of the cost content of the contract shall 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 shall be given to the amount of notable scientific talent or unusual or scarce engineering talent needed in contrast to journeymen 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 shall be considered.

(3) Engineering overhead, manufacturing overhead, and general and administrative expenses. Analysis of these overhead items of cost includes the evaluation of the make up of these expenses and how much they contribute to contract performance. This analysis shall 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 shall be given the same profit consideration that they would receive if they were treated as direct labor. The other elements of these overhead pools shall be evaluated to determine whether they are routine expenses such as utilities, depreciation, and maintenance, and hence given lesser profit consideration, or whether they are significant contributing elements. The composite of the individual determinations in relation to the elements of the overhead pools will be the profit consideration given the pools as a whole. The procedure for assigning relative values to these overhead expenses differs from the method used in assigning values to direct labor. The upper and lower limits assignable to the direct labor are absolute. In the case of overhead expenses, individual expenses may be assigned values outside the range as long as the composite ratio is within the range.

(c) Contractor's assumption of contract cost risk. (1) This factor reflects the policy of the Department of Defense to shift the risk of contract costs to the fullest extent practicable to contractors and to compensate them for the assump

tion of this risk. Evaluation of this risk requires a determination of (i) the degree of cost responsibility the contractor assumes, (ii) the reliability of the cost estimates in relation to the task assumed, and (iii) the chances of the contractor's success or failure. This factor is specifically limited to the risk of contract costs. Thus, such risks on the part of the contractor as reputation, losing a commercial market, risk of losing potential profits in other fields, or any risk on the part of the purchasing activity, such as the risk of not acquiring an effective weapon, are not within the scope of this factor.

(2) 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-fixedfee 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 7 percent rating shall be given to a closely priced firm fixed-price contract for a new, complex item.

(3) The second determination is that of the reliability of the cost estimates. Sound price negotiation requires welldefined contract objectives and reliable cost estimates. Prior production experience assists the contractor in preparing reliable cost estimates on new procurements for similar equipment and does not in any way reduce his cost responsibility in a firm fixed-price contract. 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.

(4) 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.

(5) Contractors are likely to assume greater cost risks only if contracting of

These ranges may not be appropriate for all procurement circumstances. 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 contract, while a fixed-price-incentive contract with a high ceiling price and low cost incentive formula could be considered to contain cost-plus-incentive-fee contract features. Similarly, if a cost-plus-incentive-fee contract includes a ceiling or an unlimited downward (negative) fee adjustment on cost control, it could be comparable to a fixed-price-incentive contract.

(d) Record of contract performance. (1) Contractors who have an excellent record of previous performance should receive more favorable profit consideration than poor performers, in order to provide an incentive for improved performance and to decrease the cost risk to the Government. The following factors are to be considered in evaluating a contractor's performance record.

(2) Management-stability and competence of management personnel, their willingness and ability to adjust company resources to meet peculiarily difficult and changing defense requirements are criteria for consideration. The degree of cooperation by the contractor, both business and technical, with the objectives of the Government should be considered.

(3) Cost efficiency-low cost performance reflecting economic use of facilities

and manpower, sound purchasing methods and subcontracting procedures, and effective inventory control are criteria for consideration. Improvement in production efficiency through investment in plant modernization, past production efficiencies, or lack thereof, effectiveness of the contractor's make-or-buy program, purchasing and subcontracting system and inventory control shall be evaluated.

(4) Reliability of cost estimates—accuracy and reliability of previous cost estimates shall be considered.

(5) Timely deliveries-the contractor's delivery record, considering excusable delays and the contractor's efforts to overcome delays, shall be analyzed.

(6) Quality of product-experience with the contractor's product reliability, including the rate of rejection of his product and his acceptance of responsibility for continuing support shall be considered.

(7) Inventive and developmental contributions-extent and nature of contractor-initiated and financed research, development, design work, product engineering, quality control, value engineering, and manufacturing processes and techniques shall be analyzed.

(8) Small business and labor surplus participation-the contractor's policies and procedures which energetically support Government, small business and labor surplus-area programs should be given favorable consideration. Any unusual efforts which the contractor displays in subcontracting with these concerns, particularly for development type work likely to result in later production opportunities, and the overall effectiveness of the contractor in subcontracting with and furnishing assistance to such concerns shall be considered.

(e) Selected factors. The following additional factors which may enter into particular procurement circumstances shall, as a group, be assigned a weight.

(1) Source of resources (Government or private). Application of this factor calls for an analysis of the contractor's dependence on Government financial assistance; material assistance in the form of special test equipment, facilities, and special tooling; and special technical assistance in the form of designs, processes, and techniques previously developed at Government expense. Contractor reliance upon Government resources shall be discouraged by providing for less favor

facilities to be rented by the contractor will be evaluated as contractor furnished. Customary progress payments and guaranteed loans with normal guarantees (90 percent or less) shall not be weighed in this evaluation. However, other forms of financial assistance such as extraordinary progress payments, guaranteed loans with abnormal guarantees, or advance payments shall be considered as a minus factor. Similarly, the reliance on any other type of Government assistance, including facilities, shall be evaluated as a minus from zero.

(2) Special achievement, if any, required in the contract. This factor indicates the need for extra profit consideration when outstanding performance is required. Such achievement may be in the form of a special technical requirement, such as production of some remarkable first, or achievements involving non-technical objectives, such as an extraordinarily fast delivery schedule.

(3) Other. Particular procurement situations may give rise to the desirability of using a profit factor other than those in subparagraphs (1) and (2) of this paragraph. Such factor shall be identified; and the reason for its use shall be documented in accordance with § 3.811.

[28 F.R. 12556, Nov. 23, 1963]

§ 3.808-6 Special profit consideration.

Contractors who develop military items without Government assistance are entitled to special profit consideration on those items. This consideration shall be in addition to the profit objective arrived at through the weighted guideline method. One to four percent of recognized cost is established as the normal range of value for this profit factor. The criteria for selection of the specific percentage shall be the importance of the development in furthering defense purposes, the demonstrable initiative in determining the need and application of the development, the extent of the contractor's cost risk, and whether the development capital was recovered directly or indirectly from Government sources. [28 F.R. 12556, Nov. 23, 1963]

Prior Amendments

1962: 27 F.R. 3448, Apr. 11; 27 F.R. 8871, Sept. 6.

1963: 28 F.R. 2579, Mar. 16.

1. Contract type. The contractor has proposed a FFP contract. The item to be procured is a sound measuring device developed by the contractor, without government assistance.

2. Contractor's input to total perform, ance-a. Direct materials. Analysis revealed that the purchased parts were priced on the basis of catalog or competitive prices and were purchased under many small contracts. The subcontract items are predominantly newly developed and will be mostly purchased through negotiation under a small number of separate orders. Other materials represent approximately 90 percent of raw materials and 10 percent of standard nuts, bolts and similar hardware. These materials will all be purchased on the basis of catalog or competitive prices. The contracting officer, after evaluating the technical and managerial effort received for the acquisition

of these items assigned a 3 percent weight for purchased parts and other materials and a 4 percent weight for subcontract items.

b. Direct labor. The contracting officer determined that approximately 10 percent of the engineering labor cost represented the input of supervisory engineering to which he assigned a profit value of 14 percent and the remaining 90 percent represented support engineering labor to which he assigned a value of 11 percent, or an average weight of 11.3 percent. He also determined that 5 percent of the manufacturing labor to be applied to the proposal would be of a

supervisory nature, justifying a profit weight of 9 percent; 70 percent would be provided by skilled assembly workers, to which he assigned a value of 7 percent and the remaining input would be provided by unskilled labor on which he placed a value of 5 percent. This resulted in an average of 6.4 percent.

c. Overhead expenses. Contracting officer grouped the overhead expenses into the following classifications and assigned relative profit rates in accordance with his reasoning as to how the effort represented by these expenses contributed to effective contract performance.

3. Risk. In selecting 7 percent for this factor, the contracting officer made a thorough analysis of the contractor's proposed fixed prices. This item had been developed in the contractor's laboratory and had never been built in production quantities. The contractor's proposal of estimated costs included amortization of tooling over total future military and civilian production. The contractor's estimates presumed the ability to incorporate the laboratory development techniques into his production facility with little difficulty. In light of his fixed-price proposal, the closeness of his cost estimates and the inherent difficulty involved with the first production run, the maximum assumption of contract cost risk was felt to be present.

4. Performance. This contractor has repeatedly demonstrated his technical competence and cost effectiveness. Although his sales are predominantly commercial, he has cooperated with Department of Defense policies and has maintained an excellent record of on-time delivery of quality products.

5. Selected factors. This contractor requires no Government facilities or financing. This contractor is primarily a commercial

producer of hearing aid devices. The particular product involved in this contract has extensive commercial possibilities in this field. Since it is a significant advancement, the contractor has desired to obtain a competitive edge by being the first to introduce it into the commercial market. Because of its significant military uses, the Government has requested that the total initial production be for military use. The contractor has complied and is sacrificing some of his commercial potential to meet this military requirement. The contracting officer has therefore assigned a 2 percent weight for this special request.

6. Special consideration. The mix of this contractor's business is approximately 70 percent commercial and 30 percent military. The contractor maintains his own basic re

search group. This group is primarily devoted towards developing commercial products, but maintains a knowledge of defense requirements in its area of operation. The group recognized that the development of a more sophisticated sound measuring device would have significant military applications as well as being useful in the commercial hearing aid business. In the

1. Contract type. The proposed contract calls for the delivery of 200 units of a complex missile system, utilizing a fixed price incentive type contract with a firm target price, and a ceiling price 5 percent above. Contractors proposed a 50-50 incentive formula on cost, plus performance and delivery incentives.

2. Profit objective. In establishing his profit objective, the contracting officer determined that the relative weights and profit dollars should be assigned to the specific factors on the following basis:

a. Contractor's input to total performance. (1) Raw Materials-$3,000,000. Analysis revealed that this amount represented approximately 100 orders for standard sizes of aluminum, steel, and other readily available materials which would be purchased on the basis of competitive or catalog prices. The contracting officer reasoned that the procurement of these materials represented a below-normal effort, justifying a profit weight below the median for this factor, and assigned a profit weight of 2 percent. (2) Purchased Parts-$5,000,000. curement of these parts will involve approximately 3,000 purchase orders, 90 percent of which will be purchased on the basis of competitive or catalog prices, and the remaining 10 percent will be negotiated on a cost analysis basis. The parts were purchased to existing industry and military standards and the contractor's contribution was primarily related to selection of vendors and purchasing administration. The contracting officer assigned a weight of 3 percent.

Pro

(3) Subcontracted Items-$28,000,000. The contracting officer's analysis indicated that the subcontracting program involved subcontracts of varying complexity to which he assigned the following profit weights:

Totals.

Composite weight..

(4) Engineering Labor-$1,500,000. Manufacturing Labor-$9,000,000. In his analysis of engineering and manufacturing

labor, the contracting officer assigned the following relative weights to the various categories of competence and responsibility