§ 1-3.902-2 Approval of programs.

(a) Proposed "make" items shall not be agreed to when the products or services under consideration:

(1) Are not regularly manufactured or provided by the contractor, and are available-quality, quantity, delivery, and other essential factors considered-from other firms at prices no higher than if the contractor makes or provides the product or service;

(2) Are regularly manufactured or provided by the contractor, and are available-quality, quantity, delivery, and other essential factors considered-from other firms at prices lower than if the contractor makes or provides the product or service; or

Provided, That such items may be agreed to, notwithstanding paragraphs (a) (1) and (2) of this section, if in the opinion of the contracting officer the overall cost of the contract to the Government would be increased if the items were "bought”.

(b) Approval of the contractor's purchasing system shall not constitute approval of the "make-or-buy" program.

§ 1-3.902-3 Contract clause.

The following clause shall be incorporated in all cost-reimbursement, price redetermination, or incentive type contracts as to which a "make-orbuy" program has been agreed upon:

CHANGES TO MAKE-OR-BUY PROGRAM The Contractor agrees to perform this contract in accordance with the "make-orbuy" program attached to this contract, except as hereinafter provided. If the Contractor desires to change the "make-or-buy" program, he shall notify the Contracting Officer in writing of the proposed change reasonably in advance and shall submit justification in sufficient detail to permit evaluation of the proposed change. Changes in the place of performance of work on any "make" item in the "make-or-buy" program are subject to this requirement. With respect to items deferred at the time of negotiation of this contract for later addition to the "make-or-buy" program, the Contractor shall notify the Contracting Officer of each proposed addition at the earliest possible time, together with justification in sufficient detail to permit evaluation. The Contractor shall not, without the written consent of the Contracting Officer, make changes or additions to the program. How

ever, in his discretion, the Contracting Officer may ratify in writing any changes or additions. The "make-or-buy" program attached to this contract shall be deemed to be modified in accordance with the written consent or ratification by the Contracting Officer.

[End of Clause]

§ 1-3.902-4 Administration of program.

(a) On applicable contracts, the cognizant contract administration office will establish a procedure with the contractor to assure timely compliance with the terms of the contract clause. This procedure will include provisions for processing changes to the established "make-or-buy" program and for obtaining “make-or-buy” decisions for items reserved for deferred decisions or unidentified at the time of contract negotiations.

(b) When a "make-or-buy" program is agreed upon with a contractor, or there are changes or additions to a "make-or-buy" program, the consideration given each item on such program will be documented in the contract file. If a contract (including supplemental agreements for new procurement) except one specifically exempted by § 1-3.902-1(b), does not include the Changes to Make-or-Buy Program clause, the contracting officer will document the contract file with a written statement of facts to sustain and make clear the appropriateness of the determination not to include the clause. Such determination will be based on one of the following: (1) the contract is on a firm fixed-price basis; (2) the contract is not exempt but there are no items which can be identified as requiring a "make-or-buy" program as defined in § 1-3.902-1(a); or (3) a deviation has been approved.

§ 1-3.903 Review and approval of contractor's purchasing system and subcontracts.

§ 1-3.903-1 [Reserved]

§ 1-3.903-2 Review and approval of subcontracts.

(a) When the prime contract is not to be placed on a firm fixed-price basis, review of subcontracts prior to placement may be desirable since the

ultimate cost to the Government will depend in part on subcontract prices and performance. Contract provisions requiring advance notification to the contracting officer of proposed subcontracts for materials, components, and other purchases may be appropriate both for information as to sources and prices and to provide an opportunity for review and for approval or objection by the contracting officer prior to award of the subcontracts. Careful and thorough evaluation of subcontracts prior to placement is particularly necessary when:

(1) The prime contractor's purchasing system of performance thereunder is considered inadequate;

(2) Subcontracts are for items for which there is no competition or for which the proposed prices appear unreasonable, and the amounts involved are substantial (see § 1-3.807-10(b));

(3) Close working arrangements or business or ownership affiliations exist between the prime and the subcontractor which may preclude the free use of competition or result in higher subcontract prices than would otherwise be obtained;

(4) A subcontract is being proposed at a price less favorable than that which has been given by the subcontractor to the Government, all other factors such as manufacturing period and quantity being comparable; or

(5) A subcontract is to be placed on a fixed-price incentive, time and material, labor-hour, fixed-price redeterminable, or cost-reimbursement basis.

(b) (1) Prime contract provisions relating to subcontracts, including those requiring advance notification, review, or approval thereof, should be consistent with the amount and character of subcontract work and with the overall character and type of the prime contract and the conditions applicable to its use as described in Subpart 1-3.4; and should involve the Government to the minimum extent practicable in the contractor's exercise of management responsibility, but give reasonable assurance that adequate subcontracting opportunities have been afforded to small business and that the Government is receiving the greatest practical return for its expenditure. For exam

ple, if the contract is on a firm fixedprice basis except for a clause permitting price escalation resulting from cost increases for certain materials, the prime contract may limit the contracting officer's right of review of subcontracts to those for materials covered by the escalation clause. In the case of cost-reimbursement type contracts, advance notification, and prior consent or approval of subcontracts should be required. (Section 304(b) of the Act (41 U.S.C. 254(b)) requires that all such contracts shall provide for advance notification of any subcontract thereunder on a cost-plusa-fixed-fee basis and of any fixed-price subcontract or purchase order which exceeds in dollar amount either $25,000 or 5 per centum of the total estimated cost of the prime contract.)

(2) Provisions in prime fixed-price contracts relating to subcontract review may, as appropriate, be confined to one major subcontract or to certain classes of subcontracts; may set a floor above which advance approval of proposed subcontracts may be required before placement; or may be tailored to cover unusual or particular circumstances.

(3) In those instances where a contractor's purchasing system, including its small business program has been deemed adequate, review of subcontracts generally may not be necessary. However, contracting officers shall conduct periodic reviews of the application of the system to insure conformance therewith.

(4) In instances where subcontracts have been placed on a cost-reimbursement or time and materials basis, contracting officers should be skeptical of approving the repetitive or unduly protracted use of such types of contracts and should follow the principles of § 1-3.803(b).

(c) In cases where the prime contract reserves a right for the contracting officer to review or approve subcontracts, the prime contract shall also reserve to the Government the right to inspect and audit the books and records of such subcontractors. Whenever such first tier subcontracts are of the cost-reimbursement, fixedprice incentive, or time and material

type, a similar right shall be reserved to the Government to inspect and audit the books and records of lower tier subcontractors: Provided, That such a right shall not be reserved contractually at or below the point where a firm fixed-price subcontract inter

venes.

Subparts 1-3.10-1-3.11-[Reserved]

Subpart 1-3.12-Cost Accounting
Standards

SOURCE: 39 FR 43058, Dec. 10, 1974, unless otherwise noted.

§ 1-3.1200 Scope of subpart.

This subpart prescribes policies and procedures with respect to the application of regulations and standards of the Cost Accounting Standards Board (see 4 CFR Part 331 et seq.) to negotiated national defense contracts and negotiated nondefense contracts.

1-3.1201 Purpose.1

Public Law 91-379, 50 U.S.C. App. 2168, as implemented by the regulations of the Cost Accounting Standards Board (see 4 CFR 331 et seq.) requires the development of cost accounting standards to be used in connection with negotiated national defense contracts and disclosure of cost accounting practices to be used in such contracts. Such disclosure of cost accounting practices shall also be used in connection with negotiated nondefense contracts. In addition, cost accounting standards shall be used in negotiated nondefense contracts as the standards become effective and to the same extent that such standards are applicable to defense contracts. If deemed appropriate, however, the application of a particular standard to negotiated nondefense contracts may be limited by a modification or withdrawal of applicability. Such action, if any, will be set forth in § 1-3.1218 entitled Modification or Withdrawal of Applicability. Waivers of cost accounting standards, rules, and regulations are treated in § 1-3.1211.

[41 FR 47237, Oct. 28, 1976]

'For a document relating to this section, see Appendix-Temporary Regulations appearing at the end of Chapter 1.

§ 1-3.1202 Definitions.'

When used in this subpart, the words and terms defined in 4 CFR Part 331 et seq. shall have the meanings set forth therein (see also § 13.1220(b)). In addition, the words and terms defined in this paragraph shall have the meanings set forth below:

(a) "Net awards" means the obligated value of negotiated national defense prime contracts, awarded in the reporting period, minus cancellations, terminations, and other credit transactions relating thereto.

(b) "Company" includes all divisions, subsidiaries, and affiliates of the contractor under common control. (The monetary threshold requirements for applicability of disclosure statement submissions under 4 CFR Part 351 are based on this definition of "company.")

(c) "Contractor" and "subcontractor," as the words pertain to contract applicability requirements of cost accounting standards under the clauses set forth in § 1-3.1204, apply to business units, such as a profit center, division, subsidiary, or similar unit of a company, which perform the contract (including each corporate or group office whose costs are allocated to one or more corporate segments performing under a clause), even in those cases where the contract was entered into on behalf of the overall company rather than the business unit.

(d) For the purpose of determining whether a contract is a national defense or a nondefense contract, the following CASB definitions appearing in 4 CFR 331.20 are set forth below.

(1) A "relevant Federal agency" is any Federal agency making a national defense procurement and any agency whose responsibilities include review, approval, or other action affecting such a procurement.

(2) A "defense contractor" is any contractor entering into a contract with the United States for the production of material or the performance of services for the national defense.

(3) A “defense subcontractor” is any person other than the United States who contracts, at any tier, to perform any part of a defense contractor's contract.

(4) "National defense" is any program for military and atomic energy production or construction, military assistance to any foreign nations, stockpiling, space, and directly related activity.

(e) A "small business concern" is any concern, firm, person, corporation, partnership, cooperative, or other business enterprise which pursuant to 15 U.S.C. 637(b)(6) and the rules and regulations of the Small Business Administration set forth in 13 CFR Part 121 is determined to be a small business concern for the purpose of Government procurement (see 4 CFR 331.20(k) and § 1-1.701).

(f) A "CAS covered contract" is any negotiated contract or subcontract which pursuant to the requirements of the Cost Accounting Standards Board or agency regulations includes a cost accounting standards clause (see §§ 13.1204-1 and 1-3.1204-2).

(g) A "negotiated subcontract" is any subcontract except a firm fixedprice subcontract made by a contractor or subcontractor after receiving offers from at least two firms not associated with each other or such contractor or subcontractor, providing (1) the solicitation to all competing firms is identical, (2) price is the only consideration in selecting the firms solicited, and (3) the lowest offer received in compliance with the solicitation from among those solicited is accepted (see 4 CFR 331.20(f)).

[39 FR 43058, Dec. 10, 1974, as amended at 43 FR 14110, Apr. 4, 1978]

§ 1-3.1202-1 Materiality.1

Materiality shall be considered in the application of regulations and standards of the CASB to both national defense and nondefense contracts. The provisions of the CASB appearing in 4 CFR 331.71 apply and are set forth below.

(a) In determining whether amounts of cost are material or immaterial, the following criteria shall be considered

1 For a document relating to this section, see Appendix-Temporary Regulations appearing at the end of Chapter 1.

where appropriate; no one criterion is necessarily determinative.

(1) The absolute dollar amount involved. The larger the dollar amount, the more likely that it will be material.

(2) The amount of contract cost compared with the amount under consideration. The larger the proportion of the amount under consideration to contract cost the more likely it is to be material.

(3) The relationship between a cost item and a cost objective. Direct cost items, especially if the amounts are themselves part of a base for allocation of indirect cost, will normally have more impact than the same amount of indirect costs.

(4) The impact on Government funding. Changes in accounting treatment will have more impact if they influence the distribution of costs between Government and non-Government cost objectives than if all cost objectives have Government financial support.

(5) The cumulative impact of individually immaterial items. It is appropriate to consider whether such impacts (1) tend to offset one another, or (a) tend to be in the same direction and hence to accumulate into a material amount.

(6) The cost of administrative processing of the price adjustment modification shall be considered. If the cost to process exceeds the amount to be recovered, it is less likely the amount will be material.

(b)(1) A contract modification for price adjustment or cost allowance under paragraphs (a)(4) and (a)(5) of the Cost Accounting Standards clause set forth in § 331.50 is required only if the cost impact is material (see also § 1-3.1204).

(2) Where a contractor is in noncompliance and does not change a cost accounting practice because the cost impact is immaterial, the contracting agency is not relieved of its responsibilities to ensure that an appropriate price adjustment is obtained if the cost impact of the noncompliance subsequently becomes material. The contractor shall be notified that the Government's decision to forbear action

for noncompliance is solely because the cost impact at the time of the notice is immaterial. If at any time thereafter the Government determines that the cost impact of noncompliance with respect to the practice in question is material, the Government then must require action under paragraph (a)(5) of the contract clause for any accounting period in which the cost impact is material. The fact that the Government does not pursue a price adjustment does not excuse the contractor from his obligation to comply with the Standard involved.

(3) Whether cost impact is recognized by modifying a single contract, several but not all contracts, or all contracts, or any other suitable technique, is a contract administration matter. The Standards, rules, and regulations of the Board do not in any way restrict the capacity of the parties to select the method by which the cost impact attributable to a change in cost accounting practice is recognized.

[43 FR 14110, Apr. 4, 1978]

§ 1-3.1202-2 Cost accounting practice.1

The definitions of "cost accounting practice" and "change to either a disclosed cost accounting practice or an established cost accounting practice" appearing in 4 CFR 331.20 apply to both national defense and nondefense CAS covered contracts and are set forth below:

(a) A "cost accounting practice" is any accounting method or technique which is used for measurement of cost, assignment of cost to cost accounting periods, or allocation of cost to cost objectives.

(1) Measurement of cost encompasses accounting methods and techniques used in defining the components of cost, determining the basis for cost measurement, and establishing criteria for use of alternative cost measurement techniques. The determination of the amount paid or a change in the amount paid for a unit of goods and services is not a cost accounting practice. Examples of cost ac

'For a document relating to this section, see Appendix-Temporary Regulations appearing at end of chapter 1.

counting practices which involve measurement of costs are:

(i) The use of either historical cost, market value, or present value;

(ii) The use of standard cost or actual cost; or

(iii) The designation of those items of cost which must be included or excluded from tangible capital assets or pension cost.

(2) Assignment of cost to cost accounting periods refers to a method or technique used in determining the amount of cost to be assigned to individual cost accounting periods. Examples of cost accounting practices which involve the assignment of cost to cost accounting periods are requirements for the use of specified accrual basis accounting or cash basis accounting for a cost element.

(3) Allocation of cost to cost objectives includes both direct and indirect allocation of cost. Examples of cost accounting practices involving allocation of cost to cost objectives are the accounting methods or techniques used to accumulate cost, to determine whether a cost is to be directly or indirectly allocated, to determine the composition of cost pools, and to determine the selection and composition of the appropriate allocation base.

(b) A "change to either a disclosed cost accounting practice or an established cost accounting practice" is any alteration in a cost accounting practice, as defined in paragraph (a) of this section, whether or not such practices are covered by a Disclosure Statement, except that:

(1) The initial adoption of a cost accounting practice for the first time a cost is incurred or a function is created is not a change in cost accounting practice. The partial or total elimination of a cost or the cost of a function is not a change in cost accounting practice. As used here, function is an activity or group of activities that is identifiable in scope and has a purpose or end to be accomplished.

(2) The revision of a cost accounting practice for a cost which previously had been immaterial is not a change in cost accounting practice.

[43 FR 21038, May 16, 1978]