countries. The requirements of these agreements are set forth in the AFISR.

[28 F.R. 12546, Nov. 23, 1963]

$1.321 Procurements involving work to

be performed in foreign countries. Prior to entering into a contract which requires work to be performed in a foreign country by personnel of a United States contractor, coordination shall be effected with the appropriate component Commander of the unified Command concerned to assure compliance with offshore procurement policies and countryto-country agreements (see § 1.320). The purchasing activity shall provide the appropriate commander with all essential data, including security requirement and logistic support provisions of the proposed contract.

[28 F.R. 12546, Nov. 23, 1963]

(2) Enhancement of standardization; (3) Reduction of administrative burden in the placement and administration of contracts;

(4) Production continuity;

(5) Stabilization of work forces; and (6) Broadening the competitive base with opportunity for participation by I firms not otherwise willing or able to compete for lesser quantities, particularly in cases where high startup costs are involved.

This method of procurement may be suitable for total small business setasides. Therefore, in any procurement where both the total set-aside procedure and multi-year procedure are appropriate, both may be used.

(b) Definition. Multi-year procurement is a method for competitive contracting for known requirements for mil

itary supplies, in quantities not in excess of planned requirements for five years set forth in, or in support of, the Department of Defense Five Year Force Structure and Financial Program, even though the total funds ultimately to be obligated by the contract are not available to the contracting officer at the time of entering into the contract. Under this method, contract quantities are budgeted and accounted for in accordance with the program year in which each quantity is authorized.

(c) Application. Unless overriding disadvantages are evident, the multiyear procurement method should be used when:

(1) Reduced unit prices can reasonably be anticipated over annual buys by reason of elimination of repetitive substantial startup costs, including such costs as preproduction engineering, special tooling, plant rearrangement, initial rework, initial spoilage, and pilot runs; (2) Effective competition can be obtained;

(3) There are known requirements for the quantities involved;

(4) The design and specifications of the item are expected to remain relatively stable for the multi-year period; and

(5) Continuous production can be reasonably anticipated throughout the multi-year period.

(d) Limitations. Multi-year procurement shall not be used (1) when funds covering the procurement are limited by statute for obligation during the fiscal year in which the contract is executed, or (2) for quantities in excess of the planned requirements for five years set forth in, or in support of, the Department of Defense Five Year Force Structure and Financial Program.

[29 F.R. 2809, Feb. 29, 1964] § 1.322-2 Procedure.

(a) Formal advertising, including twostep formal advertising, is the preferred method for use in multi-year procurement. In cases where the period of production is such that a contingency for labor and material costs is likely otherwise to be included in the multi-year contract price, the contracting officer should normally use a provision for price escalation.

(b) Solicitations shall include:

(1) A statement of the requirements, separately identified by bid or proposal item in the schedule, for

(i) The first program year; and

(ii) The multi-year procurement including the quantities for each program year thereunder;

(2) A provision that a price must be submitted for the total requirements of the first program year;

(3) A provision that a price may be submitted for the multi-year procurement and if submitted such price must be for the total requirements of that procurement;

(4) A provision that the unit price of each item in the multi-year requirement shall be the same for all program years included therein;

(5) Criteria for comparing the lowest evaluated submission on the first program year's requirement against the lowest evaluated submission on the multiyear requirements (see § 1.322-3(b));

(6) A provision setting forth a separate cancellation ceiling (on a percentage basis) applicable to each program year subject to cancellation (see paragraph (c) of this section); and

(7) A prominently placed provision directing attention to the multi-year features of the solicitation, and to

(i) The "Limitation of Price and Contractor Obligations" clause (see § 1.3224(a)) which limits the payment obligation of the Government to the requirements of the first program year and to those of such succeeding program years as may be funded by the Government (see § 1.322-4(b));

(ii) The "Cancellation of Items" clause (see § 1.322-4(b)) which allows the Government to cancel the requirements for any or all program years subsequent to the first by a specific date, or within a specified period; and

(iii) The cancellation ceilings set forth in the schedule.

(c) The term "cancellation" as used in multi-year procurement refers only to the cancellation of the total requirements of one or more program years after the first. Such cancellation results from failure to provide additional funds for contract performance of the cancelled requirements. For each program year except the last, the contracting officer shall establish a cancellation ceiling applicable to the remaining program years subject to cancellation. Cancellation ceilings will be lower for each succeeding program year in that such ceilings must exclude all amounts allocable to items included in the prior program year requirements. Such ceilings shall

be expressed in the schedule in percentages of the total multi-year contract price and shall apply to all bidders alike. In determining cancellation ceilings, the contracting officer must estimate reasonable preproduction and other nonrecurring costs applicable to and which normally would be amortized in all items to be furnished under the multi-year requirement. They include such items as plant rearrangement, special tooling, preproduction engineering, initial rework, initial spoilage, and pilot runs. There shall not be taken into account any amount for labor, materials, or other expense (except as indicated above) which might be incurred for production of the items subject to cancellation for each program year. The total estimate must then be compared with the best estimate of the procurement cost to arrive at a reasonable percentage figure. Cancellation dates for each program year's requirement shall be established with due regard for production lead time and the date by which funding therefor can reasonably be accomplished.

(d) Sufficient information to establish cancellation ceilings for inclusion in a solicitation may not be readily available. One means of obtaining such information is through a pre-bidding conference. Original cancellation ceilings may be revised when information developed after issuance of a solicitation discloses that such ceilings are not realistic. In the case of formal advertising, such changes must be by amendment of the invitation for bids prior to bid opening. In two-step formal advertising discussions conducted during the first step may indicate the need for revised ceilings in step two. Negotiations with offerors in a negotiated procurement may provide information requiring a change in cancellation ceilings for all offerors, prior to final negotiation and contract award.

(e) For each program year requirement, funds shall be obligated to cover the quantity of items to be delivered thereunder. In addition, funds equal to the applicable cancellation ceiling shall be committed. At the time the contractor is notified that funds are available for a succeeding program year's requirement, (1) funds shall be obligated to cover that requirement; (2) the commitment for cancellation for the prior program year shall be cancelled; and (3) funds under the then current program year shall be committed in an amount

equal to the cancellation ceiling that then becomes applicable.

(f) In the event of a cancellation the contractor is entitled to payment as consideration therefor in accordance ) with the terms of the "Cancellation of Items" clause (see § 1.322-4(b)) in an amount not to exceed the cancellation ceiling.

(g) The schedule shall contain a provision limiting the payment obligation of the Government to a monetary amount there described as being available for contract performance. Such amount for the first program year rerequirements shall be inserted by the contracting officer upon award of the contract and shall be modified for successive program years upon availability of funds for such years. (See § 1.322-4 (a).)

[29 F.R. 2810, Feb. 29, 1964, as amended at 29 FR. 6912, May 27, 1964]

(a) Evaluation of offers in a multiyear procurement involves not only the determination of the lowest overall evaluated cost to the Government for both alternatives, the multi-year procurement and the first program year procurement; it also involves the comparison of the cost of buying the total requirement under a multi-year procurement with cost of buying the total requirement in successive independent procurements. All the factors to be considered for the various evaluations involved shall be set forth in the solicitation.

(b) The cancellation ceiling shall not be a factor for evaluation. Unless Government administrative costs incident to annual procurement methods and contract administration can be reasonably established and supported, they shall not be used as a factor for evaluation. When administrative costs are to be used in evaluation, the dollar amount to be used shall be stated in the solicitation.

(c) Delivery destinations may be unknown for certain quantities due to the extended duration of contract performance. In such cases, destinations shall be developed on the basis of best estimates; a definite place or places shall be designated in the solicitation as the point to which transportation costs will be computed (but only for the purpose of evaluating bids or proposals); and the solicitation shall contain the notice required under § 1.1305–5.

(d) When Government production and research property is provided pursuant to Subpart C, Part 13 of this chapter, the use of such property may be on a rent-free basis under the policies contained in Subpart E, Part 13 of this chapter. In this event, the solicitation shall set forth a detailed description of the procedure to be followed and the factors to be considered in accordance with Subpart E, Part 13 of this chapter, for the elimination of competitive advantage. The amount added for evaluation to each offeror's unit price for the first program year requirement shall also be added to his unit price for the multiyear requirements.

(e) In comparing prices for the first program year requirement against prices for multi-year requirements, the evaluated unit price for each item of the lowest evaluated offer received on the first program year alternative shall be multiplied by the total number of units of that item required by the multi-year alternative. The sum of these products, plus the dollar amount of any administrative costs of the Government which are to be used in the evaluation shall be compared against the total evaluated price of the lowest offer received for all items under the multi-year alternative. If the multi-year price is low, award shall be made on that basis; otherwise, award shall be made on the basis of the first program year alternative.

[29 F.R. 2810, Feb. 29, 1964, as amended at 30 F.R. 1729, Feb. 9, 1965]

The following clauses shall be included in all contracts under the multi-year procurement method.

(a) Limitation of price and contractor obligations.

LIMITATION OF PRICE AND CONTRACTOR
OBLIGATIONS (Nov. 1963)

(a) This clause applies only in the event this contract is awarded on the alternative basis for award described in the Schedule as "Multi-Year Procurement".

(b) Funds are available for performance of this contract in the amount specifically described in the Schedule, as available for contract performance. The amount of funds so described at the time of award is not considered sufficient for the contract performance required by and described in the Schedule for any Program Year other than the First Program Year. Upon availability to the Contracting Officer of additional funds sufficient for performance of the full requirements for the next succeeding Program

Year, the Contracting Officer shall, not later than the date specified in the Schedule, unless a later date is agreed to by the parties, so notify the Contractor in writing and the amount of funds described in the Schedule as available for contract performance shall be modified accordingly. This procedure shall apply for each successive Program Year.

(c) The Government is not obligated to the Contractor for contract performance in any monetary amount in excess of that described in the Schedule or modifications thereto, as available for contract performance.

(d) The Contractor is not obligated to incur costs for the performance required for any Program Year after the first unless and until he has been notified in writing by the Contracting Officer of an increase in availability of funds in accordance with paragraph (b) of this clause. If so notified, the Contractor's obligation shall be increased only to the extent contract performance is required for the additional Program Year for which funds have been made available.

(e) In the event of termination pursuant to the "Termination for Convenience of the Government" clause of this contract, the terms "total contract price" and "work under the contract" as used in that clause refer to the amount available for performance of this contract as provided for in this clause and to the work under program year requirements for which funds have been made available. In event of termination for default, the Government's rights under this contract shall apply to the entire multi-year requirements.

(f) Notification to the Contractor of an increase or decrease in the funds available for performance of this contract as a result of a clause other than this clause (e.g., exercise of an option for increased quantities or the "Changes" clause) shall not constitute the notification contemplated by paragraph (b) of this clause.

(b) Cancellation of items.

CANCELLATION OF ITEMS (Nov. 1963)

(a) This clause applies only in the event this contract is awarded on the alternative basis for award described in the Schedule as "Multi-Year Procurement".

(b) As used herein, the term "cancellation" means that the Government is cancelling, pursuant to this clause, its Program Year requirements for items as set forth in the Schedule for all Program Years subsequent to that in which notice of cancellation is provided. Such cancellation shall occur only if, within the time period specified in the Schedule, or such further time as may be agreed to, the Contracting Officer (1) notifiles the Contractor that funds will not be available for contract performance for any subsequent Program Year; or (ii) fails to notify the Contractor that funds have been made

available for performance of the Program Year requirement for the succeeding Program Year.

(c) Except for cancellation pursuant to this clause or for termination pursuant to the "Default" clause, any reduction by the Contracting Officer in the quantities called for under this contract shall be considered a termination in accordance with the "Termination for Convenience of the Government" clause of this contract.

(d) In the event of cancellation pursuant to this clause, the Contractor will be paid, as consideration therefor, a cancellation charge not to exceed the cancellation ceiling described and separately set forth in the Schedule as being applicable at the time of cancellation.

(e) The cancellation charge is intended to cover only expenses reasonably necessary for production which would have been equitably amortized in the unit prices for the entire quantity of the Multi-Year Procurement, but which, because of the cancellation, are therefore not so amortized. The cancellation charge shall be computed and claim therefor made as would be applicable under the “Termination for Convenience of the Government" clause of this contract, except that the cancellation charge shall not include any amount for:

(1) Labor, materials or other expenses incurred for production of the cancelled items; provided, that initial costs, preparatory expenses and other nonrecurring costs reasonably and necessarily incurred by the Contractor and its subcontractors, but exclusive of any costs allocable to the completed supplies paid or to be paid for at the unit price, may be included in such charge; and

(ii) Which payment has already been made to the Contractor; or

(iii) Anticipated profit on the cancelled items, or on the costs included in the cancellation charge.

Where options are otherwise authorized, multi-year contracts may include an appropriate "Option to Increase Quantities" clause in which the period for exercise of the option is limited to the date set forth in the contract schedule for notifying the contractor that funds are available for the requirements of the next succeeding program year. If such an option is included, the following paragraph (f) should be added to the clause set forth above:

(f) Any quantities added to the original contract quantities through exercise of the Government option in the "Option to Increase Quantities" clause of this contract shall be subtracted from what would other