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and economical to have a source of sup- or service by individual contracting ofply and price determined in advance offices. the individual instances of actual need. (f) Responsibilities of contracting of

(3) When this method best meets the fice and participating offices. The reneeds for providing ordering offices with sponsibilities of the contracting agency ready sources of supply.

and of the other participating oiices (c) Use of existing contracts. In lieu with respect to common local term conof entering into a separate contract for tracts, except where other arrangements an item covered by a local term contract have been made, normally will be: of another office or agency, use of the (1) Contracting office. (i) Arranging term contract should be considered under with participating offices for submission any one of the following circumstances, of estimated requirements. If such use is approved by the contracting (ii) Soliciting and analyzing bids and office and if the contract permits (or is awarding and executing contracts. amended to permit) such use:

(iii) Exercising general contract ad(1) When such use will obviate the ad- ministration, except followup and exministrative expense and time delay in- pediting. cident to making a separate contract. (iv) Making available to the partici

(2) When there is a price advantage pating office such contract data as is reto be gained, freight and other costs quired for placing orders, payment of considered.

invoices, etc. (3) When the requiring office has local (2) Other participating offices. (1) purchasing authority but is not staffed Placing of orders directly with conor authorized to execute contracts. tractor.

(d) Multiple use contracts. In further- (ii) Arranging for inspection and acance of the economical and other ad- ceptance. vantages to be gained from cross uti- (iii) Arranging for billing and paying lization of local term contracts, wherever the contractor. possible the requirements of several offices in the same community should be

Subpart 1-3.7–Negotiated combined and included in a single

Overhead Rates contract:

SOURCE: The provisions of this Subpart (1) When there is a local repetitive 1-3.7 appear at 31 F.R. 15805, Dec. 15, 1966, need for a particular article or service unless otherwise noted. by the individual agencies;

8 1-3.700 (2) When an advantage accrues to re

Scope of subpart. quiring offices or activities through es

This subpart sets forth the policies tablishment of such contracts; and and procedures governing the establish

(3) When it is expedient and practical ment of overhead rates by negotiation for a single office to perform the con (including determination or settlement) tracting function for other offices, deliv for use in cost-reimbursement type ery or performance under the contract contracts. being arranged for by the participating

§ 1-3.701 Definitions. ofices as required. (e) Selection of contracting agency.

As used in this subpart: The following criteria usually will deter (a) The term "overhead (indirect mine which of the agency ofices in any costs)” includes, but is not limited to, given area having a common need for a the general groups of indirect expenses given article or service should assume the such as those generated in manufacturresponsibility for contracting for the re- ing departments, engineeering departquirements of the group in addition to ments, tooling departments, general Its own needs:

and administrative departments, and, if (1) Current or potential preponderant applicable, indirect costs accumulated use or consumption.

by cost centers within those general (2) Actual or potential qualifications groups (see § 1-15.203 of this chapter). and experience of contracting personnel, In the case of contractors using fund with due regard to adequacy of staff. accounting systems (e.g., educational

(3) Physical location of the contract institutions), the term includes, but is ing office in relation to market area sery not limited to, the general groups of ing the agencies.

expenses such as: general administra(4) Consideration of the bid prices tion and general; operation and mainconsistently received for a given article tenance of physical plant; library;

THE

and departmental administration (see (e) The term “contracting officer" 88 1-15.305 and 1-15.306 of this chapter). includes the authorized representative

(b) The term "billing overhead rate". of a contracting officer. (or "billing rate'') means a tentative

$ 1-3.702 General. percentage or dollar factor which is acceptable to the contracting officer and Except for contracts with educational is established for interim reimbursement Institutions where predetermined overpurposes. For example, a “billing rate" head rates may be used (see § 1-3.703 could be used where the use of a "pro (c)), ordinarily the negotiation, detervisional overhead rate" is not appro mination, or settlement of the reimburspriate or desirable, or where such able amount of overhead under costa rate has not yet been negotiated (see reimbursement type contracts is accum§ 1-3.703(b)), and pending final settle- plished after the fact on an individual ment of the actual allowable overhead. contract basis and is based upon an A "billing rate" is not negotiated and is audit of actual costs incurred during the not incorporated into a contract. It period involved in accordance with gives the contracting officer a procedure. agency procedures (see § 1-3.705(c)) which is more easily administered and However, where a contractor performs provides him with greater flexibility work in the same period under several (than would a "provisional overhead contracts for one or more procurement rate") for prompt adjustment to meet activities or agencies, it may be desirable new or changed circumstances during and appropriate, when mutually agreed the rate period.

to by the agencies and the contractor (c) The term “provisional overhead to negotiate uniform overhead rates for rate" (or “provisional rate") means a application to all such contracts, in order tentative percentage or dollar factor to: (a) Effect uniformity of approach mutually agreed upon by the con

(b) effect economy in administrative eftracting officer and the contractor. It fort, and (c) promote timely settlement is negotiated for interim reimbursement of reimbursement claims. The forepending final settlement of the actual going objectives are not intended to pre. allowable overhead (see § 1-3.703(b)) clude the use of an overhead rate which Such rate shall be incorporated in the excludes elements of cost which are not con

ract and changed. if necessary. by allocable to a particular contract contract amendment.

(See, for example, $$ 1-3.807-11 and (d) The term “negotiated final over

1--15.307-1 of this chapter 1 The basis head rate” means a percentage or dollar

or justification for the latter shall be factor which expresses the ratio(s)

contained in the contract file (see mutually agreed upon by the contracting

§ 1-3.706). officer and the contractor after the close § 1-3.703 Applicability. of the contractor's fiscal year, unless the

(a) Billing overhead rates parties mutually agree to a different

(see

§ 1-3.701(b)) or negotiated (provisional period. of allowable indirect expense incurred in the completed period to

and final) overhead rates (see § 1-3.701 direct labor, manufacturing cost, cost of

(c) and (d) may be used in any cost

reimbursement type contract (except sales, or other appropriate allocation or distribution base of the same period

facilities contracts) where such use, pur(see $$ 1-15.203 and 1-15.305-2 of this

suant to the guidelines of this Subpart chapter). Ordinarily, such rates are

1-3.7, is appropriate; where the use of used as a means of determining the

negotiated rates will accomplish one or amount of reimbursement for the ap

more of the purposes enumerated in

§ 1-3.702; or where the use of either billplicable indirect costs for such completed period; in such cases, they are

ing or negotiated rates will be otherwise termed "postdetermined" overhead rates.

advantageous to the Government. (See In certain circumstances involving edu

paragraph (c) of this section with recational institutions, negotiated final

spect to predetermined fixed overhead

rates with educational institutions.) overhead rates may be used as a means

(b) Billing or provisional overhead of determining the amount of reim

rates should be used for interim rebursement for the applicable indirect

imbursement only after the contracting costs to be incurred during a future period of contract performance; in such

officer is satisfied either on the basis of cases, they are termed "predetermined" a recent review or as a result of previous overhead rates (see § 1-3.703(c)).

audits or past experience with the par.

ticular 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.SC. 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 con

tractor'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 possible, an earlier audit may be used, but appropriate steps should be taken to identify and evaluate significant variations in costs incurred or bases used which may have a bearing on the reasonableness of the rate proposed by the contractor. Audits by other Government agencies may be utilized. In the case of smaller contracts (e.g., $100,000 or less), an audit made at an earlier date is acceptable provided (1) there have been no significant changes in the contractor's organization, and (ii) it is reasonably apparent that another audit would have little effect on the rate finally agreed upon.

(4) The use of predetermined overhead rates shall be approved at a level

above the contracting officer, in accord shall be reimbursed either at negotiated proance with agency procedures, with re visional rates as provided in the contract, or spect to any of the following:

at billing rates acceptable to the Contract(1) Where estimated reimbursable

Ing Officer, subject to appropriate adjust

ment when the final rates for that period are costs for the contract are expected to ex

established. To prevent substantial over or ceed $1 million annually;

under payment, and to apply either retro(ii) Where there has been no recent

actively or prospectively: (1) Provisional audit of the overhead; or

rates may, at the request of either party, be (iii) Where there have been frequent revised by mutual agreement and (2) billing or wide fluctuations in overhead rates rates may be adjusted at any time by the and their bases over a period of years.

Contracting Officer. Any such revision of

negotiated provisional rates provided in the § 1-3.704 Contract clauses.

contract shall be set forth in a modification

to this contract. & 1-3.704–) Contracts with concerns

(1) Any failure by the parties to agree on other than educational institutions.

any final rates under this clause shall be Insert the following clause in contracts considered a dispute concerning a question with concerns other than educational in

of fact for decision by the Contracting Oi

ficer within the meaning of the “Disputes" stitutions where negotiated overhead

clause of this contract. rates are to be used pursuant to this subpart.

§ 1-3.704–2 Contracts with educational NEGOTIATED OVERHEAD RATES

institutions. (a) Notwithstanding the provisions of the

(a) Insert the following clause in conclause of this contract entitled "Allowable

tracts with educational institutions Cost, Fixed Fee, and Payment," i the allow

where postdetermined overhead rates able indirect costs under this contract shall

(see § 1-3.701(d) are to be used purbe obtained by applying negotiated overhead rates to bases agreed upon by the parties,

suant to this subpart. as specified below.

NEGOTIATED OVERHEAD RATES-POSTDETERMINED (b) The Contractor, as soon as possible but not later than ninety (90) days after the (a) Notwithstanding the provisions of the expiration of his fiscal year, or such other clause of this contract entitled "Allowable period as may be specified in the contract, Cost and Payment," 8 the allowable indirect shall submit to the Contracting Officer, with costs under this contract shall be obtained a copy to the cognizant audit activity, a pro by applying negotiated overhead rates to posed fipal overhead rate or rates for that bases agreed upon by the parties, as specified period based on the Contractor's actual cost

below. experience during that period, together with (b) The Contractor, as soon as possible supporting cost data. Negotiation of over but not later than six (6) months after the head rates by the Contractor and the Con close of his fiscal year, or such other period tracting Officer shall be undertaken as as may be specified in the contract, shall promptly as practicable after receipt of the submit to the Contracting Officer, with a Contractor's proposal.

copy to the cognizant audit activity, a pro(c) Allowability of costs and acceptability posed final overhead rate or rates for that of cost allocation methods shall be deter period based on the Contractor's actual cost mined in accordance with ?------

experience during that period, together with as in effect on the date of this contract. supporting cost data. Negotiation of final

(d) The results of each negotiation shall overhead rates by the Contractor and the be set forth in a modification to this con

Contracting Officer shall be undertaken as tract, which shall specify (1) the agreed final

promptly as practicable after receipt of the rates, (2) the bases to which the rates ap Contractor's proposal. ply, and (3) the periods for which the rates (c) Allowability of costs and acceptability apply.

of cost allocation methods shall be deter(e) Pending establishment of final over

mined in accordance with Subpart 1-15.3 of head rates for any period, the Contractor

the Federal Procurement Regulations (41 CFR 1-15.3), as in effect on the date of this

contract. 1 The contracting agency may substitute

(d) The results of each negotiation shall the title of its own parallel clause when the

be set forth in a modification to this contitle is other than "Allowable Cost, Fixed

tract, which shall specify (1) the agreed Fee, and Payment."

final rates, (2) the bases to which the rates 'In paragraph (c), Insert the reference

apply, and (3) the periods for which the which is appropriate to the agency: Subpart rates apply. 1-15.2 of the Federal Procurment Regulations (41 CFR 1-15.2), or the corresponding The contracting agency may substitute agency regulations, or both; or to an "Al- the title of its own parallel clause when the lowable Cost" clause in the contract, which title is other than "Allowable Cost and Pay. lists allowable and unallowable costs.

ment."

(e) Pending establishment of final overhead rates for any period, the Contractor shall be reimbursed either at negotiated provisional rates as provided in the contract, or at billing rates acceptable to the Contracting Officer, subject to appropriate adjustment when the final rates for that period are established. To prevent substantial over or under payment, and to apply either retroactively or prospectively: (1) Provisional rates may, at the request of either party, be revised by mutual agreement, and (2) billing rates may be adjusted at any time by the Contracting Officer. Any such revision of negotiated provisional rates specified in the contract shall be set forth in a modifcation to this contract.

(1) Any failure by the parties to agree on any final rate of rates under this clause shall be considered a dispute concerning a question of fact for decision by the ContractIng Officer within the meaning of the “Disputes" clause of this contract.

(b) Provision may be made in costo reimbursement type research and development contracts with educational institutions for payment of reimbursable Indirect costs on the basis of predetermined overhead rates (see 8 1-3.703 (c)). To the extent appropriate and applicable, this basis may be used with respect to all contracts entered into by an agency with such an institution. Insert the following clause in contracts with educational institutions where such negotiated overhead rates are to be used pursuant to this subpart. NEGOTIATED OVERHEAD RATES—PREDETERMINED

(a) Notwithstanding the provisions of the clause of this contract entitled “Allowable Cost and Payment," + the allowable Indirect costs under this contract shall be obtained by applying predetermined overhead rates to bases agreed upon by the parties, as specified below.

(b) The Contractor, as soon as possible but not later than three (3) months after the close of his fiscal year, or such other period as may be specified in the contract, shall submit to the Contracting omcer, with a copy to the cognizant audit activity, a proposed predetermined overhead rate or rates based on the Contractor's actual cost experience during that period, together with supporting cost data. Negotiation of predetermined overhead rates by the Contractor and the Contracting Oficer shall be undertaken as promptly as practicable after receipt of the Contractor's proposal.

(c) Allowability of costs and acceptability of cost allocation methods shall be determined in accordance with Subpart 1-15.3 of the Federal Procurement Regulations (41 CFR 1-15.3), as in effect on the date of this contract.

(d) The results of each negotiation shall be set forth in a modification to this contract which shall specify (1) the agreed predetermined overhead rates, (2) the bases to which rates apply. (3) the fiscal year unless the parties agree to a different period for which the rates apply, and (4) the specifici Items treated as direct costs or any changes. in the Items previously agreed to be direct, costs.

(e) Pending establishment of predetermined overhead rates for the initial period of contract performance, or for any fiscal year or different period agreed to by the parties, the Contractor shall be reimbursed either at: (1) the rates fixed for the previous fiscal year or other period, or (2) billing rates aco: ceptable to the Contracting Officer, subject to appropriate adjustment when the final rates for that fiscal year or other period are established.

(f) Any failure by the parties to agree on. any predetermined overhead rate or rates. under this clause shall not be considered a dispute concerning a question of fact for decision by the Contracting Officer within the meaning of the “Disputes" clause of this contract. If for any fiscal year or other period of contract performance the parties fail to agree to a predetermined overhead rate or rates, it is agreed that the allowable indirect costs under this contract shall be obtained by applying negotiated final overhead rates in accordance with the terms of the “Negotlated Overhead Rates-Postdetermined" clause set forth in 1-3.704-2(a) of the Fed. eral Procurement Regulations (41 CFR 1-3.704-2(a)), as in effect on the date of this contract. 81-3.704- Modification of contract

clauses. When a separate negotiated overhead rate agreement is used in accordance with § 1-3.705(g), the clauses in $813.704-1 and 1-3.704–2 may be appropriately modified. § 1-3.705 Procedure.

(a) The procedure for the establishment of overhead rates generally consists of a review of the contractor's overhead rate proposal and the related advisory audit report, conduct of & negotiation conference, preparation of a negotiation report or summary, and ex- . ecution of contract amendments or sup. plemental agreements.

(b) When only one procuring activity of an agency is concerned, the contractor's proposal shall be submitted to the

4 The contracting agency may substitute the title of its own parallel clause when the title is other than "Allowable Cost and Payment."

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