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pricing data submitted prior to agree- data is only disclosed by Government ment on the prime contract price if: audit, the information necessary to

(i) Such subcontractor data was not support a reduction in prime contract accurate, complete, and current as of and subcontract prices may be availathe date certified in the prime con- ble only from the Government. To the tractor's Certificate of Current Cost or extent necessary to secure a prime Pricing Data, or in some cases was not contract price reduction, the contractaccurate as submitted by the subcon ing officer should make such necestractor; and

sary information available, upon re(ii) The prime contract price was in

quest, to the prime contractor or apcreased by a significant sum because

propriate subcontractors. However, if of such defective subcontractor data. the release of such information would Any adjustment in prime contract compromise security or disclose trade price due to defective subcontract data secrets or other confidential business of a prospective subcontractor, where information, it shall be made available the subcontract was not subsequently only under conditions that will fully awarded to the prospective subcon protect it from improper disclosure, as tractor, will be limited to the amount may be prescribed by the head of the (plus applicable overhead and profit agency or his authorized designee. Inmarkups) by which the actual subcon- formation made available pursuant to tract price or actual cost to the con this paragraph (e) shall be iimited to tractor if not subcontracted, was less that used as the basis for the prime than the original subcontract cost esti contract price reduction. mate, provided the actual subcontract (f) Inasmuch as price reductions price was not affected by defective under the “Price Reduction for Defecdata.

tive Cost or Pricing Data" clauses may (3) Under cost-reimbursement type

involve subcontractors as well as the and under all fixed-price type con prime contractor, the contracting offitracts except firm fixed-price and

cer should give the prime contractor fixed-price with escalation, increases an opportunity to take any action in payments to subcontractors due to

deemed advisable by him, particularly defective subcontractor cost or pricing in connection with any subcontracts data will be the basis for disallowance

that may be involved. or nonrecognition of costs under the defective cost or pricing data clauses, [34 FR 2661, Feb. 27, 1969, as amended at 39 because the Government has a con

FR 1753, Jan. 14, 1974) tinuing and direct financial interest in

8 1-3.807-6 Refusal to provide cost or such payments which is unaffected by the initial agreement on prime con

pricing data. tract price. Although the action is If cost or pricing data from the contaken under those price reduction tractor (or offeror) are required to clauses rather than under Part 1-15 of permit adequate analysis of the conthe Federal Procurement Regulations tractor's proposal in accordance with (41 CFR Part 1-15), as a practical § 1-3.807-3 and the contractor has rematter the result is the same, i.e., the fused to provide such data, the conincreased costs will be disallowed tracting officer shall try to persuade under cost type contracts or not con- the contractor to furnish such data. If sidered as actual costs for final pricing the contractor persists in his refusal to of redeterminable or incentive type provide necessary data, the contractcontracts. The action is taken under ing officer shall withhold making the the price reduction clauses because, award or price adjustment and refer not only will the increased costs be dis- the case to higher authority within allowed or not considered as actual the agency. Such referral shall include costs but also, the fixed-fee or target a complete statement of the attempts profit included in the initial price may made to resolve the matter, including: be subject to reduction in accordance (a) Steps taken to secure essential cost with § 1-3.807-5(d) (1) and (2).

data, (b) efforts to secure the contrac(e) In some cases, as where the de- tor's cooperation in the establishment fective nature of a subcontractor's of a satisfactory business relationship,

(c) any assurances offered, such as agreements to adequately safeguard information furnished, and (d) a state ment concerning the practicability of obtaining the supplies or services from another source of supply.

8 1-3.807-7 Unacceptable substitutes for

pricing negotiations. A certificate of cost or pricing data (see § 1-3.807-4) shall not be considered a substitute for examination and analysis of the contractor's proposal. Contracting officers shall not rely on profit limiting statutes as remedies for ineffective pricing.

8 1-3.807-8 Evaluation and pricing of in

dividual contracts. Each contract shall be priced separately and independently, and no consideration shall be given to losses or profits realized or anticipated in the performance of other contracts. This prohibition neither prevents the negotiation of fixed overhead and other rates applicable to several contracts during annual or other specific periods nor prohibits forward pricing agreements applicable to several contracts. A proposed price reduction under another contract or other contracts shall not be used as an evaluation factor.

tract prices and subcontract performance, the contracting officer must have adequate knowledge of those elements and their effect on prime contract prices. Therefore, contractors' "make-or-buy" programs and proposed subcontracts should be reviewed in accordance with Subpart 1-3.9 and the information from such review should be used in negotiating prime contract prices. Even though not specifically required by Subpart 1-3.9, the contracting officer should, where appropriate, elicit from the offeror or contractor information concerning:

(1) His purchasing practices;

(2) The principal components to be subcontracted and the contemplated subcontractors, including (i) the degree of competition obtained, (ii) cost or price analyses or price comparisons accomplished, including accurate, complete, and current cost or pricing data, and (iii) the extent of subcontract supervision;

(3) The types of subcontracts; i.e., firm fixed-price or other (see $ 13.401), and

(4) The estimated total extent of subcontracting, including procurement of purchased parts and materials.

(b) In the review of subcontracting there should be assurance that the contractors obtain competition, if available, from qualified sources in their award of subcontracts to the extent consistent with the procurement of the required services or supplies. Contractors shall be required to undertake appropriate price analysis (see § 1-3.807-2(b)) in all significant subcontract transactions, and to undertake cost analysis (see § 1-3.8072(c)) if competition is not available or does not yield reasonable subcontract prices. Where the contracting officer's consent to subcontract is required (see § 1-3.903), price or cost analysis shall be required as a condition to such consent.

(c) Where subcontracts are placed on a price redetermination or fixedprice incentive basis, it is particularly important in negotiating revisions of prime contract prices that there be substantial assurance that there was initial close pricing of subcontracts. Also, contracting officers should be alert to the risk of establishing firm

§ 1-3.807-9 Specified contingencies.

When a contract is to include a provision for an upward adjustment of price upon the happening of a specified contingency (e.g., escalation clauses, Government-furnished property clauses, tax clauses), the contract price should not include any amount in anticipation of such contingency. § 1-3.807-10 Subcontracting consider.

ations in cost analysis. (a) The amount and quality of subcontracting may be a major factor in fluencing price. Since a large portion of the procurement dollar is spent by prime contractors in subcontracting for work, raw materials, parts, and components, efficient purchasing practices by a contractor will contribute heavily toward efficient and economic cal production. While basic responsibility rests with the prime contractor for decisions to make or buy, for selection of subcontractors, and for subcon

redetermined prime contract prices scribed by $ 1-3.405-5(c)(2). These while a major subcontract is still sub- limits should not be inserted in the ject to price redetermination and may prime contract because insertion of eventually be redetermined at a price them might tend to inflate fees cusfar lower that that ascribed to it in re tomarily negotiated at lower rates. determining the prime contract price,

(29 FR 10155, July 24, 1964, as amended at with consequent profits to the con

43 FR 46304, Oct. 6, 1978) tractor far in excess of those contemplated in the prime contract price ne- 81-3.807-11 Overhead rate considerations. gotiation. However, in some cases, it

(a) Indirect costs commonly known may be appropriate to negotiate firm contract prices even though the con

as overhead are defined and described tractor has not yet established final

in $ 1-15.203. Criteria for treatment subcontract prices, if the contracting

and application of indirect costs to officer can justify as reasonable the

contracts are also set forth in $ 1amount included for subcontracting,

15.203. e.g., where fairly definite cost data on

(b) In order to assure a reasonable subcontract prices are available. In approximation and allocation of indiother cases, where certain subcon

rect costs on an equitable basis to inditracts are subject to redetermination

vidual contracts, negotiators shall utiand available cost data on these sub

lize audited overhead data or negotiatcontracts are highly indefinite but

ed overhead rates, where available, in other circumstances require prompt

connection with negotiation of connegotiation of revised prime contract tracts and should not seek preferential prices the contract modification which overhead rates. However, contracting evidences the revised contract prices officers may examine such data or should provide for adjustment of the rates to determine whether they intotal amount paid or to be paid under clude elements of cost which individthe contract on account of subsequent ually are not allocable with respect to redetermination of the specified sub- the contract under consideration (see contracts. This may be done by includ- Part 1-15). Where a rate is found to ing in the contract modification a pro include such elements of cost an overvision substantially as follows:

head rate should be established which

excludes those costs. Promptly upon the establishment of firm

(c) If there is any question with reprices for each of the subcontracts listed below, the Contractor shall submit, in such

spect to audited overhead data or neform and detail as the Contracting Officer gotiated overhead rates, or if such are may reasonably require, a statement of not available, the negotiator should costs incurred in the performance of such normally avail himself of the audit subcontract and the firm price established services of the agency in consonance therefor. Thereupon, notwithstanding any

with § 1-3.809. other provisions of this contract as amended by this modification, the Contractor and the [29 FR 10155, July 24, 1964, as amended at Contracting Officer shall negotiate an equi. 30 FR 9593, July 31, 1965) table adjustment in the total amount paid or to be paid under this contract to reflect 81-3.807-12 Sole source items. such subcontract price revision. The equitable adjustment shall be evidenced by a

When purchases of standard commodification to this contract, signed by the

mercial or modified standard commerContractor and the Contracting Officer. cial items are to be made from sole

source suppliers, use of the techniques [List subcontracts)

of price and cost analysis may not (d) In considering cost-plus-fee sub always be possible. In such instances contracts while negotiating prime con and consistent with the volume of protracts where cost analysis is per curement normally consummated with formed, the contracting officer shall the contractor, the contractor's price make every effort to ensure, and in lists and discount or rebate arrangeconsenting to cost-plus-fee subcon- ment should be examined and negotiatracts the contracting officer shall tions conducted on the basis of the ensure, that fees under such subcon “best user," "most favored customer," tracts do not exceed the limits pre- or similar practice customarily fol

13-131 0-83––16

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(c) Both the Government and contractors should be concerned with profit as a motivator of efficient and effective contract performance. Negotiations aimed merely at reducing prices by reducing profit, without proper recognition of the function of profit, are not in the Government's best interest. Negotiation of extremely low profits, use of historical averages, or automatic application of predetermined percentages to total estimated costs do not provide proper motivation for optimum contract performance. Therefore, agencies shall not (1) establish ceilings on profits or fees, (2) create administrative procedures that could be represented to contractors as de facto ceilings, or (3) otherwise unduly constrain the application of judgment in negotiating fair and reasonable prices (but see § 1-3.808-4(e)). [47 FR 50252, Nov. 5, 1982]

§ 1-3.808-1 Scope and applicability.

This section

(a) Prescribes policies for establishing the profit or fee portion of the government prenegotiation objective;

(b) Applies to price negotiations, based on cost analysis, of contracts and contract modifications (including modifications to contracts awarded by formal advertising);

(c) Prescribes policies for agencies' development and use of a structured approach for determining the profit or fee prenegotiation objective; and

(d) Specifies (1) situations requiring contracting officers to analyze profit, and (2) considerations for that analysis. [47 FR 50252, Nov. 5, 1982] § 1-3.808–2 General.

(a) Profit or fee prenegotiation objectives do not necessarily represent net income to contractors. Rather, they represent the potential remuneration contractors may receive for contract performance. This remuneration and the Government's estimate of allowable costs to be incurred in contract performance together equal the Government's total prenegotiation objective. Just as actual costs may vary from estimated costs, the contractor's actual profit may vary from negotiated profit or fee, as a result of such factors as efficiency of performance, incurrence of costs the Government does not recognize as allowable, complexity of work, or contingencies.

(b) It is in the Government's interest to offer contractors opportunities for financial rewards sufficient to (1) stimulate efficient contract performance. (2) attract the best capabilities of qualified large and small business concerns to Government contracts, and (3) maintain a viable industrial base.

§ 1-3.808-3 Agency responsibilities.

(a) Structured approach. (1) Structured approaches for determining profit or fee prenegotiation objectives provide a discipline for ensuring that all relevant factors are considered (see § 1-3.808-6). The structured approach an agency adopts when required shall allow the tailoring of profit or fee on an individual contract to fit the particular circumstances of that contract. Agencies are encouraged to adopt a weighted-guidelines approach, but may prescribe another structured approach if it incorporates a logic and rationale similar to that of the weighted-guidelines method, an example of which may be found in the Defense Acquisition Regulation (32 CFR 3-808). Instead of independently establishing its own structured approach, an agency may adopt another agency's approach if that approach is consistent with, or is appropriately modified to be consistent with the policies set forth in the various subsections of § 1-3.808. Each agency's approach shall be conceptually sound, practicable to apply, and equitable to both the Government and its suppliers in the market environment from

which the agency draws its supplies analysis factors under an agency's and services.

structured approach already take into (2) Agencies that have awarded less account the allowability of facilities than $50 million in noncompetitive capital cost of money. contracts over $100,000 in any fiscal (3) When a prospective contractor year after fiscal year 1979, need not does not propose or identify facilities adopt a structured approach, but may capital cost of money in a proposal for do so. However, any agency which a contract under which this cost could makes noncompetitive contract awards be allowed, it is presumed that considover $100,000 totaling $50 million or eration for facilities capital to be emmore in any fiscal year after fiscal ployed in contract performance is inyear 1979

cluded, but not identified, in the con(i) Shall prescribe a structured ap tractor's profit or fee objective. Acproach for determining the profit or cordingly, the contractor may not fee objective in those acquisitions that later claim this cost as allowable (see require cost analysis;

8$ 1-3.808-4(c) and 1-15.205(a)(2)(iii)). (ii) May prescribe specific exemp (4) The policy on offsets set forth in tions for situations in which manda paragraph (b)(2) of this section does tory use of a structured approach not apply to the cost of money as an would be clearly inappropriate; and element of the cost of capital assets

(iii) Shall exercise management under construction (see $$ 1-15.205oversight to ensure that the agency's 51(b) and 1-3.1302-6). approach is appropriately structured and applied.

[47 FR 50252, Nov. 5, 1982) (b) Cost of money as an element of

§ 1-3.808–4 Contracting officer responsi. the cost of facilities capital. (1) Cost

bilities. Accounting Standard (CAS) 414 (Cost of Money as an Element of the Cost of

(a) When the price negotiation is not Facilities Capital) provides a means based on cost analysis, contracting offor allocating to individual contracts ficers are not required to analyze an imputed cost of facilities capital profit. employed, making it practical for the (b) When the price negotiation is Government to differentiate among based on cost analysis, contracting of. contracts with respect to the level of ficers in agencies that have a struccontractor-furnished facilities to be tured approach shall analyze profit, employed in contract performance. using their agency's structured apThis imputed cost is an allowable cost proach except as specifically exempted under contracts subject to the cost under the agency's procedures. When principles for commercial organiza not using a structured approach (betions (see § 1-15.205-51).

cause the agency does not have one or (2) Agencies shall ensure that con because a specific exemption applies), tractors are not compensated for facil contracting officers shall comply with ities capital cost of money both as a § 1-3.808-6 in developing profit or fee direct or indirect cost and in profit or prenegotiation objectives. fee. Before the allowability of facili- (c) Contracting officers shall use the ties capital cost of money, considera. Government prenegotiation cost objection for it was included in profits and tive amounts as the basis for calculatfees. Therefore, profit and fee prene- ing the profit or fee prenegotiation obgotiation objectives shall be reduced if jective. Before applying profit or fee necessary to reflect this refinement in factors, the contracting officer shall cost accounting practices. This reduc exclude any facilities capital cost of tion may be accomplished by means of money included in the cost objective offsets; that is, by (i) using a dollar amounts. If the prospective contractor for-dollar offset in the Government's fails to identify or propose facilities prenegotiation profit or fee objective, capital cost of money in a proposal for or (ii) incorporating a common offset a contract that will be subject to the factor under an agency's structured cost principles for contracts with comapproach. No offset is necessary when mercial organizations (see Subpart 1the profit rates applied to the profit 15.2), facilities capital cost of money

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