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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 tract prices and subcontract performagreements to adequately safeguard ance, the contracting officer must information furnished, and (d) a state- have adequate knowledge of those element concerning the practicability of ments and their effect on prime conobtaining the supplies or services from tract prices. Therefore, contractors' another source of supply.

"make-or-buy" programs and proposed

subcontracts should be reviewed in ac8 1-3.807-7 Unacceptable substitutes for

cordance with Subpart 1-3.9 and the pricing negotiations.

information from such review should A certificate of cost or pricing data be used in negotiating prime contract (see § 1-3.807-4) shall not be consid- prices. Even though not specifically reered a substitute for examination and quired by Subpart 1-3.9, the contractanalysis of the contractor's proposal. ing officer should, where appropriate, Contracting officers shall not rely on elicit from the offeror or contractor profit limiting statutes as remedies for information concerning: ineffective pricing.

(1) His purchasing practices;

(2) The principal components to be 8 1-3.807-8 Evaluation and pricing of in

subcontracted and the contemplated dividual contracts.

subcontractors, including (i) the Each contract shall be priced sepa degree of competition obtained, (ii) rately and independently, and no con cost or price analyses or price comparisideration shall be given to losses or sons accomplished, including accurate, profits realized or anticipated in the complete, and current cost or pricing performance of other contracts. This data, and (iii) the extent of subconprohibition neither prevents the nego tract supervision; tiation of fixed overhead and other (3) The types of subcontracts; i.e., rates applicable to several contracts firm fixed-price or other (see § 1during annual or other specific periods 3.401), and nor prohibits forward pricing agree (4) The estimated total extent of ments applicable to several contracts. subcontracting, including procurement A proposed price reduction under an of purchased parts and materials. other contract or other contracts shall (b) In the review of subcontracting not be used as an evaluation factor. there should be assurance that the

contractors obtain competition, if § 1-3.807-9 Specified contingencies.

available, from qualified sources in When a contract is to include a pro their award of subcontracts to the vision for an upward adjustment of extent consistent with the procureprice upon the happening of a speci ment of the required services or supfied contingency (e.g., escalation plies. Contractors shall be required to clauses, Government-furnished prop undertake appropriate price analysis erty clauses, tax clauses), the contract (see § 1-3.807-2(b)) in all significant price should not include any amount subcontract transactions, and to unin anticipation of such contingency. dertake cost analysis (see § 1-3.807

2(c)) if competition is not available or 81-3.807-10 Subcontracting consider

does not yield reasonable subcontract ations in cost analysis.

prices. Where the contracting officer's (a) The amount and quality of sub- consent to subcontract is required (see contracting may be a major factor in- § 1-3.903), price or cost analysis shall fluencing price. Since a large portion be required as a condition to such conof the procurement dollar is spent by sent. prime contractors in subcontracting (c) Where subcontracts are placed for work, raw materials, parts, and on a price redetermination or fixedcomponents, efficient purchasing prac price incentive basis, it is particularly tices by a contractor will contribute important in negotiating revisions of heavily toward efficient and economi- prime contract prices that there be cal production. While basic responsi- substantial assurance that there was bility rests with the prime contractor initial close pricing of subcontracts. for decisions to make or buy, for selec- Also, contracting officers should be tion of subcontractors, and for subcon- alert to the risk of establishing firm

scribed by $ 1-3.405-5(c)(2). These limits should not be inserted in the prime contract because insertion of them might tend to inflate fees customarily negotiated at lower rates. [29 FR 10155, July 24, 1964, as amended at 43 FR 46304, Oct. 6, 1978)

redetermined prime contract prices while a major subcontract is still subject to price redetermination and may eventually be redetermined at a price far lower that that ascribed to it in redetermining the prime contract price, with consequent profits to the contractor far in excess of those contemplated in the prime contract price negotiation. However, in some cases, it may be appropriate to negotiate firm contract prices even though the contractor has not yet established final subcontract prices, if the contracting officer can justify as reasonable the amount included for subcontracting, e.g., where fairly definite cost data on subcontract prices are available. In other cases, where certain subcontracts are subject to redetermination and available cost data on these subcontracts are highly indefinite but other circumstances require prompt negotiation of revised prime contract prices the contract modification which evidences the revised contract prices should provide for adjustment of the total amount paid or to be paid under the contract on account of subsequent redetermination of the specified subcontracts. This may be done by including in the contract modification a provision substantially as follows:

Promptly upon the establishment of firm prices for each of the subcontracts listed below, the Contractor shall submit, in such form and detail as the Contracting Officer may reasonably require, a statement of costs incurred in the performance of such subcontract and the firm price established therefor. Thereupon, notwithstanding any other provisions of this contract as amended by this modification, the Contractor and the Contracting Officer shall negotiate an equitable adjustment in the total amount paid or to be paid under this contract to reflect such subcontract price revision. The equitable adjustment shall be evidenced by a modification to this contract, signed by the Contractor and the Contracting Officer.

(List subcontracts) (d) In considering cost-plus-fee subcontracts while negotiating prime contracts where cost analysis is per formed, the contracting officer shall make every effort to ensure, and in consenting to cost-plus-fee subcontracts the contracting officer shall ensure, that fees under such subcontracts do not exceed the limits pre

§ 1-3.807-11 Overhead rate considerations.

(a) Indirect costs commonly known as overhead are defined and described in § 1-15.203. Criteria for treatment and application of indirect costs to contracts are also set forth in § 115.203.

(b) In order to assure a reasonable approximation and allocation of indirect costs on an equitable basis to individual contracts, negotiators shall utilize audited overhead data or negotiated overhead rates, where available, in connection with negotiation of contracts and should not seek preferential overhead rates. However, contracting officers may examine such data or rates to determine whether they include elements of cost which individually are not allocable with respect to the contract under consideration (see Part 1-15). Where a rate is found to include such elements of cost an overhead rate should be established which excludes those costs.

(c) If there is any question with respect to audited overhead data or negotiated overhead rates, or if such are not available, the negotiator should normally avail himself of the audit services of the agency in consonance with § 1-3.809. (29 FR 10155, July 24, 1964, as amended at 30 FR 9593, July 31, 1965)

§ 1-3.807-12 Sole source items.

When purchases of standard commercial or modified standard commercial items are to be made from sole source suppliers, use of the techniques of price and cost analysis may not always be possible. In such instances and consistent with the volume of procurement normally consummated with the contractor, the contractor's price lists and discount or rebate arrangement should be examined and negotiations conducted on the basis of the "best user," "most favored customer," or similar practice customarily fol

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lowed by the contractor. Such price (c) Both the Government and connegotiations should consider the tractors should be concerned with volume of business anticipated for a profit as a motivator of efficient and fixed period, such as a fiscal year, effective contract performance. Negorather than the size of the individual

tiations aimed merely at reducing procurement being negotiated.

prices by reducing profit, without

proper recognition of the function of § 1-3.808 Profit or fee.

profit, are not in the Government's § 1-3.808–1 Scope and applicability.

best interest. Negotiation of extremely

low profits, use of historical averages, This section

or automatic application of predeter(a) Prescribes policies for establish

mined percentages to total estimated ing the profit or fee portion of the government prenegotiation objective;

costs do not provide proper motivation (b) Applies to price negotiations,

for optimum contract performance. based on cost analysis, of contracts

Therefore, agencies shall not (1) estaband contract modifications (including

lish ceilings on profits or fees, (2) modifications to contracts awarded by

create administrative procedures that formal advertising);

could be represented to contractors as (c) Prescribes policies for agencies’

de facto ceilings, or (3) otherwise development and use of a structured unduly constrain the application of approach for determining the profit or judgment in negotiating fair and reafee prenegotiation objective; and

sonable prices (but see § 1-3.808-4(e)). (d) Specifies (1) situations requiring

[47 FR 50252, Nov. 5, 1982] contracting officers to analyze profit, and (2) considerations for that analy § 1-3.808-3 Agency responsibilities. sis.

(a) Structured approach. (1) Struc[47 FR 50252, Nov. 5, 1982]

tured approaches for determining § 1-3.808–2 General.

profit or fee prenegotiation objectives

provide a discipline for ensuring (a) Profit or fee prenegotiation ob

that all relevant factors are considjectives do not necessarily represent

ered (see § 1-3.808-6). The structured net income to contractors. Rather,

approach an agency adopts when rethey represent the potential remu

quired shall allow the tailoring of neration contractors may receive for

profit or fee on an individual contract contract performance. This remuneration and the Government's estimate of

to fit the particular circumstances of

that contract. Agencies are encourallowable costs to be incurred in contract performance together equal the

aged to adopt a weighted-guidelines

approach, but may prescribe another Government's total prenegotiation objective. Just as actual costs may vary

structured approach if it incorporates from estimated costs, the contractor's

a logic and rationale similar to that of actual profit may vary from negotiat

the weighted-guidelines method, an ed profit or fee, as a result of such fac

example of which may be found in the tors as efficiency of performance, in

Defense Acquisition Regulation (32 currence of costs the Government

CFR 3-808). Instead of independently does not recognize as allowable, com

establishing its own structured applexity of work, or contingencies.

proach, an agency may adopt another (b) It is in the Government's interest

agency's approach if that approach is to offer contractors opportunities for

consistent with, or is appropriately financial rewards sufficient to (1) modified to be consistent with the stimulate efficient contract perform policies set forth in the various su ance. (2) attract the best capabilities tions of § 1-3.808. Each agency's apof qualified large and small business proach shall be conceptually sound, concerns to Government contracts, practicable to apply, and equitable to and (3) maintain a viable industrial

both the Government and its suppliers base.

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;

$ $ 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

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

§ 1-3.808–4 Contracting officer responsithe 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 of. for 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 orprenegotiation 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 lthe profit rates applied to the profit 15.2), facilities capital cost of money

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