(3) In any other case where the writing of numerous purchase orders can be avoided through the use of this procedure.

(b) Blanket purchase arrangements should be made with local firms from whom numerous individual purchases will likely be made in a given period. For example, where past experience has shown that certain commercial firms selling supplies in a local area are dependable and consistently lower in price than other supply firms in the area dealing in the same commodities, and numerous small purchases are usually made from such suppliers, it would be advantageous to establish blanket purchase arrangements with these firms.

(c) There is no prohibition against making these arrangements with several suppliers for the same class or classes of items. Where experience indicates that prices vary between suppliers, it is preferable to have several blanket purchase arrangements that delivery orders can be placed with the firm offering the best price.

§ 1-3.606-3 Establishment of account.

SO

If it is determined that blanket purchase arrangements with certain suppliers would be advantageous, such suppliers should be contacted, preferably in person or through correspondence, in order to make the necessary arrangements with respect to securing maximum discounts, documenting the individual purchase transactions, periodic billing, and other necessary details.

§ 1-3.606-4 Documentation.

(a) Any documentation that assures the following with respect to individual purchase transactions is permissible:

(1) That the vendor and purchaser are in agreement as to what is being purchased.

(2) That at the time of delivery a record of sale and receipt is created.

(3) That at the time of billing for payment the foregoing requirements have provided evidence of the items, quantity, price, date sold and other relevant data.

(b) The issuance of a formal purchase order to document blanket purchase arrangements may be necessary only in certain instances. Such instances may be: When required by the vendor for administrative or tax exemption purposes; when administratively deemed necessary in the best interests of the Government by an agency; or when it is necessary to fix the extent of items covered, quantity, prices, expenditure authorized, activities participating, or otherwise identify or isolate areas of the arrangement. The issuance of a purchase order for Government purchasing or accounting reasons alone is not necessary.

(1) Purchase orders establishing blanket purchase arrangements, when required, may be general and broad in language with only sufficient detail to indicate the general nature of supplies or services to be covered, and may or may not, as the need dictates, be specific as to quantity, quality, specifications, or time limitation. The blanket purchase orders may be issued on any authorized purchase order form. Individual blanket purchase orders terminate when the purchases thereunder total the dollar amount limitation or when the stated time period expires.

(2) In any contemplated amendment of a blanket purchase order, due consideration should be given to possible changes in market conditions, sources of supply, etc., which may warrant placing a new order with the same or a different source in preference to amendment.

§ 1-3.606-5 Agency implementation.

The following general instructions are set forth for agency use in the issuance of administrative regulations impementing this policy:

(a) The vendor-agency relationship is that of an open account limited only by the maximum amount and time period limitations fixed by that agency.

(b) The vendor-agency arrangement may be limited to furnishing individual items, or commodity groups or classes, or it may be unlimited for all items or services that the source of supply is in a position to furnish.

(c) The requirements of one or more activities, offices, or projects in a geographical area may be secured by this means.

(d) Authority and responsibility for effecting blanket purchase arrangements should be delegated by agencies to the lowest agency level to which the responsibility is placed or assigned for providing supplies for its own operations or to other offices, installations, projects, or functions. Such levels may be organized supply points, separate independent or detached field parties, or one-man posts or activities.

(e) The use of blanket purchase arrangements does not exempt the agency from responsibility for keeping obligations and expenditures within available funds, but this should be accomplished by the use of simplified methods and by avoiding formal fiscal recordation of individual deliveries and transactions under blanket purchase arrangements.

(f) The use of a blanket purchase arrangement does not authorize purchases not otherwise authorized by law or regulation. For example, the blanket purchase arrangement, being a method of simplifying the making of individual small purchases, shall not be used to avoid the $10,000 limitation. (g) The blanket purchase arrangement method is primarily designed to reduce the amount of documentation in connection with small purchases. The same policies as to selection of suppliers on the basis of price, time discounts, quality of merchandise, and responsibility of suppliers pertain to blanket purchase arrangements and purchases thereunder as to purchases made by other approved methods. Individual purchases under blanket purchase arrangements should be made only after making price comparisons with other sources available to the extent practicable, consistent with the size and nature of the purchase involved.

(h) Constant consideration should be given to possible changes in market conditions, sources of supply, and other pertinent factors which may warrant making new arrangements with different dealers or vendors, or modifying existing arrangements.

(i) Individual purchases under blanket purchase arrangements shall not be in excess of $5,000.

[29 FR 10155, July 24, 1964 as amended at 39 FR 28438, Aug. 7, 1974; 40 FR 44139, Sept. 25, 1975]

§ 1-3.607 Interagency use of local term contracts.

(a) General. This § 1-3.607 provides for the cooperative use by the field office of one executive agency of the local term contracts of another agency, or of another office of the same agency, under the circumstances outlined, and establishes criteria for local term contracting by an agency for the combined needs of several agency offices in the area. These contracts provide a means of meeting the local requirements for supplies and services not available from normal agency internal supply channels or other prescribed sources of supply. All Federal agencies are urged to participate in this program.

(b) General conditions warranting use. The use of term contracts usually will be found expedient and economical under any or all of the following conditions:

(1) When the day-to-day requirements for the supply or service are continuing or recurring.

(2) When the probable total requirements only are known and it is expedient and economical to have a source of supply and price determined in advance of the individual instances of actual need.

(3) When this method best meets the needs for providing ordering offices with ready sources of supply.

(c) Use of existing contracts. In lieu of entering into a separate contract for an item covered by a local term contract of another office or agency, use of the term contract should be considered under any one of the following circumstances, if such use is approved by the contracting office and if the contract permits (or is amended to permit) such use:

(1) When such use will obviate the administrative expense and time delay incident to making a separate contract.

(2) When there is a price advantage to be gained, freight and other costs considered.

(3) When the requiring office has local purchasing authority but is not staffed or authorized to execute contracts.

(d) Multiple use contracts. In furtherance of the economical and other advantages to be gained from cross utilization of local term contracts, wherever possible the requirements of several offices in the same community should be combined and included in a single contract:

(1) When there is a local repetitive need for a particular article or service by the individual agencies;

(2) When an advantage accrues to requiring offices or activities through establishment of such contracts; and

(3) When it is expedient and practical for a single office to perform the contracting function for other offices, delivery or performance under the contract being arranged for by the participating offices as required.

(e) Selection of contracting agency. The following criteria usually will determine which of the agency offices in any given area having a common need for a given article or service should assume the responsibility for contracting for the requirements of the group in addition to its own needs:

(1) Current or potential preponderant use or consumption.

(2) Actual or potential qualifications and experience of contracting personnel, with due regard to adequacy of staff.

(3) Physical location of the contracting office in relation to market area serving the agencies.

(4) Consideration of the bid prices consistently received for a given article or service by individual contracting offices.

(f) Responsibilities of contracting office and participating offices. The responsibilities of the contracting agency and of the other participating offices with respect to common local term contracts, except where other arrangements have been made, normally will be:

(1) Contracting office. (i) Arranging with participating offices for submission of estimated requirements.

(ii) Soliciting and analyzing bids and awarding and executing contracts.

(iii) Exercising general contract administration, except followup and expediting.

(iv) Making available to the participating office such contract data as is required for placing orders, payment of invoices, etc.

(2) Other participating offices. (i) Placing of orders directly with contractor.

(ii) Arranging for inspection and acceptance.

(iii) Arranging for billing and paying the contractor.

Subpart 1-3.7-Negotiated Overhead Rates

SOURCE: Subpart 1-3.7 appears at 31 FR 15805, Dec. 15, 1966, unless otherwise noted. § 1-3.700 Scope of subpart.

This subpart sets forth the policies and procedures governing the establishment of overhead rates by negotiation (including determination or settlement) for use in cost-reimbursement type contracts.

§ 1-3.701 Definitions.

As used in this subpart:

(a) The term "overhead (indirect costs)" includes, but is not limited to, the general groups of indirect expenses such as those generated in manufacturing departments, engineering departments, tooling departments, general and administrative departments, and, if applicable, indirect costs accumulated by cost centers within those general groups (see § 1-15.203 of this chapter). In the case of contractors using fund accounting systems (e.g., educational institutions), the term includes, but is not limited to, the general groups of expenses such as: general administration and general; operation and maintenance of physical plant; library; and departmental administration (see §§ 1-15.305 and 115.306 of this chapter).

(b) The term "billing overhead rate" (or "billing rate") means a tentative

percentage or dollar factor which is acceptable to the contracting officer and is established for interim reimbursement 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 §§ 115.203 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.

§ 1-3.702 General.

Except for contracts with educational institutions where predetermined overhead rates may be used (see § 13.703(c)), ordinarily the negotiation, determination, or settlement of the reimbursable amount of overhead under cost-reimbursement 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 § 13.705(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, §§ 1-3.80711 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 § 13.701(b)) or negotiated (provisional and final) overhead rates (see § 1-3.701 (c) and (d)) may be used in any cost-reimbursement 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, including 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.

(3) Predetermined overhead rates 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 possi