(d) The determination required by section 305(c) of the Act (41 U.S.C. 255 (c)) that the making of advance payments would be in the public interest (see § 1-30.405);

(e) The determination required with respect to waiving a requirement for the submission of cost or pricing data and the certification thereof (see § 1-3.807-3 (b)) and for the inclusion of the clauses required by §§ 1-3.814-1 through 1-3.814-3 in contracts with foreign governments or agencies thereof.

(f) The determinations required by section 304 (c) of the Act (41 U.S.C. 254 (c)) and Subpart 1-6.10 with respect to omitting the clause specified in § 1-7.103-3 or § 1-7.602-7 from contracts with foreign contractors or subcontractors regarding the right of the Comptroller General of the United States to examine the contractor's records when it is determined (1) that the omission will serve the best interests of the United States, or (2) that the public interest will best be served by the omission.

[29 F.R. 10155, July 24, 1964, as amended at 30 F.R. 9593, July 31, 1965; 34 F.R. 6844, Apr. 24, 1969; 38 FR 6670, Mar. 12, 1973]

§ 1-3.303 Determinations and findings by the head of the agency.

The determinations and written findings in support thereof, required by §§ 1-3.211 through 1-3.213 and 1-6.1004, may be made only by the head of the agency, except that the authority to make the determinations and findings required by § 1-3.211 may be delegated by the head of the agency to a chief officer responsible for procurement and only with respect to contracts which will not require the expenditure of more than $25,000.

[34 F.R. 6844, Apr. 24, 1969]

§ 1-3.304 [Reserved]

§ 1-3.305 Form and requirements of determinations and findings.

(a) The form of determination and findings required shall be sufficient to satisfy the requirements of the applicable provisions of law and of this Part 1-3, and shall be in such form as may be prescribed in agency instructions.

(b) Each determination and findings required by Subpart 1-3.2 and § 1-3.302 shall be signed by the official making the determination and findings and shall set out enough facts and circumstances to clearly justify the specific determination made. Each determination and findings

required to negotiate either an individual contract, or a class of contracts under §§ 1-3.202, 1--3.207, 1-3.208, 1-3.210, 1– 3.212 through 1-3.214, and for the procurement of property or supplies under § 1-3.211, shall set forth enough facts and circumstances to clearly and convincingly establish that the use of formal advertising would not have been feasible or practicable.

§ 1-3.306 Procedure with respect to determinations and findings.

Determinations and findings for authority to negotiate required by §§ 13.202, 1-3.207, 1-3.208. and 1-3.210 through 1-3.214 shall be signed by the appropriate official prior to issuance of a request for proposals. Any modifications of such determinations and findings subsequently found to be necessary will not require cancellation of the request for proposals if the determinations and findings as modified support negotiation under any one of the authorities cited in Subpart 1-3.2. Where the facts continue to support the negotiation but under an authority for which a determination and findings is not required, cancellation of the determination and findings will not require cancellation of the request for proposals.

§ 1-3.307 [Reserved]

§ 1-3.308 Preservation of data.

(a) The originals of all determinations and findings required by this Part 1-3. and copies of supporting documents, shall be preserved and available in the files of the agency for a period of at least six years following the date of the determination.

(b) A copy of each determination and findings required by Subpart 1-3.2 and by (b) and (d) of § 1-3.302 shall be filed with the General Accounting Office copy of the contract in connection with which the determination and findings is made.

(c) In any case where a purchase or contract is negotiated under § 1-3.201 and §§ 1-3.207 through 1-3.214, data with respect to negotiation shall be preserved in the files of the agency for a period of six years following final payment on such purchase or contract. Such data shall be sufficient to show:

(1) The reason and basis for use of negotiation;

(2) The extent of competition secured; and

(3) Other essential information bearing on the actual negotiations.

This subpart (a) describes and defines types of contracts for procurement by negotiation, (b) defines the areas of applicability in which each type of contract may be used appropriately and sets forth considerations and policies governing the choice of type of contract, and (c) imposes conditions on the use of certain of the available types of contracts. § 1-3.401 Types of contracts.

(a) A contract negotiated under this Part 1-3 may be of any type or combination of types described in this Subpart 1-3.4 which will promote the best interests of the Government, subject to the restrictions in § 1-3.401(b). The respective contract types vary as to (1) the degree and timing of responsibility assumed by the contractor for the costs of performance, and (2) the amount and type of profit incentive offered the contractor to achieve or exceed specified standards or goals. With regard to degree of cost responsibility, the various types of contracts may be arranged in order of decreasing contractor responsibility for the costs of performance. At one end is the firm fixed-price contract under which the parties agree that the contractor assumes full responsibility in the form of profits or losses, for all costs under or over the firm fixed price. At the other end of this range is the costplus-a-fixed-fee contract where profit. rather than price, is fixed and the contractor's cost responsibility is therefore minimal. In between are the various incentive contracts which provide the varying degrees of contractor cost responsibility, depending upon the degree of uncertainty involved in contract performance.

subcontracts. In addition, all cost-plusfee subcontracts under prime contracts which are on other than a firm fixedprice basis shall limit the payment of fees to those prescribed by agency procedures within the limitations of section 304 of the Act (see § 1-3.405-5 (c)). § 1-3.402 [Reserved]

§ 1-3.403 Selection of contract type.

(a) General. The selection of contract type is generally a matter for negotiation and requires the exercise of judgment. Type of contract and pricing are interrelated and should be considered together in negotiation in accordance with § 1-3.803. Because the type of contract affects the resulting price to the Government, use of an appropriate type is of primary importance in obtaining fair and reasonable prices. Each contract file shall include documentation to show why the particular contract type was used, except for small purchases (see Subpart 1-3.6); repetitive types of procurement usually accomplished on a firm fixed-price basis, such as subsistence procurement; or awards made on the setaside portion of formally advertised procurements partially set aside for either small business or labor surplus area concerns. Although no absolute rules can be laid down, there are many factors which should be considered in the use of an appropriate type of contract, including those which follow.

(1) Price analysis. Price analysis (see § 1-3.807-2(b)) may provide a basis for selection of contract type. The degree to which price analysis can provide a realistic pricing standard should be carefully considered, even where there may not be full and free competition.

(2) The cost estimate. In the absence of effective price competition and where price analysis is not sufficient, the cost estimates of the offeror and of the Government are the bases for negotiation of any pricing arrangements. As a minimum, the uncertainties involved in performing at the cost estimated, and their possible impact on costs, must be identified and evaluated so that a pricing arrangement can be negotiated which imposes a reasonable degree of cost responsibility upon the contractor. The following are some of the considerations which may influence the estimate and hence, the selection of contract type:

(1) Type and complexity of the item. (ii) Stability of design, which in turn may influence such subordinate consid

erations as the adequacy and firmness of specifications, and the availability of relevant historical pricing data and prior production experience.

(iii) Prospective period of contract performance and length of production run at the time of negotiation.

(iv) Extent and nature of subcontracting contemplated.

(v) Adequacy of the contractor's estimating system.

(3) Urgency of the requirement. In certain procurements the best interests of the Government may dictate that the urgency of the requirement be a primary consideration in selection of contract type.

(4) Technical capability and financial responsibility of the contractor.

(5) Adequacy of the contractor's accounting system. Before reaching agreement on price and contract type, determination should be made that the contractor's accounting system will permit timely development of all necessary cost data in the form required by the specific contract type contemplated. This may be particularly critical where the contract type requires revision of price while performance is in progress, or where a cost-reimbursement type of contract is being considered and all current or past experience with the contractor has been on a fixed-price basis (see § 1-3.809).

(6) Other concurrent contracts. If performance under a proposed procurement involves operations which concurrently are required in performance of other work, the nature of the pricing arrangements on the other work may be important in selecting the contract type for the proposed procurement. This factor may not be so important where close controls exist that will assure proper allocation of costs.

(b) Research. In the majority of research programs, including preliminary explorations and studies, the work to be performed cannot be described precisely Hence, the negotiation of cost-plus-afixed-fee or cost-sharing contracts frequently is necessary. However, where the level of contractor effort desired can be identified and agreed upon in advance of performance, negotiation of a firm fixed-price contract should be considered.

(c) Development and test. Where possible, a final commitment to undertake specific product development and test should be avoided until preliminary

exploration and studies have indicated a high degree of probability that the development is feasible and the Government generally has determined both its minimum requirements for product performance and schedule completion and its desired performance and schedule completion objectives. The precision with which the performance objectives can be defined will largely determine the type of contract employed, with firmfixed-price contracts receiving first consideration. In development programs where use of cost and performance incentives are considered desirable and administratively practicable, fixed-priceincentive and cost-plus-incentive-fee contracts are to be considered in that order of preference. The solicitation should describe the Government's minimum requirements for product performance and schedule completion, its desired performance and schedule completion objectives, and the type of contract contemplated. The Government's minimum requirements for product performance and schedule completion generally should not be considered subject to negotiation. The solicitation should also indicate the factors on which the Government will evaluate proposals and which of those factors the Government considers most important (e.g., greater weight may be assigned to the range of an aircraft than to its speed). When Incentive contracts are to be used, contractors shall be required to submit targets and incentive sharing arrangements for meeting or surpassing the Government's requirements for performance and for schedule completion, together with an estimate of the cost thereof. The targets proposed by each offeror, the estimated cost thereof, and the sharing arrangements proposed should, to the extent practical, be considered by the Government in the contractor selection process. When this approach to contractor selection has been used, the resulting development program should be performed under an incentive contract which includes performance, schedule completion, and cost targets. the requisite test procedures by which attainment of performance targets will be measured, and provisions for varying profits to the extent targets are or are not met. In order to provide maximum incentive, the swing of profit variation should in each case be as wide as practical (see § 13.405-4(b)). The introduction of incentives into development is of such

Fixed-price contracts are of several types so designed as to facilitate proper pricing under varying circumstances. The fixed-price type contracts provide for a firm price, or under appropriate circumstances may provide for an adjustable price, for the supplies or services which are being procured. In providing for an adjustable price, the contract may fix a ceiling price, target price (including target cost), or minimum price. Unless otherwise provided in the contract, any such ceiling, target, or minimum price is subject to adjustment only if required by the operation of any contract clause which provides for equitable adjustment, escalation, or other revision of the contract price upon the occurrence of an event or a contingency.

§ 1-3.404-2 Firm fixed-price contract.

(a) Description. The firm fixed-price contract provides for a price which is not subject to any adjustment by reason of the cost experience of the contractor in the performance of the contract. This type of contract, when appropriately applied as set forth in this § 13.404-2, places maximum risk, upon the contractor. Because the contractor assumes full responsibility, in the form of profits or losses, for all costs under or over the firm fixed price, he has a maximum profit incentive for effective cost control and contract performance. Use of the firm fixed-price contract imposes a minimum administrative burden on the contracting parties.

(b) Application. The firm fixed-price contract is suitable for use in procurements when reasonably definite design or performance specifications are available and whenever fair and reasonable prices can be established at the outset, such as where:

(1) Adequate competition has made initial proposals effective;

(2) Prior purchases of the same or similar supplies or services under competitive conditions or supported by valid cost or pricing data provide reasonable price comparisons;

(3) Cost or pricing information is available permitting the development of

realistic estimates of the probable costs of performance;

(4) The uncertainties involved in contract performance can be identified and reasonable estimates of their possible impact on costs made, and the contractor is willing to accept a firm fixed price at a level which represents assumption of a reasonable proportion of the risks involved; or

(5) Any other reasonable basis for pricing can be used consistent with the purpose of this type of contract.

The firm fixed-price contract is particularly suitable in the purchase of standard or modified commerical items, or of any other items for which sound prices can be developed.

§ 1-3.404-3 Fixed-price contract with escalation.

(a) Description. The fixed-price contract with escalation provides for the upward and downward revision of the stated contract price upon the occurrence of certain contingencies which are specifically defined in the contract. The risks in a fixed-price contract are reduced by the inclusion of escalation provisions in which the parties agree to revise the stated price upon the happening of a prescribed contingency. Where escalation is agreed upon, upward adjustments shall be limited by the establishment of a reasonable ceiling, and provisions will be included for downward adjustments in those instances where the prices or rates fall below the base levels provided in the contract. In the establishment of the base levels from which escalation will operate, contingency allowances shall be eliminated from the base to be set forth in the contract to the extent that escalation is provided for any particular contingency. Generally, escalation provisions are of two broad types.

(1) Price escalation provides for adjustment of the contract price on the basis of increases or decreases from an agreed upon level in published or established prices of specific items or in price levels of the contract end items.

(2) Labor and material escalation provides for adjustment of the contract price on the basis of increases or decreases from agreed standards or indices in wage rates, specific materials costs, or both.

(b) Application. Use of this type of contract is appropriate where serious doubt exists as to the stability of market

(a) Description—(1) General. The fixed-price incentive contract is a fixedprice type contract with provision for adjustment of profit and establishment of the final contract price by a formula based on the relationship which final negotiated total cost bears to total target costs.

(2) Firm target. Under the firm target type of incentive contract there is negotiated at the outset a target cost, a target profit, a price ceiling (but not a profit ceiling or floor), and a formula for establishing final profit and price. After performance of the contract, the final cost is negotiated and the final contract price is then established in accordance with the formula. Where the final cost is less than target cost, application of the formula results in a final profit greater than the target profit: conversely, where final cost is more than target cost, application of the formula results in a final profit less than the target profit, or even a net loss. Thus, within the price ceiling, the formula provides for the Government and the contractor to share the responsibility for costs greater or less than those originally estimated, as determined by a comparison of negotiated final cost with target cost. Because the profit resulting from application of the formula is in inverse relationship to costs. the formula provides the contractor in advance with a calculable profit incentive to control costs. To provide an incentive consistent with the circumstances, the formula should reflect the relative risks involved in contract performance. Thus, it is appropriate in certain procurements to establish a formula which provides for contractor assumption of a considerable or major share of total cost responsibility In such circumstances, when a major share of total cost responsibility is as

sumed by the contractor, every consideration should be given to establishing target profits which reflect assumption of such responsibility.

(3) Successive targets. Under the successive targets type of incentive contract, there is negotiated at the outset an initial target cost, an initial target profit, a price ceiling, a formula for fixing the firm target profit, and a production point at which the formula will be applied. Generally, the production point will be prior to delivery or shop completion of the first item. This formula does not apply for the life of the contract but simply is used to fix the firm target profit for the contract. The initial formula shall also provide for a ceiling and floor on the firm target profit. To provide an incentive consistent with the circumstances, the formula for fixing the firm target profit should reflect the relative risk involved in establishing an incentive arrangement where cost and pricing information were not sufficient to permit the negotiation of firm targets at the outset (see § 1-3.404-4(b) (3)). Thus it normally will not provide for as great a degree of contractor cost responsibility as would a formula for establishing final profit and price. When the production point for applying the formula is reached, the firm target cost is then negotiated, consideration being given to experienced cost and all other pertinent factors, and the firm target profit is automatically determined in accordance with the formula. At this point. two alternatives are possible. First, a firm fixed price may be negotiated using as a guide the firm target cost plus the firm target profit. Second, if use of the firm fixed price is determined to be inappropriate. a formula for establishing final profit and price may be negotiated. using the firm target profit and the firm target cost. As in the firm target tyne of contract described in § 1-3.404-4(a) (2), the final cost is negotiated at the completion of the contract and the final contract price is then established in accordance with the formula for establishing final profit and price.

(4) Billing price. In either of the types of contract described in (2) and (3) of this § 1-3.404-4 (a), a billing price will be established as an interim basis for payment. This billing price may be adjusted within the ceiling limits, upon request of either party to the contract, when it becomes apparent that final