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3.407-2). Contract performance requirements must be such that there is reasonable opportunity for the incentive provisions to have a meaningful impact on the manner in which the contractor manages the work.

(2) The firm target type of incentive contract, described in paragraph (a) (2) of this section, is appropriate for use whenever a firm target and a formula for establishing final profit and price can be negotiated at the outset which will provide a fair and reasonable incentive.

(3) The successive targets type of incentive contract, described in paragraph (a) (3) of this section, is appropriate for use whenever available cost and pricing information is not sufficient to permit the negotiation of realistic firm targets at the outset. However, enough information should be available to permit negotiation of initial targets, and there should be reasonable assurance that additional reliable information will be available at an early point in the performance of the contract so as to permit negotiation of either a firm fixed price, or firm targets and a formula for establishing final profit and price, which will provide a fair and reasonable incentive. The additional information need not in all cases come from experience under the contract itself, but may be drawn from experience on any other contracts for the same or similar items.

(c) Limitations. Fixed-price incentive contracts shall not be used unless the contractor's accounting system is adequate for price revision purposes and permits satisfactory application of the profit and price adjustment formulas. In no case should such contracts be used where cost or pricing information adequate for firm targets is not available at the time of initial contract negotiation or at a very early point in performance, or the sole or principal purpose is to shift substantially all cost responsibility to the Government. In no case shall the firm target profit or the formula for final profit and price be established prior to the negotiation of the firm target cost. Neither type of fixed-price incentive contract shall be used unless a determination has been made, 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.

§3.404-5 Prospective price redetermination at a stated time or times during performance.

(a) Description. This type of contract provides for a firm fixed price for an initial period of contract deliveries or performance and for prospective price redetermination either upward or downward at a stated time or times during the performance of the contract. It also may provide for a price ceiling, where appropriate. Once established, ceiling prices are subject to adjustment only by reason of the operation of other contract clauses (see § 3.404-1).

(b) Application. This type of contract is appropriate in procurements calling for quantity production or services where it is possible to negotiate fair and reasonable firm fixed prices for an initial period, but not for subsequent periods of contract performance. This initial period should be the longest period for which it is possible to establish fair and reasonable firm fixed prices at the time of original negotiation. The length of the prospective pricing periods should depend on the circumstances of each case and should generally be at least twelve months each. Ceiling prices, where appropriate, should be based on an evaluation of the uncertainties involved in contract performance, and their possible impact on cost, and should be negotiated at a level which represents contractor assumption of a reasonable degree of risk.

(c) Limitations. This type of contract shall not be used unless:

(1) It has been established through negotiation that a firm fixed-price contract does not fulfill the requirements established by the conditions surrounding the procurement;

(2) The contractor's accounting system is adequate for price redetermination purposes;

(3) The prospective pricing period can be made to conform with the operation of the contractor's accounting system; and

(4) Reasonable assurance exists that price redetermination action will be taken promptly at the time or times specified.

§ 3.404-7 Retroactive price redetermination after completion.

(a) Description. This type of contract provides for a ceiling price and retroactive price redetermination after completion of the contract. The redetermined price should be negotiated so as to give weight to the management effectiveness and ingenuity exhibited by the contractor during performance, and the basis for such negotiation should be fully discussed with the contractor when this type of contract is negotiated. Because the price is redetermined on a completely retroactive basis, this contract type (except for the price ceiling) does not provide the contractor with a calculable incentive for effective cost control. Once established, the ceiling price is subject to adjustment only if required by the operation of other contract clauses (see § 3.404-1).

(b) Application. This type of contract is appropriate in procurements where it is established at the time of negotiation that a fair and reasonable firm fixed price cannot be negotiated and the amount involved is so small or the time for performance so short that use of any other type of contract is impracticable. Even in these situations, however, it should be used only after negotiation of a billing price as fair and reasonable as the circumstances of the particular procurement permit. Based on an evaluation of the circumstances involved in contract performance, and their possible impact on cost, the ceiling price should be negotiated at a level which represents contractor assumption of a reasonable degree of risk.

(c) Limitations. This type of contract shall not be used unless the procurement is for research and development at an estimated cost of $100,000 or less, and

(1) The contractor's accounting system is adequate for price redetermination purposes;

(2) Reasonable assurance exists that price redetermination action will be taken promptly at the time specified;

(3) A ceiling price is established; and (4) Written approval has been received from a level above the head of a procuring activity.

[27 F.R. 4015, Apr. 29, 1962, as amended at 29 FR. 2929, Feb. 29, 1964]

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(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 (1) obligation of funds, and (2) establishing a ceiling which the contractor may not exceed (except at his own risk) without prior approval or subsequent ratification of the contracting officer.

(b) Application. The cost-reimbursement type contract is suitable for use only when the uncertainties involved in contract performance are of such magnitude that cost of performance cannot be estimated with sufficient reasonableness to permit use of any type of fixed-price contract. 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 cost-reimbursement contracts are particularly useful for procurements involving substantial amounts, e.g., estimated cost of $100,000 or more, the parties may agree in a given case to use this type of contract to cover transactions in which the estimated costs are less than $100,000.

(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.

§ 3.405-2 Cost contract.

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

(b) Application. 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; and

(2) Facilities contracts. §3.405-3 Cost-sharing contract.

A cost-sharing contract is a cost-reimbursement type contract, for use in research or development procurements, under which the contractor is reimbursed only for an agreed portion of his allowable costs. The contractor agrees to absorb a portion of the costs of performance in the expectation of substantial compensating benefits. For instructions governing the use of cost-sharing contracts, see § 4.208 of this chapter. [29 F.R. 9749, July 21, 1964]

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(a) Description. centive-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 cost. 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 to provide an incentive for maximum effort on the part of the contractor to manage the contract effectively.

(b) Application. The cost-plus-incentive-fee contract is suitable for use primarily for development and test when a cost-reimbursement type of contract is found necessary in accordance with § 3.405-1(b), and when a target and a fee adjustment formula can be negotiated which are likely to provide the contractor with a positive profit incentive for effective management. In particular, where it is highly probable that the development is feasible and the Govern

ment generally has determined its desired performance objectives, the costplus-incentive-fee contract should be used in conjunction with performance incentives in the development of major systems, and in other development programs where use of the cost and performance incentive approach is considered both desirable and administratively practical (see § 3.403 (c) and 3.407-2(b)). Range of fee and the fee adjustment formula should be negotiated so as to give appropriate weight to basic procurement objectives. For example, in an initial product development contract, it may be appropriate to negotiate a costplus-incentive-fee contract providing for relatively small increases or decreases in fee tied to the cost incentive feature, balanced by the inclusion of performance incentive provisions providing for significant upward or downward fee adjustment as an incentive for the contractor to meet or surpass negotiated performance targets. Conversely, in subsequent development and test contracts, it may be more appropriate to negotiate an incentive formula where the opportunity to earn additional fee is based primarily on the contractor's success in controlling costs. With regard to the cost incentive provisions of a contract, the minimum and maximum fees, and the fee adjustment formula, should be negotiated so as to provide an incentive which will be effective over variations in costs throughout the full range of reasonably foreseeable variations from target cost. Whenever this type of contract, with or without the inclusion of performance incentives, is negotiated so as to provide incentive up to a high maximum fee, the contract also shall provide for a low minimum fee, which may even be a "zero" fee or, in rare cases, a “negative fee.

(c) Limitations. The target fee shall be subject to the administrative limitations and approvals stated in § 3.405-5 (c) (2), and the maximum fee shall not exceed the statutory limitations stated therein.

[27 F.R. 4015, Apr. 27, 1962, as amended at 29 F.R. 6916, May 27, 1964]

§ 3.405-5 Cost-plus-a-fixed-fee contract. (a) Description. The cost-plus-afixed-fee contract is a cost-reimbursement type of contract which provides

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contract for experimental, developmental, or research work or for the manufacture or furnishing of supplies for experimentation, development, research, or test (but see § 3.303 (b) when the amount does not exceed $100,000);

(b) The determination required by § 3.212 with respect to any negotiated contract that should not be publicly disclosed;

(c) The determination required by §3.213 with respect to any negotiated contract for technical equipment requiring standardization and interchangeability of parts;

(d) The determination required by §3.214 with respect to any negotiated contract for technical or specialized supplies requiring a substantial initial investment or an extended period of preparation for manufacture;

(e) The determination required by §3.215 with respect to any negotiated contract entered into after advertising has proved unsatisfactory;

(f) The determination required by §3.216 with respect to any negotiated contract entered into in the interest of

national defense or industrial mobilization;

(g) The determination required with respect to advance payments under any negotiated contract (but see Defense Contract Financing Regulations, Subpart D, Part 163 of this chapter; and

(h) The determinations required with respect to waiving a requirement for submission of cost or pricing data and certification thereof (see § 3.807-3(a)) and for inclusion of the clauses required by §§ 7.104-29 and 7.104-42 (but see § 3.303 (a) (1) for contracts with foreign governments or agencies thereof).

In addition to the foregoing determinations, the Secretary of any Department may also make any of the determinations, and written findings in support thereof, that may be made by the head of any procuring activity signing as a chief officer responsible for procurement or by a contracting officer.

[28 F.R. 2094, Mar. 5, 1963, as amended at 31 F.R. 1041, Jan. 27, 1966]

§ 3.303 Determinations and findings below the Secretarial level.

(a) Determinations, and findings in support thereof, not required to be made by higher authority including those in subparagraphs (1) through (4) of this paragraph may be made with respect to

individual purchases or contracts by the Head of a Procuring Activity signing as a chief officer responsible for procurement. Unless his authority is limited by higher authority, the contracting officer may make the determinations and findings in subparagraphs (2) through (4) of this paragraph with respect to individual purchases and contracts:

(1) The determination required with respect to waiving the requirements for submission of cost or pricing data and certification thereof and for the inclusion of the clauses required by §§ 7.10429 and 7.104-42 of this chapter for contracts with foreign governments or agencies thereof;

(2) Determinations and findings with respect to authority to enter into contracts by negotiation required §§ 3.202-3, 3.207-3, 3.208-3, 3.210-3 and 3.211-3; Provided, That under § 3.211-3 the basic contract or any single modification thereto does not obligate the Government to pay more than $100,000 (in a procurement under § 3.211, where it is known in advance that the scope of the contract will be expanded to include additional phases or where it is incrementally funded, the total estimated cost of all increments will be used as the basis for determining whether a determination and finding will be made at the Secretarial level or by the contracting officer);

(3) Determinations and findings with respect to the use of a cost or a costplus-a-fixed-fee or an incentive-type contract required by §§ 3.404-4, 3.405, 3.405-4, and 3.405-5; and

and

(4) Any other determinations findings not required to be made by higher authority.

(b) The authority to make class determinations and findings with respect to authority to enter into contracts by negotiation pursuant to §§ 3.202, 3.207. 3.208 and 3.210 may be delegated by the Secretary of any Department.

[25 F.R. 14132, Dec. 31, 1960, as amended at 29 F.R. 2828, Feb. 29, 1964]

§ 3.305 Forms of determinations and findings.

(a) Each determinations and findings-whether for (1) authority to negotiate an individual contract, or (2) authority to negotiate a class of contracts, or (3) kind of contract, or (4) any other purpose shall be prepared in accordance with Departmental procedures, but determinations and findings

for advance payments must be prepared in accordance with the format in § 163.60 of this chapter.

(b) Each determination and findings prepared in accordance with Departmental procedures shall set out enough facts and circumstances to justify clearly the specific determination made. Each determination and findings for authority to negotiate either an individual contract or a class of contracts shall clearly indicate that the use of formal advertising would be impracticable and the reasons therefor.

[26 F.R. 2604, Mar. 28, 1961]

§ 3.306

Procedure with respect to determinations and findings.

(a) Determinations and findings for authority to negotiate required by §§ 3.202, 3.207, 3.208, and 3.210 through 3.216 shall be signed by the appropriate official prior to issuance of a request for proposals or quotations. Any modifications of such determinations and findings subsequently found to be necessary will not require cancellation of the request for proposals or quotations, provided the determinations and findings as modified support negotiation under any one of the authorities cited in §§ 3.201 through 3.217. Where the facts continue to support the negotiation but under an exception for which a determination and findings is not required, cancellation of the determination and findings will not require cancellation of the request for proposals or quotations.

[29 F.R. 2828, Feb. 29, 1964]

§ 3.307 Distribution of copies of determinations and findings.

Copies of each Determination and Findings shall be distributed in accordance with procedures prescribed by each respective Department: Provided, That one copy thereof with respect to (a) negotiated contracts (whether by individual contract or by class of contracts), (b) advance payments, and (c) the use of a cost or a cost-plus-a-fxed-fee contract or an incentive-type contract, shall be sent to the General Accounting Office with the copy of the contract negotiated and executed thereunder.

[25 FR. 14132, Dec. 31, 1960]

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In order to provide maximum uniformity in application, implementations of §§ 3.401 through 3.405 and 3.407-2 shall not be issued. In the event need exists for more detailed coverage of the subjects contained in the sections referred to, appropriate recommendations should be submitted to the ASPR Committee.

§ 3.401 Types of contracts.

(a) To provide the flexibility needed in the purchase of the large variety and volume of military supplies and services, a wide selection of types of contracts is available to the contracting parties. The respective contract types vary as to (1) the degree and timing of responsibility assumed by the contractor for the costs of performance, and (2) the amount and type of profit incentive offered the contractor to achieve or exceed specified standards or goals. With regard to degree of cost responsibility, the various types of contracts may be arranged in order of decreasing contractor responsibility for the costs of performance. At one end is the firm fixedprice contract under which the parties agree that the contractor assumes full responsibility in the form of profits or losses, for all costs under or over the firm fixed price. At the other end of this range is the cost-plus-a-fixed-fee contract where profit, rather than price, is fixed and the contractor's cost responsibility is therefore minimal. In between are the various incentive contracts which provide for varying degrees of contractor cost responsibility, depending upon the degree of uncertainty involved in contract performance.

(b) Pursuant to the authority of 10 U.S.C. 2306, a contract negotiated under this part may be of any type or combination of types described herein which will promote the best interests of the Government, subject to the restrictions described below. Types of contracts not described herein shall not be used,

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