The Code of Federal Regulations of the United States of America

purposes. For example, a "billing rate" could be used where the use of a "provisional overhead rate" is not appropriate or desirable, or where such a rate has not yet been negotiated (see § 1-3.703(b)), and pending final settlement of the actual allowable overhead. A "billing rate" is not negotiated and is not incorporated into a contract. It gives the contracting officer a procedure which is more easily administered and provides him with greater flexibility (than would a "provisional overhead rate") for prompt adjustment to meet new or changed circumstances during the rate period.

(c) The term "provisional overhead rate" (or "provisional rate") means a tentative percentage or dollar factor mutually agreed upon by the contracting officer and the contractor. It is negotiated for interim reimbursement pending final settlement of the actual allowable overhead (see § 1-3.703(b)). Such rate shall be incorporated in the contract and changed, if necessary, by contract amendment.

(d) The term "negotiated final overhead rate" means a percentage or dollar factor which expresses the ratio(s) mutually agreed upon by the contracting officer and the contractor after the close of the contractor's fiscal year, unless the parties mutually agree to a different period, of allowable indirect expense incurred in the completed period to direct labor, manufacturing cost, cost of sales, or other appropriate allocation or distribution base of the same period (see §§ 1-15.203 and 1-15.305-2 of this chapter). Ordinarily, such rates are used as a means of determining the amount of reimbursement for the applicable indirect costs for such completed period; in such cases, they are termed "postdetermined" overhead rates. In certain circumstances involving educational institutions, negotiated final overhead rates may be used as a means of determining the amount of reimbursement for the applicable indirect costs to be incurred during a future period of contract performance; in such cases, they are termed "predetermined" overhead rates (see § 1-3.703 (c)).

(e) The term "contracting officer" includes the authorized representative of a contracting officer.

head rates may be used (see § 1-3.703 (c)), ordinarily the negotiation, determination, or settlement of the reimbursable amount of overhead under costreimbursement type contracts is accomplished after the fact on an individual contract basis and is based upon an audit of actual costs incurred during the period involved, in accordance with agency procedures (see § 1-3.705 (c)). However, where a contractor performs work in the same period under several contracts for one or more procurement activities or agencies, it may be desirable and appropriate, when mutually agreed to by the agencies and the contractor, to negotiate uniform overhead rates for application to all such contracts, in order to: (a) Effect uniformity of approach, (b) effect economy in administrative effort, and (c) promote timely settlement of reimbursement claims. The foregoing objectives are not intended to preclude the use of an overhead rate which excludes elements of cost which are not allocable to a particular contract. (See, for example, §§ 1-3.807-11 and 1-15.307-1 of this chapter.) The basis or justification for the latter shall be contained in the contract file (see § 1-3.706).

§ 1-3.703 Applicability.

(a) Billing overhead rates (see § 1-3.701(b)) or negotiated (provisional and final) overhead rates (see § 1-3.701 (c) and (d) may be used in any costreimbursement type contract (except facilities contracts) where such use, pursuant to the guidelines of this Subpart 1-3.7, is appropriate; where the use of negotiated rates will accomplish one or more of the purposes enumerated in § 1-3.702; or where the use of either billing or negotiated rates will be otherwise advantageous to the Government. (See paragraph (c) of this section with respect to predetermined fixed overhead rates with educational institutions.)

(b) Billing or provisional overhead rates should be used for interim reimbursement only after the contracting officer is satisfied either on the basis of a recent review or as a result of previous audits or past experience with the particular contractor, or similar reliable data or experience obtained from another Government agency and included in the contract file. that the contractor's accounting system (including items treated as indirect cost and the method of distributing them) conforms to generally

accepted accounting principles; also, that its financial management policies and procedures, including contract financial controls, are adequate for the timely reporting of potential cost overruns and underruns to the contractor's management and subsequently to the Government. Compliance with these criteria is essential in order to avoid the recovery of cost overruns by contractors. If consistent with the foregoing guidelines, a billing or provisional overhead rate or rates may be established, taking into consideration the prior year's experience, adjusted to eliminate nonrecurring costs and to reflect any new or changed conditions which may be applicable to the future. Such rate or rates shall be applied to an appropriate base or bases for computation of the interim payments. The elements of indirect cost and the base or bases used in computing interim payments shall not be construed as indicating the elements of expense to be distributed or the base or bases of distribution to be employed in the determination or settlement of actual allowable overhead. The actual allowable overhead shall be determined or settled not less often than annually and any interim payments made shall be adjusted accordingly.

(c) Predetermined overhead rates may be used in cost-type research and development contracts with educational institutions (Public Law 87-638; 10 U.S.C. 2306 note). The use of such rates is permissive and not mandatory. In determining whether or not predetermined overhead rates should be used in one or more contracts with an institution, consideration should be given to the degree of stability shown in overhead rates and their bases over a period of years. All anticipated changes in the contractor's volume and overhead shall be taken into consideration. In addition the following procedures shall be employed:

(1) When predetermined overhead rates are proposed for the initial period of contract performance and no such rates have been established for the contractor's current fiscal year (or other appropriate period), the contractor shall provide the contracting officer with (i) a proposal for predetermined overhead rates to be applied until the end of such fiscal year or other period, and (ii) complete data on overhead for such preceding fiscal years (or other periods) as the contracting officer may require, includ

ing overhead rates, bases, and supporting cost data. As far as practicable, the contractor's proposal for the initial period, with supporting current cost data, shall be based on the contractor's cost experience under similar contracts. Pending mutual agreement on predetermined overhead rates for the initial period, the contractor shall be reimbursed at billing rates acceptable to the contracting officer, subject to appropriate adjustment when the final rates for that period are established. When mutual agreement is reached, the predetermined rates and the applicable bases and period shall be specified in the contract.

(2) Pursuant to the contract clause in § 1-3.704-2(b), the contractor, as soon as possible, but not later than three (3) months after the expiration of each fiscal year, shall submit to the contracting officer a proposed predetermined overhead rate or rates for use during the contract year based on the contractor's actual cost experience during the immediately preceding fiscal year, together with supporting cost data.

overhead rates

(3) Predetermined shall be applicable for a period of not more than 1 year, and should generally be based on an audit of the institution's costs for the year immediately preceding the year in which the rate is being negotiated. If this is not possible, an earlier audit may be used, but appropriate steps should be taken to identify and evaluate significant variations in costs incurred or bases used which may have a bearing on the reasonableness of the rate proposed by the contractor. Audits by other Government agencies may be utilized. In the case of smaller contracts (e.g., $100,000 or less), an audit made at an earlier date is acceptable provided (i) there have been no significant changes in the contractor's organization, and (ii) it is reasonably apparent that another audit would have little effect on the rate finally agreed upon.

(4) The use of predetermined overhead rates shall be approved at a level above the contracting officer, in accordance with agency procedures, with respect to any of the following:

(i) Where estimated reimbursable costs for the contract are expected to exceed $1 million annually;

(ii) Where there has been no recent audit of the overhead; or

(iii) Where there have been frequent or wide fluctuations in overhead rates and their bases over a period of years.

§ 1-3.704

Contract clauses.

§ 1-3.704-1 Contracts with

concerns

other than educational institutions. Insert the following clause in contracts with concerns other than educational institutions where negotiated overhead rates are to be used pursuant to this subpart.

NEGOTIATED OVERHEAD RATES

(a) Notwithstanding the provisions of the clause of this contract entitled "Allowable Cost, Fixed Fee, and Payment," the allowable indirect costs under this contract shall be obtained by applying negotiated overhead rates to bases agreed upon by the parties, as specified below.

(b) The Contractor, as soon as possible but not later than ninety (90) days after the expiration of his fiscal year, or such other period as may be specified in the contract, shall submit to the Contracting Officer, with a copy to the cognizant audit activity, a proposed final overhead rate or rates for that period based on the Contractor's actual cost experience during that period, together with supporting cost data. Negotiation of overhead rates by the Contractor and the Contracting Officer shall be undertaken as promptly as practicable after receipt of the Contractor's proposal.

as in effect on the date of this contract.

(d) The results of each negotiation shall be set forth in a modification to this contract, which shall specify (1) the agreed final rates, (2) the bases to which the rates apply, and (3) the periods for which the rates apply.

(e) Pending establishment of final overhead rates for any period, the Contractor shall be reimbursed either at negotiated provisional rates as provided in the contract, or at billing rates acceptable to the Contracting Officer, subject to appropriate adjustment when the final rates for that period are established. To prevent substantial over or under payment, and to apply either retroactively or prospectively: (1) Provisional rates may, at the request of either party, be revised by mutual agreement and (2) billing rates may be adjusted at any time by the Contracting Officer. Any such revision of negotiated provisional rates provided in the

1 The contracting agency may substitute the title of its own parallel clause when the title is other than "Allowable Cost, Fixed Fee, and Payment."

2 In paragraph (c), insert the reference which is appropriate to the agency: Subpart 1-15.2 of the Federal Procurment Regulations (41 CFR 1-15.2), or the corresponding agency regulations, or both; or to an "Allowable Cost" clause in the contract, which lists allowable and unallowable costs.

36-088-70--10

(a) Insert the following clause in contracts with educational institutions rates where postdetermined overhead (see § 1-3.701(d) are to be used pursuant to this subpart.

NEGOTIATED OVERHEAD RATES-POSTDETERMINED

(a) Notwithstanding the provisions of the clause of this contract entitled "Allowable Cost and Payment," the allowable indirect costs under this contract shall be obtained by applying negotiated overhead rates to bases agreed upon by the parties, as specified below.

(b) The Contractor, as soon as possible but not later than six (6) months after the close of his fiscal year, or such other period as may be specified in the contract, shall submit to the Contracting Officer, with a copy to the cognizant audit activity, a proposed final overhead rate or rates for that period based on the Contractor's actual cost experience during that period, together with supporting cost data. Negotiation of final overhead rates by the Contractor and the Contracting Officer shall be undertaken as promptly as practicable after receipt of the Contractor's proposal.

(c) Allowability of costs and acceptability of cost allocation methods shall be determined in accordance with Subpart 1-15.3 of the Federal Procurement Regulations (41 CFR 1-15.3), as in effect on the date of this contract.

(e) Pending establishment of final overhead rates for any period, the Contractor shall be reimbursed either at negotiated provisional rates as provided in the contract, or at billing rates acceptable to the Contracting Officer, subject to appropriate adjustment when the final rates for that period are established. Το prevent substantial over or under payment, and to apply either retroactively or prospectively: (1) Provisional rates may, at the request of either party, be revised by mutual agreement, and (2) billing rates may be adjusted at any time

3 The contracting agency may substitute the title of its own parallel clause when the title is other than "Allowable Cost and Payment."

by the Contracting Officer. Any such revision of negotiated provisional rates specified in the contract shall be set forth in a modification to this contract.

(f) Any failure by the parties to agree on any final rate of rates under this clause shall be considered a dispute concerning a question of fact for decision by the Contracting Officer within the meaning of the "Disputes" clause of this contract.

(b) Provision may be made in costreimbursement type research and development contracts with educational institutions for payment of reimbursable indirect costs on the basis of predetermined overhead rates (see § 1-3.703 (c)). To the extent appropriate and applicable, this basis may be used with respect to all contracts entered into by an agency with such an institution. Insert the following clause in contracts with educational institutions where such negotiated overhead rates are to be used pursuant to this subpart.

NEGOTIATED OVERHEAD RATES-PREDETERMINED

(a) Notwithstanding the provisions of the clause of this contract entitled "Allowable Cost and Payment," the allowable indirect costs under this contract shall be obtained by applying predetermined overhead rates to bases agreed upon by the parties, as specified below.

(b) The Contractor, as soon as possible but not later than three (3) months after the close of his fiscal year, or such other period as may be specified in the contract, shall submit to the Contracting Officer, with a copy to the cognizant audit activity, a proposed predetermined overhead rate or rates based on the Contractor's actual cost experience during that period, together with supporting cost data. Negotiation of predetermined overhead rates by the Contractor and the Contracting Officer shall be undertaken as promptly as practicable after receipt of the Contractor's proposal.

(d) The results of each negotiation shall be set forth in a modification to this contract, which shall specify (1) the agreed predetermined overhead rates, (2) the bases to which rates apply, (3) the fiscal year unless the parties agree to a different period for which the rates apply, and (4) the specific items treated as direct costs or any changes

• The contracting agency may substitute the title of its own parallel clause when the title is other than "Allowable Cost and Payment."

in the items previously agreed to be direct

costs.

(e) Pending establishment of predetermined overhead rates for the initial period of contract performance, or for any fiscal year or different period agreed to by the parties, the Contractor shall be reimbursed either at: (1) the rates fixed for the previous fiscal year or other period, or (2) billing rates acceptable to the Contracting Officer, subject to appropriate adjustment when the final rates for that fiscal year or other period are established.

(f) Any failure by the parties to agree on any predetermined overhead rate or rates under this clause shall not be considered a dispute concerning a question of fact for decision by the Contracting Officer within the meaning of the "Disputes" clause of this contract. If for any fiscal year or other period of contract performance the parties fail to agree to a predetermined overhead rate or rates, it is agreed that the allowable indirect costs under this contract shall be obtained by applying negotiated final overhead rates in accordance with the terms of the "Negotiated Overhead Rates-Postdetermined" clause set forth in § 1-3.704-2(a) of the Federal Procurement Regulations (41 CFR 1-3.704-2(a)), as in effect on the date of this contract.

(a) The procedure for the establishment of overhead rates generally consists of a review of the contractor's overhead rate proposal and the related advisory audit report, conduct of a negotiation conference, preparation of a negotiation report or summary, and execution of contract amendments or supplemental agreements.

(b) When only one procuring activity of an agency is concerned, the contractor's proposal shall be submitted to the contracting officer, with a copy to the cognizant audit activity. Where coordinated negotiations described under § 1-3.706 are involved, the contractor's overhead rate proposals may be submitted to the negotiating activity of the agency sponsoring the negotiation, with a copy to the cognizant audit activity.

(c) The decision to audit or not to audit, and the extent of the audit, involves the exercise of judgment based upon a number of considerations, such

as the significance of the amount involved, the dollar volume of Government contracts held by the contractor, previous experience, and the apparent reasonableness of the overhead data furnished by the contractor (see 35 Comp. Gen. 434-436). The determination as to the necessity and extent of an advisory audit report, and the extent of the use of such a report, is solely the responsibility of the contracting officer in accordance with agency procedures. Unless advised to the contrary by the contracting officer, the cognizant audit activity should provide him with an advisory audit report. Such report should set forth the findings of the audit activity, including the results of discussions of such findings with the contractor. The audit or accounting review shall be governed by the contract cost principles which are applicable to the contract.

(d) To the extent appropriate, particularly when there is a significant difference of opinion between the audit activity and the contractor concerning such matters as the allowability, reasonableness, necessity or allocability of certain indirect costs, the acceptability of the bases used in developing the overhead rates, the specific items to be treated as direct cost, or other matters, the contracting officer, before the negotiation conference with the contractor, shall:

(1) Solicit the comments and recommendations of other Government procurement activities or agencies (doing business with the same contractor) as to: (i) The proposals made by the contractor; and (ii) the related advisory auidt report;

(2) Obtain the advisory comment and analyses of appropriate legal pricing, audit, and technical personnel as to the rate or rates of overhead, application of cost principles, treatment of particular items of cost, and other pertinent issues; and

(3) Develop the position of the procurement agency in coordination with other interested procuring activities (if any) of that agency. Failure of those procuring activities to agree as to the agency position shall be resolved in accordance with agency procedures.

(e) Generally, the negotiation conference should be conducted by a contracting officer of the sponsoring activity (see § 1-3.706). He shall arrange for appropriate legal, pricing, technical, or other

specialist personnel of his agency to assist him in the preparation for and conduct of the negotiation conference. The audit activity also should be requested to render appropriate assistance and to participate in the negotiation conference. The negotiation shall be governed by the contract cost principles which are applicable to the contract. In the event provisional overhead rates were utilized to effect a termination settlement (see § 1-8.404-4 of this chapter), that fact will not be considered a precedent when negotiating final rates.

(f) At the completion of the negotiation, the contracting officer shall, as promptly as practicable, prepare, and distribute to all interested Government agencies (see § 1-706, a report or summary to become a part of the contract file, to record the results of the negotiation setting forth information such as the following, to the extent appropriate and applicable:

(1) The name, position, and organization of conferees representing the contractor and the Government;

(2) The purpose of the negotiation;

(3) A summary of the contractor's overhead rate proposal and the pertinent advisory audit report recommendations;

(4) The various overhead rates, and related bases and periods resulting from the negotiation (see § § 1-15.203 and 1– 15.305 of this chapter);

(5) A discussion of the treatment given to cost items requiring specific consideration, including advance understandings (see § 1-15.107 of this chapter), special contract provisions or limitations, and cost-sharing arrangements (see this § 1-3.707); also, where applicable, similar data on the special treatment of cost items agreed upon for the succeeding period;

(6) The specific items treated as direct cost;

(7) The reasons for variation (if any) from the recommendations of the advisory audit report;

(8) A list of the contracts affected by the negotiation, showing identification number and the estimated total dollar value, or a statement that such information is provided in the advisory audit report:

(9) A specific comment as to the percentage (or dollar factor) and amounts allowed for costs of the contractor's independent research and development programs and the effect of such allowance on rates and total amounts of the

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