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contracting officer, with a copy to the cognizant audit, activity. Where coordinated negotiations described under § 1-3.706 are involved, the contractor's overhead rate proposals may be submitted to the negotiating activity of the agency sponsoring the negotiation, with a copy to the cognizant audit activity.
(c) The decision to audit or not to audit, and the extent of the audit, involves the exercise of judgment based upon a number of considerations, such as the significance of the amount involved, the dolar volume of Government contracts held by the contractor, previous experience, and the apparent reasonableness of the overhead data furnished by the contractor (see 35 Comp. Gen. 434-436). The determination as to the necessity and extent of an advisory audit report, and the extent of the use of such a report, is solely the responsibility of the contracting officer in accordance with agency procedures. Unless advised to the contrary by the contracting officer, the cognizant audit activity should provide him with an advisory audit report. Such report should set forth the findings of the audit activity, including the results of discussions of such findings with the contractor. The audit or accounting review shall be governed by the contract cost principles which are applicable to the contract.
(d) To the extent appropriate, particularly when there is a significant difference of opinion between the audit activity and the contractor concerning such matters as the allowability, reasonableness, necessity or allocability of certain indirect costs, the acceptability of the bases used in developing the overhead rates, the specific items to be treated as direct cost, or other matters, the contracting officer, before the negotiation conference with the contractor, shall:
(1) Solicit the comments and recommendations of other Government procurement activities or agencies (doing business with the same contractor) as to: (i) The proposals made by the contractor; and (ii) the related advisory auidt report;
(2) Obtain the advisory comment and analyses of appropriate legal pricing, audit, and technical personnel as to the rate or rates of overhead, application of cost principles, treatment of particular items of cost, and other pertinent issues; and
(3) Develop the position of the procurement agency in coordination with other interested procuring activities (if any) of that agency. Failure of those procuring activities to agree as to the agency position shall be resolved in accordance with agency procedures.
(e) Generally, the negotiation conference should be conducted by a contracting officer of the sponsoring activity (see § 1-3.706). He shall arrange for appropriate legal, pricing, technical, or other specialist personnel of his agency to assist him in the preparation for and conduct of the negotiation conference. The audit activity also should be requested to render appropriate assistance and to participate in the negotiation conferen The negotiation shall be governed by the contract. cost principles which are applicable to the contract. In the event provisional overhead rates were utilized to effect a termination settlement (see § 1-8.404–4 of this chapter), that fact will not be considered a precedent when negotiating final rates.
(f) At the completion of the negotiation, the contracting officer shall, as promptly as practicable, prepare, and distribute to all interested Government agencies (see § 1-706, a report or summary to become a part of the contract file, to record the results of the negotiation setting forth information such as the following, to the extent appropriate and applicable:
(1) The name, position, and organization of conferees representing the contractor and the Government;
(2) The purpose of the negotiation;
(3) A summary of the contractor's overhead rate proposal and the pertinent advisory audit report recommendations;
(4) The various overhead rates, and related bases and periods resulting from the negotiation (see § § 1-15.203 and 115.305 of this chapter);
(5) A discussion of the treatment given to cost items requiring specific consideration, including advance understandings (see `§ 1-15.107 of this chapter), special contract provisions or limitations, and cost-sharing arrangements (see this § 1-3.707); also, where appli. cable, similar data on the special treatment of cost items agreed upon for the succeeding period;
(6) The specific items treated as direct cost;
(7) The reasons for variation (if any) from the recommendations of the ad. visory audit report;
(8) A list of the contracts affected by agency has been invited to participate, the negotiation, showing identification but does not expect to have a representanumber and the estimated total dollar tive at the negotiation, it should provide value, or a statement that such informa. the sponsoring activity with full infortion is provided in the advisory audit mation pertinent to its interest therein, report;
such as the specific features or special (9) A specific comment as to the per requirements of its contract(s), the apcentage (or dollar factor) and amounts plicable cost principles, its recommendaallowed for costs of the contractor's in tions in the matter, and should request dependent research and development the sponsoring activity to represent it programs and the effect of such allow with respect to the matters to be negotiance on rates and total amounts of the ated. At the completion of the negotiarelated overhead cost group (see $ 1 tion, the sponsoring activity shall, as 15.203(b) of this chapter); and
promptly as practicable, prepare and (10) Where applicable, the billing distribute to all interested activities and rates, the provisional rates, or, if ap agencies the negotiation report or sumpropriate. the predetermined rates, for mary as outlined in § 1-3.705(1), includapplication in the succeeding period. ing a full report to the procurement ac
(g) Contract administration may be tivities or agencies which it has represimplified by including, as appropriate, sented in the negotiation. All procureprovisional, final (as subsequently es ment agencies or activities invited to tablished), or predetermined negotiated participate (or to be represented) in the overhead rates in basic agreements (see negotiations should accept the results § 1-3.410-1) when such agreements exist. thereof unless a contracting officer, with When no basic agreement exists and ne respect to one or more contracts for gotiated overhead rates are applicable to which he has responsibility, has detera substantial number of contracts, the mined that the acceptance of either (a) rates may be set forth in a separate nego the overall results of the negotiations, or tiated overhead rate agreement, which (b) one or more negotiated rates, would may be incorporated by reference in the result in inequitable or improper charges individual contracts affected in the same to the affected contract(s). See also way that basic agreements are incorpo § 1-3.702.) To the extent applicable, rated in contracts. Any agreement that each procuring activity and agency sets forth overhead rates shall state the should thereupon amend or supplement bases to which they apply and the period the affected contracts in accordance with of rate applicability, and the contract file
the rates and other data set forth in the shall contain the negotiation report or negotiation report or summary. summary referenced in paragraph (f) of 81_2707 Cool
§ 1-3.707 Cost-sharing rates and limita. this section.
tion on overhead cost. § 1-3.706 Coordination.
(a) Cost-sharing arrangements may When more than one procuring activ- be made wherein cost participation by ity of an agency has cost-reimbursement the contractor is evidenced by a contract type contracts with the same contractor, provision to accept overhead rates which the activity having the preponderance of are lower than the anticipated actual such contracts should, generally, spon overhead rates. In such cases, a nesor and conduct any required negotiation gotiated ceiling overhead rate may be of overhead rates. Alternatively, an applied prospectively. agency may designate one or more of its (b) In other cases, it may be desirable offices or activities to sponsor and con
to provide for a ceiling on overhead duct coordinated negotiation of overhead
rates, beyond which the contractor will rates. Each procuring activity of the
absorb the costs. For example:
(1) The proposed contractor is a new negotiating agency, as well as other pro
company or has been recently reorgacurement agencies having an interest,
nized and there may be no past or recent should be notified of the pending nego record of indirect costs incurred; tiation, provided (upon request) with a (2) The proposed contractor may copy of the contractor's overhead rate have a recent record of rapidly increasproposals and pertinent Government ing overhead rates due, perhaps, to a data thereon developed for the negotia- declining volume of sales without a comtion, and invited to participate in the mensurate decline in indirect expense; negotiation. If a procuring activity or or
(3) The proposed contractor may be seeking to enhance its competitive position in a particular procurement by basing its proposal on overhead rates lower than those which reasonably may be expected to occur during contract performance, thereby causing a cost overrun When any of the foregoing (or comparable) circumstances are apparent with either a proposed prime or subcontractor, reasonable realistic, and equitable ceilings should be negotiated on overhead rates, and specified in the contract.
(c) In the cases cited in paragraphs (a) and (b) of this section, the contract should also provide that the Government will not be obligated to pay any additional amount on account of overhead above the negotiated ceiling rates under that (or any other) contract. In the event overhead rates resulting from an audit of allowable costs are less than the negotiated ceiling rates, the ne. gotiated rates will be reduced in conformity with the lower rates. Subpart 1-3.8—Price Negotiation
Policies and Techniques § 1–3.800 Scope of subpart.
This subpart sets forth the price negotiation policies and techniques applicable to negotiated prime contracts and modifications thereto (including modifications to formally advertised contracts) and to those subcontracts which are subject to approval or review within an agency. The principles in this subpart apply to negotiation of prices on all types of contracts, to equitable adjustments thereunder, and to revised prices as well as initial prices. (34 F.R. 2659, Feb. 27, 1969) § 1-3.801 Basic policy. § 1-3.801-1 General.
It is the policy of the Government to procure property and services from responsible sources at fair and reasonable prices calculated to result in the lowest ultimate overall cost to the Government. Sound pricing depends primarily upon the exercise of sound judgment by all personnel concerned with the procurement. (34 F.R. 2659, Feb. 27, 1969) § 1-3.801-2 Responsibility of contract.
ing officers. (a) Contracting officers, acting within the scope of their appointments (and in some cases acting through their author
ized representatives) are the exclusive agents of their respective agencies to enter into and administer contracts on behalf of the Government in accordance with agency procedures. Each contracting oficer is responsible for performing or having performed all administrative actions necessary for effective contracting. The contracting officer shall exercise reasonable care, skill, and judgment and shall avail himself of all of the organizational tools (such as the advice of specialists in the fields of contracting, finance, law, contract audit, engineering, traffic management, and cost or price analysis) necessary to accomplish the purpose as, in his discretion, will best serve the interests of the Government.
(b) To the extent services of specialists are utilized in the negotiation of contracts, the contracting officer must coordinate a team of experts, requesting advice from them, evaluating their counsel, and availing himself of their skills as much as possible. The contracting officer shall obtain simultaneous coordination of the specialists' efforts to the greatest practical extent. He shall not, however, transfer his own responsibilities to them. Thus, determination of the suitability of the contract price to the Goyernment always remains the responsibility of the contracting officer.
(c) When the contractor insists on a price or demands a profit or fee which the contracting officer considers unreasonable, the contracting officer shall (1) determine the feasibility of developing an alternate source of supply, and (2) take such other action within his authority as may be appropriate in the circumstances. If, after exhausting the above course of action, a satisfactory solution has not been obtained, the contracting officer shall proceed in accordance with agency regulations. With regard to a contractor's refusal to provide cost or pricing data, see § 1-3.807-6. 134 F.R. 2659. Feb. 27, 1969) § 1--3.801-3 Responsibility of other per.
sonnel. (a) Requirements and other logistics personnel. Personnel, other than the contracting officer, who determine type. quality, quantity, and delivery requirements for property and services to be procured, can influence the degree of competition obtainable and exert a material effect upon prices. Failure to determine requirements in sufficient time to allow (1) a reasonable period for pre
aration of requests for proposals, (2) team members' knowledge of production, preparation of quotations by offerors, (3) quality control, engineering and manucontract negotiation and preparation, or facturing practices and techniques and (4) adequate lead time for manufactur information as to plant capacity, scheding or performance causes delays in de uling, engineering and production liveries and uneconomical prices. Re "know-how," Government property, quirements issued on an urgent basis or make-or-buy considerations, and induswith unrealistic delivery schedules should trial security, particularly as these relate be avoided since they generally increase to the practices of the specific prospecprices or restrict desired competition, tive contractor. Personnel determining requirements, (3) The contract auditor is responspecifications, adequacy of sources of sible for submission of information and supply, and like matters have responsi- advice, based on his analysis of the conbility in such areas for timely, sound, tractor's books and accounting records and economical procurements.
or other related data, as to the accept(b) Pricing personnel. To the extent ability of the contractor's incurred and they are available and their use is ap estimated costs. The auditor shall report. propriate, the services of pricing person any denial by the contractor of access nel shall be utilized as provided in this. to records or cost or pricing data which paragraph (b).
the auditor considers essential to the (1) The contract pricing team to sup preparation of a satisfactory report. If port the contracting officer in the review the auditor believes that the contractor's and analysis of pricing proposals may estimating methods or accounting systom include a price specialist (or analyst), are inadequate to produce valid support negotiator, buyer, project engineer, con- for the proposal or to permit satisfactract auditor, and other professional and tory administration of the type of contechnical specialists, such as production, tract contemplated, this shall be stated quality control, packaging, and transpor in the audit report and concurrently tation specialists.
made known to the contractor so that he (2) The advice and assistance of may have the opportunity of presenting pricing personnel (such as a price his views to the contracting officer. specialist or analyst, or contract auditor). Where the contracting officer determines should be obtained when complex pricing that deficiencies in the contractor's actechniques are indicated, including the counting system or estimating methods use of contract types involving the skills are such that the proposed contract canful balancing of price, cost, and perform- not be adequately priced or administered, ance incentive arrangements. Such pric- he shall, with the advice of the contract. ing personnel or negotiators supporting auditor, ensure that necessary corrective. the contracting officer may be designated action is initiated prior to the award of to develop a Government pricing objec such contract. Generally, the auditor has tive prior to the negotiation. In such responsibility for performing that part case, this may include the responsibility of reviews, and cost or price analyses for:
which requires access to the contractor's. (1) Determining the extent of advice books and financial records supporting required from other specialists, request- proposed cost or pricing data, regardless ing, obtaining, and considering such ad- of the dollar amount involved. This does. vice, and for obtaining pricing data, not preclude the contracting officer or his omission of such clause, the clause in technical representatives from requesttorical cost or pricing data, independent, ing any data from, or reviewing records Government cost estimates, economic of, the contractor (such as cost or pricanalyses and the like; and
ing data, list of labor operations, proc(ii) Consolidating and evaluating the ess sheets, etc.) necessary to the disfindings of the pricing team members, charge of their responsibilities. and for the analysis of proposed prices (4) In order to provide the contractin consideration of, but not limited to, ing officer with maximum support, it is such factors as the need for quantities: essential that there be close cooperaand kinds of materials included in the tion and communication between the proposal; the need for the number and contract auditors and the production and kinds of man-hours; the need for special other technical specialists. Such cotooling and facilities; and the reason. ordination will be accomplished in a ableness of scrap and spoilage factors. manner which will minimize duplication. These analyses shall be based on the of analysis (see § 1-3.809(b) (3)). The
analyses by technical and audit personnel are of mutual interest, and information relating thereto shall be exchanged throughout the review process. It is recognized that the duties of auditors and those of other technical specialists in many cases require both to evaluate the same elements of estimated costs. While they shall review the data jointly or concurrently wherever possible, each shall render his services within his own area of responsibility. For example, on quantitative factors (such as labor hours), the auditor will frequently find it necessary to compare proposed hours with hours actually expended on the same or similar products in the past as reflected on the cost records of the contractor. From this information he can often project trend data. The technical specialist may also analyze the proposed hours on the basis of his knowledge of such things as shop practices, industrial engineering, time and motion factors, and the contractor's plant organization and capabilities. The interchange of this information will not only prevent duplication but will ensure adequate and complementary analysis,
(5) Pricing based on cost analysis involves, among other things, an appraisal of estimates of costs expected to be incurred in the future. The accounting projection of trends based on cost or pricing data, together with any known changes therein, is only one method of conducting this appraisal, others being:
(i) An engineering appraisal of the need for the estimated labor and material costs and of tooling and facilities, and the reasonableness of scrap and spoilage factors; and
(ii) The preparation of independent estimates by competent technical personnel. Occasionally, differences of opinion will exist not only on the reasonableness of cost projections but also on the accounting techniques on which they are based. In addition, it is normally not possible to negotiate a pricing result which is in strict accord with all of the opinions of all the specialists, or even with the Government's pricing objective. Reasonable compromises are normally necessary and this fact must be understood by all members of the team. For all of these reasons audit reports or pricing recommendations by others must be considered to be advisory only. The contracting officer is responsible for the exercise of the req
uisite judgments and is solely responsible for the final pricing decision. In these instances where the contracting officer does not adopt audit or other specialist recommendations that have particular significance on the contract price, appropriate comments shall be included in the record of the negotiation (see § 1-3.811).
(6) Whenever it becomes apparent to the contracting officer that the negotiations will require the resolution of complex problems which involve items significant in amount, he shall request attendance by audit and other appropriate representatives at the negotiation meeting. 134 F.R. 2659. Feb. 27, 1969) 8 1-3.802 Preparation for negotiation.
(a) Product or service. Knowledge of the product or service, and its use, is essential to sound pricing. Before soliciting quotations, every contracting officer should develop, where feasible, an estimate of the proper price level or value of the product or service to be purchased. Such estimates may be based on a physical inspection of the product and review of such items as drawings, specifications, job process sheets, and prior procurement data. When necessary, requirements and technical specialists should be consulted. The primary responsibility for the adequacy of specifications and for the delivery requirements must necessarily rest with requirements and technical groups. However, the contracting officer should be aware of the effect which these factors may have on prices and competition, and should, prior to award, inform requirements and technical groups of any unsatisfactory effect which their decisions have on prices or competition.
(b) Selection of prospective sources. Selection of qualified sources for solicitation of proposals is basic to sound prices. Proposals should be invited from a sufficient number of competent potential sources to insure adequate competition (see $$ 1-1.302, 1-1.702, 1-1.1203, and 1-3.101). The bidder's mailing lists prescribed by § 1-2.205 should be used where appropriate.
(c) Requests for proposals. Requests for proposals shall contain the information necessary to enable a prospective offeror to properly prepare a quotation or proposal. The request for proposals shall be as complete as possible with re