and development projects jointly sponsored by the Government and the contractor, under which the contractor receives no fee and is reimbursed only for an agreed portion of allowable costs.

(b) Policy. (1) It is the policy of NASA to utilize this form of contract only in research and development projects sponsored jointly by the Government and the contractor when it is probable that the contractor will receive contribution in the form of present or future commercial benefits, except in the case of contracts with nonprofit institutions and foreign governments. It is the responsibility of the procurement officer to develop evidence to assure that commercial benefits may reasonably be expected to result, such as: increased technical knowledge useful in commercial operations; adding to technical know-how and training to employees; opportunity to benefit through patent rights; and use of background knowledge in future production contracts.

(2) The application of cost sharing principles and the negotiation of cost sharing provisions are in no way preIcluded by the above restriction stated in subparagraph (1) of this paragraph when, for example: incentive provisions in a contract include an arrangement whereby the contractor's profit or fee is decreased if costs exceed a stipulated target amount; costs are to be incurred by a contractor in the performance of a contract which are in excess of a mutually agreed upon ceiling cost; in a CPFF contract cost overrun situation, or in any situation where such cost sharing principles can be applied and negotiated without violating the integrity of the competitive procurement processes.

(3) Competition in procurement and support of the Small Business Program are two prime objectives of NASA. In consonance with these objectives, awards of cost sharing contracts should not be made solely on the basis of ability or willingness to cost share but should be made primarily on the basis of the contractor's competence only after adequate competition among large and small business.

(4) To ensure against any implication of inviting or inducing contractors to cost share, installations will avoid formal or informal statements wherein a specified amounts is announced as available for a development when the request for proposals clearly indicates a scope of work which may require a larger amount of funds than the announced available

funding. Additionally, prospects of preferred consideration for award of a possible future contract should not be offered as an inducement to contractors to enter into cost sharing arrangements.

(c) Approval. Cost sharing contracts will not be used unless the decision to use a cost sharing contract has been individually approved by the Procurement Officer.

§ 18-3.405-4 Cost - plus - incentive-fee

contract.

(a) Description. The cost-plus-incentive-fee contract is a cost-reimbursement type contract with provision for a fee which is adjusted by formula in accordance with the relationship which total allowable costs bear to target cost. Under this type of contract, there is negotiated initially a target cost, a target fee, a minimum and maximum fee, and a fee adjustment formula. After performance of the contract, the fee payable to the contractor is determined in accordance with the formula. The formula provides, within limits, for increases in fee above target fee when total allowable costs are less than target costs, and decreases in fee below target fee when total allowable costs exceed target costs. The provision for increase or decrease in the fee is designed to provide an incentive for maximum effort on the part of the contractor to manage the contract effectively.

(b) Application. The cost-plus-incentive-fee contract is suitable for use primarily for development and test when a cost-reimbursement type of contract is found necessary in accordance with § 18-3.405-1(b), and when a target and a fee adjustment formula can be negotiated which are likely to provide the contractor with a positive profit incentive for effective management. In particular, where it is highly probable that the development is feasible and the Government generally has determined its desired performance objectives, the costplus-incentive-fee contract should be used in conjunction with performance incentives in the development of major systems, and in other development programs where use of the cost and performance incentive approach is considered both desirable and administratively practical (see §§ 18-3.403 (c) and 18-3.407-2(b)). Range of fee and the fee adjustment formula should be negotiated so as to give appropriate weight to basic procurement objectives. For ex

ample, in an initial product development contract, it may be appropriate to negotiate a cost-plus-incentive-fee contract providing for relatively small increases or decreases in fee tied to the cost incentive feature, balanced by the inclusion of performance incentive provisions providing for significant upward or downward fee adjustment as an incentive for the contractor to meet or surpass negotiated performance targets. Conversely, in subsequent development and test contracts, it may be more appropriate to negotiate an incentive formula where the opportunity to earn additional fee is based primarily on the contractor's success in controlling costs. With regard to the cost incentive provisions of a contract, the minimum and maximum fees, and the fee adjustment formula, should be negotiated so as to provide an incentive which will be effective over variations in costs throughout the full range of reasonably foreseeable variations from target cost. Whenever this type of contract, with or without the inclusion of performance incentives, is negotiated so as to provide incentive up to a high maximum fee, the contract also shall provide for a low minimum fee, which may even be a "zero" fee or, in rare cases, a "negative" fee.

§ 18-3.405-5 Cost-plus-a-fixed-fee con

tract.

cost-plus-a

(a) Description. The fixed-fee contract is a cost reimbursment type of contract which provides for the payment of a fixed fee to the contractor. The fixed fee once negotiated does not vary with actual cost, but may be adjusted as a result of any subsequent changes in the work or services to be performed under the contract. Because the fixed fee does not vary in relation to the contractor's ability to control costs, the costplus-a-fixed-fee contract provides the contractor with only a minimum incentive for effective management control of costs.

(4) The contract is for development and test where the use of a CPIF is not practical.

(c) Limitations. (1) This type of contract normally should not be used in the development of space systems and equipment, once preliminary exploration and studies have indicated a high degree of probability that the development is feasible and the Government generally has determined its desired performance objectives and schedule of completion (see § 18-3.405-4).

(2) 10 U.S.C. 2306(d) provides that in the case of a cost-plus-a-fixed fee contract the fee shall not exceed ten percent (10%) of the estimated cost of the contract, exclusive of the fee, as determined by the Administrator at the time of entering into such contract (except that a fee not in excess of fifteen percent (15%) of such estimated cost is authorized in any such contract for experimental, developmental, or research work and that a fee inclusive of the contractor's cost and not in excess of six percent (6%) of the estimated cost, exclusive of fees, as determined by the Administrator at the time of entering into the contract, of the project to which such fee is applicable is authorized in contracts for architectural or engineering services relating to any public works or utility projects).

(3) In addition to the statutory limitations, fees under cost-plus-a-fixed-fee type contracts, except for Architect-Engineer contracts, are subject to the administrative limitations set forth below:

(1) Ten percent of the estimated cost, exclusive of fee, of any cost-plus-a-fixedfee contract for experimental, developmental, or research work; or

(ii) Seven percent of the estimated cost, exclusive of fee, of any other costplus-a-fixed-fee contract.

(4) Fixed-fees within the limitations imposed by 10 U.S.C. 2306(d) and in excess of those cited in subparagraph (3) of this paragraph will be submitted to the Director of Procurement for approval. The request for approval shall include a detailed justification setting forth the rationale supporting the proposed fee in terms of the factors prescribed in § 18-3.808-2.

(5) Pursuant to 10 U.S.C. 2311, authority to make the determinations of the estimated costs of a contract or project on which the allowable fee percentage is measured, has been delegated to the contracting officer (see § 18-3.304 (v)).

(6) The administrative limitations on subcontract fees are set forth in § 183.807-10(d).

(d) Completion or term form. The cost-plus-a-fixed-fee contract can be drawn in one of two basic forms, Completion or Term.

(1) The Completion form is one which describes the scope of work to be done as a clearly-defined task or job with a definite goal or target expressed and with a specific end-product required. This form of contract normally requires the contractor to complete and deliver the specified end-product (in certain instances, a final report of research accomplishing the goal or target) as a condition for payment of the entire fixed-fee established for the work and within the estimated cost if possible; however, in the event the work cannot be completed within the estimated cost, the Government can elect to require more work and effort from the contractor without increase in fee provided it increases the estimated cost.

(2) The Term form is one which describes the scope of work to be done in general terms and which obligates the contractor to devote a specified level of effort for a stated period of time for the conduct of research and development. Under this form, the fixed-fee is payable at the termination of the agreed period of time on certification of the contractor that he has exerted the level of effort specified in the contract in performing the work called for, and such performance is considered satisfactory by the Government. Renewals for further periods of performance are new procurement and involve new fee and cost arrangements.

(3) The Completion form of contract, because of differences in obligation assumed by the contractor, is to be preferred over the Term form whenever the work itself or specific milestones can be defined with sufficient precision to permit the development of estimates within which prospective contractors can reasonably be expected to complete the work. A milestone is a definable point in a program when certain objectives can be said to have been accomplished.

(4) In the case of research and exploratory development work, it is rarely possible to define the scope of work with the degree of precision necessary for contracting on a completion basis because of the nature of the work to be performed. Hence in such cases, the

(2) A base fee commensurate with minimum acceptable performance;

(3) Criteria against which the contractor's performance will be evaluated:

(4) An additional adjustment to the base fee, not to exceed a stipulated maximum, which is awarded on the basis of the subjective evaluation by NASA of contractor performance; and

(5) Specific provision that the determination of fee adjustment shall not be subject to the contract article entitled "Disputes."

(b) Application. The cost-plus-awardfee contract is suitable for use when: (1) A cost reimbursement type of contract is found necessary in accordance with § 18-3.405-1;

(2) The work to be performed is such that specific quantitative or objective measurement is not feasible and effective incentive arrangements cannot be devised on the basis of cost (§ 18-3.405-4), performance (§ 18-3.407-2) or schedule (§ 18-3.407-2);

(3) NASA procurement objectives will be advanced if the contractor is effectively motivated to exceptional performance; and

(4) Any added administrative effort and costs required to monitor and evaluate performance are justified by the benefits expected.

(c) Considerations of concept. The opportunity for increase in earned fees is intended to motivate the contractor to effectively manage the required work, to control costs, and to improve the timeliness, quality, and quantity of performance. Where cost is of primary concern to NASA, the contract may provide for a combination incentive fee-award fee arrangement by setting forth a costbased incentive separately stated from the award fee arrangement, which would

then be concentrated on performance aspects. The award fee should be earned by the contractor by exceptional performance, surpassing minimum acceptable levels and should be commensurate with the benefits accruing to NASA from the contractor's performance. The contract terms generally obligate the contractor to devote a specified level of effort for a stated period of time to satisfy the various areas of the scope of the work; it follows that the award of additional fee for exceptional performance in designated areas should be contingent upon an acceptable level of performance for all other contract requirements. Although the determination of the amount of award fee earned is a unilateral one based on subjective evaluations, the decision may be aided by such quantifying devices as adjectival ratings, point systems, or percentages of achievement. Ordinarily, the award fee adjustments will be increases only, and contract arrangements for decrease adjustment of base fee (e.g., if certain criteria or levels of performance are not met) must be carefully scrutinized prior to approval for use. Such arrangement must provide that the contractor will be informed of the reasons for decrease in fee, and will be given specific opportunity to submit information in his behalf prior to decision by the official responsible for adjustment of fee.

(d) Limitations. (1) The cost-plusaward-fee contract shall not be used (i) in procurements in which all factors affected by the incentive (e.g., cost, delivery performance) can be measured or objectively evaluated, or (ii) where the contract amount, term of performance or the benefits expected of the incentive are insufficient to warrant the additional administrative effort or cost.

(2) The maximum fee, which is the total of base fee, award fee, and any other incentive fee payable under the contract, is subject to the administrative limitations in § 18–3.450(f).

(e) NASA Incentive Contracting Guide (NPC 403). Additional guidance on the negotiation and administration of cost-plus-award-fee contracts is contained in Part 7 of the NASA Incentive Contracting Guide (NPC 403). § 18-3.406 Other types of contracts. § 18-3.406-1 Time and materials con

tracts.

(a) Description. The time and materials type of contract provides for the

procurement of supplies or services on the basis of (1) direct labor hours at specified fixed hourly rates (which rates include direct and indirect labor, overhead, and profit) and (2) material at cost. Material handling costs may be included in the charge for "material at cost," to the extent they are clearly excluded from any factor of the charge computed against direct labor hours. This type of contract does not afford the contractor with any positive profit incentive to control the cost of materials or to manage his labor force effectively.

(b) Application. The time and materials contract is used only where it is not possible at the time of placing the contract to estimate the extent or duration of the work or to anticipate costs with any reasonable degree of confidence. Particular care should be exercised in the use of this type of contract since its nature does not encourage effective management control. Thus it is essential that this type of contract be used only where provision is made for adequate controls, including appropriate surveillance by Government personnel during performance, to give reasonable assurance that inefficient or wasteful methods are not being used. This type of contract may be used in the procurement of (1) engineering and design services in connection with the production of supplies; (2) the engineering, design and manufacture of dies, jigs, fixtures, gauges, and special machine tools; (3) repair, maintenance or overhaul work; and (4) work to be performed in emergency situations.

(c) Limitation. Because this type of contract does not encourage effective cost control and requires almost constant Government surveillance, it may be used only after determination that no other type of contract will suitably serve. This type of contract shall establish a ceiling price which the contractor exceeds at his own risk. The contracting officer shall document the contract file to show valid reasons for any change in the ceiling and to support the amount of such change.

(d) Optional method of pricing material. When the nature of the work to be performed requires the contractor to furnish material which is regularly sold to the general public in the normal course of business by the contractor, the contract may provide for charging material on a basis other than at cost if:

(1) The total estimated contract price does not exceed $25,000 or the estimated price of material so charged does not exceed twenty percent (20%) of the estimated contract price;

(2) The material to be so charged is identified in the contract;

(3) No element of profit on material so charged is included in the profit in the fixed hourly labor rates; and

(4) The contract provides that the price to be paid for such material shall be on the basis of an established catalog or list price, in effect when material is furnished, less all applicable discounts to the Government: Provided, That in no event shall such price be in excess of the contractor's sales price to his most favored customer for the same item in like quantity, or the current market price, whichever is lower.

§ 18-3.406-2 Labor-hour contract.

(a) Description. The labor-hour type of contract is a variant of the time and materials type contract differing only in that materials are not supplied by the contractor.

(b) Application. See § 18-3.406-1(b). (c) Limitations. See § 18-3.406-1(c). § 18-3.407 Additional incentives. § 18-3.407-1 General.

In addition to the profit incentives to control costs, inherent in many of the contract types, and combinations thereof, described in § 18-3.404 through § 183.406, there are other means of providing profit incentives to contractors, which are described in § 18-3.407-2, to obtain extra management attention and effort. Increases in profits or fees resulting from the use of incentive provisions are made only because cost, performance, or other contractual goals or standards have been surpassed.

§ 18-3.407-2 Contracts with performance incentives.

(a) Description. A contract with a performance incentive is one which incorporates an incentive to the contractor to surpass stated performance targets by providing for increases in the fee or profit to the extent that such targets are surpassed and for decreases to the extent that such targets are not met. Salient features and considerations in the use of this type of contract are as follows:

(1) "Performance", as used in this § 18-3.407-2, refers not only to the per

formance of the article being procured, but to the performance of the contractor as well. Performance which is the minimum which the Government will accept shall be mandatory under the terms of the Completion form contract and shall warrant only the minimum profit or fee related thereto. Performance which meets the stated targets will warrant the "target" profit or fee. Performance which surpasses these targets will be rewarded by additional profit or fee. The incentive feature (providing for increases or decreases, as appropriate) is applied to performance targets rather than performance requirements.

(2) The incentive, when applied to the product, should relate to specific performance characteristics, such as thrust of an engine, maneuverability of a vehicle, and fuel economy. However, high overall performance of the end item is the primary objective of such contracts. Accordingly, the incentive feature should reflect a balancing of the various characteristics which together account for overall performance so that no one characteristic will be exaggerated to the detriment of the end item as a whole. When applied to the performance of the contractor, the incentive should relate to specific performance areas or milestones, such as delivery or test schedules, quality controls, maintenance requirements, and reliability standards.

(3) Since performance tests generally are essential in order to determine the degree of attainment of performance targets, the contract must be as specific as possible in establishing test criteria, such as conditions of testing, precision of instrumentation, and interpretation of test data.

(4) It is essential that there be explicit agreement between the Government and the contractor as to the effect on performance of contract changes (e.g., pursuant to the Changes clause).

(5) Care must be exercised, in establishing performance criteria, to give recognition to the fact that the contractor should not be rewarded or penalized for attainments of Government-furnished components.

(6) In establishing incentives in connection with delivery schedules, it is important to determine the Government's primary objectives in a given contract. In some instances, earliest possible delivery is of paramount importance. In others, early quantity production is essential. One the other hand, it may