status of the negotiation is such that a report would serve a useful purpose. The original of all technical reports received by the auditor shall be made a part of the audit report.

(7) The audit report, giving the financial effect of related technical and other evaluations, shall be forwarded by the auditor to the contracting officer. If any information disclosed subsequent to the receipt of the audit report is such as to significantly affect the audit findings, the contracting officer should promptly advise the auditor, who shall determine whether to issue a supplemental report.

(8) Information generated through sources other than the contractor's records may be available to the contracting officer which may affect the Government's negotiating position. The auditor shall not disclose to the contractor his conclusions and recominendations to the contracting officer on the contractor's proposal. No portion of the advisory audit report shall be furnished to the contractor without the concurrence of the contracting officer. The auditor shall not disclose to the contractor the results of technical analysis and similar information that would prejudice the Government's negotiating position. The above limitations are not intended to preclude disclosure of discrepancies or mistakes of fact such as duplications, omissions, and errors in computations, contained in the contractor's cost or pricing data supporting the proposal.

(9) If, in the opinion of the contracting officer, or auditor, the review of a prime contractor's proposal requires audit reviews of subcontractors' cost estimates at the subcontractors' plants (after due consideration of reviews performed by the prime contractor), such reviews should be arranged through audit channels. Criteria as to necessity for audit of subcontracts shall be in accordance with guidelines applicable to prime contracts. Where technical reviews are needed they shall be arranged through the contracting officer.

(10) The audit report shall be made a part of the official contract file.

(c) Additional function of the contract auditor. (1) Under cost-reim

bursement type contracts, the cost-reimbursement portion of fixed-price contracts, letter contracts which provide for reimbursement of costs, time and materials contracts, and laborhour (negotiated or formally advertised) contracts:

(i) The auditor shall conduct periodic audits of contractors as is warranted by the financial condition, integrity, reliability of the contractor, prior audit experience, adequacy of the accounting system, and the amount of unaudited claims. Advisory audit reports shall be prepared by the auditor at such times when the report is needed or desirable, and (where possible) should be rendered no less frequently than once yearly. When the circumstances warrant, arrangements may be made for the contract auditor to examine contractor's reimbursement vouchers or invoices, and transmit those approved for payment to the cognizant contracting or disbursing officer. If the contract auditor questions costs or considers them unallowable, he shall provide the contracting officer with reasons and justification therefor. The contracting officer, if he agrees with the contract auditor, shall promptly notify the contractor in writing of the costs questioned and suspended, or disapproved. In the case of costs disapproved (including disapproval of costs previously questioned and suspended, where the difference cannot be resolved), the written notice to the contractor shall include a complete statement, as prescribed by agency procedures or regulations, to the effect that the notice constitutes a final decision of the contracting officer, the effective date of such decision, the contractor's right to appeal therefrom, and the specific procedure to be followed if the contractor decides to make such an appeal.

(ii) The contract auditor shall be responsible for performing audits of contracts in which pricing or payment is based upon cost or other financial information furnished by the contractor, when such audit is required or considered desirable.

(iii) The contract auditor shall be responsible for making appropriate recommendations to the contracting offi

cer concerning the establishment of overhead rates (billing, provisional, or predetermined), when such rates are provided for in the contract (see Subpart 1-3.7, Negotiated Overhead Rates).

(2) Preaward surveys (see § 1-1.3109) of potential contractor's competence to perform proposed contracts shall be arranged by the contracting officer. Where information is required on the adequacy of the contractor's accounting system or its suitability for administration of the proposed type of contract, such information shall always be obtained by the contracting officer from the auditor (see § 1-3.8013(b)(3)). The contracting officer shall be responsible for compliance with the agency's implementing policies and procedures concerning the contractor's financial competence or credit needs (see also § 1-1.310).

(3)(i) The establishment, maintenance, and consistent use of formal cost estimating systems by contractors is to the mutual benefit of the Government and industry, particularly where a large portion of the contractor's business is Government work and there are a number of significant proposals requiring review. Procuring activities should encourage contractors to formalize and follow good estimating procedures. It is recognized that estimating procedures will vary among contractors, and may vary between plants or divisions of a contractor due to differences in products, size and methods of operations, production vs. research, and other factors. While formal systems do not eliminate the need for judgmental factors to be applied by contractors in developing cost proposals, they do provide a sound foundation for the systematic and orderly application of these judgment factors to specific proposals. The consistent preparation of proposals in accordance with an acceptable estimating system is of material benefit in ensuring both the contractor and the Government that proposals are realistically and reasonably priced, that the § 1-3.807-3 requirements for utilizing current, accurate, and complete cost and pricing data in developing the proposal are met, and that underestimat

ing and overestimating of contract costs are minimized. Some of the advantages of sound estimating procedures are: a greater degree of confidence can normally be placed in the accuracy and reliability of contractors' individual proposals; it expedites the negotiation process; it reduces the amount of detailed explanation of estimating processes on each individual proposal; and, as in the case of the well established practice regarding acceptable accounting systems, reduces the scope of reviews performed by audit and other technical and procurement personnel.

(ii) When an audit is performed pursuant to § 1-3.809(b)(1), the contract auditor shall determine whether the contractor's estimating systems or methods are acceptable to the Government. Among the matters to be considered in determining the acceptability of the estimating systems or methods are the following:

(A) Responsibilities within the contractor's organization for originating, reviewing, and approving estimates;

(B) Procedures followed in developing estimates for each of the direct and indirect elements of cost;

(C) The source of data used in developing the estimates and in ensuring that such data are current, complete, and accurate;

(D) The documentation developed and maintained by the contractor to support the estimate;

(E) Management support of the program review including approval of the estimate, controls established to ensure consistent compliance with estimating procedures; and personnel training and evaluation programs; and

(F) The extent of coordination and communication between the various elements of the contractor's organization responsible for the estimate.

(iii) If the contractor's estimating systems or methods are not acceptable to the Government, the contracting officer shall determine whether an estimating system survey should be undertaken as a team effort (including the contract auditor and other qualified technical specialists) after consideration of criteria such as:

(A) The significance (including estimated cost or price) of all present and estimated future Government procurements, provided, that if only a onetime procurement is involved, other appropriate methods may be used to establish the reliability and reasonableness of the contractor's cost or pricing data;

(B) The benefits which might accrue to the Government in view of the cost of the survey; and

(C) The findings and corrective actions taken in connection with previous estimating surveys, if any.

(iv) A copy of the survey report, together with a copy of the official notice of corrective action (see § 13.801-3(b)(3)) required, shall be furnished to each agency procuring activity having business with that contractor, and (upon request) to other procurement agencies. Any significant deficiencies in the system not corrected by the contractor shall also be considered in subsequent proposal reviews, and by contracting officers in negotiating with, and in determining the reasonableness of prices proposed by, that contractor. Where these deficiencies continue to exist and where they have adverse effect on prices, the problem should be brought to the attention of procurement officials at a level necessary to bring about corrective action.

(4) In accordance with Subpart 13.12, Cost Accounting Standards, and Part 1-15, Contract Cost Principles and Procedures, the cognizant contract auditor shall be responsible for making recommendations to the contracting officer as to whether:

(i) A contractor's disclosure statement (see § 1-3.1203(a)), submitted as a condition of contracting, adequately describes the actual or proposed cost accounting practices as required by Public Law 91-379, 50 U.S.C. App. 2168, as implemented by the Cost Accounting Standards Board;

(ii) A contractor's disclosed cost accounting practices are in compliance with Part 1-15 and applicable Cost Accounting Standards;

(iii) A contractor's or subcontractor's failure to comply with applicable Cost Accounting Standards or to follow

consistently his disclosed cost accounting practices has resulted or may result in any increased cost paid by the Government; and

(iv) A contractor's or subcontractor's proposed price changes, submitted as a result of changes made to previously disclosed or established cost accounting practices, are fair and reasonable. [34 FR 2662, Feb. 27, 1969, as amended at 37 FR 13092, July 1, 1972; 39 FR 43058, Dec. 10, 1974; 43 FR 11987, Mar. 23, 1978)

§ 1-3.810 Exchange of information.

In appropriate cases it is desirable to exchange and coordinate specialized information regarding a contractor between procurement activities or agencies, since it will provide uniformity of treatment of major issues (see, for example, §§ 1-3.705 and 1-3.706).

[34 FR 2664, Feb. 27, 1969]

§ 1-3.811 Record of price negotiation.

(a) At the conclusion of each negotiation of an initial, revised, or final price, the contracting officer shall prepare a memorandum setting forth the principal elements of the price negotiation, for inclusion in the contract file and for the use of any reviewing authorities. The memorandum shall include the following information, to the extent applicable:

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

(2) The purpose of the negotiation; (3) If cost or pricing data was required to be submitted and certified pursuant to §§ 1-3.807-3 and 1-3.807-4, respectively, the memorandum shall reflect the extent to which the contracting officer:

(i) Did not rely on the factual cost or pricing data submitted and did not use such data in negotiating the price; and

(ii) Recognized in the negotiation that any cost or pricing data submitted by the contractor was inaccurate, incomplete, or noncurrent; the action taken by the contracting officer and the contractor as a result; and the effect, if any, of such defective data on the price negotiated.

(4) If cost or pricing data was not required in the case of any price negotiation in excess of $100,000, the memo

randum shall include a statement of the basis for determining that (i) the price resulted from or was based on adequate price competition, established catalog or market prices of commercial items sold in substantial quantities to the general public, or prices set by law or regulation (see § 1-3.8071), or (ii) information already available is adequate for the proposed procurement (see § 1-3.809(b)(1)(i));

(5) A summary of the contractor's proposal, the pertinent advisory audit report recommendations, and the reasons for variation (if any) from such recommendations;

(6) The most significant facts or considerations controlling the establishment of the initial, revised, or final price; and

(7) Appropriate explanation (in fixed-price type contracts) where the total price negotiated differs significantly from the total price objective.

(b) Whenever an audit review has been made pursuant to § 1-3.809, the contracting officer shall forward a copy of the record of negotiation to the cognizant contract audit office, for use by that office and the auditor to improve the usefulness of the audit work and related reports to negotiation officials. Where appropriate, the negotiation memorandum should include (or be supplemented by) information on how the contract audit advisory services can be made more effective in future negotiations with this (or other) contractor(s).

[34 FR 2664, Feb. 27, 1969]

§ 1-3.812 Disposition of postaward audits. An auditor's advisory report of postaward reviews of cost or pricing data may result either from a specific request of a contracting officer (see § 1-3.807-5(c)) or from audit action initiated independent of a contracting officer's request. The contracting officer shall prepare a memorandum on each audit report indicating (a) whether defective data was submitted and relied upon (see § 1-3.811), and (b) the results of any contract action taken. A copy of the memorandum shall be forwarded to the auditor issuing the report.

[34 FR 2664, Feb. 27, 1969]

§ 1-3.813 Preproduction and startup and other nonrecurring costs.

(a) Estimates of preproduction and startup costs include such costs as preproduction engineering, special tooling, special plant rearrangement, training programs, and such nonrecurring costs as initial rework, initial spoilage, and pilot runs.

(b) Since an offeror may propose a price which does not include all preproduction and startup or other nonrecurring costs for the purpose of obtaining the first production contract and of gaining an advantage over competitors in negotiations for future procurements, it is important to know whether the offeror intends to absorb any portion of these costs or whether he plans to recover them in connection with subsequent pricing actions under the proposed or future contracts. This information is needed in evaluating competing proposals to determine which proposal is most likely to result in the lowest overall cost to the Government, particularly where the successful offeror is likely to become, in effect, a sole source for follow on procurement.

(c) When it is anticipated that such costs will be a significant factor in the evaluation of proposals for the procurement of an item, the request for proposals shall require the offeror to provide the following information:

(1) An estimate of the total of such costs;

(2) The extent to which these costs are included in the proposed price; and

(3) The intent to absorb, or plan for recovery, of any remaining costs. When entering into a contract with an offeror who has indicated that he intends to absorb any portion of these costs, the contract shall expressly provide that such portion will not be charged to the Government in any future noncompetitive procurement or other pricing action.

§ 1-3.814 Contract clauses.

Where any cost or pricing data is required in accordance with § 1-3.807-3, the applicable clauses in §§ 1-3.814-1, 1-3.814-2, and 1-3.814-3 shall be in

cluded in the solicitation and in any resultant contract (see § 1-3.807-3(i)). [39 FR 1754, Jan. 14, 1974]

§ 1-3.814-1 Price reduction for defective cost or pricing data.

(a) Except as provided in § 1-3.8073(b), the following clause shall be included in (1) all negotiated contracts which when entered into exceed $100,000, (2) other negotiated contracts for which, in connection with the initial pricing of the contract, (i) a certificate of cost or pricing data is required in accordance with § 1-3.8073(c), or (ii) partial cost or pricing data is obtained in accordance with § 13.807-3.

PRICE REDUCTION FOR DEFECTIVE COST OR PRICING DATA

If any price, including profit or fee, negotiated in connection with this contract or any cost reimbursable under this contract was increased by any significant sums be

cause:

(a) The Contractor furnished cost or pricing data which was not accurate, complete and current as certified in the Contractor's Certificate of Current Cost or Pricing Data; (b) A subcontractor, pursuant to the clause of this contract entitled "Subcontractor Cost or Pricing Data" or "Subcontractor Cost or Pricing Data-Price Adjustments" or any subcontract clause therein required, furnished cost or pricing data which was not accurate, complete and current as certified in the subcontractor's Certificate of Current Cost or Pricing Data;

(c) A subcontractor or prospective subcontractor furnished cost or pricing data which was required to be accurate, complete and current and to be submitted to support a subcontract cost estimate furnished by the Contractor but which was not accurate, complete and current as of the date certified in the Contractor's Certificate of Current Cost or Pricing Data; or

(d) The Contractor or a subcontractor or prospective subcontractor furnished any data, not within (a), (b) or (c) above, which was not accurate as submitted; the price or cost shall be reduced accordingly and the contract shall be modified in writing as may be necessary to reflect such reduction. However, any reduction in the contract price due to defective subcontract data of a prospective subcontractor when the subcontract was not subsequently awarded to such subcontractor, will be limited to the amount (plus applicable overhead and profit markup) by which the actual subcontract, or actual cost to the Contractor if there was

no subcontract, was less than the prospective subcontract cost estimate submitted by the Contractor: Provided, The actual subcontract price was not affected by defective cost or pricing data.

(NOTE: Since the contract is subject to reduction under this clause by reason of defective cost or pricing data submitted in connection with certain subcontracts, it is expected that the Contractor may wish to include a clause in each such subcontract requiring the subcontractor to appropriately indemnify the Contractor. It is also expected that any subcontractor subject to such indemnification will generally require substantially similar indemnification for defective cost or pricing data required to be submitted by his lower tier subcontractors.)

(b) The following clause shall be included in all contracts, both formally advertised and negotiated, which when entered into exceed $100,000, other than those described in § 1-3.8141(a)(1) and (2) However, the clause need not be included where, in accordance with § 1-3.807-3(b), the requirement for obtaining cost or pricing data has (1) not been applied to a cost contract of the type specified therein, or (2) been waived by the head of the agency. In addition, the clause, with dollar amounts appropriately reduced, shall be included in contracts of this type which do not exceed $100,000 where any cost or pricing data is required in accordance with § 1-3.807-3 in connection with the pricing of contract modifications.

PRICE REDUCTtion for Defective Cost or

PRICING DATA-PRICE ADJUSTMENTS

(a) This clause shall become operative only with respect to any modification of this contract which involves aggregate increases and/or decreases in costs plus applicable profits in excess of $100,000 unless the modification is priced on the basis of adequate price competition, established catalog or market prices of commercial items sold in substantial quantities to the general public, or prices set by law or regulation. The right to price reduction under this clause is limited to defects in data relating to such modification.

(b) If any price, including profit, or fee, negotiated in connection with any price adjustment under this contract was increased by any significant sums because:

(1) The Contractor furnished cost or pricing data which was not accurate, complete and current as certified in the Contractor's Certificate of Current Cost or Pricing Data;